Semiannual Report to Congress for the period ending March 31, 2002

U.S. Department of Housing

and Urban Development
INSPECTOR GENERAL’S MESSAGE

On March 27, 2002, I was sworn in as the Inspector General of the Office of Inspector General (OIG),

Department of Housing and Urban Development (HUD). I would like to extend my sincere appreciation to the

Honorable David C. Williams, Inspector General of the Office of the Treasury Inspector General for Tax Administration, who served as Inspector General not only at his own agency but also as HUD’s Acting Inspector

General pending my confirmation. He truly deserves commendation for his outstanding professionalism and

commitment throughout this interim period.

As Inspector General, I intend both to improve the OIG and to continue to address HUD’s pressing needs.

With respect to OIG, specifically, I will work tirelessly to restore the public image of and trust in this organization. In this regard, I shall lead the transition of OIG back to its core mission of combating waste, fraud and

abuse. Moreover, I want to augment OIG’s relevance within HUD, without compromising its independence, and I

will strive to achieve this.

Regarding HUD’s needs, we are most concerned with its management and performance challenges, which are

discussed in Chapter 1 of this report. We are working with Departmental officials to ensure that these challenges

are dealt with as expeditiously as possible. Both the General Accounting Office and the OIG have identified these

areas as being of critical importance to HUD in its ability to carry out its mission.

We continue to report fraud and abuse in HUD’s Single Family Mortgage Insurance Programs. These problems, which have been a major focus of our audits and investigations for several years, are discussed in Chapters

2 through 5 of this report. We have already begun to devote significantly more resources to Single Family

Programs, and plan to further increase these efforts in the future. This will be made possible through the redeployment of OIG resources previously devoted to violent crime investigations associated with Operation Safe

Home. Since 1994, the OIG has devoted considerable investigative resources to this anti-violent crime initiative,

particularly to combating violent crime in public and assisted housing. With the termination of Congressional

funding for Operation Safe Home in HUD’s Fiscal Year 2002 Appropriations Act, OIG has closed violent crime

investigations, and, as mentioned above, is now re-deploying more resources to single family housing fraud,

which is part of OIG’s core mission.

Chapter 6 of this report discusses the audit resolution process. In our last Semiannual Report to the Congress, we reported that, as a result of the cooperation and support of the current HUD Administration, we had no

items to report on significant audits where a management decision had not been reached for audits that were

more than 6 months old. We are pleased to report that, for the second consecutive semiannual reporting period,

we again have no such items to report.

Finally, I look forward to working with Secretary Martinez and the Congress to ensure that HUD’s resources

are directed to their intended recipients, and I welcome any challenges we may face in making HUD a responsive, capable, and respected Department.

Kenneth M. Donohue, Sr.

Inspector General
HUD Secretary Presents New York Special Agent in Charge with Two Awards

HUD Secretary Mel Martinez presents Ruth Ritzema, Special Agent in Charge of the New York/New Jersey

District, with the Secretary’s Award for Valor and the Secretary’s Award for Extraordinary Leadership at a HUD

Headquarters ceremony on February 21, 2002. This is the first time the Secretary’s Award for Valor has been

presented to any recipient. Ms. Ritzema received the awards for her actions and extraordinary leadership following the tragic events in New York on September 11, 2001. At a reception following the ceremony, Ms. Ritzema

said, “What we did wasn’t extraordinary, it was just what all civil servants would do when faced with a similar

situation, whether Federal Agents, Police, or Firemen — any of us. On that day, HUD OIG Agents and Auditors

pulled together and did what we had to do. These awards are for all the people of the New York Office who

were there and had to deal with that catastrophe.”

Ms. Ritzema, as Special Agent in Charge, was the highest ranking HUD OIG official in New York on September 11. The OIG New York Office was destroyed by the towers when they fell. Fortunately, our Agents were at

firearms training that morning, and Auditors and Support Staff safely evacuated World Trade Center (WTC)

Building #6. Ms. Ritzema first joined the federal law enforcement team at the command post at the WTC, and

then became a part of the Joint Terrorism Task Force led by the FBI. HUD OIG Agents assigned to the New York

Office immediately teamed with FBI and other law enforcement personnel to accomplish the tasks of evidence

retrieval and running leads. OIG Agents from Boston, Philadelphia, and Chicago were added to the team. Ms.

Ritzema was asked to coordinate with the New York FBI Office, Treasury Inspector General for Tax Administration, and the President’s Council on Integrity and Efficiency in providing an additional 80 Agents from OIG

Offices of various Departments. HUD OIG Agents continued their investigative efforts for 30 days following the

attacks. Concurrent with these efforts, Ms. Ritzema assessed and began the rebuilding process, not only of the

many investigations that were disrupted by the attacks, but our office’s infrastructure as well.
Chapter 1 HUD’s Management

and Performance

Challenges
HUD’s Management and Performance Challenges

Information

About the HUD

Office of

Inspector General

Major Issues

Facing HUD

Departmentwide

Organizational Changes

HUD’s Office of Inspector General (OIG) was one of the original 12 established by the Inspector General Act of 1978. The OIG provides oversight of

HUD’s programs and operations through its audit and investigative activities.

While organizationally located within the Department, the OIG mission is to

provide independent and objective reporting to the Secretary and the Congress.

OIG activities seek to:

 Promote economy, efficiency, and effectiveness in the administration of

HUD programs and operations.

 Detect and deter fraud and abuse in HUD programs and operations.

 Investigate allegations of misconduct by HUD employees.

 Review and make recommendations regarding existing and proposed

legislation and regulations relating to HUD programs and operations.

The Offices of Audit and Investigation carry out these duties with a cadre

of staff located throughout the nation. Supporting these efforts are the Office of

Counsel and the Office of Management and Policy.

The Department’s primary mission is to find ways of expanding housing

opportunities for American families seeking to better their quality of life. HUD

seeks to accomplish this through a wide variety of housing and community

development programs. While HUD is a relatively small agency in terms of

staff, about 9,500 nationwide, it relies on the performance and integrity of a

large group of entities to administer a diversity of programs. Among HUD’s

administrators are hundreds of cities that manage HUD’s Community Development Block Grant funds, hundreds of Public Housing Authorities that manage

assisted housing funds, and thousands of HUD approved lenders that originate

and service FHA insured loans.

Each year, in accordance with Section 3 of the Reports Consolidation Act

of 2000, the OIG is required to submit a statement to the Secretary with a

summary assessment of the most serious challenges facing the Department. We

submitted this year’s assessment on February 26, 2002. These reported challenges have been the focus of much of our audit and investigative effort this

reporting period. HUD is working to address these challenges and in some

instances has made progress in correcting them. The Department’s management challenges reported this year include:

In the last 5 years, the Department has undergone major organizational and

management changes. The changes included the consolidation of common

functions into Centers, the establishment of Community Builders, and an

increased focus on enforcement. Many existing HUD employees were assigned
Financial Management

Systems

new duties and responsibilities and many new employees were hired. Sweeping changes were made to organizational lines of authority.

As HUD’s new Administration took office last year, many of the organizational changes were still incomplete. Some of the changes created a pervasive

tension between centralized control and local empowerment and it became

evident to HUD’s new management that some revisions were necessary. In this

regard, efforts to realign HUD’s field structure are being finalized. The Administration put an end to the Community Builder function. Other operational

areas being reexamined include the functions of the Real Estate Assessment

Center, Homeownership Centers (HOC), and the Enforcement Center.

Our audits and investigations have identified weaknesses brought about by

delays in completing various operational changes. For example, in September

2001, we testified before the House of Representatives Subcommittee on

Oversight and Investigations of the Committee on Financial Services regarding

the 1998 scandals of the Section 203(k) Rehabilitation Home Mortgage

Insurance Program in New York City. We noted that the pace of change in the

Single Family Program during this period made HUD extremely vulnerable. In

about a year’s time, single family staff was cut in half and those staff remaining in New York were transferred to the Philadelphia HOC. These staffing

shifts had a direct bearing on HUD’s ability to provide adequate oversight.

HUD’s new management team is in the process of reexamining the changes

brought about by the previous Administration and deciding what organizational realignments are needed to best address program needs.

HUD needs to complete the development of its financial management

systems. The lack of an integrated financial system in compliance with federal

financial system requirements has been reported as a material weakness since

fiscal year (FY) 1991. This noncompliance represents a material weakness in

internal controls. While progress has been made in improving the

Department’s general ledger system, HUDCAPS, a number of long-standing

deficiencies remain.

Our annual financial audits continue to report problems with systems

integration. For example, there is a lack of an automated interface between the

Departmental general ledger and the FHA subsidiary ledger, which necessitates

extensive manual analyses, reprocessing, and additional entries. FHA’s funds

control process is also largely manual, even to the point of requiring the hand

carrying of documents. Other serious deficiencies include the inability to

timely identify excess funds on expired Section 8 projects and inadequate

assurance about the propriety of Section 8 rental assistance payments. The

systems solutions to these problems remain unresolved.

During the FY 2001 Financial Statement Audit, we also noted another

challenge for the Department in grants management. There are additional Joint

Financial Management Improvement Program requirements for integrating

certain transactions in the grants management systems with the core financial

system. This has increased the importance of HUD’s financial systems for

consolidated financial reporting. However, the Department’s efforts to implement the necessary grants management systems have made little progress to

date.

To correct financial management deficiencies in a Departmentwide manner, HUD initiated a project to design and implement an integrated financial
Adequate and

Sufficiently Trained

Staffa

FHA Single Family

Loan Origination and

Real Estate Owned

(REO) Oversight

system consisting of both financial and mixed systems. Over the years, the

Department’s plans have experienced significant schedule delays, changes in

direction, and cost overruns. Because of the many concerns we have raised in

our audits, the Department is proceeding cautiously. The Department is planning to contract for a feasibility study and cost benefit and risk analyses to help

it identify the best platform for its integrated financial system. In the meantime,

the project to improve the FHA subsidiary accounting systems has made little

progress.

HUD’s security program and practices is another issue critical to HUD’s

financial systems. In accordance with the requirements of the Government

Information Security Reform Act, the OIG performed its annual evaluation of

HUD’s security program and practices and found that the security monitoring

program still needs strengthening, the information security program lacks

executive level leadership and direction, and previously reported weaknesses in

management, operational, and technical controls remain uncorrected.

HUD has a draft plan for establishing and maintaining an effective, comprehensive information technology security program at HUD. Our review found

improvements in information security. Also, during FY 2001, HUD initiated the

planning and program development for an entity-wide security awareness and

training program. Despite these improvements, greater emphasis on information security is needed.

HUD’s FY 1999 Annual Performance Plan noted that the Department no

longer had a system for measuring work and reporting time, and that HUD

lacked a single integrated system to support resource allocation. HUD worked

with the National Academy of Public Administration (NAPA) to develop a

methodology or approach for resource management that would allow the

Department to identify and justify its resource requirements for effective and

efficient program administration and management.

HUD needs to more effectively manage its limited staff resources. Many of

the weaknesses facing HUD, particularly those concerning HUD’s oversight of

program recipients, are exacerbated by HUD’s resource management shortcomings. Accordingly, we consider it critical for the Department to address these

shortcomings through the successful completion of ongoing plans. To operate

properly and hold individuals responsible for performance, HUD needs to know

that it has the right number of staff with the proper skills.

To address staffing imbalances and other human capital challenges, the

Department has implemented the Resource Estimation and Allocation Process

(REAP). The last phase of REAP (a baseline for staffing requirements) was

completed in December 2001. The next step in development of the

Department’s resource management strategy is the implementation of the Total

Estimation and Allocation Mechanism (TEAM).TEAM is the validation component of REAP and will collect actual workload accomplishments and staff usage

data for comparison against the REAP baseline. TEAM is scheduled for implementation this Spring.

Procedures and practices pertaining to HUD’s Single Family Loan Origination Program have undergone considerable change, particularly in the last 5

years. The changes have been both programmatic and organizational, including

significant changes in loan underwriting requirements and the transfer of
Public and Assisted

Housing Program

Administration

virtually all aspects of single family production and program monitoring from

HUD staff to lenders and contractors under the oversight of HUD’s

Homeownership Centers.

A comprehensive audit of FHA loan origination practices 2 years ago found

significant problems with FHA’s reviews of lender underwriting and property

appraisals. Also, the monitoring of lenders by HUD’s Quality Assurance

Division was deficient. We noted problems with the oversight of pre-endorsement contractors, and the accuracy of information in the automated tracking

system. These weaknesses increase HUD’s risk and can result in inflated

appraisals, fraudulent underwriting, property flipping, and other lending

abuses. OIG audits and investigations continue to result in indictments and

convictions in FHA fraud schemes. These fraudulent activities are occurring at

the same time that FHA delinquencies are rising. HUD’s procedures for monitoring both lenders and contractors were less than effective, resulting in an

increased risk of fraud, waste, and abuse.

More recently, we looked at the participation of not-for-profits in HUD

Single Family Programs. The audit found that the Department was receiving

little or no benefit from discounted sales of REO properties to not-for-profits.

In many cases, not-for-profits were fronts for profit-motivated real estate

agents, consultants, investors, contractors, or lenders. Discounted sales should

have reduced the final cost to low- and moderate-income homebuyers.

The audit of FHA’s FY 2001 financial statements includes a reportable

condition on the need for improvement in early warning and loss prevention

for FHA single family insured mortgages. FHA continues to make progress in

improving its ability to monitor its insured portfolio. However, as of September 30, 2001, FHA had not yet fully implemented certain initiatives to effectively identify and manage risks in its single family insured portfolio. FHA

needs to increase its use and analysis of other data now available to continue

improvements in lender monitoring. Timely identification of lenders with

above average early default rates is a key element of FHA’s efforts to target

monitoring and enforcement resources to single family insured mortgages and

lenders that represent the greatest financial risks to FHA. Potentially problem

lenders must be identified before FHA can institute loss mitigation techniques

and lender enforcement measures that can reduce eventual claims.

FHA contracted for the management and marketing (M&M) of its single

family properties in March of 1999. Seven companies received awards for the

16 M&M contracts to manage HUD’s single family property inventory. The

objective of the contracts was to reduce the inventory in a manner that: “(1)

expands home ownership, (2) strengthens neighborhoods and communities,

and (3) ensures a maximum return to the mortgage insurance fund.” Our

audits have shown that HUD needs to do more to strengthen its M&M contractor monitoring and follow-up procedures. We found performance deficiencies

were not being corrected and HUD property conditions declined. HUD staffs

were ill equipped to manage the voluminous amount of paperwork associated

with M&M contractors.

HUD provides housing assistance funds under various grant and subsidy

programs to multifamily project owners (both nonprofits and for profit) and

Housing Authorities (HAs). These intermediaries, in turn, provide housing
assistance to benefit primarily low-income households. HUD spent about $21

billion in FY 2001 to provide rent and operating subsidies that benefited over 4

million households. Weaknesses exist in HUD’s control structure such that HUD

cannot be assured that these funds are expended in accordance with the laws

and regulations authorizing the grant and subsidy programs.

The Office of Public and Indian Housing (PIH) provides funding for rent

subsidies through its public housing operating subsidies and tenant-based

Section 8 Rental Assistance Programs. These programs are administered by

HAs who are to provide housing to low-income families or make assistance

payments to private owners who lease their rental units to assisted families. The

Office of Housing administers a variety of Assisted Housing Programs, including parts of the Section 8 Program and the Section 202/811 Programs. These

subsidies are called “project-based” subsidies because they are tied to particular properties; therefore, tenants who move from such properties may lose their

rental assistance. This is a significant responsibility because of the sizable

number of project owners HUD must monitor.

For many years, we have reported on material weaknesses with the monitoring of HAs and multifamily projects. These monitoring weaknesses seriously

impact HUD’s ability to ensure that its intermediaries are correctly calculating

housing subsidies. This material weakness was first reported in our financial

audit in 1991 and it has been reported in every audit thereafter. The Secretary

has made the reduction of subsidy overpayments a top priority of his Administration.

A recent study of rent determinations under housing assistance programs

estimates that errors made by intermediaries result in substantial subsidy

overpayments and underpayments. Using a statistical sample of tenant files,

tenant interviews, and income verification data, the study projected subsidy

overpayments of about $1.7 billion and underpayments of about $0.6 billion

annually. Payment errors of this magnitude take on added significance in light

of HUD’s estimate of 4.9 million unassisted households that pay more than half

of their income for housing or live in severely substandard housing.

We agree with HUD’s initial efforts to address the incorrect rental subsidy

determinations. HUD has undertaken initiatives such as: (1) providing HAs with

information on the problems associated with rental subsidy determinations; (2)

making available a guidebook on the requirements of housing choice vouchers;

and (3) conducting reviews of rental determinations during some on-site monitoring reviews. However, it will be another 2 years before all of HUD’s planned

corrective actions are implemented to fully address the problems. In addition,

it may take several more years before the success of these actions will be

known.

During FY 2001, HUD continued to implement its performance oriented,

risk based strategy for carrying out its HA oversight responsibilities. As noted

in previous years, further improvements need to be made in the field offices’

monitoring of HAs in key areas. As in previous years, we could not fully assess

HUD’s measures aimed at improving oversight of HAs since the Department’s

plans to monitor and improve performance are not yet fully developed and

continue to experience delays. Finally, HUD has been slow to implement additional strategies needed to improve quality control over the rental assistance

subsidy determinations. Nevertheless, we do believe that some of the initiatives

are positive.
In prior years we have also reported on long-standing weaknesses with the

processing of subsidy payment requests under the project-based programs

administered by the Office of Housing. Historically, this process has been

hampered by the need for improved information systems to eliminate manually

intensive review procedures that HUD has been unable to adequately perform.

Office of Housing or Contract Administrator (CA) staff are to perform

management reviews to monitor tenant eligibility and ensure accurate rents are

charged at multifamily projects. The primary tool is to conduct on-site reviews

that assess the owners’ compliance with HUD’s occupancy requirements.

HUD’s continued implementation of the CA initiative resulted in a substantial

increase in the total number of management reviews conducted during FY 2001

compared with the previous year. However, at the end of FY 2001, reviews

were performed at only a small portion of that part of the portfolio. A comprehensive plan needs to be developed which would result in an increase of

on-site reviews that would assess and ensure that all owners of assisted multifamily projects comply with HUD’s occupancy requirements.

HUD’s plans include a variety of continuing efforts. Principle among these

are: continued implementation of the CA initiative; increased enforcement

efforts; implementation of more targeted risk management of re-inspections of

properties; better use of mortgagee inspectors; increased frequency of management/occupancy reviews for assisted projects; and development of an integrated risk reporting system. We support these efforts.
Chapter 2 Housing Fraud

Initiative
Housing Fraud Initiative

Central District of

California

The OIG Housing Fraud Initiative (HFI), which became operational in

1999, is a law enforcement effort designed to detect and prosecute fraud in

HUD programs. HFIs generally combine OIG audit and investigative resources

with those of the Federal Bureau of Investigation and the United States Attorneys’ Offices. The HFI sites are the Judicial Districts of: (1) the Eastern

District of New York; (2) the District of Maryland; (3) the District of Columbia; (4) the Northern District of Illinois; (5) the Central District of California;

and (6) the Northern District of Texas. The goal of the HFI is to prosecute

those who abuse HUD programs, thereby helping to ensure that HUD assistance

reaches those who truly need it.

Fraud in single family loan origination continues to be the most pervasive

problem uncovered by HFI investigations. The following are examples of recent

HFI results.

Lilian Figueroa, Rodney Tyson, Frederico Loakes, and Jose Iniguez were

sentenced to a total of 3 years and 1 month in prison, 11 years probation, and

8 months home detention, fined $20,000, and ordered to pay nearly $2.4

million in restitution. All four were involved in a conspiracy to obtain HUD

insured single family loans using strawbuyers. Figueroa, a mortgage company

employee in Los Angeles, purchased cashiers’ checks for down payments in

the names of the strawbuyers and purchased and caused others to purchase

fraudulent W-2’s, pay stubs, and other documents to create fictitious credit

and employment histories for the strawbuyers. Subsequent to the closing of

escrow, Figueroa received proceeds from the sales of the properties. Tyson

obtained HUD insured home improvement loans using strawbuyers to pose as

his wife. He recruited others to pretend that the co-conspirators were married

and lived at the properties when they applied for the Title I loans. Tyson was

tape-recorded offering $3,000 to one of the individuals to pose as his spouse.

He told the individual to act as if they were married when he arranged for

them to meet with a notary and to sign the loan documents. Tyson was later

arrested after he attempted to receive the proceeds of a fraudulent Title I home

improvement loan from the Real Estate Mortgage Acceptance Company.

Loakes and Iniguez cooperated with the government during the investigation.

They were both employed as mortgage brokers at RE Mortgage where they

conspired to obtain FHA insured single family home loans using strawbuyers.

Loakes and Iniguez caused false information to be placed on loan applications

and used fraudulent income documentation for strawbuyers. This was a joint

FBI/OIG investigation.

In Los Angeles, Kathia Otero was sentenced for her involvement in a

single family loan origination fraud scheme. She was sentenced to 6 months

home detention, 3 years probation, and 1,500 hours of community service,

and was ordered to pay $1,228,442 in restitution and a $1,000 special assessment fee. In April 2001, Otero pled guilty to 10 counts of conspiracy, wire

fraud, and false statements. She knowingly used false information obtained
from strawbuyers to prepare fraudulent FHA insured home mortgage loan

applications. Otero’s co-conspirator, Andres Martinez, was previously sentenced for his part in the fraud. OIG and the FBI conducted this investigation.

Andres Ocampo, an admitted document forger, was sentenced for his role

in manufacturing false income, employment, identification, and other documents. These documents were subsequently used by numerous real estate

agents, loan officers, and others in the greater Los Angeles area in order to

make ineligible applicants appear qualified for FHA insured loans. Ocampo,

who admitted his involvement and cooperated with the government during the

investigation, was sentenced to 4 months incarceration followed by 36 months

supervised release, and was ordered to pay $599,860 in restitution to HUD and

a $200 special assessment. This investigation was conducted jointly by OIG and

the FBI.

Following an investigation by OIG and the FBI, Salvador Silva, a real estate

salesperson in Los Angeles, was sentenced to 12 months incarceration and

ordered to pay $517,444 in restitution. He pled guilty in August 2001 to one

count of conspiracy and one count of mail fraud. Silva and others involved in

the fraud scheme purchased single family residential properties for the purpose

of reselling them. Silva recruited potential buyers for the properties who often

did not qualify for FHA insured mortgage loans due to insufficient income or

assets for a down payment. He received a commission for every purchaser he

located. The buyers were then assisted in finding co-signers for the loans. As a

result, mortgage applications were completed and submitted containing false

employment documents, false verifications that the down payments were either

a gift or made from the buyers’ personal funds, false explanation letters concerning the relationships of the co-signers to the buyers, and false notarizations

of the buyers’ and co-signers’ signatures. Silva’s actions caused at least $2

million in fraudulent FHA insured loans. A real estate salesperson was also

charged with one count of conspiracy and one count of mail fraud in this case.

The salesperson’s actions caused approximately $1.5 million in fraudulent FHA

insured mortgage loans. To date, the resulting loss to HUD is in excess of

$600,000.

During this reporting period, 11 people were sentenced and 3 pled guilty as

a result of a 2-year investigation into single family loan origination fraud in the

Los Angeles area. To date, the loss to the government resulting from the fraud

is approximately $11 million, with an additional $15 to $20 million of government insured loans in default. The investigation, conducted by OIG and the FBI,

has thus far yielded sentences totaling 34 months incarceration, $208,626 in

restitution, $22,000 in fines, and 20 years probation. There are eight remaining

defendants to be sentenced.

Rose Pinkus and Rogelio Gonzalez, Sr., were sentenced after pleading

guilty to two counts each of making false statements to HUD. Pinkus was

sentenced to 2 years probation and 200 hours of community service, and was

fined $5,000. Gonzalez was sentenced to 3 years probation and 500 hours of

community service, and was fined $2,500. Xavier Lujan was sentenced after

pleading guilty to two counts of making false statements to HUD. Lujan was
sentenced to 5 months incarceration and 5 months of home detention, and was

ordered to pay $67,525 in restitution to HUD. In addition, Sandra Sansur pled

guilty to two counts of making false statements to HUD. Pinkus, Gonzalez,

Lujan, and Sansur obtained forged employment and income documents in

order to make ineligible applicants appear qualified for FHA insured loans.

Sansur, who worked as a real estate agent at Realty Masters, Pinkus, who was

a real estate broker at Remax Tri-City, Gonzalez, a real estate agent with

Dynamic Brokers, and Lujan, a loan officer at International Mortgage, then

caused the false documents to be submitted to HUD. The loans based on false

information from Pinkus have a total value of approximately $1.2 million, and

those identifiable with Gonzalez total approximately $2.2 million. The loans

based on false information from Sansur have a total value of approximately

$1.4 million, while those identifiable with Lujan have a total value of approximately $2.7 million.

Molly Villa was sentenced after pleading guilty to two counts of making

false statements to HUD. Villa was sentenced to 3 years probation and ordered

to pay a $500 fine and a $200 special assessment. Villa, a loan officer for

Arroya Home Loan, Inc., obtained forged employment and income documents

in order to make ineligible applicants appear qualified for FHA insured loans.

The loans based on false information from Villa have a total value of approximately $2.3 million.

Anthony Quintero, Cesar Villapudua, and Adela Jaime were each sentenced to 2 years probation after pleading guilty to 2 counts each of making

false statements to HUD. In addition to the probation, Quintero was sentenced

to 500 hours of community service and fined $5,000. Villapudua was sentenced to 200 hours of community service and fined $5,000. Jaime was

sentenced to 250 hours of community service and fined $4,000. The three

defendants obtained forged employment and income documents in order to

make ineligible applicants appear qualified for FHA insured loans. Quintero

was a real estate agent at City Mortgage; Villapudua was a loan officer at

American Charter Mortgage; and Jaime was the owner and operator of California First Funding. The loans based on false information provided by

Quintero, Villapudua, and Jaime have a total value of approximately $1.3

million, $.6 million, and $3.4 million, respectively.

Juan Sandoval, a buyer and seller of homes, and Norma Simental, a loan

officer for California First Funding, were sentenced after pleading guilty to

two counts each of making false statements to HUD. Sandoval was sentenced to

12 months and 1 day incarceration and 12 months supervised release, and

ordered to pay $84,996 in restitution to HUD. Simental was sentenced to 6

months incarceration and 3 years probation, and ordered to pay $45,701 in

restitution to HUD and a $200 special assessment. Both Sandoval and Simental

obtained forged employment and income documents in order to make ineligible applicants appear qualified for FHA insured loans. The loans based on

false information from Sandoval have a total value of approximately $673,000,

while the loans based on false information from Simental have a total value of

approximately $3.1 million.

Andrew Lujan and Salvador Alvarez were sentenced after pleading guilty

to two counts each of making false statements to HUD. Lujan was sentenced to

3 years probation and ordered to pay a $5,000 fine and a $200 special assess-
ment. Alvarez was sentenced to 6 months incarceration and 3 years supervised

release, and was ordered to pay $10,500 in restitution to HUD. Lujan and

Alvarez obtained forged employment and income documents in order to make

ineligible applicants appear qualified for FHA insured loans. Lujan and Alvarez,

who were real estate agents, then caused the false documents to be submitted to

HUD. The loans based on false information from Lujan have a total value of

approximately $3.4 million, while the loans based on false information from

Alvarez have a total value of approximately $1 million.

Diana Villapudua was sentenced after pleading guilty to two counts of

making false statements to HUD. Villapudua was sentenced to 6 months incarceration and 1 year supervised release, and was ordered to pay $100,841 in

restitution to HUD. Villapudua, a loan processor for the American Charter

Mortgage Company, caused approximately $1.5 million of insured loans based

on false information.

Rogelio Gonzalez, Jr., a real estate professional who bought and sold

properties, pled guilty to two counts of making false statements to HUD.

Gonzalez obtained and used forged employment and income documents in

order to make ineligible applicants appear qualified for FHA insured loans. The

loans based on false information from Gonzalez have a total value of approximately $5.3 million.

Mario Gonzalez, a mortgage broker and co-owner of Pacific Investment

Capital (PIC) in Los Angeles, was sentenced to 24 months incarceration and 3

years supervised release, and ordered to pay a $700 special assessment. He was

previously found guilty of one count of conspiracy, five counts of mail fraud,

and one count of money laundering. Rene Fagundo, a co-conspirator, was

sentenced to 3 years probation and ordered to pay a $200 special assessment.

The two were also ordered to pay a total of $242,458 in restitution. Fagundo

pled guilty in August 2001 to two counts of mail fraud. Gonzalez and Fagundo

were involved in a Title I and Title II loan fraud scheme that involved $14

million in HUD insured loans and over 46 properties. To date, HUD has paid $5

million in claims.

PIC was a mortgage brokerage company that originated Title I and Title II

home improvement loans. Gonzalez and Fagundo created false verification of

employment forms, W-2s, and pay stubs using personal information provided

by employees of Allstate Mortgage. The false documents were submitted to

HUD so that unqualified buyers were able to obtain HUD insured loans. The

Allstate Mortgage employees involved in the scheme were previously charged.

This case was initiated and conducted by OIG with the assistance of the FBI.

Clifton Anderson Hinds was sentenced to 24 months incarceration and 36

months supervised release, was fined $3,000, charged a special assessment of

$1,400, and ordered to pay $41,810 in restitution to HUD. Hinds previously

pled guilty to 14 counts of mail fraud and 7 counts of making false statements.

He had owned and operated real estate investment companies named United

Funding Group, H&H Investments, and Noetic Investments, through which he

recruited and met potential strawbuyers to help him obtain mortgage loans and

invest in properties. The scheme was directed at commercial lending institutions and HUD. Hinds would purchase distressed properties in the Los Angeles
area and arrange for fictitious sales of the properties to strawbuyers at inflated

prices. He then used the information obtained from the strawbuyers to prepare

loan applications, real estate purchase contracts, deeds of trust, and other loan

documents to obtain mortgages in the names of the strawbuyers. The lending

institutions relied on the false information to extend loans to the strawbuyers.

The profits from the proceeds of the fraudulent real estate transactions caused

this scheme to continue and flourish. Hinds caused not less than $10 million

of loans to default at a loss to the government of between $600,000 and $1

million.

Two other individuals were also charged with mail fraud in this case.

Using their companies, Malitop, Inc., Malitop Realty, Inc., Western Security

Group, Champion Investment Group, Pacific Access, Inc., Western Property

Management Group, and Nesbitt’s Distributing, Ltd., the defendants allegedly

used the personal information of others to fraudulently obtain single family

mortgage loans and Title I loans insured by HUD/FHA. They obtained the loans

through the fraudulent use of the victims’ Social Security numbers, dates of

birth, and other personal and credit information. The defendants recruited

strawbuyers or directed others to do so, created or obtained false W-2 forms

and pay stubs in the names of the strawbuyers, and notarized documents

certifying that the strawbuyers signed deeds and other required documents.

The loan applications and false documents were submitted to lending institutions to support inflated income levels necessary to obtain the loans; the

lending institutions relied on the false information to extend loans to the

strawbuyers. About $1.5 million of FHA insured loans went into default as a

result of this scheme. This was a joint FBI/OIG investigation.

A defendant in Los Angeles was arrested pursuant to a federal indictment

charging her with six counts of wire fraud, five counts of bank fraud, and one

count of aiding and abetting. Two co-defendants were summonsed to federal

court pursuant to the same indictment. The co-defendants were involved in a

fraud scheme from 1997 through 2000 that used businesses owned and operated by the first defendant to help unqualified borrowers obtain $100 million

in fraudulent FHA insured loans. The first defendant is currently on federal

probation for a conviction on similar charges related to a document forging

business that she ran. The most recent indictment charges that she continued

the scheme by selling forged tax forms, check stubs, and credit documents that

could be used to obtain FHA insured loans. She allegedly created fictitious

businesses to verify the documents for lenders, and sold these documents to

real estate brokers and agents for $75 to $300. The loss to HUD/FHA as a

result of these schemes is approximately $20 million. This was a joint FBI/OIG

investigation.

Sheldon Port pled guilty to one count of mail fraud and one count of

aiding and abetting in conjunction with a scheme to defraud American Development Corporation (ADC), a Los Angeles company that managed HUD

subsidized multifamily properties. While the ADC employees were being paid

with HUD funds to maintain Section 8 subsidized apartments, Port used the

employees to perform construction work for the John Turner Construction

Company on non-subsidized properties. Port and his co-conspirators then kept
the proceeds from the John Turner Company for themselves. Port was also paid

by ADC to be a maintenance employee even though he performed no maintenance work. He submitted false timecards to a co-conspirator who approved

them with the knowledge that Port had not done the work for which he was

being paid. This case was conducted jointly by the FBI and OIG.

The guilty pleas of three property speculators, John Quigley, Dorothy

Quigley, and Timothy Blackburn, and a real estate agent, George Daniel Page,

Jr., were unsealed in district court. The three speculators previously pled guilty

to conspiracy to commit fraud against HUD. The speculators, with the assistance of the real estate agent, would buy and quickly resell distressed properties

at fraudulently inflated prices, create and submit false financial documents

regarding homebuyers in order to qualify them for FHA insured mortgages, and

fraudulently inflate appraisals. This, in turn, caused lenders to lend more

money than the properties were worth. The co-conspirators distributed the

illegal mortgage proceeds among themselves. Proceeds from these transactions

totaled over $2.4 million. The real estate agent participated in at least 42

fraudulent sales of properties in the Washington, DC metropolitan area. Approximately 13 of the properties are in default or the foreclosure process, with

an estimated loss to HUD in excess of $700,000. This was an OIG/FBI investigation.

Eun Joo Hopkins was sentenced for her involvement in a mortgage flipping

scheme. She was sentenced to 5 years probation and ordered to pay $112,359 in

restitution. Hopkins, acting as a loan officer, used false verifications of employment and false documentation of assets in order to ensure that strawbuyers

would qualify for FHA insured mortgages. The investigation was conducted by

OIG and the FBI.

A joint investigation by OIG and the FBI resulted in the sentencing of a

Prince Georges County, MD mortgagor to 30 months incarceration in connection with a scheme in which counterfeit checks were negotiated at various

institutions and false earning documents were submitted to HUD to obtain an

FHA insured mortgage. The scheme resulted in a $120,000 loss to the various

institutions and a $158,000 claim to HUD on the mortgage loan.

An Upper Marlboro, MD appraiser was indicted on one count of conspiracy and seven counts of accepting a bribe. The appraiser, an approved HUD

real estate appraiser, along with unnamed co-conspirators, allegedly made

money by creating and submitting false financial documents about homebuyers

in order to qualify them for FHA insured mortgages, fraudulently inflating the

values of the properties, and causing lenders to lend more money than the

properties were worth. They then allegedly distributed the illegal mortgage

proceeds among themselves. The appraiser appraised 45 properties that were

bought and sold with 1 or more of the co-conspirators. Twenty of the 45 FHA

insured mortgage loans have been foreclosed. HUD has acquired 14 of these

properties and resold them at a total loss of over $1.3 million. This investigation was conducted by OIG and the FBI.

District of Columbia
A Metropolitan Police Captain and his wife, an Amtrak Police Officer,

were indicted on charges of conspiracy and submitting false statements to HUD

in connection with the purchase of an Officer Next Door (OND) Program

property, a four-unit apartment building. An investigation by OIG and the

Postal Inspection Service disclosed that the Officers failed to reside in the OND

property for the required 3-year period. The Officers received a $35,000

discount on the sales price of the property under the OND Program.

In addition, they were also indicted on charges of perjury and aiding and

abetting. The Officers sought and obtained representation from the Federal

Defender’s Office, and in doing so, filed a false financial affidavit with the

court.

Agents from the HUD and Social Security Administration OIGs executed a

federal search warrant on the home of a Temple Hills, MD real estate speculator. The speculator is allegedly involved in illegal property flips in Maryland

and Washington, DC. An investigation disclosed that the speculator lured

unsophisticated buyers to purchase properties, on which the speculator had

obtained inflated appraisals, by providing the buyers with false gift letters and

working with lenders and settlement companies to disguise the sources of the

down payment funds. To date, HUD has suffered financial losses approaching

$500,000 as a result of the speculator’s scheme.

A joint investigation by the Postal Inspection Service, OIG, and the

Howard County Police Department led to the arrest of a Laurel, MD man for

identity theft, mail theft, possession of a credit card in the name of another

person, and fraudulently using the identifying information of another person.

The individual had stolen mail from numerous victims and assumed their

identities to obtain credit cards. He then used HUD foreclosed homes as mail

drops to receive the fraudulent credit cards and other mailings. Agents and

Police Officers arrested the man as he picked up the mail at one of the HUD

homes.

OIG and FBI Agents seized $360,000 in profits from a speculator along

with $270,000 in property from a loan officer. The funds/property were

derived from the individuals’ illicit real estate transactions. The speculator and

loan officer provided homebuyers with fraudulent gift funds, earning statements, and verifications of employment so they would qualify for FHA insured

loans. The loan officer purchased a house using fictitious documents and

proceeds from the fraudulent transactions.

In the same case, federal authorities arrested a former Washington, DC

speculator at the Atlanta Hartsfield International Airport as she attempted to

re-enter the United States from Panama. The woman fled the United States

after OIG and FBI Agents seized $500,000 in assets that were derived from her

illicit real estate transactions. A U.S. Magistrate Judge in Atlanta ordered the

woman detained pending her removal to the District of Columbia.

OIG and FBI Agents arrested a District of Columbia resident and a Montgomery County, MD resident for their involvement in a property flipping

scheme in the Washington, DC area. The speculators allegedly purchased
distressed properties and then sold them for a significant profit. The pair

helped the buyers qualify for FHA insured home loans by providing them with

fictitious documents and fraudulent gift funds. The loss to HUD is estimated at

$1.4 million.

OIG and the FBI conducted a joint investigation involving a 20 person

property flipping scheme in Chicago. To date, 12 persons have been sentenced,

while 21 have been indicted and convicted for their participation in the scheme.

Tamira Smyth, also known as Tamira Russo, a former loan officer, was sentenced to 20 months confinement and 3 years supervised release, and ordered

to pay $2.2 million in restitution to HUD and various private lenders. In

Smyth’s capacity as a loan officer, she fraudulently originated at least 27 loans,

9 of which were FHA insured. Specifically, Smyth was responsible for the

submission of false loan documents on behalf of buyers. For her participation

in the scheme, she received kickbacks at the closings under an alias.

Jerry Williams, a recruiter and mortgagor, and Reginald Owens, an appraiser, were sentenced to a total of 33 months incarceration and 3 years

probation, and ordered to pay $1.9 million in restitution, $821,000 of which

was due to HUD. William was responsible not only for recruiting strawbuyers,

but also obtaining his own mortgage through the use of fraudulent documents.

Owens intentionally inflated appraisals for the transactions. He also received

kickbacks for his role in the scheme.

Loan processor Nicole Williams was sentenced to 12 months confinement

and 3 years supervised release, and ordered to pay $831,428 in restitution to

HUD and various other private lenders. Williams previously pled guilty to her

participation in the origination of eight fraudulent loans, two of which were

FHA insured. Although some of the loans were for the borrowers of flip

transactions, Williams personally obtained two loans for herself through the

submission of false loan documents.

Loan officer Nancy Zimmerman was sentenced to 10 months in prison and

2 years supervised release and ordered to pay $666,700 in restitution to HUD

and other private lenders. Zimmerman previously pled guilty to originating 14

fraudulent loans, 9 of which were FHA insured, for the end borrowers of flip

transactions. For her participation in the scheme, Zimmerman received kickbacks under an alias following the loan closings.

Marlon Jackson, a real estate agent, and Keith Sloan, a paralegal, were

sentenced after pleading guilty. Jackson, who facilitated 6 fraudulent loan

originations, 4 of which involved FHA insured mortgages, was sentenced to 16

months confinement and 1 year supervised release, and ordered to pay

$311,000 in restitution to HUD and other private lenders. Sloan, who participated in the falsification of records at a title company, was directly responsible

for 14 fraudulent loans, many of which were FHA insured. He was sentenced to

3 years supervised release and 200 hours of community service, and ordered to

pay $638,396 in restitution to HUD and other private lenders.

Valarae Washington-Hill, a mortgagor, was sentenced to 3 years probation

and 100 hours of community service, and ordered to pay $94,079 in restitution

to HUD. Washington-Hill previously pled guilty to her participation in the

purchase of her own FHA insured home, and receiving kickbacks for her role in

cashing inflated sales proceeds checks for Brian Parr, a property flipper who

has already been convicted.

Northern District of

Illinois
Curtis Jackson, a mortgagor/recruiter, was sentenced to 3 years probation

and 1 month house arrest, and fined $5,000. Jackson not only fraudulently

obtained his own FHA insured property, but recruited a buyer to whom he sold

another property through fraudulent means and split $34,000 in proceeds

from that transaction.

Angela Nash pled guilty to one felony count. Nash, who was charged with

bankruptcy and bank fraud, admitted submitting a fictitious name, Social

Security number, and employment information in order to purchase an FHA

insured home and a sport utility vehicle. She also used the false information in

filing three separate bankruptcies following her failure to make payment on the

loans.

Hermilyn Strong was sentenced in Chicago to 60 months imprisonment

and 3 years supervised release, and ordered to pay $562,000 in restitution to

HUD, private lenders, and various other victims. Strong previously pled guilty

to one count of submitting false statements to HUD, bankruptcy fraud, and

misuse of a Social Security number in connection with a scheme wherein she

purchased properties with fraudulent information and bogus identities and

forestalled foreclosure by providing additional false information on bankruptcy

filings. This was a joint investigation by the HUD and Social Security Administration OIGs and the FBI.

Carol Wikell, a Section 8 landlord, and Maria Davis, a Section 8 resident,

both of whom were originally charged in December 2000, pled guilty and

were sentenced in Dupage County. Wikell, who collected housing assistance

payments on behalf of a deceased resident, was sentenced to 24 months

probation and ordered to pay $4,113 in restitution. Davis, who failed to report

her correct income, was sentenced to 30 months probation and 100 hours of

community service, and ordered to pay $6,242 in restitution. This brings the

total restitution in this case to $97,000 to date. The investigation was conducted by OIG and the Dupage County States Attorney’s Office.

In Zion, Rene Pierce was sentenced to 3 years supervised release and

ordered to pay $23,733 in restitution. Pierce previously pled guilty after an

OIG investigation determined that though she received Section 8 rental benefits, she did not occupy her Section 8 property. Instead, she purchased an

FHA insured home and occupied it.

Following an OIG investigation, Section 8 resident Sammie Carter pled

guilty to state benefits fraud and was ordered to pay $11,664 in restitution to

the Joliet Housing Authority. Carter was indicted in July 2001 as part of a

follow-up to an Attorney General Section 8 landlord/tenant prosecution

package. Specifically, Carter failed to report her and her husband’s wages to

the Housing Authority and then filed bankruptcy, wherein she listed all of the

unreported income as well as a multitude of creditors.

In Chicago, Wilma Corks and Eugene Hardney, who earlier pled guilty to

their participation in an FHA fraud scheme involving fraudulent identities,

fictitious banks and employers, and the submission of counterfeit cashiers’
checks at closing, were each sentenced to 5 years probation and were ordered

to pay a total of $26,424 in restitution. This was a joint investigation by OIG

and the Secret Service.

A joint OIG/FBI investigation of Easy Life Realty in Chicago resulted in

seven guilty pleas and one arrest. Richard Nelson, president of Easy Life

Realty, and Millie Morales, Nelson’s office assistant/real estate agent, each pled

guilty to one count of mail fraud. The two falsified mortgagors’ down payments and closing costs by making the down payments appear to be gifts from

relatives, when in fact Nelson and Morales provided the cash. Losses attributed

to Nelson and Morales range between $200,000 and $300,000.

Barbara Brown-Reich, Laura Stegmeir-Pauwels, and Peter Sandow, all

former real estate agents for Easy Life Realty, were sentenced after earlier

pleading guilty to defrauding HUD by falsifying gift information on behalf of

FHA insured loan applicants. Brown-Reich was sentenced to 15 months probation and a $1,500 fine. Stegmeir-Pauwels was sentenced to 1 year probation

and a $1,000 fine. Sandow was sentenced to 1 year probation and a $1,000

fine, and was ordered to immediately surrender his Illinois real estate license.

All three cooperated in the investigation following their indictment.

Robert Ducks, former Easy Life real estate agent, was arrested on an

outstanding murder warrant. The murder warrant was discovered when Ducks’

fingerprints matched those of one Donald Galloway, who was wanted for

the1979 murder of his wife. Ducks’ fingerprints were taken after he pled guilty

to one felony count in connection with making fraudulent gifts on FHA insured

loans. Additionally, while using the Galloway alias, Ducks is believed to have

been arrested several times, including on a felony charge for which he spent

time in the Stateville Correctional Center.

Helen Miller, a real estate agent and former employee of Easy Life Realty,

pled guilty to her involvement in the FHA fraud scheme. Miller also admitted

to falsifying gift letters, when in fact Easy Life Realty provided the cash for

borrowers to qualify for the loans. The loss attributed to Miller is approximately $111,000.

John Morelli, a loan officer, and his wife, closing agent Deborah Rivera,

each pled guilty to federal charges in connection with their attempt to refinance

and cash out on a property in Chicago that they never actually owned. Specifically, they falsified deeds as well as verifications of deposit and employment.

This was a joint OIG/FBI investigation.

Reynaldo Saez, a loan officer, pled guilty to mail fraud. Saez admitted

falsifying W-2 documents, verifications of employment, and loan applications

in connection with three different FHA insured properties in Chicago. This was

a joint OIG/FBI investigation.

An investor in Chicago, who is currently being investigated for selling

properties to which he does not have title, was indicted on charges of submitting false statements. The investor allegedly used a fictitious name in bankruptcy filings, and at the time of the filings, failed to disclose that he grossed
over $140,000 in real estate proceeds over the last 2 years or that he owned 2

real properties. This was a joint OIG/FBI investigation.

A loan officer, who is currently under indictment for two different real

estate schemes under the Cook County States Attorney’s Office, another loan

officer, a loan processor, and their employer were indicted on multiple counts

of conspiracy, theft of over $100,000, theft of over $10,000, and computer

fraud over $50,000. The second loan officer and the loan processor were

indicted on two counts of forgery relative to a fraudulent bankruptcy. The

second loan officer was also charged separately for failure to file state income

tax returns. These individuals allegedly originated eight FHA insured loans. As

part of the scheme, the loan officers acted as the sellers under fictitious

names, while simultaneously recruiting strawbuyers with assumed identities to

apply for the fraudulent financing. The properties allegedly had inflated

appraisals, making the scheme similar to a flip transaction. The sales occurred

on the same day as the original sales, or shortly thereafter, with prices much

higher than the original sales prices. This investigation was conducted by OIG

and the Illinois State Police.

A former loan officer, already under investigation for activities in connection with a series of FHA insured loans, was indicted for the second time on

state charges with two other individuals for attempting to sell a property in

Chicago to which they did not have title. These individuals were indicted the

first time on August 16, 2001. Specifically, the former loan officer, acting as

the attorney, and two other individuals, acting as the seller’s representative and

the strawbuyer, allegedly attempted to sell a mortgage-free property in order

to make over a half million dollar profit. All of this was unknown to the true

owner. In total, the individuals were each charged with one count of attempted

deception, one count of forgery to make or alter documents, five counts of

forgery with intent to issue or deliver documents, and one count of forgery to

possess with intent. The individuals posing as the seller’s representative and

the strawbuyer were charged with an additional count of possession with intent

by display of fraudulent identification. This was an OIG/Chicago Police Department investigation.

Anthony Deal, a former real estate salesman in Greenbelt, was sentenced

to 33 months incarceration and 3 years probation, and ordered to pay

$348,000 in restitution to HUD for his role in at least 36 fraudulent FHA

transactions. Deal, who previously pled guilty to an 8-count indictment, failed

to file personal tax returns for 1995, 1996, and 1997, and filed false tax

returns for at least 11 clients, claiming nonexistent business losses, child care

credits, and a false real estate deduction. Deal also made fraudulent real estate

sales, using false employment verification documents, wage statements, and

gift letters to secure FHA insured loans. The loss to the government from these

false transactions will exceed $2.5 million. This investigation was conducted

by the OIG, IRS, and FBI.

George Schiaffino, a real estate agent, Kay House Realty, his company,

and William Dennis White, a non-licensed real estate agent who previously

District of Maryland
pled guilty to submitting false statements to HUD, were sentenced in federal

court in Baltimore. A joint investigation by OIG and the FBI, which included an

undercover operation, found that the defendants flipped approximately 80

properties and provided the mortgagors with false paperwork, including gift

letters, rental histories, employment documents, and credit information, to

enable them to qualify for about $5 million in FHA insured mortgages. Approximately 20 percent of these mortgages have gone into foreclosure, with

losses to the FHA insurance fund in excess of $300,000.

Schiaffino was sentenced to 6 months house arrest with electronic monitoring and 5 years probation, and ordered to pay $342,341 in restitution to HUD

and a $100 special assessment fee. As part of a special condition, Schiaffino

was also ordered to pay Kay House Realty’s fine in a lump sum payment within

180 days. This amount will be credited to Schiaffino’s restitution. Kay House

Realty was sentenced to 3 years probation, fined $62,001, and ordered to pay a

$200 special assessment fee. White was sentenced to 4 years probation and

1,500 hours of community service, and ordered to pay $104,932 in restitution

to HUD and a $100 special assessment fee. Both Schiaffino and White were

determined to be responsible for restitution. Schiaffino and Kay House have

been debarred from participating in HUD programs for 3 years.

Harvey Adler, the owner of Adler Services Group, was sentenced to 41

months incarceration and 3 years probation, and ordered to pay $235,000 in

restitution to HUD for his role in submitting false and inflated bills to the

Housing Authority of Baltimore City (HABC) for maintenance and repair work

on several public housing properties. Adler was previously convicted on nine

counts of making fraudulent statements to the HABC. He caused his company to

submit invoices for maintenance on gas and oil fired furnaces that was never

performed and inflated the cost of the parts. Adler directed technicians to

install parts that were not needed and to inflate the number of hours they

worked by two or more times.

Scott Dower, the former vice president of Adler Services Group, was also

sentenced in this case to 3 years probation and ordered to pay $28,519 in

restitution and perform 300 hours of community service. Dower submitted

false and inflated bills to the HABC for maintenance and repair work on several

public housing properties. This was a joint OIG/FBI investigation.

Scott Mead, who flipped dozens of Baltimore properties, often using

aliases, and then laundered hundreds of thousands of dollars in illicit profits

through Cayman Islands bank accounts, was sentenced to 64 months in federal

prison. Mead also returned to the government $187,856 from his bank accounts in the Cayman Islands and Liechtenstein and from the sale of a Montana

ski condominium that he bought and moved to after learning he was under

investigation. Over a 4-year period, Mead bought low-cost houses and quickly

resold them at prices as much as twice the actual value. Buyers put little money

into the deals and were promised cash at settlement. Mead admitted not only

using false information to obtain mortgages for the buyers, but also that the

loans exceeded the value of the homes by more than $1 million. After the deals

were closed, the money was wired to New York and then to Liechtenstein.

During the course of the investigation, it was learned that Mead arranged for
one of his properties to be burned down for insurance proceeds after he

learned that he would be unable to realize sufficient profit after resale. This

was a joint investigation by OIG, ATF, and the Postal Inspection Service.

Kent Cockrell, a tax return preparer in Greenbelt and known associate of

speculator Donald Harmon, was sentenced to 6 months home detention, 2

years probation, and 75 hours of community service, and ordered to pay

$77,330 in restitution to HUD for his role involving a mortgage fraud scheme

in Prince George’s County. Cockrell created fraudulent W-2’s and pay stubs in

order to enable a speculator to obtain approximately 20 properties; the documents were used in support of loan applications to obtain FHA insured mortgages. The loss to the government exceeded $600,000. Harman previously

pled guilty and is awaiting sentencing. This investigation was conducted by the

OIG, FBI, and Postal Inspection Service.

In Greenbelt, David D. Nuyen, the owner of 15 rental properties in the

District of Columbia and Maryland, was sentenced to 24 months incarceration

and 3 years probation, and fined $50,000 for obstructing justice and submitting false documents to HUD in order to conceal his failure to notify tenants of

the presence and hazards associated with lead-based paint. This was the first

criminal prosecution in the Nation relating to lead hazard warnings required

under the Lead Hazard Reduction Act of 1992. Nuyen sought to obstruct

HUD’s investigation and to conceal his failure to properly notify tenants of the

presence of any lead-based paint hazards by giving HUD lead paint disclosure

forms for his tenants that were false and misleading. Nuyen directed resident

building managers to have tenants sign and backdate the lead-based paint

disclosure forms. He also backdated his own signature and tenants’ signatures

representing that all available lead-based paint information had been provided

to the tenants. Nuyen presented lead hazard notification forms to HUD representing that he had notified tenants that he had no specific information regarding certain apartments, when he had actually been issued housing deficiency

notices. Nuyen was also sentenced to 12 months incarceration, to run concurrently, for violating the Toxic Substance Control Act. He failed to provide the

required lead hazard pamphlet and lead paint disclosure form even after

learning of and obstructing HUD’s investigation. HUD OIG, the EPA Criminal

Investigations Division, and the FBI conducted this investigation.

On the same day in a related case, Nuyen, as a real estate broker and

mortgage lender, was also sentenced for submitting false documents to HUD in

order to conceal the fact that he was under investigation. Nuyen was charged

with making materially false statements to HUD as part of his effort to become

a loan originator. He knew and deliberately failed to disclose material information on his application that HUD was conducting an investigation regarding

his compliance with the Lead Hazard Reduction Act and that the Department

of Justice planned to file a civil lawsuit against him. This was a joint OIG/FBI

investigation.

Following an investigation by the OIG District of Maryland and District of

Columbia Housing Fraud Initiative Offices, Ruby Frye, a former employee of

Special Properties Incorporated (SPI), was sentenced to 4 months incarcera-
tion, 4 months home detention, and 1 year probation, and ordered to pay

$7,000 in restitution to HUD. Frye was responsible, under a real estate asset

management contract with SPI, for preparing and submitting invoices to HUD

for work performed by SPI’s subcontractors on properties in Montgomery

County. Frye submitted false invoices in order for SPI to obtain additional

profits from the contracts. The invoices included Frye’s certification that work

completed was done in a satisfactory manner and in accordance with the terms

of the contract.

Two Section 8 tenants pled guilty in Baltimore City to one count of felony

theft. Cynthia Steward and Daisy Victoria Reed were previously indicted for

conspiracy to commit theft through the sale and distribution of bogus Section 8

vouchers from July 1999 through February 2001, which resulted in a total loss

to the victims of $15,944. The defendants were sentenced to 5 years in prison

(suspended), 3 years probation, and 100 hours of community service, and

ordered to pay $375 in restitution to a victim and a $175 court fee. They have

also been terminated from the Section 8 Program.

This investigation stemmed from information provided by the Housing

Authority of Baltimore City (HABC) Police Department. Documents were seized

during the execution of two state search warrants, including folders of individuals with forged Section 8 vouchers and receipts of payments to the subjects.

Also seized were Section 8 vouchers and other HABC paperwork that were

whited–out except for the signature of the Housing Authority official. The

documents were copied and sold to numerous individuals for approximately

$500-$750 per voucher. In many instances, the subjects often portrayed themselves as HABC employees and explained that for a fee, the City had a program

that could expedite the Section 8 waiting process. The victims would take the

forged voucher and request for lease approval to the landlord and move in to a

Section 8 unit. Due to problems at HABC, the landlords were not suspicious

when they did not receive timely payments. Eventually, the landlord would

contact HABC only to be informed that the tenants did not have legitimate

vouchers. This was an OIG investigation.

FAA employee Malcolm Morris, Jr., pled guilty in Baltimore to submitting

false statements to HUD in order to help Rose Wright, who previously pled

guilty and is awaiting sentencing, avoid the foreclosure of her home. In March

1999, Wright sold her property to Morris, who obtained an FHA insured

mortgage. In support of his loan application, Morris submitted W-2 wage and

tax statements for 1997 and 1998 as well as a gift letter for $9,000 from his

sister. All of these documents were false and were created by Morris as a favor

to Wright. When a bank employee called Morris to confirm his stated employment, Morris lied to support the false W-2’s. After one payment, the property

went into foreclosure. HUD paid a claim of $135,855.

Also in this case, Cathy Mack, sister of Malcolm Morris, pled guilty to

furnishing the false $9,000 gift letter. This was a joint investigation by OIG and

the Postal Inspection Service.

Former Section 8 recipient Joan Wyre pled guilty to furnishing false information to the Baltimore County Housing Authority to obtain excess rental
assistance. An OIG investigation found that Wyre failed to disclose that another

person, who was employed for most of the 10 years that she received assistance, resided with her. She also failed to report income that she earned as a

day care provider and a convenience store clerk. Total assistance overpaid on

Wyre’s behalf exceeded $50,000.

An 11-count indictment was unsealed against a real estate agent charging

him with submitting false statements to HUD by creating fraudulent financial

documents for borrowers in order to help them secure FHA loans. The agent

was allegedly involved in submitting false documentation on at least 30

properties, with a loss to the government in excess of $750,000. Most of the

false documentation included tax returns, W-2’s, pay stubs, and gift letters. In

addition, the agent was involved in a series of flip transactions involving

properties in Southern Maryland. He allegedly used his own company to

buy and then resell single family properties, at a significant price increase, to

unsuspecting first-time homebuyers. In some cases, the agent provided the

purchasers with false documentation to assist them in obtaining FHA loans.

This was a joint OIG/FBI investigation.

Darrell Hill, a homebuyer/recruiter in New York City, pled guilty to

making false statements and was sentenced to 3 years in prison. Hill used false

documents to assist in qualifying homebuyers for FHA insured mortgages. He

submitted, and caused to be submitted, loan applications to banks; these

applications overstated the income of homebuyers and misrepresented the

sources of funds used for down payments and closing costs. Hill also recruited

several strawbuyers who purchased a total of 21 properties with FHA insured

loans. HUD has paid claims for 16 of the 21 loans; the remaining 5 loans are

still in default status. The total loss to the FHA insurance fund is estimated at

over $4.2 million. This was an OIG investigation.

A real estate agent in Brooklyn, who was responsible for arranging illegal

flips on properties that were insured by FHA and originated by several local

banks on Long Island, was arrested for submitting false statements to HUD. An

investigation by OIG and the FBI’s Bank Fraud Unit found that the agent

allegedly arranged for the use of strawbuyers and false employment and

income verification documents, and staged fraudulent gifts in order to obtain

FHA insured loans. This agent also appears to have profited substantially by

being the undisclosed middle buyer in these real estate transactions. Four

additional arrest warrants and one search warrant were also executed as part of

this fraud investigation involving applications for FHA insured loans which

were originated by Saxon Mortgage Bank. The arrestees included a certified

public accountant (CPA)/real estate broker in Brooklyn, who was purportedly

responsible for producing false W-2’s, pay stubs, tax returns, and verifications

of employment for many of the applicants, a loan officer employed by Saxon

Mortgage Bank, a second real estate broker, and a business owner. The search

warrant was executed at the CPA’s office.

The former director of the Youth Program for the Municipal Housing

Authority for the City of Yonkers was arraigned for theft of $261,000 in

Eastern District of New

York
government funds. The former director allegedly caused the Housing Authority

to issue 429 checks in the names of current and former Youth Program employees between May 1996 and February 2001, which were subsequently deposited

in a checking account controlled by him. A review of records disclosed that the

former director used this money for personal benefit. The investigation was

conducted by OIG and the Municipal Housing Authority for the City of Yonkers.

The president of the Ingersoll Tenants’ Association, Inc., a community

based not-for-profit organization established in the Ingersoll public housing

development in Brooklyn, was arraigned on charges of making false statements

to HUD in connection with single family equity skimming. From November

1998 through June 1999, the individual allegedly signed as borrower for

mortgages on 34 distressed properties located in Brooklyn and Queens. An

investigation by the HUD and New York City Housing Authority OIGs and the

New York City Department of Investigation disclosed falsified information on

all of the mortgage forms. In addition, all 34 properties, with Section 203(k)

Rehabilitation Home Mortgage Insurance Program mortgages, went into default

within 1 year. The Tenants’ Association received rental payments from the

tenants even though the Association never made a mortgage payment on any of

the FHA insured properties. These properties are currently in foreclosure.

Sharon Morris, the former executive director of the Lancaster Housing

Authority, was sentenced on 1 count of theft to 6 months home confinement

and 36 months supervised release, fined $3,000, and ordered to pay $92,490 in

restitution to HUD. The sentencing is the result of an OIG investigation which

found that from 1992 to 1999, Morris and an assistant stole over $300,000 in

Section 8 funds from the Authority. To conceal the theft scheme, they altered

tenant income forms to reflect certain tenants’ reported income, and to indicate

that tenants’ rents were 100 percent subsidized by the Authority. Morris and her

assistant had the tenants pay rent to them at the Authority and paid the landlord

with checks written from the Section 8 account. They also provided tenants

with rent receipts, threatened to evict them for non-payment, and split the

funds after cashing tenant checks or depositing them in their personal bank

accounts. The stolen money was spent on personal expenses and used to pay off

numerous credit card balances. Morris’ assistant, Catherine Massingill, was

sentenced in July 2001.

Rodney Dale Waggoner, the owner of Texas Real Tax, Inc. (TRTI), was

sentenced following an earlier guilty plea to one count of making false statements. Waggoner was placed on 5 years supervised release and ordered to pay

$69,500 in restitution to HUD. The sentencing is the result of a joint investigation by OIG and the FBI which found that Waggoner conspired with various

closing attorneys to charge them less than amounts appearing on statements

submitted to HUD for closing costs. Several closing attorneys contracted to do

HUD closings in the Dallas/Fort Worth area hired TRTI to research the taxes

paid on the HUD properties being closed. Waggoner entered into “back door”

agreements with at least three attorneys to charge them less than the amount

shown on the statements submitted to HUD so that the closing attorneys could

Northern District of

Texas
“pocket” the difference. While Waggoner took none of the “extra” cash, the

scheme assured TRTI a steady high volume share of business in the area.

Waggoner has cooperated with investigations of the closing attorneys that used

TRTI. Losses to HUD are expected to be in excess of $200,000.

Nancy L. Kozlowski, a former Dallas Police Department Officer, was

sentenced after pleading guilty to one count of submitting false statements to

HUD. She was placed on 2 years supervised release and ordered to pay

$21,688 in restitution to HUD. The sentencing is the result of an OIG investigation which found that Kozlowski made false statements to Special Agents

during an official interview concerning her participation in the Officer Next

Door Program (ONDP). Kozlowski received a $34,500 discount on a home

purchased through the ONDP, and instead of residing in the property for 3

years as required, vacated the house after 1 year and entered into a rental

agreement with another individual. The tenant was subsequently evicted and

the house was sold for $80,000.

Bruce E. Collingsworth, the facilities manager for the Fort Worth Police

Department, was sentenced for submitting false statements to HUD.

Collingsworth was fined $1,000 and ordered to pay $38,793 in restitution.

The sentencing is the result of an OIG investigation which found that

Collingsworth, while not a full time Police Officer, participated in the ONDP.

He purchased a home under the program, and instead of using the home as his

primary residence for 3 years, as required by the program, failed to reside in

the home.

Collingsworth is one of six North Texas Police Officers convicted for

abusing the ONDP. The prosecutions have resulted in more than $175,000 in

restitution to HUD. One Officer is serving 18 months in prison.

Earl Williams, an automotive business owner, and his spouse, Gayla

Williams, a U.S. Postal Service employee, were sentenced in Dallas for

conspiracy and aiding and abetting. Earl Williams was sentenced to 11 months

incarceration and 3 years supervised release. His wife received 180 days home

confinement and 5 years supervised release. Both were ordered to pay a $100

special assessment and restitution in an amount determined by the court. The

couple previously pled guilty to their roles in a scheme to defraud HUD. The

sentencings stemmed from an OIG investigation which found that the couple

originated a $96,000 FHA insured mortgage in the name of their minor daughter in an attempt to conceal their prior credit problems, including a previous

foreclosure on an FHA insured mortgage. Their mortgage application contained false income information and identification documents. The sentencings

are part of an investigation of Infinity Mortgage Company, which originated

$22 million in fraudulent FHA insured mortgages.

Bobby Omolo, a co-conspirator in a scheme to elicit funds from distressed

single family homeowners, pled guilty to Social Security fraud. In July 1998,

Omolo represented to a credit card company that he was the holder of a Social

Security card issued by the Commissioner of Social Security, when in fact, he

was not. Omolo was a co-conspirator with his mother, Mary Omolo. Mother
and son, doing business as MBC Financial Group, purchased Dallas/Fort

Worth area monthly foreclosure lists of properties identifying homeowners

facing foreclosure. They then mailed advertisements to these homeowners

representing that for a fee, MBC could help them avoid foreclosure by making

payments to or renegotiating the terms of the loans with the mortgage companies. After the homeowners paid the fees, no negotiations were held with the

mortgage companies and the properties went into foreclosure. Some of the

loans were insured by FHA. Mary Omolo was sentenced in July 2001. The

approximate loss to the Department is $550,000. This investigation, known as

“Operation Payback,” was conducted by the OIG.

The president of Kings Land Development (KLD), a subsidiary of Grace

Outreach Church, the pastor of Grace Outreach Church, and 2 other individuals were indicted on 36 counts of conspiracy and false statements. The indictments are the result of a joint OIG/FBI investigation which found that KLD and

Grace Outreach Church allegedly purchased dilapidated homes at low prices,

performed some repairs, obtained inflated appraisals, and sold the homes, with

FHA insured loans, to low-income buyers through American Investment Mortgage Company (AIM). Closing costs and down payment assistance were provided through a City of Fort Worth grant program. One of the subjects operated as Royal Lending, a net branch of AIM, and also falsified documents to

qualify the buyers for the FHA insured loans which later went into default. The

estimated loss to the government is expected to be in excess of $13 million.

Also in this case, Venita Darlyn Lawson, a loan processor for AIM, pled

guilty to one count of wire fraud for processing loans containing false documentation.

Ronnie Lamar Williams was sentenced for threatening to use a weapon of

mass destruction. He was ordered to serve 30 months in prison and 5 years

supervised release. The sentencing is the result of a joint investigation by OIG

and the FBI which found that in October 2001, Williams contacted the law firm

of Baker, Brown, and Dixon in Arlington, disguising his voice so that he

sounded Middle Eastern, and left a message on the office answering service

threatening to send a package of anthrax to the law firm. The answering service

logged the message as well as the caller identification information. The telephone number where the call was initiated belonged to a resident of a HUD

subsidized property owned by the Dallas Housing Authority. The OIG Southwest District Housing Fraud Initiative Office is located in the same commercial

building as the law firm.

A single family mortgagor in Dallas was indicted for submitting false

statements to HUD, identity theft, and bankruptcy fraud. The indictment is the

result of a larger investigation by OIG and the FBI involving alleged loan origination fraud by Universal Lending Group (ULG) of Southlake. ULG originated

over $50 million in loans over a 2-year period, $4 million of which are in

default and on which the Department has lost over $1 million. The investigation found that the mortgagor used a Social Security number belonging to

another individual in order to obtain an FHA insured loan, and then later used

that same Social Security number to file bankruptcy.
A federal grand jury in Dallas indicted an individual on charges relating

to previous INS deportation charges, submitting false statements to HUD, and

submitting false statements relating to an application for and use of a passport.

The indictment is the result of an OIG investigation which found that the

subject, in addition to violating previous deportation charges, used a false

name and Social Security number in order to obtain an FHA insured loan. The

subject also made false statements on applications for a Social Security number and a passport.
Chapter 3 Audits
In addition to evaluating HUD’s management and reform challenges,

conducting audit work in support of the Housing Fraud Initiative, and commenting on regulations and legislative proposals, the OIG’s Office of Audit

continued to monitor HUD programs and operations through audits. During

this reporting period, the Office of Audit issued 8 reports and 2 audit-related

memoranda on internal HUD operations, and 10 reports and 19 audit-related

memoranda on grantees and program participants. (See Appendix 1 for a

listing of the audit reports and memoranda issued.) Collections amounted to

$6.9 million, with another $11 million in management decisions on audits

with questioned costs.

Single Family Housing Programs provide mortgage insurance that enables

individuals to finance the purchase, rehabilitation, and/or construction of a

home. During this reporting period, among other reviews, we conducted a

nationwide audit of nonprofit organizations’ participation in FHA insured

Single Family Programs and follow-up nationwide audits of the Loss Mitigation and Asset Control Area Programs.

An OIG nationwide audit of nonprofit organizations’ participation in FHA

insured Single Family Programs disclosed that HUD’s current regulations,

guidelines, and controls have allowed profit-motivated entities and individuals

to manipulate the Real Estate Owned (REO) Discount Sales Program and reap

the benefits of discounted sales prices. As a result, low- and moderate-income

homebuyers have not benefited significantly from the approximately $220

million in discounts given under the program between January 1998 and April

2001. During this period, we identified nearly 4,000 REO discount sales

properties that were subsequently resold by the original nonprofit agencies to

individuals who obtained FHA insured mortgages. Analysis of information

relating to these resales showed:

 The average resale price of the properties by the nonprofit agencies was 30

percent higher than HUD’s as-repaired value of the property.

 The average resale price by the nonprofit agencies, in relation to the

subsequent FHA appraised value of the properties, was 98 percent.

 Gifts were provided by the nonprofit agencies to the mortgagors purchasing the properties from them in only 15 percent of the cases.

Abuses of HUD’s program for discount sales to nonprofit organizations

have resulted from a deficient initial screening and approval process; lack of

effective on-site monitoring; inadequate reviews of annual reports; lack of

controls over resale and reporting on properties sold at a 10 percent discount;

and a failure to take quick and effective actions when problems are noted.

Although HUD has made important changes in its approval and monitoring

processes over the last year, significant problems continue to exist.

Single Family Housing Programs

Single Family

Insurance

Programs

Nonprofit

Participation
We recommended that approval, monitoring, recertification, and sanction

processes be strengthened. (Report No. 2002-SF-0001)

The OIG performed a nationwide follow-up audit of HUD’s Single Family

Loss Mitigation Program to evaluate whether the program is effectively and

efficiently achieving HUD’s goals for increased home retention and minimized

costs to the insurance fund. The audit included reviews at six large and two

mid-size servicing mortgages and the private contractor servicing partial claim

notes.

The Department has exceeded its goals to increase the usage of loss mitigation strategies, thereby reducing losses to the FHA insurance fund with foreclosure avoidance. Although HUD has expanded the usage of loss mitigation on

FHA insured loans, additional work is needed to improve the administration of

the program. We identified four issues that are keeping the Loss Mitigation

Program from reaching its full potential and achieving HUD’s goals to help

borrowers retain homeownership while mitigating the economic impact to the

FHA insurance fund. First, servicers are approving borrowers for loss mitigation when the work-out is unlikely to succeed. These actions are delaying the

foreclosure process, increasing the cost of foreclosure, and subsidizing borrowers who fail to make their mortgage payments for extended periods of time.

Second, servicers are over-relying on partial claims, the costliest of the three

home retention loss mitigation strategies, because partial claims are quick and

easy to process while other loss mitigation strategies are more complicated.

Third, additional collection procedures are needed to collect borrowers’ defaulted partial claim notes that are not paid during the sales or refinance transactions. Fourth, HUD needs to improve its monitoring and oversight of large

servicers to ensure the servicers are consistently administering the Loss Mitigation Program within HUD requirements.

To resolve these problems, the Department needs to enhance existing

policies and procedures to improve the effectiveness and efficiency of the

program and to further achieve HUD’s goals. (Report No. 2002-DE-0001)

The OIG performed a nationwide audit of the Asset Control Area Program

to assess its effectiveness in meeting the objective of expanded homeownership

opportunities in revitalization areas. Our audit disclosed that eligible single

family properties were improperly made available to for-profit developers at

discounted prices. More importantly, we noted that the Asset Control Area

Program has only produced limited numbers of homeownership opportunities.

Furthermore, we noted that HUD is unable to adequately evaluate the effectiveness of the program because of a lack of management controls, and that the

program has increased HUD’s administrative burden under its Property Disposition Program. We further noted that HUD has a history of problems in its

attempts to administer rehabilitation programs for its single family properties.

A case in point is the Section 203(k) Program, which is the Department’s

primary program for the rehabilitation of single family properties. There have

been a number of OIG and GAO audits that discuss fraud and mismanagement in

that program. In this regard, we question the need for another rehabilitation

program, e.g., the Asset Control Area Program, especially since HUD is

experiencing implementation problems.

Loss Mitigation

Program

Asset Control

Area Program
We recommended that HUD assess the need for the Asset Control Area

Program in light of: (1) the decline in the inventory of HUD owned single

family properties; (2) the susceptibility of the program to abuse by housing

investors and contractors; and (3) the fact that the program will place an

increased burden on HUD staff. If HUD decides to continue the Asset Control

Area Program, we recommended that various management controls be

strengthened. In addition, in order to ensure that the program stays at a

manageable size, we recommended that HUD limit the number of properties

that are involved in the Asset Control Area Program. This would give HUD the

flexibility to control the size of the program. To ensure this flexibility, HUD

may need to seek legislative change. (Report No. 2002-NY-0001)

In Sandy, UT, an OIG review of American Union Mortgage’s management

controls over its loan origination and quality control procedures for the origination of FHA insured loans showed American Union not to be in compliance

with HUD requirements.

American Union has been using independent contract loan officers to

perform all loan origination functions, including those functions that are

required by HUD regulations to be performed only by American Union employees. American Union established mortgage loan origination agreements

with its independent contract loan officers, requiring exclusivity to American

Union, as they felt this would bring their loan origination operations in

compliance with HUD requirements. In addition, American Union has not

actively participated in the loan origination process performed by its independent contract loan officers. American Union relied solely on its direct endorsement mortgagee as its checks and balance for the propriety of information contained in loan origination packages.

The audit recommended that the Denver Homeownership Center: (1)

require American Union to comply with HUD requirements by making all

independent contracted loan officers full or part-time employees; (2) direct

American Union to develop and implement a management control process that

will ensure all loan origination functions are monitored for compliance with

HUD requirements; and (3) review American Union’s implementation of these

recommendations. (Report No. 2002-DE-1801)

HUD provides grants and subsidies to approximately 4,200 housing authorities (HAs) nationwide. About 3,200 HAs manage public housing units and

another 1,000 HAs, with no public housing, manage units under Section 8

Programs. (Many HAs administer both public housing and Section 8 Programs.) HUD also provides assistance directly to HAs’ resident organizations to

encourage increased resident management of public housing developments and

to promote the formation and development of resident management entities

and resident skills. Programs administered by HAs are designed to enable lowincome families, the elderly, and persons with disabilities to obtain and reside

in housing that is safe, decent, sanitary and in good repair.

Loan

Origination

Activities

Public and Indian Housing Programs
During this reporting period, we reviewed the administrative efforts of

various HAs.

In response to an anonymous complaint, we performed a review at the

Philadelphia, PA Housing Authority (Authority). The complaint alleged that

the Authority’s executive director (ED) was unfairly recruiting and promoting

individuals with whom he was affiliated rather than allowing for open and fair

competition. The complaint also alleged that the ED’s management style was

causing many executive level personnel to leave the Authority.

We found the allegation relating to the ED’s unfair hiring practices had

merit. However, as for the second allegation, although there was a general

consensus that the ED was a demanding supervisor and a number of executive

personnel left for this reason, we did not find his management style violated

any federal or state laws. In addition, we noted that the Authority violated the

conflict of interest provision of its consolidated Annual Contributions Contract

(ACC) with HUD when it hired the daughter of a member of the Authority’s

board of commissioners for a senior management position for which she was

not qualified. Further, we questioned the circumstances relating to the

Authority’s obtaining the services of a human resource consultant, who drafted

the Authority’s personnel policy that exempted the ED from following the

Authority’s prescribed personnel policies and procedures.

We recommended that the board of commissioners update the Authority’s

personnel manual to clearly define all directions and mandates granted to the

ED and other executive managers on their discretionary hiring authority, and to

include adequate safeguards to identify, track, and monitor all discretionary

hires. Further, we recommended that the board objectively assess whether the

actions taken by the ED, as defined in the report, warrant disciplinary action.

We also recommended that HUD’s Office of Public and Indian Housing evaluate

whether the conflict of interest constitutes an actionable breach of the ACC, and

if so, implement appropriate action to remedy the breach. (Report No. 2002-

PH-1803)

Following a complaint to the HUD Hotline, the OIG reviewed the Housing

Authority of the City of Evansville, IN, and found that the Authority’s former

and current management staff and its board of commissioners did not effectively manage the Authority. Specifically, they: (1) misused over $911,000 in

HOPE I and Comprehensive Grant Program funds to purchase and renovate its

administration building; (2) improperly awarded three consulting contracts

worth over $70,000 and over $10,000 in fringe benefits to its former chief

executive officer; (3) awarded 5 cleaning contracts totaling over $199,000

without full and open competition and/or when conflicts of interest existed; (4)

inappropriately acquired, developed, and disposed of property for the Emporia

Project; (5) did not exercise sound management practices over steel purchased

for construction work; and (6) did not establish an acceptable cost allocation

plan to support the allocation of costs among the Authority’s programs.

The audit recommended, among other things, that the Director of the

Public Housing Hub, Cleveland Area Office, assure that the Authority obtains

training for its current management staff and board of commissioners, take

appropriate administrative actions against the former chief executive officer and

former director of operations, reimburse the HOPE I and Comprehensive Grant
Programs for misused funds, and implement procedures to ensure the Authority follows appropriate requirements when awarding contracts. (Report No.

2002-CH-1801)

At the request of the Director of Public Housing, HUD Kentucky State

Office, the OIG reviewed the Waverly, TN Housing Authority and found that

because of mismanagement, abuse, and a lack of internal controls, the Authority is financially troubled and tenants are living in housing that is not decent,

safe, and sanitary. The audit disclosed that Authority expenditures were

inappropriate, inefficient, and undocumented. Between May 2000 and December 2000, the former executive director (ED) diverted more than $165,000 to

himself, his wife, and Authority staff through excessive salary and bonus

payments. In a possible attempt to conceal or justify the diversions, the ED

submitted a budget revision on August 31, 2000, to the board of directors and

HUD requesting over $14,000, including bonuses of over $5,000 for the ED

and $9,500 for other staff. The budget revision was approved even though it

conflicted with the Authority’s personnel policy. Neither the board nor HUD

was unaware when they approved the revision that the ED had already paid

bonuses totaling $49,750. We believe the diversions remained undetected over

an extended period due to ineffective board oversight and a lack of management controls.

The audit recommended that HUD require the Authority to collect

$165,630 through its fidelity insurance policy and terminate all employees

involved in the diversions. We further recommended that HUD ensure the

Authority obtains and maintains competent management and institutes proper

management controls. We also recommended administrative sanctions, as

appropriate. (Report No. 2002-AT-1804)

At the request of the Senior Community Builder of the HUD San Antonio

Office, the OIG reviewed the Housing Authority of the City of Lockhart, TX.

We concluded that:

 Allegation: family members of Authority employees are paid to perform

“odd jobs” for the Authority. We found two occurrences of payments to

family members of Authority employees for temporary employment. Also,

an independent accountant audit report for the year ended September 30,

1997, included a finding that a contractor for the Authority hired the

executive director’s (ED) son to help him. We found no further payments

to the ED’s son during our review.

 Allegation: family members of Authority employees and board members

have custody of Authority cell phones. The ED permitted at least two

personal cell phones to be billed to the Authority. These phones are not

used for Authority business. The ED also permitted Authority employees

to use Authority cell phones for personal use. However, based on our

review, the Authority only pays for cell phone usage related to Authority

business.

 Allegation: the Authority purchased its vehicles from a company owned by

the chairman of the board. The Authority violated the Annual Contribu-
tions Contract, as well as its own procurement policy. Since the board

chairman and his family own Lockhart Motor Company, there is an appearance that a conflict of interest may exist in the Authority’s purchase of a

vehicle from the dealership. Also, the Authority solicited only two bids

instead of the required three.

Our review also found that the Authority arbitrarily allocated almost

$121,000 in personnel salaries to the Low-Rent Program.

We recommended that HUD require the Authority to implement procedures

consistent with OMB Circular A-87 to allocate costs to the Low-Rent Program

based on the benefit received, justify unsupported salary allocations, and

correct the instances where we found that complaints were valid. (Report No.

2002-FW-1801)

In response to a request from the Director of Public and Indian Housing,

HUD Massachusetts State Office, the OIG reviewed of the South Kingstown, RI

Housing Authority and found that the Authority lacks proper internal controls,

thus contributing to the improper use of credit cards, poor safeguarding of

assets, and the failure to enforce travel policies. Further, the Authority has been

unable to adequately recover outstanding tenant accounts receivable, which

have increased 50 percent over a 10-month period because the Authority does

not enter into repayment agreements with tenants on a timely basis, and does

not enforce court decisions to evict tenants for non-payment of rent.

The former executive director (ED) used the Authority’s Visa card for over

$15,000 in purchases of personal items. While the ED repaid the money, he

also used the Authority’s credit cards for another $4,800 in inappropriate

charges which were not reimbursed.

Both the maintenance director and the administrative assistant at the Authority maintain manual logs to track non-expendable equipment. However, the

logs were missing significant information. A computerized work order system

used by the Authority to track maintenance work by job was also missing

pertinent information.

The Authority spent over $56,000 on training and travel during the past 4

fiscal years. However, in the absence of supporting documentation justifying

the need for the travel, we could not be assured that these costs were reasonable

and necessary.

The audit recommended that HUD require the Authority to implement

necessary internal control procedures, perform an inventory of all non-expendable equipment and reconcile the results with property records, and implement

procedures to aggressively recover outstanding tenant accounts receivable. We

also recommended HUD impose appropriate administrative sanctions against

persons responsible for the misuse of low-income operating funds. (Report No.

2002-BO-1801)

At the request of the Program Center Coordinator, HUD’s Portland Office of

Public Housing, the OIG audited the Nampa, ID Housing Authority and found

that its board of commissioners did not adequately carry out its responsibilities

to oversee the administration and operations of the Authority. The board did

not provide adequate monitoring or adopt policies and procedures that are

adequate or consistent with program requirements. Specifically:
 The Authority does not have specific procedures for evaluating employee

performance and determining the reasonableness of staff salaries. As a

result, the board substantially increased the executive director’s salary

without properly evaluating his performance or the reasonableness of the

increases.

 The board advised the executive director not to track his time, resulting in

HUD grants paying for work on non-HUD activities. Also, the Authority

charged employee salaries to HUD grants based on budget estimates rather

than actual activities.

 The board did not always ensure that the executive director’s travel was

approved and claims were proper. Therefore, the Authority does not know

if travel costs were necessary and reasonable.

 The board did not exercise reasonable controls when it allowed the executive director to sell items to the Authority, resulting in conflicts of interest

and questionable purchases.

 The board did not ensure the Authority had controls to safeguard tenant

rent and security deposits, resulting in misappropriated funds. In addition,

the board did not take action to recover the misappropriated funds.

The audit recommended that HUD: (1) determine, in conjunction with

appropriate City officials, the proper administrative actions to be taken against

the board and the executive director; (2) implement the necessary policies and

controls to ensure the Authority is run efficiently, has proper board oversight,

and complies with HUD requirements; and (3) require the Authority to reimburse or provide support for questionable costs. (Report No. 2002-SE-1001)

Based on concerns by the HUD Michigan State Office of Public Housing

Hub about the Ypsilanti, MI Housing Commission’s controls over monetary

assets and inventory, the OIG audited the Commission. We found that the

Commission’s controls over cash and other monetary assets and inventory

were weak. Specifically, the Commission: (1) improperly claimed almost

$98,500 in operating subsidy since the Commission did not adjust its subsidy

claims for long-term vacant units and inflated the number of occupied units

claimed; (2) failed to maintain an acceptable level of occupancy that resulted

in the Commission’s losing an estimated $157,000 in rental income; and (3)

did not implement procedures and controls to safeguard its cash and other

monetary assets against possible waste, loss, and misuse. Procedures and

controls were lacking over cash receipts and deposits, disbursements, equipment, procurement, and financial and administrative processes.

We recommended that the Director of HUD’s Michigan State Office of

Public Housing Hub assure that the Commission implements controls to

correct the weaknesses cited in the audit. (Report No. 2002-CH-1001)

As a result of citizen complaints, we completed an audit of the Housing

Authority of the City of Alton, IL’s Low-Income Housing and Public Housing
Drug Elimination Programs. The complainants’ allegations were: (1) the

Authority’s former executive director (ED) was granting preferential treatment

to certain tenants; (2) the Authority improperly used HUD funds; and (3) the

Authority had poor controls over its equipment.

There was no evidence that the Authority’s former ED was granting preferential treatment to certain tenants. However, the Authority did improperly use

HUD funds and had poor controls over its equipment. Specifically, the Authority: failed to make required tax payments totaling almost $51,000; claimed at

least $38,800 in excess operating subsidies over a 4-year period; did not make

sufficient efforts to collect tenant accounts receivable totaling $39,700; inappropriately charged expenses of almost $145,000 to its Drug Elimination

Grants; and improperly paid its former ED almost $6,700 for accrued but

unused sick leave. The Authority’s system of management controls was weak.

Controls did not assure that the Authority adhered to its policies concerning

performance appraisals, inventory of equipment, allocation of unit size, tenant

grievances, rental collections and evictions, and travel reimbursements. As a

result, HUD lacks assurance that the Authority’s resources were used to the

maximum extent to benefit low- and moderate-income tenants.

We recommended that the Director of HUD’s Illinois State Office of Public

Housing Hub assure that the Authority reimburses HUD for the ineligible use of

funds and implements controls to correct the weaknesses cited in the audit.

(Report No. 2002-CH-1002)

An OIG audit of the Concord, NH Housing Authority contains four findings: (1) improper procurement activities where we questioned the correct

valuation of contracts costing $772,000; (2) lack of an adequate system of

management controls; and (3) improvement needed in the administration of the

Public Housing Drug Elimination Program (PHDEP); and (4) improvement

needed over administration of the Section 8 Program. We identified unsupported costs totaling over $58,000 relating to PHDEP and ineligible costs of

more than $6,000 relating to duplicate Section 8 payments. For these 4 findings, we made 16 recommendations to recover ineligible costs, document

unsupported costs, establish proper values for goods and services, ensure that

proper practices are carried out, and utilize HUD provided resources efficiently

and effectively. (Report No. 2002-BO-1002)

HUD issued its final debarment letter to Rogelio P. Perez, former executive

director of the Uvalde, TX Housing Authority. The debarment resulted from a

December 2000 OIG audit of the Authority which showed that Perez diverted

over $500,000 of Section 8 and Low-Rent Housing Program funds for other

than their intended purpose. The debarment is for a 3-year period, from

November 26, 2001, the date of HUD’s initial proposed debarment letter, to

November 25, 2004.

The Office of Community Planning and Development (CPD) seeks to

develop viable communities by promoting integrated approaches that provide

Community Planning and Development Programs
decent housing, a suitable living environment, and expanded economic opportunities for low- and moderate-income persons. The primary means toward

this end is the development of partnerships among all levels of government

and the private sector. During this reporting period, OIG audits focused primarily on grantees’ administration of the Community Development Block Grant

(CDBG) and HOME Programs, Enhanced Enterprise Community Funding, and

the Continuum of Care.

The CDBG Program provides annual grants to entitled communities to

carry out a wide range of activities directed toward neighborhood revitalization, economic development, and improved facilities and services. The purpose of the HOME Program is to expand the supply of decent, safe, sanitary,

and affordable housing, primarily rental housing for low- and very lowincome families, through eligible forms of assistance, such as loans, loan

guarantees, equity investments, and interest subsidies. Enhanced Enterprise

Community Programs were designed to address severe community problems

such as high unemployment, crumbling infrastructure, and minimal access to

business capital. The Continuum of Care Program is designed to fight against

homelessness by linking key housing services and expediting movement

toward housing for the homeless.

At the request of the HUD Pennsylvania State Office of CPD, the OIG

audited the City of Williamsport, PA’s CDBG and Home Investment Partnership (HOME) Programs. HUD requested the audit based on the number of

deficiencies identified in the City’s program administration during a routine

HUD monitoring review completed in June 2000. For the 6 activities reviewed,

we found the City violated 22 specific program regulations, several of which

had multiple violations. Because the City did not have a sound internal control

environment in which to execute its programs, it funded over $2 million of

ineligible activities, made over $576,000 in unsupported payments and drawdowns, and ultimately executed activities that may not have fully benefited

low- and moderate-income persons.

Key recommendations in the audit require the City to continue submitting

supporting documentation for funded activities until it demonstrates the

capacity to administer its programs without supervision, and reimburse HUD

for all ineligible costs, unsupported costs, and drawdowns which it cannot

adequately support. (Report No. 2002-PH-1001)

The OIG completed an audit of the City of Utica, NY’s (grantee) CDBG,

HOME, and Section 8 Existing Housing Programs in December 1999, but

postponed issuance of a final audit report until a related ongoing criminal

investigation was completed. Upon completion of the investigation, we performed a review to update the status of the four findings developed during the

1999 audit. Our review disclosed that deficiencies continue to exist within

each of the program areas examined in 1999. Specifically, we reported:

 Management controls are lacking or ineffective over financial and accounting functions, program monitoring, and programmatic communications.

 Because the grantee did not establish adequate controls to safeguard

assets, CDBG funded rehabilitation programs were charged nearly

CDBG and

HOME Programs
$377,000 of ineligible and unsupported costs. This lack of controls also

Allowed an employee to embezzle almost $114,000.

 The grantee could not adequately demonstrate that HUD funds amounting to

almost $832,000 were used for eligible and necessary activities, or that all

HUD funded activities achieved appropriate program objectives.

 The grantee did not effectively scrutinize the performance of Utica Community Action, Inc. (UCAI), with which it contracted to administer its

Section 8 Program. Consequently, in the first 11 months of its contract,

UCAI expended over $127,000 in costs not adequately documented.

The audit recommended that HUD require the grantee to implement the

management controls needed to correct deficiencies cited in the audit, reimburse ineligible costs to the CDBG Program from non-federal funds, and provide justification for the unsupported costs. (Report No. 2002-NY-1801)

Although the City of Worcester, MA, generally utilized its CDBG funds

efficiently and effectively, an OIG audit identified problems with the administration of the program. Our finding indicates that the City improperly allocated

salaries of over $710,000, fringe benefits of $113,500, and related maintenance

expenses of $77,700 as direct costs to the CDBG Program.

We recommended that the grantee establish and submit for HUD approval an

appropriate method for allocating direct and indirect costs in accordance with

Federal Cost Principles, and provide documentation to support the eligibility of

its costs, or reimburse the CDBG Program with non-federal funds. (Report No.

2002-BO-1001)

While the City of Ithaca, NY (grantee), generally complied with HUD

program requirements in administering its CPD Programs, an OIG audit found

that in certain areas, the grantee did not always carry out its activities efficiently and effectively. The grantee did not implement adequate program

controls to ensure that the developer of the Marina Realty Development Project

complied with HUD requirements and federal regulations. We found ineligible

costs of nearly $76,500 that represent payments for duplicate withholding

taxes, unnecessary interest costs, late fees, and unnecessary environmental

costs, and for restaurant equipment that was not included in the grant agreement. We also found unsupported costs of almost $197,000 that lacked adequate documentation for us to make an eligibility determination. In addition,

the grantee could not demonstrate that $100,000 in CDBG funds expended by

another subrecipient were used for allowable program activities. The audit also

found nearly $208,000 in questionable and/or unsupported costs which we

attribute to the grantee’s weakened management controls.

We recommended actions that will strengthen the grantee’s future administration of HUD funded programs. We also recommended that HUD require the

grantee to repay $76,500 in ineligible costs and provide justification for nearly

$505,000 in unsupported costs. (Report No. 2002-NY-1001)

An OIG review found that the City of Baltimore, MD’s Department of

Housing and Community Development (DHCD) is generally administering its

HOME Program in accordance with HUD requirements. However, we identified

four areas where DHCD needs to improve procedures and increase management
emphasis on the administration of its HOME Program: (1) loan agreements and

potential HOME Program income are not monitored and tracked; (2) administrative expenditures are not adequately reviewed to ensure that contracts are

formally established to acquire professional services, contract rates for technical inspection services are within approved limits and clearly defined, and

invoices are sufficiently reviewed prior to payment; (3) matching fund requirements are not properly applied to ensure accurate accountability; and (4)

HOME Program activities are not sufficiently monitored.

Among other things, the audit recommended that HUD require the City to

develop a loan management system designed to track and monitor the status of

HOME Program funds and develop administrative cost review procedures that

will allow for periodic analyses of expenses. (Report No. 2002-PH-1801)

In response to three complaints made to our office, the OIG reviewed

Partners for Community Development, Inc.’s Home Buyers-Lease Purchase

Program and the HOME Homeowner Rehabilitation and Accessibility Program.

The complainants alleged that Partners, located in Sheboygan, WI, did not

consistently obtain competitive bids for single family housing rehabilitation

work, award rehabilitation contracts to the lowest bidder, and perform the

rehabilitation work in a quality manner. The complainants also alleged that

Partners overcharged program participants for rehabilitation work.

We found that Partners charged its HUD funded programs excessive

amounts for housing rehabilitation work and the quality of the work was poor.

The problems occurred because Partners acted as the general contractor for

the rehabilitation work, completed all major rehabilitation work, and then

inspected its own work. Partners only subcontracted for technical repairs. As a

result, Partners overcharged its HUD funded programs nearly $25,000 to

rehabilitate 6 single family homes that we inspected. In addition, Partners did

not ensure that the work was obtained through full and open competition.

The audit recommended that Partners reimburse its HUD funded programs

from non-federal funds for the excessive rehabilitation charges, follow HUD’s

procurement regulations and the State of Wisconsin’s requirements to ensure

housing rehabilitation contracts are awarded through full and open competition, and complete necessary repairs and obtain independent inspections for

the six properties cited in the audit. (Report No. 2002-CH-1802)

In response to a citizen complaint about selection of recipients, the OIG

reviewed the Enhanced Enterprise Community (EEC) funds awarded to the

City of Kansas City, KS, in 1994. Although we did not identify any specific

violations of HUD regulations regarding selection of recipients, we did determine that the City cannot fully support its administration of EEC funds.

Because the City did not maintain an adequate recordkeeping system, it does

not have full support for actions taken and decisions made regarding funds. In

particular, the City cannot support its efforts to evaluate the feasibility of a

business venture that ultimately received $4.2 million in HUD funds. The

venture was the first project funded with EEC funds and was intended to

expand an existing business that would create jobs for residents.

We recommended that HUD ensure that the City establishes and implements a system to collect and manage HUD related program data, and take

Enhanced

Enterprise

Community

Funding
appropriate administrative action if the City does not provide the records

necessary to demonstrate that it is administering HUD funds according to

federal regulations. (Report No. 2002-KC-1801)

In administering its 1996 and 1997 grants, the Houston/Harris County,

TX Continuum of Care had adequate management controls to ensure it developed a strategic plan that fairly represented the community’s needs, had a

representative membership, and had a fair funding process. However, the

Continuum did not have sufficient management controls to measure its members’ performance and to gather, track, record, and report critical program

data. As a result, the Continuum did not know which members were performing as planned in order to hold them accountable for their performance. In

addition, it could not provide evidence that it met HUD’s goal of helping homeless individuals and families “transition from the streets to jobs and independent living.” Also, in contradiction to plans submitted to HUD, the Continuum

did not coordinate its programs once HUD awarded grant funds.

The audit recommended that HUD encourage the Continuum to implement a

process for evaluating program effectiveness and participant outcomes, establish procedures so that its members coordinate services among themselves and

serve only homeless individuals and families, and track participants to ensure

their transition to jobs and independent living. (Report No. 2002-FW-1001)

In addition to multifamily housing developments with HUD held or HUD

insured mortgages, the Department owns multifamily projects acquired through

defaulted mortgages, subsidizes rents for low-income households, finances the

construction or rehabilitation of rental housing, and provides support services

for the elderly and handicapped. In addition to efforts to address equity skimming during this period, the OIG reviewed multifamily management agent

operations.

Equity skimming is the willful misuse of any part of the rents, assets,

proceeds, income or other funds derived from a multifamily project covered by

an FHA insured or held mortgage. The use of project assets or income for other

than reasonable operating expenses and necessary repairs, or for the payment of

unauthorized distributions to the owner, constitutes a violation of the Regulatory Agreement between the owner and HUD and plays a significant part in the

realization of losses to the FHA insurance fund. Equity skimming deprives

projects of needed funds for repairs and maintenance. This, in turn, contributes

to the financial and physical deterioration of projects and the resultant substandard living conditions for the families who depend on the Federal Government

to provide housing. The following reflects equity skimming activity during this

reporting period.

An OIG audit resulted in a successful court judgment and subsequent

favorable settlement in the amount of $856,000. The case, which was referred

Continuum of

Care

Multifamily Housing Programs

Equity

Skimming
to the U.S. Attorney in March 1997, alleged that the owners of Dove Meadows Apartments in Wilmington, NC, used approximately $608,000 in project

funds in violation of the Regulatory Agreement. Specifically, the owners

repaid loans that were made to the project by an identity-of-interest construction company when there was no available surplus cash and without HUD

approval. Partly as a result of these improper payments, the physical condition

of the project deteriorated significantly and HUD was forced to foreclose. As a

remedy for the owners’ violations, the government sought double the amount

of the diversions plus costs and fees as authorized by the double damages

statute. On January 7, 2002, the court granted judgment for the government in

the amount of the diversions, and thereafter, the U.S. Attorney’s Office in

Raleigh, NC, obtained a settlement with the project owners in the amount of

$856,000. This amount is made up of $606,000 for the owners’ improper

diversions, $150,000 in double damages, and $100,000 for audit costs and

attorneys’ fees.

The OIG performed a review of D.B. Frye and Associates in Norfolk, VA,

an owner and identity-of-interest management agent responsible for managing

five multifamily projects in Virginia, three of which are HUD insured, and four

other projects in North Carolina, South Carolina, and Georgia. We initiated

our review in conjunction with a criminal investigation conducted by the OIG

Mid-Atlantic District. We reviewed all project expenditures for four projects

(Stuart Gardens I and II, Southgate Court, and Hilltop North) located in

Virginia.

We found that the management agent did not maintain adequate accountability over project funds in accordance with its Regulatory and Management

Agreements with HUD. Altogether, for the 4 projects we reviewed, $1.1

million of over $6.6 million in expenditures lacked adequate documentation to

support the expenditures. As a result, we have no assurance that these project

expenditures were necessary and reasonable for project operations. Significant

risk may be associated with the financial aspects of these projects, as well as

the other five projects the management agent manages throughout the Southern United States.

We recommended that the management agent use non-project funds to

reimburse the relevant project accounts for all costs that cannot be adequately

supported, and take steps to ensure all payments from project accounts are

made only for those expenses that are necessary and eligible. Further, we

recommended that the local HUD Office coordinate its monitoring activities

with other HUD Offices where the management agent has projects. (Report

No. 2002-PH-1802)

An OIG review of Dutchtown Care Center in St. Louis, MO, found that

Dutchtown improperly used over $484,000 in project funds to repay owner

advances when the project did not have surplus cash. Dutchtown also paid

over $308,000 in project funds to provide a salary to one of the owners.

Paying a salary to an owner is prohibited unless HUD has approved the salary

as essential to project operations. In addition, project funds totaling nearly

$52,000 were paid for other ineligible or unsupported purposes. These distributions violated HUD’s requirement that the project complete a calculation that
shows the project has accumulated surplus cash before distributions are made.

At the time these expenditures were made, the project did not have surplus

cash. These distributions increased the risk to HUD’s mortgage insurance fund.

We recommended that the Director, Office of Multifamily Housing, HUD

Kansas City Hub, take appropriate actions to correct the deficiencies and

prevent them from occurring in the future. (Report No. 2002-KC-1001)

At the request of HUD’s Caribbean Multifamily Program Center Director,

the OIG reviewed the Jardines de Valencia Housing Cooperative in Rio Piedras,

PR. The request resulted from deficiencies disclosed during the independent

audit of the Cooperative’s FY 1999 financial statements. These deficiencies

included, among other things, excessive benefits and compensation to or in

favor of the Cooperative’s former project administrator.

Our review found that the former project administrator received excessive

benefits of nearly $26,000 from the Cooperative’s operating funds, falsified

payroll records, and performed other improper actions while administering the

Cooperative. These actions were carried out with the assistance of the

Cooperative’s former fee accountant. Further, some members of the board of

directors were negligent in carrying out their duties, making the former Cooperative officials’ actions possible. This caused an unnecessary burden on the

Cooperative’s financial resources.

The audit recommended repayment of the $26,000 and debarment of the

former project administrator, fee accountant, and appropriate board officials

from future participation in HUD programs. (Report No. 2002-AT-1807)

In response to a request from HUD’s Sacramento Multifamily Program

Center, the OIG completed a limited review of commercial rent activities at the

Lorenz Hotel in Redding, CA. The Lorenz Hotel is a 77-unit low-income

housing project once owned by the Shasta Housing Development Corporation

(SHDC), a California nonprofit community entity. HUD and SHDC executed an

agreement for housing assistance payments whereby HUD would provide longterm Section 8 rental assistance to low-income people. In addition to the lobby

used by the residents, there is commercial rental space on the ground floor that

houses small businesses. OIG found that SHDC disregarded requirements contained in the property’s sales contract and grant deed by improperly retaining

over $53,000 in commercial rent. This reduced the project’s ability to readily

meet its financial obligations and provide for future monetary needs.

OIG recommended that SHDC, now known as Community Revitalization and

Development Corporation, return the $53,000 to the project. (Report No.

2002-SF-1802)

The OIG audited Mitchell Management, the management agent responsible

for managing Denver Northeast Apartments, Mitchell 66 Apartments, and

Rotella Park Manor Apartments, three HUD insured multifamily projects in

Denver, CO, and found that Mitchell’s management control structure was not

adequate to ensure that operations at the properties were in compliance with

HUD requirements. Management controls for project maintenance, cash collections and accounting, tenant eligibility determination, and HUD subsidy payments were not reliable and need to be strengthened to improve the projects’

Management

Agent Operations
housing operations. We also found that the projects were not maintained in a

decent, safe, and sanitary condition.

Our audit identified essentially the same conditions that were presented in

HUD reports and in reports issued by the projects’ independent public accountant. Even though these previous reports identified needed management

changes and improvements, we found that limited changes were made by

Mitchell Management in the operations of the HUD insured projects. Our audit

recommended that HUD require Mitchell Management to establish and implement an effective inspection and maintenance work order system for the

projects, and implement necessary procedures to ensure that project revenues

are timely deposited into the appropriate project’s bank account. HUD should

provide necessary guidance and direction to Mitchell Management in these

efforts. (Report No. 2002-DE-1001)

In compliance with the Chief Financial Officers (CFO) Act of 1990, on

February 27, 2002, we issued our report on the consolidated balance sheets of

the Department as of September 30, 2001 and 2000. Also, we reported on the

consolidated statements of net cost and changes in net position, and the

combined statements of budgetary resources and financing. We found the

financial statements presented fairly HUD’s financial position for the period

and the net costs of operations, changes in net position, status of budgetary

resources, and reconciliation of net costs to budgetary obligations for the

fiscal years then ended, in conformity with generally accepted accounting

principles. In completing our audit, we identified five material weaknesses and

nine reportable conditions, which are summarized as follows:

 Material weaknesses in internal controls in FY 2001 related to the need to:

Complete improvements to financial systems;

Improve oversight and monitoring of housing subsidy determinations;

Ensure that rental subsidies are based on correct tenant income;

Improve the Federal Housing Administration’s (FHA) controls over

budget execution and funds control; and

Enhance FHA information technology systems to more effectively

support FHA’s business processes.

 Reportable conditions in internal controls in FY 2001 related to the need

to:

Refine performance measures to effectively implement results management;

Improve controls over project-based subsidy payments;

Strengthen controls over HUD’s computing environment;

Improve personnel security for systems’ access;

Improve processes for reviewing obligation balances;

More effectively manage controls over the FHA systems’ portfolio;

Financial Statement Audits

HUD Financial

Statements Audits
Place more emphasis on monitoring lender underwriting and improving

early warning and loss prevention for FHA single family insured mortgages;

Sufficiently monitor FHA’s single family property inventory; and

Improve FHA’s process for preparing timely estimates and properly

reporting credit subsidy adjustments.

Most of these weaknesses result from long-standing problems in the Department. Correcting them will be difficult. HUD needs to address issues that

fundamentally impact its internal control environment. We have reported for

the past several years that HUD has made progress toward overhauling its

operations and addressing its management problems, but challenges remain.

HUD’s ability to address its problems will substantially improve if it completes

the efforts to:

 Deploy a reliable financial management system that meets its program and

financial management needs and complies with federal requirements.

Completing the development of adequate systems is the most critical need

faced by HUD in improving its control environment. The lack of an integrated financial system in compliance with federal financial system requirements has been reported as a material weakness since FY 1991. To correct

financial management deficiencies in a Departmentwide manner, HUD

initiated a project to design and implement an integrated financial system

consisting of both financial and mixed systems. Over the years, the

Department’s plans have experienced significant schedule delays, changes

in direction, and cost overruns.

 Develop a process to identify and justify its staff resource requirements.

More effectively managing limited staff resources is another critical need.

Many of the audit problems identified in Chapter 3 of this report are

exacerbated by HUD’s resource management shortcomings. Accordingly, we

consider it critical for the Department to address these shortcomings

through the successful completion of ongoing plans for Total Estimation

and Allocation Mechanism (TEAM) implementation.

HUD provides housing assistance funds under various grant and subsidy

programs to multifamily project owners (both nonprofits and for profit) and

housing authorities (HAs). These intermediaries, in turn, provide housing

assistance to benefit primarily low-income households. HUD spent about $21

billion in FY 2001 to provide rent and operating subsidies that benefited over 4

million households. Weaknesses exist in HUD’s control structure such that HUD

cannot be assured that these funds are expended in accordance with the laws

and regulations authorizing the grant and subsidy programs.

Legislation authorizing HUD’s housing assistance programs includes specific criteria concerning tenant eligibility and providing assistance for housing

that meets acceptable physical standards. Moreover, legislation authorizing

HUD’s programs also establishes minimum performance levels to be achieved.

For example, subsidized housing must comply with HUD’s housing quality

standards.
HUD relies on intermediaries to ensure that rent calculations for assisted

households are based on HUD requirements. Ultimately, these rent calculations

determine the amount of subsidy HUD pays on behalf of the assisted household. Under project-based programs administered by the Office of Housing,

the individual project owners or agents carry out this responsibility. Under

public housing and tenant-based Section 8 Programs, the HAs determine

eligibility and rent amounts for eligible households residing in public housing

or at approved housing provided by private landlords. In prior reports on

HUD’s financial statements, we have expressed concerns about the significant

risk to HUD that these intermediaries are not properly carrying out this responsibility. HUD’s control structure does not adequately address this risk due to

insufficient on-site monitoring along with the absence of an ongoing quality

control program that would periodically assess the accuracy of intermediaries’

rent determinations. In Chapter 1 of this report, we discuss the magnitude of

these errors.

In FY 2001, HUD initiated the Rental Housing Integrity Improvement

Project, which calls for systems capability that will identify relevant tenant

and program data for rent calculations, and requires the data to be submitted

by HAs. HUD would use the data to identify possible HAs’ certification or

recertification processing deficiencies. This increased capability and information could also make the large-scale computer match a viable option for

identifying excess rental subsidy or tenant overpayments.

HUD needs to complete its ongoing efforts to improve its financial systems. Because of the large volume of financial transactions, HUD relies heavily

on automated information systems. In prior years, we reported on security

weaknesses in both HUD’s general processing and specific applications such

that HUD could not be reasonably assured that assets are adequately safeguarded against waste, loss, and unauthorized use or misappropriation.

Progress in improving these controls has been slow. The weaknesses noted in

our current audit relate to the need to improve controls over the computing

environment and administration of personnel security operations.

We also noted the need for HUD to improve its processes for reviewing

outstanding obligations to ensure that unneeded amounts are deobligated in a

timely manner. We found that specific statutory or grant requirements for

outstanding obligations are not being enforced. Also, we found a lack of

integration between accounting systems and the need for accurate databases

has hampered HUD’s ability to evaluate unexpended Section 8 project-based

obligations. (Report No. 2002-FO-0003)

The independent certified public accounting firm of KPMG LLP performed

a separate audit of FHA’s FY 2001 and 2000 financial statements. Their report,

dated January 31, 2002, includes an unqualified opinion on FHA’s financial

statements, along with discussions of two material weaknesses and four

reportable conditions. The FHA material weaknesses are as follows:

 HUD/FHA’s ADP system environment must be enhanced to more effectively

support FHA’s business processes. HUD and FHA are conducting day-to-day

business with legacy based systems. Several systems directly impact FHA’s

financial activity and necessitate financial transactions to be processed

FHA Financial

Statements Audit
through non-integrated systems, requiring manual analysis and summary

entries to be posted to FHA’s general ledger. FHA’s and HUD’s inability to

implement modern information technology adversely affects the internal

controls related to accounting and reporting financial activities.

 Controls over budget execution and funds control must be improved. FHA

does not have a collection of ADP financial systems that are capable of fully

monitoring and controlling budgetary resources in an ADP integrated

process. Lack of efficient integration between these systems requires the

use of manual analysis and reconciliation and use of additional databases to

collect and summarize funds control information, which subjects the

process to the risk of errors resulting from reliance on manual processes.

KPMG LLP also identified four reportable conditions regarding the need for

FHA and HUD to: (1) more effectively manage controls over the FHA ADP

systems portfolio; (2) continue to place more emphasis on monitoring lender

underwriting and improving early warning and loss prevention for single family

insured mortgages; (3) sufficiently monitor its single family property inventory; and (4) continue to improve its process for preparing timely estimates and

properly reporting credit subsidy adjustments.

We included KPMG’s material weaknesses and reportable conditions for FHA

in our consolidated report for the Department. (Report No. 2002-FO-0002)

A separate audit was performed of the Government National Mortgage

Association’s (Ginnie Mae) financial statements for FYs 2001 and 2000 by

KPMG LLP. Their report on Ginnie Mae’s financial statements, dated January

14, 2002, includes an unqualified opinion on Ginnie Mae’s financial statements. In addition, the audit results indicate that there were no material weaknesses or reportable conditions with Ginnie Mae’s internal controls, or material

instances of non-compliance with laws and regulations. (Report No. 2002-FO0001)

In response to a Congressional request, the OIG reviewed alleged violations

of the Antideficiency and HUD Reform Acts in awarding Section 514 Technical

Assistance Grants by the Office of Multifamily Housing Assistance Restructuring (OMHAR). HUD did not violate the Antideficiency Act in awarding the

grants for FYs 1998 through 2001. However, HUD did not fully comply with the

HUD Reform Act because they did not publish the required notifications in the

Federal Register identifying the grantees and award amounts.

Weaknesses in HUD’s management controls resulted in errors in the award

of the grants. These errors, as well as management decisions that unnecessarily

limited the period of funds availability, led to the appearance of potential

violations of the Antideficiency Act. HUD did not obligate or expend more

Section 514 Technical Assistance funds than were authorized by statute and

made available for FYs 1998 through 2001. However, HUD did not comply with

Ginnie Mae

Financial

Statements Audit

Other Significant Audits
the Bona-fide Needs Statute because of misunderstandings between various

HUD offices regarding the availability of funds. This resulted in the misstatement of actual or valid obligations in FYs 1998 and 1999. Also, it caused

confusion regarding the amount of FY 2001 obligations. The Bona-fide Needs

Statute provides that the balance of an appropriation or fund is available only

for payment of expenses properly incurred during the period of availability.

The audit recommended that: (1) HUD’s Chief Financial Officer adjust

HUD’s accounting records for Section 514 Technical Assistance Grants to

address prior year errors; and (2) the Assistant Secretary for Housing take

appropriate actions to ensure future grants are timely awarded and properly

recorded in HUD’s accounting system. (Report No. 2002-DE-0801)

An OIG audit of the Chief Financial Officer’s (CFO) controls over the audit

resolution process found that oversight of the process by the CFO’s Office has

improved markedly since the previous OIG audit in 1996. We found no examples of abuse of the recommendation closure process, nor did we find

significant errors by the current Audit Liaison Officers. However, we did find

some areas where procedures/controls can be improved to ensure that agreedupon recommendations are supported and properly documented when closed.

Action Officials and Audit Liaison Officers and/or their designated representative do not always follow the correct procedures to ensure timely management decisions and final actions are achieved. We believe the CFO does not

have a training program in place that ensures Action Officials and Audit

Liaison Officers have a full understanding of the policies and procedures.

HUD guidance is not sufficient to ensure that recommendations are implemented correctly. The process of tracking and verifying the resolution of audit

recommendations has been continually refined over the past several years, and

the policy has not been updated to reflect the changes.

We did not make any recommendations in our audit since the CFO is in the

process of implementing a new follow-up system and has initiated an audit

resolution task force that is addressing the issues raised in our findings.

(Report No. 2002-KC-0001)
Chapter 4 Investigations
In addition to Housing Fraud Initiative responsibilities, the Office of

Investigation investigates all types of potential wrongdoing in HUD’s programs

and activities. This Chapter discusses the OIG’s recent participation in the

Federal Aviation Administration’s (FAA) Federal Air Marshal Program following the events of September 11, 2001. The Chapter also presents results from:

(1) white collar investigations relating to HUD’s Multifamily, Public and Indian

Housing, Single Family, and Community Planning and Development Programs; (2) other significant white collar investigations; and (3) Operation Safe

Home (OSH) investigations relating to violent crime and drug trafficking in

HUD’s Public and Assisted Housing Programs. Results from this third area,

violent crime and drug trafficking investigations, are reduced from previous

Semiannual Reports to Congress. This reduction has occurred as a result of

our systematic phasing out of OSH cases. The Congress funded OSH through

FY 2002 to allow an orderly and responsible conclusion of the initiative, to

cease complete operations by September 30, 2002. Thus, in accordance with

the requirements of HUD’s Fiscal Year 2002 Appropriations Act (Pub. Law

107-73, approved November 26, 2001), OIG is closing OSH violent crime

investigations and re-deploying staff to focus on investigations involving single

family fraud and property flipping.

Very shortly after the tragic events of September 11, 2001, a call went out

to federal law enforcement agencies requesting Special Agents to become

Federal Air Marshals. HUD OIG contributed 20 Special Agents who volunteered to participate in the program. Those Agents began training the first

week of October 2001. They joined many others Agents from various law

enforcement agencies, and were immediately assigned to duties in one of the

several hundred airports across the Nation. HUD OIG agents were sworn in as

Air Marshals and were detailed to the Federal Aviation Administration for a

period of 6 to 18 months. Our Agents worked for 6 months and were released

from their details in mid-March 2002. During their tenure as Air Marshals,

they worked many hours of overtime away from their families and flew thousands of miles. We are proud of the fact that 29 OIG Agents originally volunteered for 20 openings to serve their Country in a time of national emergency.

We are also proud of those who were selected and performed their duties in an

exemplary manner.

In addition to multifamily housing developments with HUD held or HUD

insured mortgages, the Department owns multifamily projects acquired

through defaulted mortgages, subsidizes rents for low-income households,

finances the construction or rehabilitation of rental housing, and provides

support services for the elderly and handicapped. During this reporting

Multifamily Housing Programs

FAA Federal Air Marshal Program
period, OIG investigations disclosed criminal equity skimming under Operation

Safe Home, as well as kickbacks, money laundering, perjury, and bribery.

Equity skimming is the willful misuse of any part of the rents, assets,

proceeds, income or other funds derived from a multifamily project covered by

an FHA insured or held mortgage. The use of project assets or income for other

than reasonable operating expenses and necessary repairs, or for the payment of

unauthorized distributions to the owner, constitutes a violation of the Regulatory Agreement between the owner and HUD and plays a significant part in the

realization of losses to the FHA insurance fund. Equity skimming deprives

projects of needed funds for repairs and maintenance. This, in turn, contributes

to the financial and physical deterioration of projects and the resultant substandard living conditions for the families who depend on the Federal Government

to provide housing. The following reflects equity skimming activity during this

reporting period.

Douglas S. Wasserman, the former owner of the Mott Haven multifamily

housing development in the Bronx, NY, pled guilty to equity skimming

charges for diverting to his personal use approximately $894,000 of HUD funds

at a time when Mott Haven was in disrepair and while its mortgage remained

unpaid. Wasserman also pled guilty to tax evasion.

From October 1990 until March 1997, Wasserman owned and managed

Mott Haven. From 1994 until March 1997, Mott Haven was in a non-surplus

cash position. The development was in disrepair with numerous problems and

hazards, including the following: nearly all of the windows in the buildings

needed replacement, the roofs had numerous leaks and holes, the buildings

needed new boilers, the elevators were non-functional, the buildings were

infested with vermin and insects, the front doors did not lock, and many

apartments had crumbling cabinets, exposed electrical wiring, and faulty

appliances. Wasserman continued to receive hundreds of thousands of dollars in

HUD Section 8 payments and tenant rental payments.

Wasserman diverted the money through several different methods, including paying personal expenses directly out of the Mott Haven account, making

checks payable to cash, and paying funds to companies he controlled as purported payments for repairs when in fact the companies performed no work on

the buildings. Wasserman used these funds to pay numerous personal and

business expenses, including legal fees for his divorce and a civil lawsuit,

personal credit card charges, car leases, and for another multifamily development he owned that was not HUD insured.

Wasserman also admitted that he attempted to evade paying taxes for

calendar year 1995. He took several measures to conceal his income, including

funneling his income through various corporate entities under his control and

causing these corporations to pay his personal expenses, using nominees to

conceal his control over the corporations paying his personal expenses, and

causing the corporations under his control to provide him with cash income by

making checks payable to cash.

On March 12, 1997, Wasserman assigned his ownership of Mott Haven to

HUD and HUD became mortgagee-in-possession, causing a potential loss to the

government of over $3 million. This investigation was conducted jointly by the

OIG, FBI, and IRS Criminal Investigation Division.

Equity Skimming
A federal grand jury in Rochester, NY, indicted an individual on one

count of equity skimming. In March 1997, the individual, who was the owner

and management agent of Cambridge Court Apartments, defaulted on the

project’s FHA insured mortgage. While the mortgage was in default, the

individual collected and used approximately $525,000 of the project’s rental

income for other than reasonable operating expenses and necessary repairs.

The investigation was conducted jointly by OIG and the FBI.

In Norfolk, VA, contractor Arthur L. Franklin, III, doing business as

Commercial Roofing–U.S.A. Inc., and Tidewater Contracting Services, was

sentenced to 33 months incarceration and 3 years supervised release, fined

$75,000, and ordered to pay $297,000 in restitution to the reserve for replacement account of the HUD assisted Stuart Gardens Apartments, as well as the

cost of his imprisonment and supervised release, which will run approximately $40,000 per year. Franklin’s sentencing followed his previous guilty

plea to paying at least $140,000 in kickbacks to 2 different managers at 4 HUD

assisted developments, including to LuAnne Wade, former property manager

for Stuart Gardens. Most of the kickback money was related to Franklin’s

ceiling replacement work at Stuart Gardens. Wade was previously convicted

and sentenced. This was a joint investigation by OIG and the FBI.

Franklin’s original indictment was superseded two times to include charges

of money laundering and perjury in a bankruptcy proceeding. In addition,

Franklin’s attorney was disqualified as defense counsel in this case based on

further investigation that led to a ruling by the trial judge that the attorney

tampered with witnesses and other potential evidence.

Following an OIG investigation, Margaret Walters, a former asset manager

in the HUD Jacksonville, FL Office, was sentenced to 6 months home confinement and 36 months supervised release. Walters previously pled guilty to

receiving items of value, such as jewelry, dinners, a ceiling fan, a computer

monitor, show tickets, and a wireless telephone, from a management agent

that she was responsible for monitoring.

HUD provides grants and subsidies to approximately 4,200 housing authorities (HAs) nationwide. About 3,200 HAs manage public housing units and

another 1,000 HAs, with no public housing, manage units under Section 8

Programs. (Many HAs administer both public housing and Section 8 Programs.) HUD also provides assistance directly to HAs’ resident organizations to

encourage increased resident management of public housing developments and

to promote the formation and development of resident management entities

and resident skills. Programs administered by HAs are designed to enable lowincome families, the elderly, and persons with disabilities to obtain and reside

in housing that is safe, decent, sanitary, and in good repair.

Public and Indian Housing Programs

Other Significant

Investigations
During this reporting period, the OIG discovered instances of fraud, false

statements, conspiracy, theft, and bribery involving Public and Indian Housing

Programs.

Michael Gray, the former executive director of the Sayre, OK Housing

Authority, was sentenced after previously pleading guilty to embezzlement.

Gray was sentenced to 5 years supervised release, ordered to attend mental

health counseling, ordered to pay $9,900 in restitution to the Authority, and

pay a $100 court fee. The sentencing took place in Denver, CO, after the

proceedings were transferred from the Western District of Oklahoma to the

District of Colorado. A joint investigation by OIG and the FBI disclosed that

Gray embezzled tenant rental income from July 1995 to November 1997. He

fled Oklahoma and remained a fugitive until he was arrested in Colorado in

October 2000.

In Cleveland, OH, Claire Freeman, the former executive director of the

Cuyahoga Metropolitan Housing Authority between 1990 and 1998, was found

guilty on all counts of her indictment. Freeman, who previously served as HUD

Assistant Secretary for Administration and who held a high level position at the

Department of Defense, was previously charged with theft of public funds, mail

fraud, and making false statements on loan documents. Specifically, Freeman

diverted monies from a Housing Authority fund for her own benefit, including

paying off a $50,000 personal loan and making $62,000 in mortgage payments

on her rental property in Virginia by using forged authorization letters from the

board of commissioners. She faces a minimum of 18 months or a maximum of

48 months in prison.

Additionally, Ronnie Davis, the former director of finance for the Authority, was sentenced in federal district court to 3 years probation and 150 hours

of community service, fined $5,000, and ordered to pay $5,468 in restitution.

Davis also agreed to exclude himself, until March 2003, from participating in

all HUD primary and lower-tier covered transactions. In addition, he agreed that

he will not resume employment at the San Francisco Housing Authority and

never accept re-employment with, be a contractor for, or a consultant to that

Authority. Davis obtained a $5,600 check for compensation to which he was

not entitled and kept the money. This investigation was conducted by OIG and

the FBI with assistance from Ohio State Auditors.

Stacy Green, the former manager at the HUD assisted Timbercroft Apartments in Towson, MD, was sentenced in state court to 18 months incarceration

and 2 years probation. She was also ordered to repay approximately $22,000 to

current and prospective tenants from whom she admitted obtaining illegal fees

in exchange for moving them up on the Section 8 waiting list. This was a joint

investigation by OIG and the Baltimore County Police Department.

Reginald Carl Fluker, a former employee of the Louisville, KY Housing

Authority, was sentenced to 36 months supervised release. He previously pled

guilty to transmitting a death threat to another Authority employee. Fluker

confessed that he sent two threatening e-mails to the Authority’s executive

director after his employment was terminated. The investigation was conducted

by OIG and the FBI.

Fraud in Public

Housing

Administration
Julius Bannerman, the former executive director of the Newburgh, NY

Housing Authority (NHA), pled guilty to 1 count of soliciting and demanding

$25,000 in bribes and kickbacks involving $329,260 in contracts awarded on

behalf of the Authority.

Maria Suarez, the former director of the Section 8 department of NHA,

and Derrick Ruillano, a landlord under an NHA housing assistance payments

contract, pled guilty to one count of embezzlement for their part in a scheme

involving the creation of fictitious Section 8 tenants. The scheme resulted in a

loss to HUD of approximately $220,000.

Dwight Parker, a maintenance supervisor at NHA, and Rene Gayle, another

NHA employee, pled guilty to conspiring to fraudulently convert to their own

use more than $100,000 of NHA funds. Parker created false work orders for

which Gayle typed fraudulent invoices and processed them for payment under

the name of an accomplice posing as an independent contractor. Gayle then

gave the checks to Parker, who accompanied the accomplice when the checks

were cashed. Parker and Gayle were responsible for the withdrawal of approximately $108,000 in NHA funds for work that was never performed. This was

an OIG investigation.

Faith Tanner, the former president of the Waimanalo Housing Resident

Association (WHRA) in Honolulu, HI, pled guilty to embezzling $22,300

from a Tenant Opportunity Program (TOP) grant received from HUD in 1995.

Sandra Napuua Clarke, the former vice president, was found guilty on one

count of conspiracy and two counts of theft from a government funded program. An OIG investigation disclosed that between 1995 and 1999, Clarke

misused $24,950 in funds from a TOP grant. Clarke also helped Tanner obtain

the $22,300, which Tanner illegally used for her own personal benefit.

HUD, through TOP, funded the WHRA. The TOP was established to allow

HUD to provide financial assistance to resident associations of public housing

projects. The ultimate goal was to promote self-help initiatives that would

enable residents to create a positive living environment and increase resident

satisfaction in public housing communities.

In Brooklyn, NY, two individuals, including a Postal Service employee,

who defrauded the Section 8 Program out of $60,884 were arrested by the

OIG, Postal Inspection Service, and New York City Department of Investigation. The New York City Department of Housing Preservation and

Development’s (HPD) Division of Rent Subsidies alerted the OIG after they

found that key information and signatures contained on required recertification

forms did not match previously submitted forms. An investigation disclosed

that in March 1995, the tenant of record had moved from her Section 8

subsidized apartment in Brooklyn to another HUD subsidized multifamily

development in Pittsburgh, PA. The tenant concealed the move from both HUD

and HPD, and allowed her friend, the Postal Service employee, to sublet the

subsidized unit in Brooklyn. As a result of the fraud scheme, the tenant of

record received a total of $60,884 in excess Section 8 subsidies. The defendants were charged with theft of government funds, conspiracy to defraud the

United States, mail fraud, and making false statements.
The City of Frederick , MD Public Housing Authority’s director of finance and a subordinate were charged by the State Attorney General with

conspiring to violate both the Maryland Public Information and the Labor and

Employment Acts. An OIG investigation found that the director ordered the

subordinate to use her official position to obtain confidential state employment

information on the director’s ex-husband for use in ongoing child support

litigation.

In Morgan City, LA, several Berwick Housing Authority (BHA) officials

and contractors were charged with conspiracy to defraud HUD. The charges

follow an OIG investigation which disclosed that BHA officials and other individuals conspired to commit theft of government funds. The former executive

director, former assistant executive director, and the former maintenance

supervisor of BHA, an independent plumbing contractor, and two other individuals turned themselves in to the St. Mary’s Parish Sheriff’s Department.

Total loss to the government is expected to be in excess of $30,000.

In Gracemont, OK, a former secretary for the Caddo Indian Housing

Authority was arrested and arraigned for embezzling over $1,000 from the

Authority. These actions resulted from a joint investigation by the HUD and

Department of the Interior OIGs which disclosed that in March 1997, the

subject falsified three Authority invoices and their accompanying checks from

HUD that were to be used for Authority operations. The subject allegedly

altered the checks, making them payable to her, maintained false invoices on

the Authority’s books, cashed each check, and embezzled the money.

In San Jose, CA, Matt Madison, the owner of Acadian Manor Apartments

in Lafayette, LA, was sentenced to 18 months in prison and 36 months supervised release and ordered to pay $1,406,255 in restitution and a $400 special

assessment. Madison was charged with one count each of mail fraud, money

laundering, false statements, and conspiracy in California, Wyoming, and

Louisiana, respectively. The restitution and fine were paid in court. The sentencing is the result of a joint investigation by the FBI, IRS, and the OIG Southwest and Pacific-Hawaii Districts which disclosed that Madison conspired to

submit false statements in an effort to receive Section 8 benefits from persons

who did not exist.

Demetrio Perez, a Section 8 landlord and a prominent Miami, FL area

public official, was sentenced to 6 months home detention, 24 months supervised release, and 500 hours of community service, fined $10,000, and ordered

to pay $210,000 in restitution. Previously, Perez pled guilty to conspiracy to

commit mail fraud, mail fraud and making false statements when an investigation disclosed that he had overcharged Section 8 tenants living in his properties. The investigation was conducted by the FBI, OIG, and the Miami-Dade

Police Department.

In Oakland, CA, Catherine Stephens, a former Section 8 tenant, was

sentenced in federal district court for failing to disclose her assets, employment, and income to HUD and the Social Security Administration (SSA).

Other

Investigations
Stephens, who was convicted on 6 felony counts of false statements and 1

count of theft of government funds in February 2001, was sentenced to 15

months in prison and 3 years supervised release, and was ordered to pay more

than $85,000 in restitution to HUD and SSA and a $600 special assessment fee.

An OIG investigation disclosed that Stephens failed to report her income and

assets derived from a dental business that she owned and operated between

February 1992 and October 1999. As a result of her non-disclosure, she

received more than $67,000 in housing subsidy payments and $50,000 in

disability income to which she was not entitled. These benefits, combined

with her income, enabled her to amass a fleet of 6 vehicles, including a 28-

foot watercraft, and a house on a 3- ̋-acre lot in Lower Lake, CA. She also

rented six residential and commercial properties at fair market rent from

landlords in Oakland and Los Angeles. These properties were used for her

businesses and secondary residences for her and her two sons.

James Todd, a former HUD assisted resident in Seattle, WA, was sentenced

to 5 years probation and ordered to pay $44,693 in restitution for concealing

his employment income. Todd pled guilty to one count of submitting false

income statements between 1990 and 2000. This was an OIG investigation.

Following an OIG investigation, Tranda Wecker was sentenced in federal

district court to 3 years probation and ordered to pay $21,328 in restitution.

Wecker previously pled guilty to nine felony counts of making false statements

to obtain government benefits and one felony count of mail fraud. Between

September 1997 and August 2000, Wecker made false statements to HUD,

through the Northeast Community Action Corporation and the St. Louis, MO

Housing Authority, during her Section 8 housing assistance recertifications.

Wecker is the birth mother whose twins were caught in a trans-Atlantic adoption dispute after the twins were placed for adoption through a California

based Internet service.

In Indianapolis, IN, Kevin Gladney, Linda Gladney, Anita Alexander,

Tiawanna Edmundson, Kalencia Kirkland, Stacy Ruffin, and Conzine Lewis

were convicted and subsequently sentenced in state court for their role in

forging and cashing or attempting to cash counterfeit checks on the bank

account of the Indianapolis Housing Agency. Johnny Parker pled guilty to one

count of forgery for his part in the counterfeit check scheme. The counterfeit

checks were prepared on a computer by scanning a legitimate Section 8

Program check received by one of the tenants. This process produced high

quality appearance checks that did not raise questions at banks. The combined

sentences for all these individuals were 27 years in prison, 19 years of probation and $17,000 in restitution. This was an OIG/Indianapolis Housing Agency

Police Department investigation.

In Los Angeles, CA, Consuelo Urenda Lopez was sentenced to 30 days in

jail and ordered to pay $100,000 in restitution for defrauding the City of

Oxnard Housing Authority. Lopez previously pled guilty to one count of

grand theft of Section 8 subsidies. The plea came in response to a three-count

felony complaint charging one count of grand theft from the City of Oxnard
Housing Authority, one count of grand theft from the County of Ventura, and

one count of conspiracy to commit grand theft by fraud. An investigation,

conducted by OIG and the District Attorney’s Office for the County of Ventura,

found that an unauthorized person was living with Lopez in her Section 8

residence, and that this person was gainfully employed.

Paula Hughes, a former Section 8 recipient at the Columbia, MO Housing

Authority, pled guilty to three counts of forgery. Hughes forged credit card

applications by using several different names to obtain the credit cards. She was

sentenced to 5 years incarceration. This was an OIG investigation.

In Jefferson City, MO, Amy Holmes pled guilty in federal district court to

two counts of making false statements. Holmes made a false statement to HUD

on her annual recertification for Section 8 housing assistance through the

Columbia Housing Authority, and falsified her application for federal student

aid which she submitted to the Department of Education. Holmes stated on her

February 1998 Section 8 recertification that her income was derived solely

from Aid to Families with Dependent Children, when in fact she made $30,000

per year from her employment at High-Tech Institute. As a result of this false

statement, as well as others Holmes made to HUD since 1996, she received

$19,700 in overpaid Section 8 housing assistance. This was an OIG investigation.

In Pittsburgh, PA, an individual who received Section 8 subsidies for 7

years under an assumed name was charged in federal court with obtaining,

under false pretenses, $125,000 in HUD rental assistance and Social Security

benefits. A joint investigation by the HUD and Social Security Administration

OIGs found that, from 1994 to 2001, the defendant received $87,000 in Social

Security benefits under at least two false identities and Social Security numbers, and $38,000 in rental assistance at Royal Court Apartments, New

Kensington, PA, under one of the false identities. In addition to using a false

identity, the individual also allegedly failed to report all of her Social Security

benefits on recertification forms. The defendant was 1 of 12 individuals

charged by the U.S. Attorney as part of an aggressive initiative to prosecute

fraud in federal benefit programs.

Carolyn Matthews, a former Northridge Cooperative Homes Section 8

tenant, pled guilty in federal district court to eight counts of making false

statements in connection with her 1998-2000 annual recertifications to HUD.

Matthews resided at the HUD subsidized multifamily housing development from

August 1993 through July 2001. OIG began the investigation after receiving an

anonymous complaint that alleged Matthews’ purchase of a 6-bedroom house

in Antioch, CA. Matthews learned of the OIG investigation in July 2001 and

promptly terminated her Section 8 contract and released control of her apartment to the San Francisco, CA Housing Authority.

The investigation disclosed that Matthews had not reported her true assets

and income since 1996. In July 1999, upon her retirement, Matthews received

a disbursement of more than $1.7 million from several investment and retirement accounts from her employer. She later used these funds to purchase an
Infiniti 2000 SUV for $39,000 and the house in Antioch for $548,832. She

later moved her family to this house. Additionally, Matthews also owns a

house in San Francisco that she acquired from her parents in 1995 and which

she leases to her brother for $900 a month. This rental income was not disclosed to HUD nor was her change in residency.

Despite her wealth, Matthews continued to submit annual recertifications

in 1996, 1998, 1999, and 2000 to HUD in which she certified that she had no

assets or income for the year. As a result of her non-disclosure, Matthews

received more than $85,000 in housing subsidies to which she was not entitled.

A Roanoke, VA Section 8 tenant residing at the HUD assisted Mountain

View Apartments was charged in a 39-count federal indictment with making

false claims and statements to various state and federal agencies, including

HUD, to obtain housing, Medicaid, food stamps, and Social Security benefits

to which he was not entitled. A joint investigation by the HUD and Social

Security Administration OIGs and the Virginia State Police disclosed that the

defendant failed to report income from self employment, resulting in theft of

benefits totaling at least $40,000, $13,000 of which represents excessive rental

assistance.

A former public housing resident was indicted in federal court for willfully making a false, fraudulent, or fictitious statement or representation to the

Topeka, KS Housing Authority to obtain rental assistance to which he was

not entitled. A joint investigation by OIG, the Department of Agriculture, and

the Kansas Department of Social Services found that the resident allegedly

failed to disclose that he was employed as a truck driver for the 3 years he was

living in public housing. He also failed to report his income to the Social

Security Administration and the Department of Agriculture, thus enabling him

to receive workman’s compensation benefits and food stamps and commodities. The resident received a total of $28,383 in government benefits to which

he was not entitled, including $12,897 in rental assistance benefits.

A Section 8 tenant residing at Essex Village Apartments in Richmond,

VA, was charged in federal court with making false statements to obtain rental

assistance to which she was not entitled. An investigation conducted by OIG

following a referral from Essex Village staff disclosed that the tenant has been

employed since at least November 1996 and failed to report the income on

annual certifications of income and family composition. Overpayment of

assistance totaled $18,000.

The Alameda County District Attorney’s Office filed a felony complaint

charging an Oakland, CA Section 8 tenant with three counts of welfare and

housing fraud. The individual was charged with perjury, grand theft of property in excess of $400, and aid by misrepresentation. A joint investigation by

the Alameda County District Attorney’s Office and the OIG disclosed that the

individual simultaneously maintained two HUD assisted housing units from

December 2000 through December 2001. By submitting false statements about

her income to HUD and the Contra Costa County Housing Authority, the
individual was able to obtain a Section 8 unit at the Morh I Apartments in

Oakland and a public housing unit at the Los Deltas development in Richmond. The individual received $16,765 in housing assistance to which she was

not entitled. The Morh I Apartments’ management and the Contra Costa

County Housing Authority have taken administrative action to terminate the

housing assistance.

A husband and wife in Lebanon, PA, were indicted in district court on two

counts each of submitting false statements, mail fraud, and aiding and abetting

in connection with a Section 8 rental subsidy fraud scheme. The indictment is

the result of an OIG investigation which disclosed that the two allegedly failed

to report the wife’s earned income on annual recertification forms. From April

1997 to April 2000, the wife received approximately $12,908 in rental subsidy

by falsely claiming she was estranged from her husband and that she had no

source of income. The investigation further disclosed that she lived with her

husband during this time period and that he earned approximately $30,000 per

year. In addition, the wife allegedly received $18,000 in income “under the

table” as a waitress. As a result of the fraudulent scheme, the husband and wife

were able to save enough money to purchase the single family home located

next door to their Section 8 residence.

A Section 8 landlord was indicted on two counts of theft for allegedly

collecting benefit checks on behalf of a tenant who was actually incarcerated.

The landlord was one of several individuals charged in a public housing fraud

prosecution package by the Marion County State’s Attorney. This was an OIG

and Indianapolis, IN Housing Police investigation.

In Oklahoma City, OK, an individual was charged by the State of Oklahoma with two counts of obtaining money by false pretenses. The subject

allegedly submitted false documents in an effort to receive Section 8 benefits.

The charges are the result of a search warrant served on the subject’s residence

by the FBI in an attempt to locate evidence concerning the September 11, 2001

terrorist attacks. The search warrant included the arrest of the subject’s spouse

as a material witness in the September attacks. In addition, the FBI provided

information to the OIG concerning the subject’s unlawfully obtaining Section 8

benefits from the Norman Housing Authority by not reporting the income of

his spouse. An investigation by the OIG found that the subject was also unlawfully obtaining food stamps and temporary aid to needy families.

A criminal complaint for two counts of false statements was filed in federal

district court against an individual for concealing her employment with the

U.S. Government from the Richmond, CA Housing Authority. During the

recertification process for Section 8 subsidies, the individual stated that she

worked at a daycare facility instead of the U.S. Post Office. This was an OIG

investigation.

In Ft. Smith, AR, an individual was indicted on two counts of submitting

false statements. The indictment is the result of an OIG investigation which

disclosed that the subject failed to report employment on recertifications for
Section 8 benefits. The subject, a resident at Smith-Keys Village in Texarkana,

recertified for Section 8 housing assistance benefits by claiming no employment and no source of income. In fact, she worked as a bus driver for the

Texarkana Special Education Center, Inc., doing business as Opportunities,

Inc. The anticipated loss to the Department is expected to be nearly $8,000.

Single Family Housing Programs provide mortgage insurance that enables

individuals to finance the purchase, rehabilitation, and/or construction of a

home. During this reporting period, OIG investigations uncovered schemes of

fraud involving property flipping, loan origination, and Title I home improvement loans.

In Atlanta, GA, former loan officer Regina McLean was sentenced to 47

months in prison and 36 months supervised release. Former real estate broker

Marcus Andre Stancil was sentenced to 41 months in prison and 36 months

supervised release. Former loan processor Wendy Andrea Dilbeck was sentenced to 33 months in prison and 36 months supervised release. The three

individuals previously pled guilty in federal court to conspiracy to defraud

HUD and were ordered pay $1,871,087 in restitution.

Investor Velmon McLean was sentenced to 18 months in prison and 36

months supervised release, and ordered to pay $840,664 in restitution.

McLean previously pled guilty in federal court to conspiracy to defraud HUD.

He was indicted in April 2001 on 64 counts of conspiracy, wire fraud, mail

fraud, money laundering, using false Social Security numbers, and HUD

mortgage fraud.

A real estate agent/loan officer was indicted by a federal grand jury. The

loan officer, who managed a branch office of a mortgagee, was charged with

mail fraud and making false statements to HUD. She was responsible for

originating over $2 million in fraudulent FHA insured loans, representing a

potential loss to HUD of approximately $500,000. A co-conspirator, who was

also a real estate agent, was also indicted and charged with tampering with a

witness. This second real estate agent allegedly created false documents

relating to the loans originated by the loan officer and gave them to a witness

to provide to an OIG Agent.

The defendants used false identification to obtain fraudulent mortgages by

having strawbuyers assume the identities of other individuals to purchase the

properties. The defendants then lived in the properties or rented them out

without making the mortgage payments, and delayed foreclosure proceedings

by filing false bankruptcy petitions in the names of the purported owners of

the properties. The properties involved mortgages totaling over $2.4 million.

The indictments also contained a forfeiture provision for all assets obtained

through criminal activity. The investigation was conducted by the HUD and

Social Security Administration OIGs, the FBI, and the IRS.

In Houston, TX, the following actions are the results of a joint task force

investigation by the OIG, FBI, IRS Criminal Investigation Division, and the

Single Family Housing Programs
Postal Inspection Service known as “Operation Straw House.” The overall

scheme may involve 3 criminal organizations and an estimated $74 million in

fraudulent loans obtained by approximately 75 individuals. To date, 38 individuals have been charged, 33 of whom have pled guilty. Two have been

convicted, and the rest are pending trial. In addition, over $5 million in real

estate and approximately $58,000 in cash have been seized.

Howard Pailet, an approved FHA real estate appraiser, was sentenced on

bank fraud charges to 27 months in prison and 60 months supervised release,

and was ordered to pay $332,598 in restitution to 2 financial institutions and a

$100 special assessment. Pailet provided false and inflated appraisals and

submitted false statements on loan applications to secure two HUD insured Title

I home improvement loans and six conventional single family mortgage loans.

Alvin J. Loupe, the owner of Lone Star Remodeling Company, was sentenced for bank fraud to 24 months in prison and 36 months supervised release, and ordered to pay a $100 special assessment and $241,473 in restitution

to the Bank of Yorba Linda, CA. Loupe was a co-conspirator with Kevin and

Frank Mei, doing business as BCM Builders — a Title I home improvement

contractor.

Alta House, the former office manager for BCM Builders, was sentenced for

mail fraud. House pled guilty to submitting false information via the U.S. mail

on loan applications for HUD insured Title I home improvement loans and

conventional single family mortgage loans. House was sentenced to 18 months

imprisonment and 36 months supervised release, and ordered to pay a $100

special assessment.

Jonathon McIntosh, a real estate investor, pled guilty to one count of mail

fraud. McIntosh submitted false statements on conventional single family loan

applications regarding income, source of down payment money, and his intention to keep as his principal residence, eight different houses. In return, he

received $5,000 per application from Kevin Mei who was previously convicted

of money laundering.

Real estate investor Vivian Bond pled guilty to one count of mail fraud.

Bond acted as a strawbuyer on six single family real estate mortgage loans and

submitted false information concerning income, source of down payments, and

intention to reside in the properties. Bond was paid $3,000 by Kevin Mei each

time Mei used her name and credit for purchases, and was promised a percent

of future profits once the homes were sold. Mei has already been sentenced.

Juan Garcia was ordered to pay $146,032 in restitution to the Bank of

Yorba Linda, CA. Garcia was sentenced to 1 day in jail, 10 months home

confinement, and 36 months probation.

Husband and wife Stacy and Terri Kline each pled guilty to one count of

submitting false statements. The Klines admitted making false statements on a

construction completion certificate submitted for a $25,000 FHA insured Title I

home improvement loan. They stated that they had not received any cash from

the Title I contractor when, in fact, they had received over $6,000 which they

used for an automobile loan.

Jim Douglas Kinser, a former home improvement salesperson for BCM

Builders and AA Quality Construction, pled guilty to mail fraud. Kinser obtained several HUD insured Title I home improvement loans, as well as several

conventional single family mortgage loans, in his own name based on false
employment and income information. In addition, he assisted a number of

borrowers in obtaining HUD insured Title I home improvement loans by

providing them with false income verifications and by using loan proceeds to

pay off overdue credit bills to “clean” their credit.

Homeowner Cecil Mann pled guilty to one count of submitting false

statements to HUD. Mann conspired with the owners of a Title I home improvement contracting company, John McGrath and Alex McGrath, doing

business as AA Quality Construction, and others in the loan fraud scheme.

Mann obtained a $17,500 HUD insured Title I loan based on false statements

and then admitted that no rehabilitation work was ever performed. He also

admitted that he received $12,500 in cash kickbacks, and that the contractor

paid his personal bills. The McGraths were previously indicted and pled guilty

to federal money laundering charges.

Craig Garret, the owner of Klassic Hardwood Floors, pled guilty to one

count of mail fraud in relation to his participation in the scheme.

A real estate mortgage broker was charged with one count of wire fraud

for allegedly submitting false information on single family mortgage loan

applications in order to obtain conventional mortgage loans.

In Atlanta, GA, Lupita Elena McCarthy, also known as Lupita McCatty,

was sentenced on charges of conspiracy to launder money, conspiracy to

commit bank fraud, mail fraud, wire fraud, and conspiracy to defraud HUD.

She was sentenced to 3 years in federal prison and 3 years supervised release,

and ordered to pay $759,363 in restitution to one of her victims. McCarthy

paid and induced others to be “straw sellers” and “straw borrowers” who

would help her and her co-conspirators submit false documents, including

counterfeit tax returns, W-2 forms, pay stubs, bank statements, and verifications of employment, deposit, and rent to banks, mortgage companies, and/or

HUD in the purchase of over 100 properties in the Atlanta area. McCarthy

recruited these “straw” or “flip” sellers to falsely claim current ownership of

the properties, and to sign and submit the false documents to obtain mortgage

loans and, on a few occasions, HUD mortgage insurance. McCarthy and her

co-conspirators originated over $20 million of loans in this scheme with

estimated losses totaling between $7 million and $10 million. The case was

investigated by the FBI and OIG.

Ralph Pena, a former loan officer for Main Street Mortgage Services in

Saddlebrook, NJ, was sentenced in federal court to 6 months home confinement and 3 years probation, and ordered to pay $565,686 in restitution to

HUD. The sentencing was a result of Pena’s previous guilty plea to submitting

false statements. This was an OIG investigation.

Denise Kerner, a former loan originator in Evansville, IN, pled guilty and

was sentenced for her role in a fraud scheme. As part of the scheme, down

payment funds provided by a real estate developer were falsely reported to

have been gifts made by purchasers’ relatives. The scheme resulted in numerous defaults on FHA insured mortgage loans. Kerner was sentenced to 6

months home detention and 5 years probation, and was ordered to pay

$239,000 in restitution. The investigation was conducted by the OIG and the

FBI.
In Atlanta, GA, Nathan Pasha, also known as Nathan Parker, had his

federal probation revoked and was sentenced to serve 2 years remaining on a

sentence for a previous conviction. Parker was arrested when a search warrant

was served by OIG and Secret Service Agents on three locations that Pasha and

his associates were using to prepare false documents. The documents were then

presented to lending institutions to obtain both FHA insured loans and conventional financing on properties that were being flipped in the Atlanta area. Over

1,500 loan files were seized during the search. It is estimated that Pasha and

his associates caused over $50 million of fraudulent mortgages to be issued by

various mortgage lenders.

In Rome, GA, Christopher Frix pled guilty to making false statements on

an application for an FHA insured mortgage. Mary MacDonald and Becky

Wilburn pled guilty to count one of a 29-count indictment. Count one involves

a conspiracy to commit fraud against the government. MacDonald and Wilburn

were involved in submitting loan packages for FHA insurance with forged and

fraudulent documentation. They provided unauthorized down payment assistance to borrowers and inflated property values.

Wilburn and McDonald were each sentenced to 1 year confinement and 3

years probation. Frix was sentenced to 6 months home confinement and 5

years probation. All 3 were sentenced to their share in the restitution of

$93,500.

These individuals and others conspired to originate 43 fraudulent mortgages amounting to over $3 million, causing a loss to HUD of over $500,000.

The individuals originated the fraudulent mortgages by providing the down

payments to unqualified borrowers. These guilty pleas conclude a 2-year

investigation by the OIG, FBI, IRS, and the U.S. Attorney’s Office.

Two Norfolk, VA real estate developers, Matthew Davis and Richard

Charles Fawcett, were sentenced to 3 years probation. Each previously paid

$61,033 in restitution to HUD. Fawcett was also fined $5,000. Both men previously pled guilty to loan origination fraud involving 15 FHA insured property

transactions. They admitted that they purchased numerous HUD owned properties, made minor repairs, and then resold the properties at substantially higher

prices. They also admitted to providing prospective buyers, who otherwise

would not have qualified for the mortgages, with funds for down payments and

to pay off personal debts. They secured these funds with second mortgages that

were never disclosed. As a condition of his probation, Davis was ordered to

indemnify the government for any future losses that may incur relative to the

14 other FHA properties that they flipped. Based on a referral from OIG, the

HUD Enforcement Center suspended Davis and Fawcett; debarment is pending.

This was a joint OIG/FBI investigation.

Ronald Hite, vice president of U.S. Window and Supply Corporation in

Syracuse, NY, was sentenced to 5 years probation, fined $5,000, and ordered

to pay $55,320 in restitution and a $100 assessment fee. Hite previously pled

guilty to submitting false statements to HUD by submitting 23 falsified tax

returns to Greentree Financial Corporation in order to obtain Title I loans. This

was an OIG investigation.
Deborah Floyd, a New York State corrections officer in Buffalo, NY, was

sentenced in federal court to 3 years probation and ordered to pay $17,500 in

restitution for falsely certifying to HUD that she would use a home purchased

under the Officer Next Door Program as her primary residence for 3 years

from the date of closing.

In a related case, Irvin Harrell Jr., a New York State Corrections Officer,

pled guilty to one count of making a false statement to HUD. Harrell also

falsely certified to HUD that he would live in his Officer Next Door Program

home for 3 years, but instead rented out the property. He received an $11,000

discount on the property. OIG and the FBI conducted these investigations.

In San Diego, CA, Michael J. Fanghella, the founder and director of

PinnFund, USA, pled guilty to one count each of conspiracy to commit wire

fraud, money laundering, and filing a false entry with HUD; and three counts

of tax evasion. PinnFund was a sub-prime lender located in Carlsbad, CA, and

a HUD approved direct endorsement lender.

Fanghella admitted that PinnFund was loosing money from the mortgage

business and that he concealed that fact from investors while soliciting new

investor money. From 1997 through 2000, through various partnerships,

Fanghella gave investors over $200 million that he had falsely represented as

earnings or a return of capital. This is known as a “Ponzi” scheme and is an

investment swindle in which some early investors are paid off with money put

up by later ones in order to encourage more and bigger risks.

Fanghella falsely reported to HUD that the funds used to support

PinnFund’s direct endorsement application were personal funds. In fact,

Grafton Partners loaned the funds to PinnFund in 1998.

Fanghella evaded paying income tax for the years 1996-1998. His income

over this period was $13.9 million. He also transferred approximately $17.3

million from PinnFund to Barbados for the eventual benefit of his girlfriend.

PinnFund was forced to close in March 2001 because of a civil enforcement action by the Securities and Exchange Commission. This enforcement

action was considered to be part of one of the largest securities fraud cases in

San Diego County history and involved issues closely related to the criminal

case.

The wire fraud charge carries a maximum penalty of 5 years imprisonment and a $250,000 fine. The money laundering charge carries a maximum

penalty of 20 years imprisonment and a fine of twice the amount involved.

The tax evasion charge carries a maximum penalty of 5 years imprisonment

and a $250,000 fine. The false entry to HUD carries a maximum penalty of 30

years imprisonment and a $1 million fine. This was a joint investigation by the

FBI, IRS Criminal Investigations Division, and the OIG.

Norfolk, VA real estate speculators Christopher and Vanessa Probst pled

guilty to a federal charge of conspiracy to commit wire fraud, mail fraud, and

bank fraud. The Probsts admitted to creating and submitting false employment

and credit documentation, including verifications of employment, pay stubs,

and W-2 forms, to lenders in order to qualify buyers for mortgages for properties the Probsts were selling. The mortgages included those insured by HUD

and guaranteed by the Department of Veterans Affairs. The Probsts also
helped unindicted conspirators who used stolen identities to obtain mortgages

to purchase their properties. Losses attributable to the scheme exceeded

$600,000, including approximately $65,500 in losses to HUD. This was a joint

investigation by the FBI and the HUD and Department of Veterans Affairs OIGs.

In Las Vegas, NV, Virginia Ly pled guilty in federal district court to count

one of a criminal information charging her with mail fraud. Ly recruited a

strawbuyer to obtain an FHA insured loan to purchase a property; she subsequently obtained two Title I loans and profited from the loan proceeds. Ly

helped provide fraudulent income and employment information to the

strawbuyer. In two other transactions, Ly assumed the identities of other individuals to obtain first and second loans on properties. This was an OIG investigation.

In Cleveland, OH, Al Rotiroti and Robert Coyle were found guilty on four

counts each of submitting false statements. Rotiroti, the general contractor for

Faith Housing, a HUD approved nonprofit, and Coyle, a 203(k) consultant,

were found guilty of signing and submitting false certifications on 203(k) draws

for work that was inflated in value, substandard, or not completed. Faith

Housing defaulted on 14 properties in the Northern District of Ohio, with

losses to HUD estimated at $500,000. This was an OIG investigation.

In Boise, ID, Kevin J. Everson, a real estate broker/property developer/

loan officer, pled guilty to two counts of wire fraud as part of a plea agreement

with the U.S. Attorney’s Office. Everson had previously been indicted on 87

counts of wire fraud, mail fraud, bank fraud, and conspiracy for his part in

originating 59 fraudulent mortgages worth $5.3 million.

Everson’s personal assistant and office secretary, Eunice Maria Alexander,

pled guilty to one count of misprision of a felony. The plea resulted from an

agreement with the U.S. Attorney’s Office in which Alexander admitted to her

part in a scheme to provide down payments and falsify numerous documents on

behalf of unqualified borrowers.

Denise Thornton, a title company officer, was sentenced to 2 years probation and 40 hours of community service and fined $3,000 for her part in the

scheme.

Michael Everson, who was also a broker and loan officer, pled guilty to

falsifying loan documents. Of the 59 fraudulent mortgages involved in the

scheme, worth $5.3 million, 24 were insured by FHA. This was a joint OIG/FBI

loan origination investigation.

In Detroit, MI, Cheryl Swain, the former vice president for marketing

syndication of MCA Financial Corporation, pled guilty to one count of mail

fraud. MCA operated a subsidiary, known as MCA Mortgage Corporation,

which was an FHA approved lender.

Keith Pietila, chief financial officer of MCA Financial Corporation, pled

guilty to one count of making false statements and one count of mail fraud.

Both Swain and Pietila assisted in the perpetuation of a “Ponzi” scheme at

MCA. This scheme involved the redirection of funds obtained from various

warehouse lines and from the sale of assets MCA had sold into investor owned
land contract pools. In addition to making false statements to the Securities

and Exchange Commission, MCA also provided fraudulent information to HUD

in an effort to obtain and maintain its direct endorsement authority. This was

an OIG/FBI investigation.

In Buffalo, NY, following a joint OIG/FBI investigation, William Roland

Hayes, an Erie County youth services officer, pled guilty to one count of

making a false statement to HUD. Hayes falsely certified that he would use a

home purchased under the Officer Next Door Program as his primary residence for a period of 3 years from the date of closing. He received a $7,000

discount on the property. Hayes sold the property to his brother, a New York

State corrections officer, who rented the residence to a Section 8 tenant.

A federal grand jury indicted a Phoenix, AZ real estate broker from Julio

and Associates, along with two of his employees, on 1 count of conspiracy, 12

counts of submitting false statements to HUD, and 5 counts of mail fraud. One

of the employees is considered a fugitive based on a single count complaint

that had been previously filed, and a warrant will be reissued for his arrest.

After the execution of two search warrants on the broker’s offices, the

investigation disclosed that the broker and his employees allegedly produced

numerous W-2’s, pay stubs, letters of credit, and verification of employment

forms for the purchase of homes with FHA insured mortgages. Many of the

500 homes sold by the broker during the previous 5 years were sold to illegal

aliens using false Social Security numbers. In addition, the broker allegedly

stole thousands of dollars from the homebuyers, claiming additional funds

were needed for closing. The indictment also alleges that, in one instance, the

broker received $20,130 from 1 homebuyer when the actual closing costs

were only $3,672. The three indicted were responsible for over $22.2 million

in fraudulent loans.

This investigation was initiated after an OIG audit revealed irregularities

with loans that had been processed by the real estate broker. OIG conducted

the investigation, with assistance from the FBI and Department of Veterans

Affairs OIG.

In Memphis, TN, appraiser Ann Baker, real estate agent Lakine Cook,

and investor Aaron Perkins entered into a plea agreement to one count each of

conspiracy to commit mail fraud, wire fraud, and bank fraud. The charges

relate to their participation in a property flipping scheme in which they

conspired with others to direct strawbuyers to purchase duplex properties for

fair market value. The strawbuyers then resold/flipped the properties to other

conspirators at greatly inflated prices. As part of the scheme, the conspirators

prepared and used fraudulent leases, appraisals, and settlement forms to

conceal the true value of the properties as well as the fact that Baker, Cook,

and the other conspirators received a substantial portion of the loan proceeds

as “consulting fees.” Baker and Cook received over $660,000 and Perkins

received over $296,500 through their participation in 25 sales between January 1998 and May 1998. This investigation was conducted by the OIG, FBI,

and the Postal Inspection Service.
OIG Agents, Postal Inspectors, and Pennsylvania Attorney General’s Office

Agents executed federal search warrants at two residences and four businesses

in the Pittsburgh, PA area. Agents and Inspectors observed, in plain view, a

vehicle that contained business records. Based on this observation, a search

warrant for the vehicle was also obtained. These actions were taken as part of

an investigation of predatory lending practices by several home improvement

companies, a mortgage broker, and a real estate appraiser. OIG previously

identified approximately 51 Title I insured loans originated by the one of the

subject’s home improvement companies wherein the homeowner defaulted and

$629,377 in claims were filed with HUD. The Pennsylvania Attorney General’s

Office has received more than 200 complaints from homeowners regarding the

same home improvement companies, wherein they alleged that the companies

secured loans for them, performed shoddy or incomplete work on their residences, and deceived them about the true cost of their loans and/or their

financial responsibility with regard to the loans.

Pursuant to the search, approximately 110 boxes of business records were

seized, including $89,000 in cash found hidden at one of the residences. Also

found at the same location were two handguns, four long guns, and ammunition.

A former loan officer for Main Street Mortgage Services was arrested in

Newark, NJ, pursuant to a federal grand jury indictment. The former loan

officer was charged with one count of making false statements to the government, six counts of mail fraud, and four counts of monetary transactions in

criminally derived property. As part of the investigation, the OIG and the FBI

also obtained a seizure warrant for a leased vehicle belonging to the arrestee. It

was determined that this lease was purchased using funds obtained directly

from the arrestee’s illegal activities. The individual was later turned over to

local authorities pursuant to an outstanding warrant.

A Memphis, TN a Police Officer was indicted for submitting false statements to HUD in connection with his participation in the Officer Next Door

Program (ONDP). The two-count indictment alleges that in March 1999, the

Officer purchased a property under the ONDP at a 50 percent discount. In June

2001, the Officer was required to verify his occupancy of the property. At that

time, he allegedly falsely represented to HUD that he was occupying the property, when in fact, he was not. This indictment was the result of an investigation conducted by the OIG and the FBI.

A Concord, NH individual was indicted by a federal grand jury on one

count of submitting false statements and one count of mail fraud. The defendant allegedly purchased a HUD foreclosed property as an owner/occupant in

October 1999 and resold it the same day for a $21,000 profit. The OIG arrested

the individual the following day.

In Reading, PA, the U.S. Attorney’s Office unsealed an eight-count federal

grand jury indictment that charged two mortgage company officials and one

investor with participating in a scheme to submit false documents to HUD to

obtain FHA insured mortgages. The indictment alleges that the defendants were
responsible for HUD’s insuring fraudulent loans valued at more than $2 million. The indictment also notes that the Department has already paid

$500,000 in defaulted claims as a result of the fraudulent loans. The indictment stemmed from a 3-year joint OIG/FBI investigation, which disclosed that

the defendants used 3 company names to purchase residential properties and

then renovate them before reselling them to FHA insured buyers. The defendants substantially increased the sales prices of the 35 properties. The

homebuyers were Hispanic, low-income, first time buyers. Some of the buyers

were not even aware they had purchased properties but thought they were

renters.

This investigation was particularly significant because one of the defendants was a former HUD employee who engaged in predatory lending practices. The unsuspecting buyers were supplied with fictitious loan origination

documents, such as verifications of employment, credit histories, gift letters,

and down payments, in order to give the appearance that they were qualified

homebuyers. Without the bogus loan origination documentation, none of the

buyers would have qualified for the mortgages.

The indictment was originally sealed because one of the defendants was

out of the country and the U.S. Attorney’s Office feared she might not return

if she knew of her indictment. The OIG was instrumental in coordinating with

international law enforcement authorities and was successful in getting the

defendant to agree to surrender to federal authorities and be extradited back to

the U.S.

As a result of information developed during this investigation, HUD withdrew the lender’s HUD/FHA approval for 8 years and imposed a civil fine of

$192,000.

In Seattle, WA, 3 individuals were indicted on 21 counts of conspiracy,

mail fraud, wire fraud, and bank fraud for their roles in a scheme to defraud

HUD in the origination of FHA single family loans. The investigation involved

24 single family homes for which the subjects arranged sham sales to obtain

the homes for their own personal benefit and/or to obtain a portion of the

mortgage proceeds. The three allegedly used Spanish-speaking strawbuyers,

who could read or speak very little or no English, to obtain the properties.

After the closings, the homes were not occupied by the strawbuyers. In some

cases, the subjects rented out the properties. The Hispanic victims were under

the impression that the documents they signed were being used to improve

their credit or to assist others in purchasing homes. The strawbuyers were

unaware that they were actually signing documents to buy and or sell properties to new strawbuyers. Two of the three subjects are also being investigated

in the Sacramento, CA area where they are believed to be involved in a similar

single family loan fraud scheme. The third individual, who has a history of

resisting arrest and possession of concealed weapons, was arrested during a

felony vehicle stop by OIG Agents with assistance from the King County

Sheriff’s Office. This investigation was conducted by the OIG.

In Birmingham, AL, following a joint investigation by the HUD and

Social Security Administration OIGs and the FBI, a mortgagor was indicted by

a federal grand jury for making false statements to HUD and identity theft. The
mortgagor allegedly provided a falsified W-2 and an employee leave and earnings statement to a mortgage loan processor. The mortgagor further coaxed a

friend into providing false information on a verification of employment form,

which was also submitted to the loan processor. The false information resulted

in the approval of an FHA insured mortgage. The mortgagor purchased a

$117,000 house and has made only 1 payment on the loan since January 2001.

A St. Louis, MO individual was indicted in federal district court on

multiple federal charges, including submitting false statements about an FHA

insured mortgage. In April 2000, the individual applied for and obtained an

FHA insured loan from Prism Mortgage using a fraudulent Social Security

number and false wage and bank account information. The individual was also

charged with one count of false use of a Social Security number and three

counts of bank fraud. The bank fraud charges entail knowingly depositing

checks drawn on closed bank accounts and the withdrawal of funds, as well as

knowingly depositing insufficient funds checks. This was a joint investigation

by OIG and the FBI.

The Office of Community Planning and Development (CPD) administers

programs that provide financial and technical assistance to states and communities for activities such as community development, housing rehabilitation,

homeless shelters, and economic job development. Grantees are responsible for

planning and funding eligible activities, often through subrecipients. OIG

investigations of these programs disclosed cases of theft, embezzlement, mail

fraud, money laundering, bribery, and conspiracy.

The Department of Justice (DOJ) entered into a settlement agreement in lieu

of civil suit with the Commonwealth of Pennsylvania wherein both parties

agree that, over approximately a 6-year period, the state Department of Community and Economic Development (DCED), formerly the Department of

Community Affairs, claimed excessive administrative expenses totaling almost

$1.7 million against the HUD funded HOME Program, as administered by DCED.

Pursuant to the Agreement, one half of the amount is payable to HUD on or

before September 1, 2002; the remainder is payable on or before September 1,

2003.

An OIG investigation, conducted at the request of DOJ after a “qui tam”

civil suit was filed by a former DCED employee, disclosed systemic weaknesses

in the DCED billing system that were known to the agency but allowed to

continue. In cases where DCED employees were assigned less than full time to

the HOME Program, a computer program charged 100 percent of their salaries,

benefits, and expenses to the HOME Program by default. There were also cases

where employees who were not assigned to the HOME Program had all or a

portion of their salary, benefits, etc., charged against the program at the direction of top management. The $1.7 million represents approximately 10 percent

of the total funding set aside for administrative expenses during the period in

Community Planning and Development Programs
question. There was no evidence that any DCED official or employee obtained

unjust enrichment from the excessive billings.

Clark Dale Koerner, former low-income housing rehabilitation manager

for the Valley of Imperial Development Alliance (VIDA) in San Diego, CA,

was sentenced to 5 months imprisonment, 5 months in a halfway home, and 3

years probation. Koerner previously pled guilty to theft and misapplication of

federal funds. As VIDA manager, Koerner provided several fraudulent claims

for reimbursement of monies funded by HUD Community Development Block

Grants (CDBG). As part of his scheme, Koerner’s identity-of-interest construction company received approximately $105,000 in HUD CDBG funds for work

that was substandard or incomplete. Koerner also received approximately

$65,000 from various contractors for steering bids their way and approving

fraudulent claims. This investigation was conducted by the OIG and FBI.

Jimi Dawn King, also known as Jimi Dawn Abernathy, a HUD Native

American grant recipient in Tulsa, OK, pled guilty to one count of embezzlement and theft from an Indian Tribal Organization. The guilty plea is a result

of a joint investigation by the HUD and Department of Interior OIGs which

found that in November 1998, King received a $26,000 grant from the HUD

funded Miami Tribe Housing Authority as a result of false statements he

submitted on a mortgage application. Sentencing is tentatively scheduled for

summer 2002.

Three brothers associated with Estevez Monroe and Associates (EMA) and

Estevez Monroe, Inc., were indicted in November 2001, along with another

individual, on charges of mail fraud and money laundering. The individuals

obtained a Rental Rehabilitation Program Loan (RRL) of $260,320 from the

City of San Antonio, TX, in the form of a Community Development Block

Grant. An OIG investigation found that the individuals allegedly made false

statements to the City indicating that they had the collateral and assets to pay

for the loan and to rehabilitate Elmhurst Apartments for low-income housing.

Under the RRL agreement, if the terms were met, the loan would be forgiven

and the RRL would become a grant; however, the loan terms were not fulfilled,

the funds were misspent, and the property was unlawfully sold in April 2000

without the rehabilitation ever having been completed.

In January 2002, a superseding indictment was issued against the four

individuals, bringing additional charges of money laundering, aiding and

abetting, mail fraud, and bank fraud. A joint investigation by the FBI, OIG,

and IRS Criminal Investigation Division found that the defendants made false

statements via the U.S. Postal Service to the City when they indicated they

had the collateral and assets to pay for the RRL and to rehabilitate Elmhurst

Apartments. In addition, the defendants allegedly provided false loan origination documents to secure FHA insured loans for residential real estate that was

not only in poor condition but was overvalued; conducted financial transactions to disguise the proceeds of their unlawful activities; and committed bank

fraud by providing false statements, thus causing the submission of a false loan

application in the amount of $584,000 to World Savings Bank for the purchase

of a private residence by one of the defendants.
A federal grand jury indicted the mayor of the City of Beaumont, TX, and

a former city councilman on 19 counts. The mayor was indicted on five counts

of mail fraud, six counts of theft or bribery concerning federal program funds,

one count of conspiracy, three counts of money laundering, and one count of

conspiracy to commit money laundering. The former city councilman was

indicted on five counts of mail fraud, three counts of theft or bribery concerning federal program funds, one count of conspiracy, two counts of money

laundering, and one count of conspiracy to commit money laundering.

The indictment is the result of a joint investigation by OIG and the FBI

which determined that the subjects conspired with Terry Samuel, owner of

Simco Building Services in San Antonio, who was conducting business transactions with the City of Beaumont. The subjects allegedly accepted cash payments, checks, and other things of value. They also allegedly assisted Samuel

in obtaining a $100,000 loan from the Small Business Revolving Loan Fund

(SBRLF) through the City of Beaumont to pay for housing renovation projects.

SBRLF funding is administered by HUD through the Community Development

Block Grant Program. Samuel also received federal funds from HUD through

his business by participating in home construction programs administered by

the City of Beaumont, including the Rental Rehabilitation Program and the

Affordable Housing New Construction Program. In November 2001, Samuel

was convicted during a jury trial on 24 counts of bribery.

As a result of an OIG investigation, the Mayor of Paterson, NJ, was

charged in a 40-count indictment. Charges included fraudulently seeking

reimbursement from the City’s HUD sponsored HOME (Rental Rehabilitation)

Program, stealing election campaign funds, fraudulently seeking reimbursement from the City for travel expenses, filing false tax returns, and making

false statements to federal Agents.

During this reporting period, other significant white collar OIG investigations resulted in one sentencing, one indictment, and one suspension.

Daniel D. Asera, the former executive director of the Greater Nevada Fair

Housing Council (the Council), a nonprofit organization in Reno, NV, was

sentenced to 30 months incarceration and 3 years supervised release, and

ordered to pay $39,630 in restitution to be split between HUD, American

Express, and Bank of America, and a $100 special assessment. Asera previously pled guilty to theft of federal program funds. The Council operated

under a $252,863 grant from HUD. It served rural Nevada in providing support

and information regarding both federal and state law prohibiting housing

discrimination. From July 1998 to March 1999, Asera embezzled $39,630

from the Council by making unauthorized charges to three credit cards he

obtained in the name of the Council. He charged hotel rooms and meals in the

Reno/Carson City area, took cash advances at local area casinos, and made

charges for pornographic Internet sites. He also hosted two “retreats” at Squaw

Other Significant White Collar Investigations
Valley for his college fraternity and alumni from the University of California

at Berkeley, and paid for the hotel rooms and meals with the charge cards.

This was an OIG investigation.

In Miami, FL, a federal grand jury returned a 63-count indictment

against the owner and controller of a Government National Mortgage Association (GNMA) approved lender/servicer charging the defendants with 2 counts

of conspiracy to defraud HUD, 6 counts of mail fraud, 1 count of bank fraud,

27 counts of wire fraud, and 27 counts of making false statements to GNMA.

The defendants were allegedly able to place 18 fictitious mortgages in GNMA

pools, which resulted in a $1.6 million loss to GNMA. In addition, the defendants kept the loan pay-off proceeds on 39 mortgages, amounting to $3.2

million, and continued to make the monthly mortgage payments so that GNMA

would not discover the fraudulent scheme. The total loss to GNMA was $4.8

million. The loss to the Federal Deposit Insurance Corporation lender that

provided the warehouse line of credit was over $22 million. The investigation

involved 15 bank accounts and over $200 million in financial transactions.

The controller was arrested by OIG Agents on March 11. This was an OIG

investigation.

A HUD employee in the Charleston, WV Office was suspended for 10

days for violating the Standards of Conduct and for conduct prejudicial to the

government after an OIG investigation disclosed that the employee had inappropriate sexual conduct with a tenant who is receiving HUD rental assistance

at a development under the employee’s responsibility. The employee and

tenant acknowledged that they engaged in consensual sex in the tenant’s

apartment on one occasion. The investigation did not develop any evidence

that the employee coerced or otherwise made any promises to the tenant as a

condition of engaging in sexual activity, nor was any evidence developed of

any additional improper conduct by the employee with regard to other HUD

assisted developments under the employee’s responsibility.

Since February 1994, OIG Special Agents have participated in investigations of violent crime and drug trafficking in public and assisted housing.

These investigations began as part of an initiative known as Operation Safe

Home (OSH). The investigations were conducted in coordination with various

federal, state, and local law enforcement task forces. In addition to law enforcement personnel from states, counties, cities, and housing authorities, the

following federal agencies have been primary partners in OSH investigations:

the Federal Bureau of Investigation (FBI), the Drug Enforcement Administration (DEA), the Bureau of Alcohol, Tobacco, and Firearms (ATF), the U.S.

Secret Service (USSS), the U.S. Marshals Service (USMS), the U.S. Postal

Inspection Service (USPS), the U.S. Customs Service (USCS), the Immigration

and Naturalization Service (INS), the Internal Revenue Service (IRS), and the

Department of Justice (DOJ).

Violent Crime in Public and Assisted Housing
As previously stated, OIG is systematically phasing out OSH cases. The

Congress funded OSH through FY 2002 to allow an orderly and responsible

conclusion of the initiative, to cease complete operations by September 30,

2002. Thus, in accordance with the requirements of HUD’s Fiscal Year 2002

Appropriations Act (Pub. Law 107-73, approved November 26, 2001), OIG is

closing OSH violent crime investigations and re-deploying staff to focus on

investigations involving single family fraud and property flipping.

Following are some of our recent significant investigative results in the

violent crime area.

Undercover operations in various Fort Worth, TX public housing developments by OIG, DEA, and the Grand Prairie Police Department resulted in the

sentencing of six individuals on narcotics charges. Patrick Remus Sneed and

Dominique Lavelle were each sentenced to 120 months confinement and fined

$100. Douglas Bernard, Darrell Dixon, and Cassandra Robinson were sentenced to 262, 97, and 151 months in prison, respectively. In addition, each

was ordered to serve 60 months probation and pay a $100 fine. Sherwyn Nisel

Cox was sentenced to 84 months confinement and 60 months probation, and

fined $100. All six defendants pled guilty to federal narcotics charges in

October 2001.

Damion Teague, a convicted drug dealer, was sentenced to 2-1/2 to 5 years

in prison after pleading guilty to attempted criminal sale of a controlled substance in the third degree. Jonathan Rivera, also a convicted drug dealer, was

sentenced to 1-1/2 to 4-1/2 years in prison for the attempted criminal sale of a

controlled substance in the third degree. Teague and Rivera were 2 of 46

individuals who controlled the sale of crack, heroin, cocaine, and marijuana in

the Castle Hill public housing development in New York, NY. The sentencings

resulted from a 4-month undercover operation conducted jointly by the New

York City Police Department’s (NYPD) Organized Crime Control Bureau, South

Bronx Narcotics Initiative, and the OIG. Designated as “Operation Good

Neighbor,” this Safe Home initiative was organized at the request of the NYPD

to identify gang members and the leadership structure controlling the sale of

narcotics in the development, and to dismantle their operation. The initiative

identified the subjects as controlling a $1 million per year criminal enterprise

in the Castle Hill development by using assigned “lieutenants,” “enforcers,”

“steerers,” “street dealers,” “stash house operators,” and “lookouts” who used

hand-held radios and bicycles. The criminal enterprise divided the 14 buildings

of the development into sections where specified drugs were sold. It was one of

the most drug-plagued, violent crime-ridden public housing developments in

New York City. During the investigation, contraband totaling 1,089 slabs, 2

grams, and 5 $80 bags of crack, 116 glassines and 1 gram of heroin, 4 grams

and 3 tins of cocaine, 62 bags of marijuana, and 2 firearms were seized.

In Albuquerque, NM, Juan Amores, a Cuban National, was sentenced to

211 months in prison and 5 years probation. Amores was convicted in June

2001 on 1 count of possession with intent to distribute over 50 grams of crack

cocaine in public housing and 1 count of carrying a firearm during a drug

trafficking crime. In the same case, Emad Al-Mosawi, an Iraqi National, was
sentenced to 106 months in prison and 6 years supervised probation. AlMosawi pled guilty in July 2001 to one count of distributing crack cocaine in

public housing and one count of possessing a firearm in furtherance of a drug

trafficking crime. These sentencings resulted from initiatives by the Albuquerque Operation Safe Home Task Force which consists of OIG and the Albuquerque Police Department Westside Narcotics Unit.

Sandra Gonzales pled guilty to 12 counts of illegal distribution of narcotics around the Leyden Woods and Oak Courts public housing developments in

Greenfield, MA. Two additional defendants, Jason Arnold and Jesse Berry,

pled guilty to various narcotics charges. Two other individuals have scheduled

plea hearings. The defendants involved in this criminal enterprise sold and

distributed over 100 grams of cocaine to undercover federal Agents acting as

drug traffickers. Illegal narcotics and money were stored at both housing

developments. The DEA Mobile Enforcement Team, ATF, OIG, Greenfield and

Montague Police Departments, Massachusetts State Police, and the U.S.

Attorney’s Office participated in this Organized Crime Drug Enforcement

Task Force investigation.

Former HUD assisted resident Kristy Marie Davis pled guilty to conspiracy

to distribute cocaine base. This plea is the result of a controlled buy of over 2

grams of crack cocaine by the Spokane Federal Drug Task Force, which is

comprised of the OIG, DEA, IRS, and USCS. At the time of the controlled buy,

Davis was receiving Section 8 assistance from the Spokane, WA Housing

Authority. Her assistance has since been terminated.

An 8-month Task Force investigation culminated in the issuance of 27

federal indictments involving 29 defendants. Twenty-six of the defendants

have been arrested; three are fugitives. To date, 17 have pled guilty and are

awaiting sentencing. Four additional defendants charged in Rhode Island

Superior Court with violating state narcotics laws were arrested. Charges

included drug trafficking and distribution of crack cocaine and/or heroin. The

indictments resulted from efforts to target and combat drug trafficking problems in the Chad Brown and Hartford Park public housing developments in

Providence, RI, and the Morin Heights public housing development in

Woonsocket, RI. This Task Force is made up of the OIG, DEA, and Providence and Woonsocket Police Departments.

A federal grand jury indicted 10 individuals from the District of Columbia, the State of New York, the State of Maryland, and the Commonwealth of

Virginia on 29 counts of conspiracy to distribute and possession with intent to

distribute heroin and cocaine and various firearms violations within the

District of Columbia. The two leaders of the conspiracy were charged with

operating a continuing criminal enterprise. Three of the defendants were also

charged with overt acts of money laundering in their attempts to hide the

financial proceeds from their illegal activities. The U.S. Attorney’s Office,

OIG, the FBI, the Metropolitan Police Department, the Organized Crime Drug

Enforcement Task Force, and the Weed and Seed Task Force initiated this

investigation into a major heroin distribution organization operating in the
Langston Terrace public housing area. The indicted individuals were involved

in the distribution of more than 100 kilograms of 90 percent pure heroin, and

more than 1,000 kilograms of composted heroin throughout the DC metropolitan area.

An individual who, in the past, has supplied large quantities of illegal

narcotics to various public housing developments in Pittsburgh, PA, was

charged in federal court with 14 counts of distributing heroin and cocaine. The

defendant, who is presently awaiting state trial for allegedly ordering the

“contract killing” in 1977 of a potential witness against him, was arrested by

the OIG, USMS, and Allegheny County Police Officers and was denied bail after

it was determined that he was a potential danger to the community. The Assistant U.S. Attorney advised that the defendant has been a target of federal law

enforcement for over 20 years, and he praised OIG and Allegheny County for

their efforts leading to the indictment.

As a result of “Operation Isolation,” a joint effort by the Kansas Bureau of

Investigation, Topeka, KS Police Department, FBI, OIG, USMS, and the Kansas

National Guard Counter Drug Operations Unit, 21 drug traffickers were

identified in the Deer Creek and Pine Ridge public housing developments and

the Highland Park assisted housing development. A major trafficker was

arrested for distributing over 563 grams of methamphetamine with a street

value of $56,343. In addition, six individuals were issued restraining orders

barring and banning them from Topeka public housing developments.

Operations by the San Francisco, CA Narcotics Task Force resulted in the

arrest of 29 individuals on various drug and violent crime charges. During 1

initiative, Task Force members arrested 21 people for selling crack cocaine to

undercover Police Officers and 1 person on an outstanding arrest warrant for

prior drug sales. The arrests stemmed from community complaints of drug

sales at the Valencia Gardens, Bernal Dwellings, Protereo Annex, Hunters

View, Hayes Valley, Mission Delores, Bayview Hunters Point, and Alemany

public housing developments and the All Hallows Garden, Bayview Apartments, Diamond View, Fredrick Douglas Haynes, Mission Bart Apartments,

and Golden Gate Apartments low-income complexes. Four of the arrests

stemmed from an operation that focused on members of the Big Block gang

who are responsible for many of the narcotics related homicides in the Bayview

Hunters Point development. OIG and the San Francisco Police Department

conducted these operations.

The Gangster Disciples street gang purportedly oversees drug and gang

activity for the north side of Chicago, IL, specifically the Cabrini Green and

Ogden Courts public housing developments. The OIG, ATF, USMS, and Task

Force Agents from the High Intensity Drug Trafficking Area Task Force, along

with Officers from the Chicago Police Department, arrested 15 gang members

in these housing developments, 1 of whom is a reputed high ranking member

of the gang. During the investigation, undercover OIG Agents purchased crack

cocaine and heroin from gang members.
The New Haven, CT Task Force, made up of OIG, the Connecticut State

Police, and the New Haven Police Department, arrested 10 people. As part of

one initiative, the Task Force arrested one person who was making narcotics

deliveries to several public housing developments. The arrestee was charged

with sale of narcotics and sale of narcotics within 1,000 feet of a school. A

search warrant was also executed at a local hotel room that was used as a stash

house to store drugs. The search netted 158 grams of crack cocaine worth

approximately $5,200, packaging materials, cutting devices, 1 electronic

scale, several identification cards, hotel receipts, and $30,200 in cash.
Chapter 5 Joint Efforts
Joint Efforts

Many successful OIG investigation cases have had the involvement of both

Criminal Investigators (Special Agents) and Auditors. In a joint effort, Investigators bring to a case a knowledge of criminal statutes, administrative regulations, necessary evidence to prove the crime, interviewing techniques of

potential witnesses and the subject(s), procedures for obtaining written statements and evidence, and a general working knowledge of the judicial process.

Auditors provide the education, background, and training to conduct the

review of accounting records and documents that is often required. Also,

based on their expertise, Auditors can be considered witnesses should a case

go to trial. Further, when considered appropriate, Auditors can accompany

Investigators on certain key witness/target interviews. Their in-depth knowledge of financial books, records, and accounting procedures can be extremely

valuable.

The joint effort is an effective means to completing an investigation. To

make a case successful, Auditors and Investigators communicate their plans,

status, and the level of assistance needed to their counterparts. This way, each

one understands their scope and limitations. The joint effort is often the only

way to put together the necessary pieces of an investigation case. The OIG has

had considerable success in conducting joint investigation cases. Some of

these cases are conducted strictly by the OIG; some involve participation by

other federal, state, or local law enforcement agencies. Following are the

results of successful joint efforts conducted by the OIG Offices of Investigation

and Audit during this reporting period.

Juan Irizzary Valentin, a supervisory public housing specialist in the HUD

Caribbean Office, was sentenced in San Juan, PR, to 33 months in prison

and 36 months supervised release, and ordered to pay $169,000 in restitution.

He pled guilty in June 2001 to bribery, theft of government funds, and extortion. Valentin, who was responsible for monitoring Puerto Rico Public Housing Authority privatization contracts, was charged along with his half brother,

Samuel Valentin Toro, and a management agent. Toro, a former employee of

the management agent, was sentenced to 4 months home detention and 36

months supervised release, and ordered to pay $28,000 in restitution. He

previously pled guilty to bribery, theft of government funds, and extortion.

The management agent is scheduled for trial. The defendants participated in a

kickback scheme involving over $28.5 million in public housing contracts.

Valentin received over $195,000 in kickbacks, through Toro, from the management agent between April 1999 and January 2001. He purchased a 306-

acre farm and a four-wheel drive vehicle with the kickback money. The FBI

also participated in this investigation.

In San Juan, PR, Freddy Valentin, a former Senator for the Commonwealth of Puerto Rico, pled guilty in federal court to a two-count criminal

information charging him with conspiracy to commit extortion (Hobbs Act

Violation) and conspiracy to commit money laundering. Valentin received

$129,700 in kickbacks for using his influence as a Senator to cause a contract
to be awarded to Centrex, a property management company. Valentin was a

silent partner in Centrex and conspired with Fernando Vigil Fernandez, Jose

M. Cobian Guzman, and 2 other individuals to approve a $4.8 million contract

for Centrex to manage public housing developments for the Puerto Rico Public

Housing Authority. Cobian and Vigil have already pled guilty. In addition,

Valentin pled guilty to conspiring with Vigil, Cobian, and a third individual to

commit money laundering. Valentin admitted that he conspired with the others

to disguise the sources of the kickbacks by issuing checks to a third party and

cashing the checks. The FBI also participated in this investigation.

In Miami, FL, Mark Cohen, an investor and an unlicensed mortgage

broker, was sentenced to 32 months imprisonment and 36 months supervised

release, and ordered to pay $265,897 in restitution. Cohen pled guilty to

conspiracy to commit wire fraud, HUD fraud, mail fraud, and money laundering. Also, closing attorney Bruce Hollander was found guilty of 13 counts of

conspiracy to commit HUD fraud, wire fraud, mail fraud, and money laundering. Cohen and Hollander, along with an employee of a real estate investment

company, were three of the seven members of an organization who were previously charged in this case. From 1996 to 1999, the defendants conspired to

fraudulently originate over 120 FHA insured loans, through 7 banks and 9

mortgage companies, by creating false gift letters and income information for

individuals who could not otherwise qualify for the loans. The loans totaled

over $11 million. In addition, the loan amounts were inflated as a result of flip

sales from the original sellers to the defendants, who then sold the properties at

inflated prices to the unqualified buyers on the same day, financing the purchases with the FHA loans. The properties were inflated an average of over

$15,000 each. The average loss on the properties is over $30,000, and the total

loss to HUD is expected to be over $1.7 million. The defendants included

closing attorneys, real estate brokers, mortgage brokers, loan officers, loan

processors, title company employees, and the owner of a printing company,

who created the false documentation. The FBI also participated in this investigation.

Luis Guillermo Rodriguez-Cardona and Violeta Rodriguez-Vasquez were

each sentenced in San Juan, PR, to 12 months home confinement with electronic monitoring and 60 months supervised release. Rodriguez-Cardona was

ordered to pay $394,874 in restitution to HUD, while Rodriguez-Vasquez was

ordered to pay $130,000 in restitution to HUD. Both previously pled guilty to

conspiracy to defraud HUD. Rodriguez-Cardona was the owner of C.A.E.R., a

company doing business with the Puerto Rico Public Housing Authority

(PRPHA). Rodriguez-Cardona and Rodriguez-Vasquez were two of seven defendants who were previously indicted and charged with conspiracy, bribery,

money laundering, and theft of PRPHA funds totaling over $1.4 million.

C.A.E.R. was contracted by the PRPHA to train PRPHA residents in the establishment of small businesses. As part of the scheme, C.A.E.R. submitted claims to

the PRPHA and received over $1.4 million from the PRPHA for services they did

not provide. C.A.E.R. submitted false claims, forged documents, and duplicate

supporting documentation. In addition, Rodriguez-Cardona conspired with

three employees of the PRPHA and paid each of them kickbacks, including cash,
real estate, and vehicles, in exchange for their approving the false invoices

submitted by C.A.E.R. Six of the seven defendants have pled guilty. The FBI

also participated in this investigation.

The U.S. Attorney for the Western District of New York announced that a

civil False Claims Act and administrative settlement was reached between the

United States and the mortgage lender formerly known as PNC Mortgage

Corporation of America. The settlement involves a single cash payment to the

United States in the amount of $1,487,283. This settlement also includes

indemnification of 27 FHA insured loans and resolves allegations that PNC

Mortgage submitted false claims to HUD relating to inflated appraisals and gift

letters. A joint investigation by the OIG Offices of Audit and Investigation, the

FBI, and the U.S. Attorney’s Office, initiated based on a referral from HUD’s

Quality Assurance Division, disclosed that PNC Mortgage underwrote a

significant number of foreclosed FHA insured mortgages in the City of Buffalo, NY; these homes were owned or sold by the corporate entities of Frank

Parlato, Sr. HUD debarred Parlato’s related corporate entities, including

Franklin Enterprises, Inc., Ellicott Enterprises, and Erie Development, Inc.,

as well as Frank Parlato, Sr., on three separate occasions. PNC Mortgage

certified to HUD that it exercised due diligence in the loan origination and

appraisal process, which it did not.

In San Juan, PR, Ruben Monroig-Almodovar, a former employee of the

Puerto Rico Public Housing Authority (PRPHA), was sentenced to 12 months

at a half-way house, 4 months home detention, and 3 years supervised release.

He was also ordered to pay $121,000 in restitution. Monroig-Almodovar

previously pled guilty to one count of embezzlement. He is the last of three

defendants to be sentenced for their participation a scheme to defraud HUD.

Monroig-Almodovar approved unauthorized checks to a private management

agent that managed PRPHA developments. The other conspirators intercepted

the checks and deposited them in the bank accounts they had set up in the

name of the management agent. The amount embezzled totaled $1,034,733.

In addition to the OIG Offices of Investigation and Audit, this investigation was

conducted by the FBI and the Comptroller of Puerto Rico.

Developer Jose Luis Diaz was sentenced to 3 months in a halfway house

and 5 years supervised release, and ordered to pay $120,000 in restitution.

Juan Mayol-Alicea, a contractor doing business with the Puerto Rico Public

Housing Authority, was sentenced to 24 months in prison and 36 months

supervised release, and fined $60,000. Diaz previously pled guilty to a criminal information charging him and Mayol-Alicea with conspiracy to interfere

with commerce by extortion. The information charged the 2 with paying

$96,000 in kickbacks to a former Senator from the Commonwealth of Puerto

Rico. Diaz and Mayol-Alicea paid the Senator over $20,000 in kickbacks for

the Senator’s promise to resolve difficulties involving a contractor’s efforts to

purchase the Extension Los Robles property for the Office of Assets of the

Puerto Rico Urban Renewal Authority, and over $75,000 in exchange for the

Senator’s promise to resolve additional difficulties with the contractor’s efforts

to purchase the Tropical Acres Project and remodel/sell low-income housing

units.
In the same case, Richard Casillas, a former official at the Puerto Rico

Public Housing Authority, was sentenced to 37 months imprisonment and 3

years supervised release, and ordered to pay $134,582 in restitution. Casillas

previously pled guilty to extortion, aiding and abetting, and unlawfully obstructing, delaying, and attempting to obstruct, delay, and affect commerce by

extortion. Casillas was indicted in December 2000 on charges of money laundering and extortion. Other defendants included three former employees of the

Department of Liquidation for CRUV (OLACRUV), the predecessor of the Puerto

Rico Public Housing Authority, and two contractors. All five defendants have

pled guilty. The individuals conspired to pay more than $500,000 in kickbacks

in exchange for OLACRUV contracts. The OLACRUV employees used their influence to award contracts for the renovation and construction of housing units at

the Puerto Rico Public Housing Authority. The FBI participated in this investigation.

An administrative settlement was reached with John Quinlan, the general

partner/management agent of Meadow Green Housing Corporation in Houston, TX. Quinlan deposited $249,644 from the corporation’s shareholders into

a corporate account associated with a HUD insured multifamily apartment

complex. The settlement is the result of an investigation which determined that

Quinlan made distributions to shareholders over the surplus cash ceiling during

a 3-year period. Despite Quinlan’s contention that the disbursements did not

exceed the amount of a HUD approved mortgage refinance, it was HUD’s position that the excess loan proceeds, which had been deposited in the project

operating account, were depleted at the end of the first year due to the project’s

operating deficit.

Maria McDonald, also known as Esperanza Guizar, a real estate agent

doing business as Maria’s Real Estate in Houston, TX, was sentenced to 9

months supervised release and 48 hours of community service, and ordered to

pay $6,200 in restitution and a $100 special assessment. Prior to sentencing,

McDonald pled guilty to submitting false statements and paid $92,803 in

restitution. The sentencing is the result of an investigation which disclosed that

McDonald engaged in a property flipping scheme using strawbuyers to misrepresent their intention to be owner/occupants in the purchase of HUD owned

properties. She provided the strawbuyers with earnest money and paid some of

them a fee of $500. McDonald exploited predominately Spanish speaking

clientele by getting the strawbuyers to transfer the properties to her name and

then selling the homes to legitimate homebuyers at inflated prices on the same

day.

In Utica, NY, Robert C. Munson, Jr., was sentenced to 1 year and 1 day

incarceration and 3 years supervised release, ordered to undergo mental health

treatment and counseling, and ordered to pay $113,964 in restitution to HUD

and a $100 court assessment. Munson pled guilty in December 2001 to one

count of theft or bribery concerning programs receiving federal funds. An

investigation disclosed that Munson, former director of housing for the City of

Utica’s Department of Urban and Economic Development, embezzled

$113,964. As part of his responsibilities as director, he managed the City’s
housing rehabilitation program. As such, he solicited construction proposals

from contractors. The contractors were required to submit, along with their

proposals, a bid security deposit in the amount of 5 percent of the total construction cost. Munson stole the bid security deposits, cashed them, and used

the funds for his personal benefit. To conceal the theft, he forged City of Utica

Community Development Block Grant Program payment vouchers for the

return of the bid securities to the contractors. Munson also produced fictitious

vouchers showing that renovation work was completed, when in fact no

construction work was performed. The FBI also participated in this investigation.

Bertha Gilkey Bonds pled guilty to a federal charge of embezzling and

converting public money. Bonds embezzled/converted the funds in her position as chairman of the board of Cochran Gardens Tenant Management Corporation in St. Louis, MO. She admitted using the funds to pay for business

travel expenses that she incurred in connection with her work as a consultant

for Urban Women, Inc., a business owned and operated by Bonds. Urban

Women, Inc., provided consulting services to other tenant management

organizations throughout the country, including Abbottsford Homes Tenant

Management Corporation in Philadelphia, PA, Hudson Gardens Resident

Management Corporation in Poughkeepsie, NY, Harriet Tubman Resident

Management Corporation in Chattanooga, TN, and 1230 North Burling

Resident Management Corporation in Chicago, IL. Bonds caused the Cochran

Gardens Tenant Management Corporation to spend $28,586 on travel expenses

for Urban Women, Inc. A portion of the loss has been repaid, resulting in a

loss for restitution purposes of $19,020. The FBI also participated in this

investigation.

Joni Lynn Estrada-Pena, who pled guilty to 1 count of theft of federal

program funds in September 2001, was sentenced to 15 months imprisonment

and 3 years supervised probation, and ordered to pay $86,393 in restitution

($17,529 to the Aurora, CO Housing Authority and $68,864 to the Littleton,

CO Housing Authority). Estrada-Pena was the Section 8 coordinator for both

Housing Authorities.

In San Juan, PR, Fernando Vigil, Jr., president of Ingenieros Y

Proyectistas, a contractor doing business with management agents hired by the

Puerto Rico Public Housing Authority (PRPHA) to manage public housing

developments in Puerto Rico, was sentenced to 5 months home detention and

36 months supervised release and ordered to pay $85,000 in restitution. Vigil

previously pled guilty to 2 counts of bribery for paying $36,000 in kickbacks

to officials at Central Housing Corporation (CHC) and $40,000 to officials at

the Inter Island Corporation (IIC). Both CHC and IIC are management agents

contracted by the PRPHA to manage PRPHA developments. The FBI also participated in this investigation.

A federal grand jury returned a two-count indictment charging the owner

of a mortgage company in Ft. Lauderdale, FL, with bank fraud in connection

with false statements he made to originate fraudulent FHA insured mortgages
and have them entered into Government National Mortgage Association pools.

Allegedly, the defendant fraudulently originated Section 203(k) Rehabilitation

Home Mortgage Insurance Program mortgages for over 80 properties, with

$4.5 million in mortgages, by not making the required down payments.

Dennis Stewart, the closing attorney in this case, was sentenced to 33

months in prison and 36 months supervised release, and ordered to pay

$81,421 in restitution. Stewart previously pled guilty to one count of making

false statements to obtain FHA insured mortgages.

Maxine Holley, the former chairperson of the board of directors for the

Benson, NC Housing Authority and a public housing tenant, pled guilty to one

count of making false statements to HUD. Holley conspired with the Authority’s

former executive director to underreport her income as a North Carolina State

Magistrate, as well as the Sergeant at Arms for the North Carolina State Legislature. The total loss to HUD was over $48,000.

The U.S. Attorney’s Office in Philadelphia, PA, announced the unsealing

of a 39-count indictment charging the owner/general manager (owner) of Arco

Redevelopment Corporation and an alleged associate of a local organized crime

boss with 18 counts of wire fraud, 13 counts of false statements to obtain HUD

insured loans, and 8 counts of money laundering. The indictment stemmed

from a multi-year joint investigation by the OIG Offices of Investigation and

Audit, the IRS Criminal Investigation Division, and the FBI which focused on

the Title I predatory lending practices of the owner. For approximately 2 years,

the owner operated Arco as a Title I contractor/dealer in the Philadelphia

market. During the time he was in business, he derived more than $150,490 in

income as a result of his fraudulent Title I loan transactions. The investigation

disclosed that the owner allegedly altered homeowner loan applications, gave

homeowners illegal cash kickbacks (but inflated the loans to account for the

kickbacks), and paid off homeowners’/borrowers’ delinquent consumer debts

as an inducement to selecting him to do the rehabilitation work. The investigation also disclosed that to further the fraud scheme, the owner created fictitious

employment information to give the appearance that several of the

homeowners/borrowers had additional income. Eight Title I loans and three

conventional loans were the basis for the false statement charges. Of the eight

Title I loans, HUD has paid a claim for one $14,000 defaulted loan. Much of

the work performed by Arco was substandard. However, despite the quality of

the workmanship, the homeowners have liens on their properties until their

loan obligations have been satisfied.

Agents arrested the owner the same day the indictment was unsealed. Prior

to making the arrest, the OIG conducted 2 weeks of surveillance and planning to

ensure a successful arrest. This was the largest and most successful Title I

investigation to date in the Eastern District of Pennsylvania.

In Baton Rouge, LA, Streuby L. Drumm was sentenced to 21 months in

federal prison for skimming money from a HUD insured housing development.

He was also ordered to pay $468,955 in restitution and a $600 fine. In an

August 2000 plea agreement, Drumm pled guilty to three counts of mail fraud

and three counts of equity skimming. He admitted diverting funds from the
Sharlo Apartments apartment complex. The OIG Offices of Investigation and

Audit, the FBI, and Louisiana State Police conducted this investigation.

The former board chairman for the Parrish, AL Housing Authority was

indicted on one count of misusing the Authority’s American Express credit

card. She allegedly charged unauthorized expenses from 1997 until 2000. In

1998 alone, she allegedly charged $7,555. The former board chairman originally agreed to repay the unauthorized amounts, but after a short time stopped

making the repayments.

A HUD Seattle, WA Office employee was terminated from employment

following an investigation into allegations the employee misused government

owned vehicles, used a government issued credit card for personal expenses,

and made false claims to HUD and the OIG to seek a relocation from Seattle to

Portland, OR, for personal benefit. The investigation confirmed that the

former employee drove a government owned vehicle 16,222 miles in 11 weeks

while assigned as a campaign representative to the Combined Federal Campaign. Gas receipts indicated that a good portion of the mileage was outside

the commuting area and/or to places at which the employee did not have

official business. Some of the mileage was also accumulated on weekends or

when the employee was on leave. Over 6,200 miles were traveled in 14 days

when the employee worked no official duty hours. The investigation also

confirmed misuse of a government issued credit card and false claims to seek

relocation.
Chapter 6 Legislation, Regulations,

Notices, and Other

Directives
Legislation

HUD Access to

Information in the

National Directory of

New Hires

Regulations

FHA Appraiser Watch

Initiative

Making recommendations on legislation, regulations, and policy issues is

a critical part of the OIG’s responsibilities under the Inspector General Act.

This responsibility has taken on added dimension at HUD because of the

dynamics of its rapidly changing program and management environment.

During this 6-month reporting period, the OIG reviewed 117 regulations,

funding notices, and other HUD directives and proposals. This Chapter highlights some of the resultant OIG recommendations.

This proposed legislation would amend Section 653(j) of the Social

Security Act (42 United States Code 653(j)) to authorize HUD and its intermediaries to have controlled access to information in the National Directory of

New Hires database. This database, maintained by the Department of Health

and Human Services, facilitates accurate income verification for applicants

and tenants of HUD public and assisted housing.

We nonconcurred with this proposed legislation because it would not

specifically authorize the HUD OIG to have access to the directory of new hires

data. Access to this information is necessary for the OIG to perform audit tests

to verify the accuracy and appropriateness of payments made under various

HUD assistance programs. We recommended revisions to authorize HUD OIG

access to the directory of new hires data.

The Department revised the language of the proposed amendment to

specifically allow disclosure of information in the National Directory of New

Hires database to the Inspector General of HUD. We lifted our nonconcurrence

based on those revisions.

This proposed rule would establish regulations for the Federal Housing

Administration (FHA) Appraiser Watch Initiative, provide a fully computerized

Appraiser Watch monitoring system, and establish a performance standard that

appraisers would be required to meet to maintain their status on the Appraiser

Roster. Appraisers would be removed from the Roster if the rate of defaults

and claims on closed mortgages linked to their appraisals exceed the rate

established in this rule.

We nonconcurred with this proposed rule because we did not agree with

removing an appraiser from FHA programs based solely on the default/claim

rate of loans that the appraiser was involved in processing. This may, inappropriately, hold the appraiser responsible for defaults that are the result of poor

underwriting practices by the lender. We recommended, instead, a closer

examination of the work performed by appraisers on loans with high default/

claim rates. Also, the standard of over 200 percent of the default and claim

rate appears to be a high standard for triggering action, considering the

problems being experienced in the program. We recommended a standard that
Housing Assistance for

Native Hawaiian

Housing Block Grant

Progam and Loan

Guarantee for Native

Hawaiian Housing

Notices of Funding Availability (NOFAs)

Community

Development Block

Grant Program for

Indian Tribes and

Alaska Native Villages

University and College

Partnership Programs

would be more inclusive of poorly performing appraisers, such as 50 percent

above the norm for the area.

In order to seek additional public comment, the Department intends to

publish the Appraiser Watch Initiative as an Advanced Notice of Proposed

Rulemaking instead of a proposed rule. This regulation had not been issued at

the close of the semiannual reporting period.

This proposed rule would implement Office of Public and Indian Housing’s

(PIH) procedures for two new programs to address the housing needs of Native

Hawaiians. The Native Hawaiian Housing Block Grant Program will provide

housing assistance block grants to fund affordable housing. The Section 184A

Loan Guarantees for Native Hawaiian Housing Program will provide Native

Hawaiian families with greater access to private mortgage resources by guaranteeing loans for one-to-four-family housing located on Hawaiian Homelands.

We nonconcurred with this proposed rule because PIH had not completed a

front-end risk analysis. This analysis is performed for new and substantially

revised programs to help the Department identify management control risks

associated with the program, and reduce those risks to an acceptable level.

Also, the rule was not clear on procedures for allocating project development

costs between assisted and non-assisted units in multi-unit projects. Additionally, the proposed rule was inconsistent in defining required affordability

periods for HUD assisted dwelling units.

The proposed rule had not been issued at the close of the semiannual

reporting period.

This SuperNotice of Funding Availability (SuperNOFA) would announce the

availability of funds for developing viable Indian and Alaska Native communities. This grant program would, primarily, benefit persons with low and moderate income by creating decent housing, sustainable living environments, and

economic opportunities.

We nonconcurred with this SuperNOFA because it would allow land appraisals to be supported with only a written opinion from a real estate agent. We

recommended that any land valuations prepared by real estate agents be supported by additional objective evidence, such as recent sales, recent appraisals

for the property or similar properties in the same area, or detailed estimates

prepared using reputable property appraisal guides. The Office of Public and

Indian Housing revised the SuperNOFA to require that real estate agent estimates be supported by additional objective data, such as recent appraisals or

sales of similar properties.

The SuperNOFA was published on March 26, 2002.

This SuperNOFA would assist institutions of higher education expand their

role and effectiveness in addressing community development needs in their

localities, including neighborhood revitalization, housing, and economic

development.
We nonconcurred with this SuperNOFA because, even though the University

and College Partnership Programs have the same authorizing legislation and

similar purposes, HUD operates separate and distinct programs for the Alaska

Native/Native Hawaiian Institutions Assisting Communities Program, the

Hispanic-Serving Institutions Assisting Communities Program, and the Historically Black Colleges and Universities Program. Contrary to the intent of

the SuperNOFA process, HUD issued separate NOFAs for each of those programs. We addressed this issue in comments made in prior years, and in 1999

wrote the former Deputy Secretary and recommended that the University

Assistance Programs be placed in a single office.

The Department did not agree that the NOFAs could be combined because

of differences in the focus, size, and level of maturity of the various programs.

However, the Department made several revisions to make the language, requirements, and rating factors more consistent, and placed the University

Assistance Programs in a single office. Based on those changes, we lifted our

nonconcurrence. We support continued efforts to consolidate the programs in

a single NOFA.

The SuperNOFA was published on March 26, 2002.

This Mortgagee Letter would allow lenders to transmit data directly from

their loan processing systems to FHA’s systems without re-keying the data into

the FHA Connection.

We nonconcurred with this proposed Mortgagee Letter because it did not

discuss security procedures, and did not include an assessment of security

risks. Also, it was unclear whether implementation of the B2B specifications

would be mandatory or optional for lenders.

The Mortgagee Letter had not been issued at the close of the semiannual

reporting period.

Mortgagee Letter

FHA Connection

(FHAC) Business-toBusiness (B2B)

Specification
Chapter 7 Audit

Resolution
In the audit resolution process, the OIG and HUD management come to an

agreement as to the needed actions and timeframes for resolving audit recommendations. Through this process, we hope to achieve measurable improvements in HUD programs and operations. The overall responsibility for assuring

that the agreed upon changes are implemented rests with HUD managers. This

Chapter describes some of the more significant pending issues where resolution action is delayed or where a management decision is revised. It also

contains a status report on HUD’s implementation of the Federal Financial

Management Improvement Act of 1996. In addition to this Chapter on audit

resolution, see Appendix 2, Table A, “Audit Reports Issued Prior to Start of

Period With No Management Decision at 3/31/02,” and Table B, “Significant

Audit Reports Described in Previous Semiannual Reports Where Final Action

Had Not Been Completed as of 3/31/02.”

First issued June 30, 1992. HUD has been preparing financial statements

under the requirements of the Chief Financial Officers Act for 11 fiscal years,

beginning with Fiscal Year (FY) 1991. Various internal control weaknesses

have been reported in these audits. In our most recent audit effort for FY 2001,

we were able to express an unqualified opinion on HUD’s principal financial

statements.

The results of our FY 2001 report on internal controls were consistent with

results reported in Semiannual Reports from prior years. While there has been

progress, material weaknesses continue with respect to the need to: (1) complete improvements to financial systems; (2) ensure that subsidies are based on

correct tenant income; and (3) improve monitoring of housing subsidy determinations. In addition to the weaknesses that continue to exist from prior

years, our report also includes two material weaknesses about the need to: (1)

enhance FHA’s information technology systems to more effectively support its

business processes; and (2) improve FHA’s controls over budget execution and

funds control. Corrective action plans to resolve these issues have continued to

change over the last decade.

First issued March 27, 1992. FHA has been preparing financial statements

for 11 years under the Chief Financial Officers Act, beginning with FY 1991.

The audit of FHA’s FY 2001 financial statements discussed problems similar to

those that have been reported since the audit of FHA’s FY 1991 financial

statements. The audit continues to recognize that FHA needs to: (1) improve its

information technology (primarily accounting and financial management

systems) to more effectively support FHA’s business processes; (2) place more

emphasis on early warning and loss prevention for single family insured

mortgages; and (3) monitor and account for its single family property inventory. A weakness reported since the FY 1992 financial statement audit relates

to the need for FHA to enhance the design and operation of information systems’ general and application level security controls. This weakness was

expanded in FYs 1999 and 2000 to include improvements needed in FHA’s data

Audits of HUD’s FY

1991 through 2001

Financial Statements

Delayed Actions

Audits of FHA’s FY

1991 through 2001

Financial Statements
integrity. FHA did resolve a material weakness in FY 2000 and part or all of

three reportable conditions. In addition, the FY 2001 audit identified a material

weakness in internal controls relating to the need to improve FHA’s controls

over budget execution and funds control.

FHA’s latest action plan continues to report efforts toward resolving these

long-standing issues. The FY 2002 financial statement audit will assess FHA’s

accomplishments in correcting these conditions.

Issued March 30, 1999. HUD did not have an adequate system of oversight

and control for the Empowerment Zone Program. Specifically, HUD did not

effectively assess the progress and status of empowerment zones, confirm

whether the use of empowerment zone funds was appropriate or complied with

cities’ strategic plans, or ensure the accuracy of performance reviews submitted

by cities. As a result, HUD did not detect inefficient and ineffective uses of

empowerment zone resources and empowerment zone benefit achievements

were overstated. In 1999, HUD agreed to develop procedures to improve the

oversight and control of the Empowerment Zone Program by March 2000.

HUD did not meet the March 2000 completion date because the former

empowerment zone coordinator did not take action on the recommendations.

Based on the OIG’s discussions with the Office of Community Planning and

Development (CPD), the CPD Comptroller started taking action on the recommendations in February 2001. In March 2001, the Comptroller estimated that

the outstanding recommendations would be closed by July 2001. CPD’s decision to obtain the services of a contractor has further delayed completion of

final action. The Comptroller advised that CPD completed a statement of work

to obtain outside services in drafting the recommended procedures and controls. The Comptroller expected that all actions would be completed by March

31, 2002; however, as of March 1, 2002, HUD was still addressing three outstanding issues. They are: (1) establishing monitoring procedures to be used for

on-site visits; (2) establishing a standardized monitoring review checklist; and

(3) developing an Empowerment Zone Handbook. HUD anticipates achieving

closure on these issues by September 30, 2002. (Report No. 1999-CH-0001)

Issued September 28, 1998, September 30, 1998, and October 15, 1998.

Audits of the Cities of Chicago, IL, Philadelphia, PA, and Atlanta, GA, found

that the Cities used empowerment zone funds inappropriately. The questioned

amounts total over $2 million for the three Cities. The unique nature of the

Empowerment Zone Program, authorized by the Omnibus Budget Reconciliation Act of 1993, provided HUD the authority to oversee the program, but

provided funding through tax credits and Social Services Block Grant funds

from the Department of Health and Human Services (HHS). HHS has responsibilities for resolving questions concerning the permissible use of zone funds.

In 1999, HUD management agreed with our findings and promised to have

the Cities repay, by June 2000, program funds spent inappropriately. HUD,

however, did not take corrective actions timely. In February 2000, HUD’s CPD

Comptroller started taking corrective actions and planned to have the outstanding recommendations closed by July 2001. In July 2001,the CPD Comptroller

requested that HHS decide whether the Cities’ use of Zone funds to provide

services to non-zone residents was an eligible use of funds. If HHS decides that

HUD’s Oversight of the

Empowerment Zone

Program

Empowerment Zone

Program, Cities of

Chicago, Philadelphia,

and Atlanta
the Cities used Zone funds improperly, HUD plans to execute a repayment

agreement with the Cities requiring repayment within 2 to 3 years. In spite of

the CPD Comptroller’s repeated verbal requests for a determination, HHS has

not responded to HUD’s request. HUD’s CPD Comptroller advised that, in

April 2002, CPD plans to have HUD’s Deputy Secretary contact high-level HHS

officials to follow up on HUD’s request for an eligibility determination. (Report Nos. 1998-CH-1005, 1998-CH-1006, and 1999-CH-1002)

Issued August 19, 1999. The City of Lynwood could not demonstrate its

compliance with CDBG requirements for activities administered by

subgrantees. The subgrantees operated a community based program which

provided business training and incubator space for the benefit of low- and

moderate-income residents. The training component included businesses

outside of the grantee’s City limits. However, the City could not provide

documentation to support the number of jobs for low- and moderate-income

persons created or retained, or document future benefits accruing to its residents. We recommended that HUD require the grantee to submit documentation of job creation and retention activities or return to its letter of credit,

from non-federal funds, the amount the grantee is unable to support. In

December 1999, the Los Angeles Office of CPD agreed with our recommendations and agreed to complete actions by October 31, 2000.

In November 2000, the Los Angeles Office of CPD requested revised

management decisions. The local office agreed that the City could not support

job creation/retention and area benefit activities. However, they concluded that

the City’s program benefited low- and moderate-income persons. Therefore, it

would not be necessary for the City to repay the program. The basis for the

local office’s decision was that a legitimate business training activity occurred

and businesses that received CDBG assistance obtained their business licenses

in the City. Further, the businesses were located in an area with 57 percent

low-income households and jobs created were primarily low-paying jobs.

We disagreed with the Los Angeles Office of CPD and referred the matter

to the Acting General Deputy Assistant Secretary for CPD for decision in

February 2001.

In July 2001, the CPD Comptroller agreed with OIG’s position and the Los

Angeles Office of CPD advised the City to reimburse about $732,000 to its

line of credit. The City offered CPD another resolution of this matter, which

HUD rejected. CPD sent the City a second request for payment in February

2002. CPD advised the City that failure to repay the amount disallowed may

result in a reduction of its FY 2002 CDBG entitlement grant, or of a future

year’s grant. The Los Angeles Office of CPD instructed the City that repayment, or a repayment plan, must be received by March 2002. The City’s reply

to CPD included a request that the City’s liability be reduced; however, CPD

plans to reject this offer. CPD plans to instruct the City to either repay the total

amount in question, or request an administrative hearing. Due to the ongoing

negotiations between CPD and the City, HUD was unable to provide a target

date for resolving this matter. (Report No. 1999-SF-1003)

Issued September 28, 1999. A special economic development activity

totaling approximately $700,000 did not meet a national objective of the

City of Lynwood, CA,

Community

Development Block

Grant (CDBG) Program

CDBG Program, City of

St. Louis, MO
Housing and Community Development Act. The project was intended to meet

the national objective of “benefiting low- and moderate-income persons with an

eligible activity of job creation.” The audit found that the City created no jobs

for low- and moderate-income persons. In January 2000, HUD agreed with our

recommendation and indicated that the City would need to demonstrate that the

activity met another national objective or repay the amount of ineligible assistance. Actions were to be completed by January 2001.

Subsequent to the audit, the City changed the national objective to “an

activity to aid in the prevention or elimination of slums or blight.” However,

the City did not produce documentation to support that the area of the activity

was deteriorating, declared a slum or blighted area, or that there were conditions existing in the building that would qualify it as “spot blight.” Nonetheless, in March 2001, the Office of CPD advised that they considered the project

to meet the national objective of prevention or elimination of slums or blight.

For over 1 year, the Office of CPD provided OIG with documentation in an

attempt to support the national objective of “an activity to aid in the prevention

or elimination of slums or blight.” At a January 2002 meeting with the Assistant Secretary for CPD, and subsequent to the meeting, additional documentation was provided. CPD believes that a national objective has been adequately

supported. In March 2002, the OIG advised the Assistant Secretary for CPD that

the information presented did not support CPD’s position.

The OIG believes it is inappropriate to change a national objective once an

objective has been selected and funds expended. A St. Louis Development

Corporation Resolution stated that the purpose of the grant was to reimburse

the Union Pacific Railroad for past expenditures. Since this was a reimbursement for past expenditures, the City should have known whether or not jobs

were actually created for low- and moderate-income employees and, therefore,

whether the national objective was met. Because agreement could not be

reached on an appropriate course of action, the matter was referred to the

Deputy Secretary, as the Department’s Audit Resolution Official, for a final

decision in March 2002. (Report No. 1999-KC-1002)

Section 5(a)11 of the Inspector General Act, as amended, requires that the

OIG report information concerning the reasons for any significant revised

management decision made during the reporting period. During the current

reporting period, there was one significant revised management decision.

Issued September 29, 2000. A nationwide audit of the Office of Housing’s

controls over housing subsidy payments found that HUD did not fully implement its Tenant Rental Assistance Certification System (TRACS) as planned and

needed to improve controls over Section 8 special claims payments. The Department abandoned its TRACS development in favor of the HUD 2020 Reform

Plan objectives. As a result, TRACS provides no assurances about controls over

assistance payments or data accuracy. New plans for TRACS extend its use to

contract administrators in much the same manner as the Department currently

uses it.

Revised Management Decision

Housing Subsidy

Payments, Office of

Housing
The audit recommended that the Office of Housing either implement

TRACS as originally planned and with effective controls over data accuracy, or

discard the system. In February 2001, the Office of Housing agreed to implement the following corrective actions:

 The Financial Management Center (FMC) will develop an automated

system to compare current tenant information in TRACS to the amount

shown on the voucher.

 The FMC will identify missing certifications in TRACS and institute a series

of notices to owners to supply the incomplete data.

 A contractor will complete an ongoing comprehensive study of the Section

8 payment process, with a focus on identified problems, and develop

proposed solutions for needed improvements and changes in the areas of

procedures,systems, and organization.

At that time, HUD expected that the study would be completed by March 2001,

with full implementation of solutions by December 2001.

On March 4, 2002, HUD revised the management decision and corrective

actions to allow for a more comprehensive strategy than planned in the original management decision and to incorporate the benefits of e-government in a

reengineered payment process. HUD agreed to complete all actions by September 30, 2005. We will conduct a follow-up to determine HUD’s progress in

developing and testing the new system and implementing other proposed

solutions. (Report No. 00-KC-0002)

FFMIA requires that HUD implement a remediation plan that will bring

financial systems into compliance with federal financial system requirements

within 3 years or obtain the Office of Management and Budget’s (OMB)

concurrence if more time is needed. FFMIA requires us to report, in our

Semiannual Reports to the Congress, instances and reasons when an agency

has not met the intermediate target dates established in the remediation plan

required by FFMIA. In April 1998, HUD determined that 38 of its systems were

not in substantial compliance with FFMIA. At the end of FY 2001, the Department reported that 17 systems were not in substantial compliance with FFMIA.

The number of reported non-conforming systems was increased from the 11

reported at the end of FY 2000 because 9 systems that were previously assessed as conforming were reclassified as non-conforming systems. HUD also

discontinued two systems and the Department corrected deficiencies in one

non-conforming system. Our audit of HUD’s FY 2001 financial statements cites

additional financial management system weaknesses, which we reported as

reasons for the Department’s FFMIA noncompliance. These include noncompliance with: (1) federal financial management systems requirements; (2)

Federal Financial Management Improvement Act of 1996

(FFMIA)
federal accounting standards; and (3) the standard general ledger at the transaction level. HUD has submitted plans to OMB to correct material system weaknesses with a target completion date of December 31, 2005.
Appendices
APPENDIX 1 - AUDIT REPORTS ISSUED

Internal Reports

Audit Reports

for the period

October 1, 2001 through March 31, 2002

Audit-Related Memoranda

2002-FO-0002

Housing

Federal Housing Administration, Audit of Fiscal Years 2000 and 2001 Financial Statements, 2/22/02.

2002-DE-0001

2002-NY-0001

2002-SF-0001

Single Family

Nationwide Review of HUD’s Loss Mitigation Program (Follow-up), 2/28/02.

Nationwide Audit-Asset Control Area Program, Single Family Housing, 2/25/02.

Nonprofit Participation, HUD Single Family Program, 11/05/01.

2002-FO-0001

2002-FO-0003

2002-FO-0004

2002-KC-0001

Miscellaneous

Audit of GinnieMae’s Fiscal Years 2000 and 2001 Financial Statements, 2/20/02.

Audit of HUD’s Fiscal Years 2000 and 2001 Financial Statements, 2/27/02. Better Use: $514,000,000.

Report on HUD’s Fiscal Year 2001 Detail Accounting Submission Report, 3/13/02.

Oversight of the Audit Resolution Process, Office of the Chief Financial Officer, 11/13/01.

2002-DE-0802

Single Family

Rocky Mountain District Review of the Officer/Teacher Next Door Program, 3/12/02.

2002-DE-0801

Multifamily

Review of Alleged Violations of the Anti-Deficiency Act and the HUD Reform Act by the Office of Multifamily Housing Assistance Restructuring, 3/22/02.
APPENDIX 1

Audit-Related Memoranda

Multifamily

External Reports

Audit Reports

2002-DE-1001

2002-KC-1001

PIH

Review of Mitchell Management, Multifamily Management Agent, 3/15/02.

Dutchtown Care Center, St. Louis, MO, Review of Project Disbursements, 3/29/02.

2002-BO-1002

2002-CH-1001

2002-CH-1002

2002-SE-1001

Concord, NH Housing Authority, Administration of Public Housing and Section 8 Programs, 3/29/02. Questioned: $64,268;

Unsupported: $58,160.

Ypsilanti, MI Housing Commission, Safeguarding Monetary Assets and Inventory, 3/26/02. Questioned: $119,074; Unsupported: $17,281.

Alton, IL Housing Authority, Low-Income and Public Housing Drug Elimination Programs, 3/29/02. Questioned: $190,225.

Nampa, ID Housing Authority, Housing Program Administration and Operations, 1/10/02. Questioned: $3,871; Unsupported:

$3,871.

2002-BO-1001

2002-FW-1001

2002-NY-1001

2002-PH-1001

CPD

City of Worcester, MA, Community Development Block Grant Program, 3/27/02. Questioned: $901,347; Unsupported:

$569,961.

Houston/Harris County, TX, Coalition for Homeless, Continuum of Care Program, 1/11/02.

City of Ithaca, NY, Community Planning and Development Programs, 3/21/02. Questioned: $581,222; Unsupported:

$504,736.

City of Williamsport, PA, Community Development Block Grant and HOME Investment Partnership Programs, 3/19/02.

Questioned: $2,638,370; Unsupported: $576,190.

Single Family

2002-DE-1801 American Union Mortgage, Sandy, UT, Single Family Loan Origination, 3/12/02.
APPENDIX 1

External Reports - continued

Audit-Related Memoranda - continued

2002-AT-1807

2002-PH-1802

2002-SF-1802

Multifamily

Jardines de Valencia Housing Cooperative, Rio Piedras, PR, 3/20/02. Questioned: $25,562.

D.B. Frye and Associates, Norfolk, VA, Management Agent Activities, 3/26/02. Questioned: $1,098,672; Unsupported:

$1,098,672.

Limited Review-Lorenz Hotel, Redding, CA, Property Disposition Program, 3/25/02. Questioned: $53,484.

PIH

2002-AT-1801

2002-AT-1803

2002-AT-1804

2002-AT-1805

2002-BO-1801

2002-CH-1801

2002-FW-1801

2002-PH-1803

West Palm Beach, FL Housing Authority, 10/30/01.

Mowa Choctaw Housing Authority, Mt. Vernon, AL, 11/09/01.

Waverly, TN Housing Authority, 12/17/01. Questioned: $165,630.

San Juan, PR Public Housing Administration, Martinal Property, Inc., 1/11/02.

South Kingston, RI Housing Authority, 12/20/01.

City of Evansville, IN Housing Authority, 1/29/02. Questioned: $936,133.

Lockhart, TX Housing Authority, 12/04/01. Questioned: $120,864; Unsupported: $120,864.

Philadelphia, PA Housing Authority, Limited Personnel Review, 3/26/02. Questioned: $203,388; Unsupported: $6,017.

CPD

2002-AT-1802

2002-AT-1806

2002-CH-1802

2002-KC-1801

2002-NY-1801

2002-PH-1801

2002-SF-1801

Macon-Bibb County, GA Economic Opportunity Council, Inc., Supportive Housing Program, 11/09/01. Questioned: $5,333;

Unsupported: $185.

Chattanooga, TN Neighborhood Enterprise, Inc., 1/16/02. Questioned: $15,900.

Partners for Community Development, Inc., Home Buyers-Lease Purchase and HOME Homeowner Rehabilitation and Accessibility Programs, Sheboygan, WI, 1/31/02. Questioned: $24,855.

Review of Enhanced Enterprise Community Funding, Kansas City, KS, 2/25/02.

City of Utica, NY, CDBG, HOME and Section 8 Existing Housing Programs, 12/03/01. Questioned: $1,335,580; Unsupported: $1,167,713; Better Use: $43,234.

City of Baltimore, MD HOME Program, 12/21/01. Questioned: $146,114.

Mayor’s Office of Housing and Nonprofit Developers, Use of Various HUD Funds to Replace Geneva Towers, San Francisco,

CA, 3/25/02.
APPENDIX 2

TABLE A

AUDIT REPORTS ISSUED PRIOR TO START OF PERIOD WITH

NO MANAGEMENT DECISION AT 03/31/02

REPORT NUMBER & TITLE REASON FOR LACK OF MANAGEMENT DECISION

ISSUE DATE/

TARGET FOR

MANAGEMENT

 DECISION

Nothing to report.
APPENDIX 2

TABLE B

SIGNIFICANT AUDIT REPORTS DESCRIBED IN PREVIOUS SEMIANNUAL REPORTS

WHERE FINAL ACTION HAD NOT BEEN COMPLETED AS OF 03/31/02

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

1992TS0011

1992PH1009

1993SF1014

1995SF0001

1995CH1009

1996FW1001

1996SF1002

1996FW1002

1997PH1002

1997FW1003

1997CH1010

1998HQ0801

1998AT1005

1998CH1005

1998CH1006

1998DP0004

Audit of Fiscal Year 1991 HUD Consolidated Financial Statements

Huntington, WV Community Development Block Grant Program

Tucson, AZ Health Care Limited Partnership, Multifamily Operations

Multi-district Audit of Section 236 Program, Excess Rental Income Collections

Alliance Mortgage Corporation, Single Family Mortgage Insurance Program, Villa Park, IL

Credit Finance Corporation, Multifamily Management Agent, Dallas, TX

Pascua Yaqui Housing Authority, Tucson, AZ

Credit Finance Corporation, Multifamily Management Agent, Dallas, TX

Newport News General Hospital, Section 242 Hospital Program, Newport News, VA

Medlock Southwest Management Corporation, Multifamily Management Agent, Lubbock, TX

Major Mortgage Corporation, Section 203(k) Rehabilitation Home Mortgage Ins. Prog., Livonia, MI

Review of HUD’s 2020 Management Reform Plan

Housing Authority of the City of Tampa, FL

City of Atlanta, GA Empowerment Zone Program

City of Philadelphia, PA Empowerment Zone Program

Controls Over the Single Family Acquired Asset Management System

06/30/92

07/10/92

09/23/93

12/21/94

08/08/95

10/16/95

02/13/96

08/19/96

12/09/96

08/26/97

09/17/97

11/25/97

04/23/98

09/28/98

09/30/98

09/30/98

09/30/94

11/07/92

01/21/94

03/31/96

11/30/95

06/05/96

06/11/96

10/17/96

03/26/97

01/16/98

01/06/98

07/14/99

10/21/98

09/20/99

09/20/99

09/29/99

Note 1

04/30/02

Note 1

09/30/02

Note 1

Note 1

Note 1

Note 1

Note 1

Note 1

Note 1

Note 1

06/01/02

Note 1

Note 1

Note 1
APPENDIX 2, TABLE B

Report

Number Report Title IssueDate

Decision

Date

Final

Action

1999NY1004

1999FO0003

1999CH0001

1999PH0801

1999SF1003

1999SF1803

1999CH1803

1999NY1007

1999KC1002

1999DE0001

2000AT1001

2000DP0002

2000NY1002

2000FW1001

2000FO0002

2000FO0003

2000AT1003

2000AT1801

Homestead Financial Services, Inc., Non-supervised Mortgagee, Syracuse, NY

U.S. Department of HUD Fiscal Year 1998 Financial Statements

HUD’s Oversight of the Empowerment Zone Program

Chester, PA Housing Authority Receivership

City of Lynwood, CA, CDBG and HOME Programs

Northern Pueblos Housing Authority, Limited Review of Operations, Santa Fe, NM

Fairfield County, Community Housing Improvement Program, Lancaster, OH

Alliance Mortgage Banking Corporation, Non-supervised Mortgagee, Rochester, NY

Community Development Block Grant Program, St. Louis, MO

Nationwide Review of HUD’s Loss Mitigation Program

Mego Mortgage Corporation, Title I Approved Lender, Atlanta, GA

Initial Development Efforts of the Departmental Grants Management System

Target V Phase I Development Associates, Multifamily Housing Program, Bronx, NY

New Orleans, LA Housing Authority, Executive Monitor Contract with Moten & Associates

Federal Housing Administration, Audit of Fiscal Year 1999 Financial Statements

Attempt to Audit the Fiscal Year 1999 HUD Financial Statements

Puerto Rico Public Housing Administration, Procurement Management, San Juan, PR

Misuse of HUD Funds, Puerto Rico Public Housing Administration, San Juan, PR

02/17/99

03/29/99

03/30/99

06/01/99

08/19/99

09/08/99

09/15/99

09/27/99

09/28/99

09/30/99

10/04/99

11/04/99

12/08/99

01/19/00

02/29/00

03/01/00

03/06/00

03/09/00

06/25/99

09/30/99

09/17/99

12/02/99

12/16/99

11/09/99

01/13/00

02/16/00

01/21/00

03/31/00

02/09/00

09/19/01

05/08/00

09/29/00

08/09/00

09/29/00

09/28/01

09/28/01

Note 1

09/30/02

Note 1

07/31/03

Note 1

Note 1

Note 1

Note 1

Note 1

Note 2

Note 1

10/31/04

Note 2

Note 2

12/31/05

09/30/02

12/31/02

12/31/02
APPENDIX 2, TABLE B

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

2000AT1004

2000SF0001

2000AO0001

2000CH1002

2000SF1001

2000FW1003

2000CH1003

2000DE1004

2000NY1005

2000AT0001

2000CH0801

2000DP0804

2000FO0802

2000KC0002

2000SE0003

2001AT1001

2001CH1001

2001NY1001

Pinellas County Housing Authority, Clearwater, FL

Single Family Production

Nationwide Audit of Storefront Operations

Cuyahoga Metropolitan Housing Authority, Title V Account, Cleveland, OH

San Francisco, CA Housing Authority, Low-Income and Section 8 Programs

Pope & Booth, P.C. Closing Agent Contract, Austin, TX

State of Ohio, Community Housing Improvement Program, Columbus, OH

Chippewa Cree Housing Authority, Housing Activities and Related Mgmt. Controls, Rocky Boy, MT

Poughkeepsie, NY Housing Authority, Low-Rent Housing Program

Single Family Property Disposition Program

HUD’s Settlement Agreement, Associated Estates Realty Corp., Office of Multifamily Housing

Department’s September 2000 Purchase of COTS Financial Management System

Survey of HUD’s Contract Award Process

Housing Subsidy Payments

Nationwide Audit, Use and Disposition of Residual Receipts

Housing Authority of the City of Miami Beach, FL

City of Ironton, OH Community Development Block Grant Program

Bay Towers, Far Rockaway, NY, Multifamily Mortgagor Operations

03/23/00

03/30/00

03/31/00

03/31/00

03/31/00

05/24/00

06/15/00

09/21/00

09/25/00

09/28/00

09/28/00

09/29/00

09/29/00

09/29/00

09/29/00

10/20/00

11/16/00

12/07/00

07/24/00

01/19/01

09/08/00

09/29/00

09/01/00

07/24/01

10/18/00

01/19/01

02/13/01

02/20/01

03/30/01

03/30/01

01/31/01

02/21/01

08/15/01

02/13/01

03/21/01

04/20/01

Note 2

12/31/02

Note 1

10/15/02

Note 2

07/23/02

Note 2

10/15/02

Note 2

Note 2

Note 2

Note 2

Note 2

09/30/05

12/30/03

Note 2

Note 2

04/19/02
APPENDIX 2, TABLE B

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

2001FW1002

2001BO1002

2001SF1802

2001DP0801

2001FO0002

2001FO0003

2001CH1004

2001CH1005

2001SF1803

2001FO0004

2001PH1003

2001AT1005

2001NY0001

2001NY1002

2001PH1005

2001SF1804

2001FW0001

2001KC1002

City of Dallas, TX Continuum of Care Program

Waller, Smith and Palmer PC – HUD Closing Agent, New London, CT

HUD Earthquake Loan Program Funds, Woodland Hills, CA

Review of the Department’s Internet Privacy Status

FHA Audit of Fiscal Year 2000 Financial Statements

Audit of HUD’s Fiscal Year 2000 Financial Statements

Youngstown, OH Metropolitan Housing Authority

London, OH Metropolitan Housing Authority, Safeguarding of Monetary Assets and Inventory

Supportive Housing Program Grant, Los Angeles, CA

HUD’s Internal Controls over Fiscal Year 1999 Annual Performance Data

Housing Authority of Baltimore City, MD, Section 8 Certificate and Voucher Programs

San Juan, PR Public Housing Administration, HOPE VI, Comprehensive Grant, and Economic

Development & Support Services Programs

Canal Corridor Initiative, HUD Administered Small Cities CDBG Section 108 Loan Guarantee Program

Belmax Management Corporation (Management Agent), Brooklyn, NY

Housing Authority of the City of Pittsburgh, PA

Supportive Housing Program Grant, County of Orange, Santa Ana, CA

New Orleans, LA Housing Authority

One McKnight Place, Review of Project Disbursements, St. Louis, MO

12/13/00

01/05/01

02/08/01

02/21/01

03/01/01

03/01/01

03/09/01

03/22/01

03/23/01

03/28/01

03/28/01

03/30/01

03/30/01

04/17/01

05/03/01

05/09/01

05/11/01

05/11/01

06/26/01

05/16/01

06/14/01

04/23/01

07/24/01

07/18/01

07/09/01

07/18/01

07/24/01

07/24/01

09/10/01

09/28/01

05/29/01

07/13/01

02/06/02

09/26/01

11/02/01

08/10/01

10/15/02

05/15/02

07/31/02

Note 2

12/21/06

12/31/02

07/09/02

07/17/02

04/30/02

06/30/03

08/31/02

08/06/02

05/28/02

07/12/02

12/31/02

04/30/02

10/15/03

05/01/02
APPENDIX 2, TABLE B

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

2001CH1007

2001FW0002

2001PH0803

2001AT0001

2001PH1006

2001SE0002

2001SE1001

2001AT0002

2001FW1807

2001AT1006

2001FW1005

2001AO0003

2001BO1006

2001SE0802

2001DP0802

2001FW1006

Detroit, MI Housing Commission, Hope VI Program

HUD’s Compliance with the Government Performance and Results Act

Philadelphia, PA Homeownership Center, Single Family Disposition Activities

Nationwide Audit on the Officer/Teacher Next Door Program

Philadelphia, PA, CDBG and Section 108 Funding, Urban Education Development Research and

Retreat Center Rehabilitation Project

Nationwide Audit of Implementation of the Native American Housing Assistance and SelfDetermination Act of 1996

City of Seattle, WA Supportive Housing Program Grants, Continuum of Care

Troubled Agency Recovery Center, Memphis, TN

Community Housing Fund, Irving, TX, Nonprofit Participation in FHA Single Family Insurance

Program

City of Hattiesburg, MS, Community Planning and Development Programs

Harmony House, Inc., Harrison, AR, Supportive Housing Program

Drug Elimination Funds Used for Creative Wellness Program

State of Connecticut, Home Investment Partnership Program, Hartford, CT

Nationwide Audit of Rent Reasonableness for Section 8 Tenant-based Units

Annual Evaluation of HUD’s Security Program and Practices

Dallas Homeless Consortium, Dallas, TX, Continuum of Care Program

05/16/01

05/31/01

06/14/01

06/29/01

08/01/01

08/02/01

08/15/01

08/17/01

08/17/01

08/27/01

08/27/01

08/29/01

08/29/01

08/29/01

09/06/01

09/21/01

09/13/01

11/02/01

06/14/01

01/29/02

11/21/01

12/11/01

12/13/01

12/06/01

01/30/02

12/21/01

12/21/01

01/22/02

11/09/01

11/28/01

01/16/02

12/18/01

03/31/03

09/30/02

06/13/02

12/31/02

07/15/02

12/31/02

06/30/02

04/30/02

12/03/02

06/30/02

10/31/02

07/31/02

08/30/02

07/31/02

12/31/02

05/01/02
Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

APPENDIX 2, TABLE B

2001AT1807

2001FW1809

2001SF1805

2001AT1808

2001DE1002

2001DE1003

2001DP0003

2001KC1005

2001KC1803

Family Home Providers, Inc., Cumming, GA, Non-Profit Participation in FHA Single Family Insurance Program

Jefferson Parish, LA Housing Authority, Limited Procurement Review

Los Coyotes Band of Mission Indians, Warner Springs, CA

Autographed Book Give-Away for Inner-City Youths, Inc., Orlando, FL, Non-Profit Participation in

FHA Single Family Insurance Program

Brothers Redevelopment, Inc., Denver, CO, Review of Housing Activities in FHA Single Family

Insurance Programs

Foster and Associates, Whitefish, MT, Review of Management Activities for Projects Clark Fork

Manor and Whitefish Manor

Real Estate Management System

First Community Resources, Inc., St. Louis, MO, Section 203(b) Home Mortgage Insurance Program

Review of Oak Tree Park Apartments, Overland, MO

09/25/01

09/25/01

09/25/01

09/27/01

09/28/01

09/28/01

09/28/01

09/28/01

09/28/01

01/25/02

11/07/01

12/14/01

01/24/02

01/16/02

01/16/02

01/30/02

01/17/02

11/30/01

07/01/02

10/31/02

06/28/02

07/01/02

01/16/03

09/30/03

09/30/02

08/01/02

11/29/02

AUDITS EXCLUDED:

21 audits under repayment plans

22 audits under formal judicial review, investigation, or

legislative solution

NOTES:

1 Management did not meet the target date. Target date is over 1 year old.

2 Management did not meet the target date. Target date is under 1 year old.
APPENDIX 2

TABLE C

INSPECTOR GENERAL ISSUED REPORTS WITH

QUESTIONED AND UNSUPPORTED COSTS AT 03/31/02

(DOLLARS IN THOUSANDS)

Reports 

Number of Audit 

Reports 

Questioned 

Costs 

Unsupported 

Costs 

A1 For which no management decision had been made by the commencement of the reporting 

period 

17 $35,076 $31,274 

A2 For which litigation, legislation or investigation was pending at the commencement of the 

reporting period 

8 $29,084 $14,708 

A3 For which additional costs were added to reports in beginning inventory - $936 $75 

A4 For which costs were added to non-cost reports 4 $2,041 $4 

B1 Which were issued during the reporting period 19 $8,6301 $4,124 

B2 Which were reopened during the reporting period 0 0 0 

Subtotals (A+B) 48 $75,767 $50,185 

C For which a management decision was made during the reporting period 282 $40,119 $32,901 

(1) Dollar value of disallowed costs: 

• Due HUD 

• Due Program Participants 

103

16 

$8,0871

$5,525 

$6,641 

$2,995 

(2) Dollar value of costs not disallowed 114 $26,507 $23,265 

D For which management decision had been made not to determine costs until completion of 

litigation, legislation, or investigation 

7 $28,808 $14,449 

E For which no management decision had been made by the end of the reporting period 13 

<29>5

$6,840 

<$6,838>5

$2,835 

<$2,832>5

 

1 The Office of Investigation is claiming $113,967 of this amount as a criminal prosecution recovery. 

2 1 audit report also contains recommendations with funds to be put to better use. 

3 2 audit reports also contain recommendations with funds due program participants. 

4 7 audits reports also contain recommendations with funds agreed to by management. 

5 The figures in brackets represent data at the recommendation level as compared to the report level. See Explanations of Tables C and D. 
APPENDIX 2

TABLE D

INSPECTOR GENERAL ISSUED REPORTS

WITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE AT 03/31/02

(DOLLARS IN THOUSANDS)

Reports Number of Audit 

Reports 

Dollar Value 

A1 For which no management decision had been made by the commencement of the reporting period 0 $7,757 

A2 For which litigation, legislation or investigation was pending at the commencement of the reporting period 3 0 

A3 For which additional costs were added to reports in beginning inventory - 0 

A4 For which costs were added to non-cost reports 0 0 

B1 Which were issued during the reporting period 2 $514,0431

Subtotals (A+B) 5 $521,800 

C For which a management decision was made during the reporting period 12 $43 

(1) Dollar value of recommendations that were agreed to by management: 

• Due HUD 

• Due Program Participants 

0 

1 

0 

$43 

(2) Dollar value of recommendations that were not agreed to by management 0 0 

D For which management decision had been made not to determine costs until completion of litigation, 

legislation, or investigation 

3 $7,757 

E For which no management decision had been made by the end of the reporting period 

1 

<0>3

$514,000 

<$0>3

 

1 $514 million of this amount included in our annual Financial Statement Audit. For a detailed description, see Explanations of Tables C and D. 

2 1 audit report also contains recommendations with questioned costs. 

3 The figures in brackets represent data at the recommendation level as compared to the report level. See Explanations of Tables C and D. 
EXPLANATIONS OF TABLES C AND D

The Inspector General Act Amendments of 1988 require Inspectors General and agency heads to report cost data on management decisions and final

actions on audit reports. The current method of reporting at the “report” level rather than at the individual audit “recommendation” level results in

misleading reporting of cost data. Under the Act, an audit “report” does not have a management decision or final action until all questioned cost items or

other recommendations have a management decision or final action. Under these circumstances, the use of the “report” based rather than the “recommendation” based method of reporting distorts the actual agency efforts to resolve and complete action on audit recommendations. For example, certain

cost items or recommendations could have a management decision and repayment (final action) in a short period of time. Other cost items or nonmonetary recommendation issues in the same audit report may be more complex, requiring a longer period of time for management’s decision or final action.

Although management may have taken timely action on all but one of many recommendations in an audit report, the current “all or nothing” reporting

format does not take recognition of their efforts.

The closing inventory for items with no management decision on Tables C and D (Line E) reflects figures at the report level as well as the

recommendation level.

Footnote 1 for Table D:

This amount includes $514 million attributable to our Audit of HUD’s Financial Statements for Fiscal Years 2001 and 2000 (Report Number 2002-

FO-0003, dated 02/27/02) relating to control weaknesses first reported in fiscal year 1999. The amounts reported include:

• $19 million in excess Section 8 project-based funds potentially available for recapture, and

• $495 million in modernization/capital funds that, in our view, are not in compliance with the expenditure and obligation requirements of the

United States Housing Act of 1937, as amended by the Quality Housing and Work Responsibility Act of 1998. Including:

o $161 million in unexpended 1997 and prior year public housing and modernization funds;

o $19 million in unobligated 1998 and prior year public housing funds; and

o $315 million in fiscal year 2001 capital funds awarded Housing Authorities that were in violation of the Act which should be redistributed to

other Housing Authorities.

These amounts relate to fiscal year 2001. Amounts associated with these conditions for previous fiscal years were not previously reported in semiannual statistical tables.

APPENDIX 2
APPENDIX 3

PROFILE OF PERFORMANCE

for the period

October 1, 2001 through March 31, 2002

Audit and Investigation Results Audit Investigation Combined 

Recommendations That Funds Be Put to Better Use $514,043,234 $514,043,234 

Management Decisions on Audits with Recommendations 

That Funds Be Put to Better Use $43,234 $43,234 

Questioned Costs $11,493,1861 $11,493,186 

Management Decisions on Audits with Questioned Costs $40,004,5211 $40,004,521 

Indictments 236 236 

Successful Prosecutions 202 202 

Years of Prison Sentences 633 633 

Investigative Recoveries $3,684,943 $3,684,943 

Collections From Audits and Investigations $6,945,593 $29,333,205 $36,278,798 

Arrests 451 451 

Search Warrants 102 102 

Value of Drugs Seized $278,135 $278,135 

Weapons Seized 32 32 

Administrative Sanctions 2 237 239 

Subpoenas Issued 8 164 172 

 

1 Amount reduced by $113,967 from that shown on Appendix 2, Table C, because it has been included in Investigative Recoveries due to a criminal 

prosecution.