U . S . D E P A R T M E N T O F H O U S I N G A N D U R B A N D E V E L O P M E N T

V I S I T O U R W E B P A G E A T W W W . H U D . G O V / O I G / O I G I N D E X . H T M L

O F F I C E O F I N S P E C T O R G E N E R A L

as of September 30, 2000

Semiannual Report to the Congress
OIG MISSION STATEMENT

 AND VALUES

The OIG’s mission is independent and objective reporting to the Secretary and

the Congress for the purpose of bringing about positive changes in the

integrity, efficiency, and effectiveness of HUD operations.

OIG values are as follows:

★ Relationships among OIG components and staff are characterized by

teamwork and respect.

★ Diversity is valued and promoted in the workforce.

★ Excellence in the workforce is fostered through continuing concern for

professionalism and career development.

★ As a general rule, emphasis is placed on “doing” rather than

reviewing, by delegating operational authority, responsibility, and

accountability to the lowest appropriate level.

★ Identifying and meeting client needs in a timely fashion are a primary

concern. Clients are defined as the Secretary, the Congress, HUD

managers and employees, and the public.

★ OIG operations are focused on substance rather than process and rely on

innovative as well as traditional methods to address issues of

significance having potential payback in terms of improved integrity,

effectiveness, and efficiency.
INSPECTOR GENERAL’S MESSAGE

I’d like to draw your attention to two key topics discussed in this Semiannual Report to the Congress: the

HUD 2020 management reform, and the Single Family Mortgage Insurance Program. In the OIG’s opinion, both

of these topics warrant close scrutiny by the new Congress and the new Administration.

➢ With respect to HUD 2020, Chapter One presents a status report at the 3 and one-half year mark. While

numerous organizational and business process changes have been made, the OIG sees HUD 2020 as a work

continuously in progress, with promised performance improvements yet to materialize. Moreover, despite

the myriad HUD 2020 changes, HUD still doesn’t have a solid foundation of skilled staff, a streamlined

program inventory, and effective management systems—elements that the OIG views as essential for meaningful HUD reform.

➢ With respect to the single family mortgage insurance program, Chapters two and four present evidence that

the program—generally viewed as a national treasure—is beset by massive fraud. These frauds can have

devastating impacts on victimized borrowers, and the growing number of foreclosures can destroy neighborhoods. In our last Semiannual Report to the Congress, we reported that single family loan origination fraud

was being enabled by a breakdown in HUD program controls. Since that time, HUD management has promised to strengthen those controls; and we will all need to be monitoring HUD’s progress in that regard. The

OIG believes, however, that the new Congress and the new Administration must also examine the potential

relationship between current single family policies intended to increase the homeownership rate and the

rising incidence of single family fraud.

Another topic deserving of your attention is the situation at the Puerto Rico Public Housing Administration

(PRPHA). On July 8, 2000, I took the unusual step of notifying Secretary Cuomo, pursuant to Section 5(d) of the

Inspector General Act of 1978, as amended, of HUD’s failure to stop flagrant fraud, waste, and abuse in the

operations of the PRPHA. In accordance with Section 5(d), within 7 days, Secretary Cuomo transmitted my

report to the Congress. Since that time, I am gratified to report, the Congress has prohibited the release of

funds under a $130 million settlement agreement between the Governor of Puerto Rico and the Secretary of

HUD “unless the Puerto Rico Public Housing Administration and the Department of Housing and Urban Development submit by December 31, 2000 a schedule of benchmarks and measurable goals to the House and Senate

Committees on Appropriations designed to address issues of mismanagement and safeguards against fraud and

abuse.”

My “7 day letter” also motivated some action at HUD. Notably, HUD sent HUD staff and HUD consultants to

PRPHA to assess the situation. But HUD’s timetable for actually taking corrective action remains pretty much

the same as it has been since March 2000, when we issued a comprehensive report on serious problems with

PRPHA procurements. That is, by March 2001, HUD intends to be in a position to decide what corrective action

needs to be taken vis a vis the PRPHA overall; by July 2001, HUD intends to make decisions on over $25 million

in ineligible costs identified by OIG auditors; and by October 2001, HUD intends that the PRPHA implement new

procurement policies. This is not the type of immediate and decisive action that the OIG had hoped for in the

face of flagrant fraud, waste, and abuse, which victimize the residents of PRPHA as well as the taxpayers.

Meanwhile, see Chapter Four for an additional PRPHA-related guilty plea and an additional PRPHA sentencing this semiannual reporting period. And the criminal investigations relating to the PRPHA continue.

The OIG looks forward to working with the new Congress and the new Administration on these and other

issues. They will be able to count on an OIG staff that is responsive, knowledgeable, objective, and committed to

ensuring that HUD programs serve their intended and deserving beneficiaries.

Susan Gaffney

Inspector General
Chapter 1 HUD

Management

 Issues
Since Secretary Cuomo announced the HUD 2020 Management Reform Plan in

June 1997, we have focused our audit and investigative efforts on evaluating the

progress and effectiveness of these reforms. This Chapter provides our current

assessment of the HUD 2020 Management Reform and discusses some of the future

challenges facing HUD.

The start of HUD’s most recent reform effort traces back to February 1993.

After the HUD scandals of the late 1980’s, HUD was under intense Congressional

scrutiny. Secretary Cisneros put together a reinvention plan which he felt was vital

to HUD’s survival. Secretary Cisneros’ “Reinvention Blueprint” proposed: (1)

major legislative changes to consolidate programs; and (2) serious staffing cuts,

bringing HUD’s staffing levels from about 13,000 to 7,500. Efforts to make the

legislative changes during the Cisneros Administration proved unsuccessful but the

Congress endorsed the proposal for reduced staffing.

When Secretary Cuomo took office in 1997, he made it clear that he would not

seek HUD legislative reforms, but he would continue reductions in HUD staffing.

Secretary Cuomo wanted to correct HUD’s long-standing management deficiencies

and compensate for the staffing reductions through the HUD 2020 Management

Reform Plan. The 2020 Plan was a very ambitious effort by Secretary Cuomo to

quickly overhaul operations at HUD with a series of complicated, far reaching

organizational and management process changes. The strategy was to centralize

major operations and establish management systems organized by function rather

than by program. As part of this strategy, staff was to be divided into two distinct

components: those who deal with clients and communities (Community Builders),

and those who handle “back office” processing operations (Public Trust Officers).

Community Builders were hired and stationed in every HUD location, providing a

presence in dealing with HUD’s clients. Public Trust Officers, who administer

HUD’s programs, were charged with focusing greater attention on program monitoring.

Concurrent with the staffing reductions and organizational/management process

changes, HUD 2020 envisioned correcting HUD’s inadequate resource allocation,

financial management, procurement, and information systems; and bringing the

HUD staff’s skill levels up to par. These management improvements were to be

made while establishing the organizational infrastructure, without the benefit of

program consolidation and within the context of staff reductions. This was and

continues to be an extraordinarily complicated plan.

The Office of Inspector General (OIG) has spent 3 years evaluating various

aspects of the HUD 2020 Management Reform. The Department has announced that

HUD 2020 has been successful at transforming the Department into an efficient and

effective agency. An August 2000 Progress Report on HUD 2020 entitled, “Promises

Made — Promises Kept,” indicates that HUD 2020 reforms are complete. And

indeed, a number of changes — including the organizational changes, the hiring of

Community Builders, the establishment and filling of Chief Procurement Officer

and Chief Information Officer positions, and the establishment of a system for

scoring the physical and financial health of public and assisted housing — have been

completed. But the OIG has yet to see the performance improvement promised as a

HUD Management Issues
result of these changes. In the OIG’s view, HUD’s reform efforts are a continuously

changing “rough draft” — a situation that will present a major challenge in the next

few years.

In a recent, HUD commissioned assessment of HUD 2020, The Public Strategies Group, Inc., said that “In our experience, public-sector reinvention on this

scale takes at least 5 years before the systems, behavioral, and cultural changes

yield dramatic improvements throughout the organization. We are convinced that

HUD has created a powerful rock-solid foundation of reform.” The OIG is not

equipped to forecast whether HUD 2020 will result in dramatic performance

improvements in 5 years. We do know, however, that HUD’s foundation for reform is

far from rock-solid.

One indicator of success of the 2020 Plan, reported by HUD senior management, is the reduction in reported material weaknesses in annual Financial Statement Audits from eight in Fiscal Year 1998 to five in Fiscal Year 1999. However, a

simple numeric comparison does not accurately portray where HUD stands. For the

most part, these differences were a result of changes in reporting methodology. In

reality, all of the internal control issues reported in Fiscal Year 1998 were still

present at the end of Fiscal Year 1999 either as material weaknesses or as reportable conditions. In addition to the five material weaknesses, HUD has reportable

conditions, which are significant deficiencies in the design or operation of internal

controls that could adversely affect HUD’s ability to record, process, summarize

and report financial data.

A material weakness concerning early warning and loss prevention on FHA

projects was reported as a material weakness in 1998 but not in 1999. We changed

this internal control issue in 1999 to a reportable condition, primarily because the

Real Estate Assessment Center (REAC) had made progress in completing physical

assessments of multifamily projects and starting financial assessments. However, to

imply that REAC’s progress has corrected the problem of early warning and loss

prevention of FHA projects is a misrepresentation. Another material weakness

reported in 1998 but not in 1999 concerns resource management. The internal

control issues with resource management have not changed. During Fiscal Year

1999, we stopped reporting this separately, choosing to view it instead as a cause

for many of the other reported weaknesses.

Another reported measure of HUD 2020 success was the fact that the OIG issued

an unqualified opinion on HUD’s 1998 Financial Statements. There were two big

problems with this apparent success story. First, HUD paid a contractor more than

$2 million to get its financial statements in shape. Secondly, there were eight

material weaknesses reported that constitute serious deficiencies in HUD’s ability to

assure that funds are spent for proper purposes.

At the start of HUD 2020, the OIG cautioned that the reorganization was moving

too fast, without sufficient analysis or planning. In our September 1997 Semiannual

Report to the Congress, we expressed concern that there was little assurance that

the reforms would enable HUD to accomplish its mission. We also expressed

concern that operating weaknesses were being exacerbated by the growth in HUD’s

programs. We felt it was premature and problematic that new organizations were

being put in place, before staffing and system problems were resolved. We believed

and continue to believe that a solid foundation of skilled staff, streamlined programs, and more effective management systems are essential for a reform effort to

be effective. Each of these areas is discussed below.
The adequacy of staff resources in the Department has long been a concern of

the OIG and, we believe, a root cause of many of HUD’s material weaknesses. Audits

have consistently found a mismatch between the number and complexity of HUD’s

programs and the capability of HUD staff to administer those programs. In a 1997

count of HUD programs, we identified over 300 separable program/activities. A

count today using similar measures would likely show programs/activities increasing. We are concerned when the Secretary announces new initiatives, such as

Teacher Next Door, Officer Next Door, Gun Buyback, Gun Safety, and Healthy

Homes. While these activities in and of themselves may offer benefits, HUD cannot

afford to deal with an increasing number of small programs that are staff intensive

to manage. It is unlikely that HUD staffing will be increased to manage and operate

these new initiatives. Consequently, HUD must more sharply focus on its core

mission and gain efficiencies through program consolidations and more effective

management techniques. Adding more weight to an already weak foundation makes

HUD an increasingly vulnerable organization.

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. Several

years ago, our office and the National Academy of Public Administration (NAPA)

recommended that HUD develop a resource management system to align resources

with program needs. HUD’s 2020 Plan called for implementing a resource estimation process that “would be a disciplined and analytical approach, to identify, justify,

and integrate resource requirements and budget allocations.” HUD worked with

NAPA to develop a methodology for resource estimation and allocation. NAPA’s

methodology was tested and refined in several HUD offices.

In HUD’s Annual Performance Report dated October 18, 1999, the Department

announced its intention to adopt NAPA’s methodology throughout HUD over a 12- to

18-month period. The Office of the Chief Financial Officer was designated the lead

organization to manage this process. Phase I of the implementation was “an independent baseline study of work functions, workload, and related resource requirements.” This phase was started in September 2000, 11 months after HUD’s announcement that the NAPA methodology would be implemented Departmentwide

within 12 to 18 months.

Our recent review of Resource Estimation and Allocation Process (REAP)

implementation found that plans were still not progressing with the urgency one

would expect for a priority status project. The implementation has experienced

inadequate funding with only a portion of the implementing contract funded in Fiscal

Year 2000. The study of Single Family Housing Programs, which experienced the

greatest staffing cuts and could greatly benefit from REAP, was moved to a later

phase of the project. The earliest estimated completion date for REAP is now in

early Fiscal Year 2002. In response to our draft audit report, the Deputy Secretary

affirmed the Administration’s commitment to the REAP project by fully funding the

implementing contract.

Nowhere is the need for a resource allocation study more evident than in the

numerous ongoing investigations involving single family loan origination fraud. In

our Housing Fraud Initiative in Judicial District locations such as the Eastern

District of New York, the District of Maryland, the District of Columbia, the

Northern District of Illinois, the Central District of California, and the Northern

District of Texas, serious fraud involving FHA insured mortgages continues to be

uncovered. Our audits and investigations have found that HUD’s current procedures

Management o ement of

Resources
for monitoring lenders, overseeing contractors, and supervising HUD staff activities

are less than effective. This lack of oversight and accountability results in criminal

activities going undetected and major losses to the insurance fund.

For example, last year, a HUD employee in the Santa Ana Homeownership

Center was convicted for accepting bribes and tax evasion. The employee conspired

with a real estate agent to carry out a systematic scheme of selling HUD owned

properties at prices far below HUD’s listed price. FHA lost several million dollars

as a result of this scheme. We found that established internal controls had not been

followed. Notably, the HUD Chief Property Officer (CPO) was not signing off on

property discounts as required, meaning that the employee was making major

financial decisions with no oversight. We recommended disciplinary action be taken

against the CPO for failing to perform his duties. The Department responded: “The

CPO at the time would not have been able to perform all the supervisory and monitoring duties prescribed in the Handbook and should not be subject to any administrative actions.” This major breach of internal controls was dismissed for a lack of

staff.

HUD is compensating for staff shortages through contracting out major activities. Unfortunately, HUD is not prepared to effectively monitor this increased level

of contractor activity. A recent comprehensive audit of the Single Family Property

Disposition Program found HUD ill equipped to oversee contractor performance.

Management and Marketing contractors (M&Ms) are expected to maintain and

market HUD properties and their fee is based on a set percentage of the final sales

price. Because the contractor shares in a percentage of the final sales price, HUD

considers these contracts as performance based. We found that these contracts,

while performance based, did not assure the top return to HUD.

The following hypothetical example shows the business reality of the M&M

sales. An M&M contractor that charges a 5 percent fee lists a HUD property for

$100,000. If the M&M contractor spends $500 for repairs, its net fee would be

$4,500. To recover the $500 in repair costs, the property would need to sell for

$110,000. More realistically, the contractor could forego the repairs and drop the

price to $90,000 and still realize the same $4,500. As seen by this illustration, the

contractor has little incentive to make the repairs. The lower price will result in the

quicker sale. FHA and neighborhoods have the most to lose through this incentive

fee.

FHA has realized some success from this outsourcing to M&M contractors:

sales volume has increased; the number of properties in inventory is down; and

contractors are implementing new marketing tools such as bidding through the

Internet. Despite these positive strides, FHA has not accomplished other core

elements of its program mission. The outsourcing has not maximized return to the

mortgage insurance fund nor has it resulted in properties being maintained in a

manner that has strengthened neighborhoods and communities. Our audit determined that outsourcing of program operations resulted in reduced returns to the

mutual mortgage insurance fund of about $188 million due to poor sales performance and substantially increased program costs. Contractors did not perform

timely inspections, correct hazardous conditions, make repairs, or perform routine

maintenance to preserve and protect properties. The poor property conditions

decreased marketability, increased FHA’s holding costs and negatively affected

surrounding communities. Although FHA repeatedly reported the deficiencies in

their monthly performance assessment reports, FHA has not had success in improving property conditions and compliance.
When Secretary Cuomo announced his HUD 2020 Management Reform Plan,

he said “For HUD to fulfill its mission, it must have credibility — with Congress,

with local government and with the customer. They must all believe that HUD has

the competence and capacity to perform its functions. It’s time HUD put its own

house in order.” To achieve this objective, Secretary Cuomo set forth two missions:

“empowering people and communities, and restoring the public trust.”

HUD’s strategy for accomplishing the first mission, empowering people and

communities, was to hire Community Builders to improve community outreach and

establish storefront offices and kiosks for the public to obtain information about

HUD. About 10 percent of HUD’s salaries and expenses resources were committed

to the Community Builder functions. Secretary Cuomo said that Community Builders would spearhead an effort to “empower America’s people and local governments to take the leading role in improving lives and strengthening communities.”

Our audits of the Community Builder Program and storefront/kiosk operations

found little, if any, measurable results for these activities. The Community Builders’

impact on HUD’s mission was for the most part indeterminable. The Secretary

established a visionary mission whereby Community Builder staff would solve “the

toughest economic and social problems facing communities.” Our discussions with

other HUD staff and outside customers found the impact of Community Builders to

be minimal. The majority of the Community Builders interviewed said that they

spent more than half of their time on public relations activities. In some instances,

we found that Community Builders’ limited knowledge of HUD programs and/or

their poorly defined responsibilities caused Community Builder staff to give inappropriate guidance to communities or improperly interfere with HUD matters

outside of their authority. Additionally, significant funds were expended to operate

and maintain 6 storefronts and install 73 kiosks. HUD had little evidence of benefits

derived from these operations.

HUD redirected a significant amount of resources to outreach and customer

relations activities at a time when additional resources were needed for operational

activities. The Secretary and the OIG see this situation differently. The Secretary

views public relations as an important function. The OIG views these outreach

activities as doing little to support HUD’s core mission. Our audits have demonstrated that HUD needs to focus on more wholesale management approaches, i.e.,

improving and empowering operations of major constituents, such as public housing

authorities, lenders, and multifamily owners.

HUD’s second mission, restoring the public trust, has entailed establishment of

various centralized centers to address long-standing management problems. The

purpose of the Real Estate Assessment Center is to assess the physical conditions

and financial integrity of multifamily developments and public housing authorities.

The purpose of the Troubled Agency Recovery Center is to deal promptly with

troubled public housing projects. The purpose of the Enforcement Center is to take

independent enforcement actions against owners and managers of FHA insured and/

or assisted multifamily housing properties. The purpose of the Homeownership

Centers is to consolidate single family operations at four locations.

The consolidation of these many functions, while perhaps attractive from the

narrow perspective of an efficiency expert, has eroded empowerment and may be

uniquely suited to the management style of the current Secretary. The Centers place

all control for functions in central locations using highly regimented approaches.

This serves to eliminate the knowledge base in the various field offices/hubs of local

HUD’s Mission s Mission
problems and, in some cases, it has angered customers. For example, the physical

inspection of public housing portfolios has caused so much customer dissatisfaction

that the use of the scoring process has been delayed. Further, these Centers have

come at a considerable cost to the government to develop systems and protocols.

Centers such as the Troubled Agency Recovery Centers and the Enforcement

Center are operating well below their intended capacity.

In summary, we see the changes being brought about by HUD 2020 as almost

contrary to the two intended missions. Empowerment should be the devolution of

power, that is, moving decision making processes to the communities that HUD

serves. Restoring the public trust should, we believe, be grounded in less regimented—but more substantively meaningful— approaches in dealing with those

who administer HUD programs.

HUD 2020 has led to the successful development and implementation of certain

information technology solutions. Touch screen computer kiosks systems are now

available to provide information to the public. Housing inspectors are now armed

with hand held computers to collect and transmit real time data on the conditions of

public and assisted housing facilities. And in keeping with the thrust toward egovernment, HUD has developed Internet applications through which the public can

submit housing discrimination complaints electronically. The “Clinger-Cohen” Act

intended that Chief Information Officers would have full control and provide leadership and accountability over information and technology resources.

It has long been the OIG’s position that HUD’s Chief Information Officer (CIO)

should be positioned in the organization to ensure compliance with the “ClingerCohen” Act. Instead, HUD’s organizational structure provides fragmented control

over information technology resources. It splits information technology planning/

policies, operations, and technical services between the CIO, the Office of Administration, and the Chief Financial Officer. The CIO is limited to a policy, guidance,

and planning role with no direct control over the resources for system development,

operations and maintenance, and security. This diffusion of authority and accountability has not provided the necessary focus and attention for information management that the Department so greatly needs. Several components of the HUD 2020

Plan are reliant upon the successful development and implementation of new

automated systems. However, developing systems that perform as intended, within

schedule and at cost, remains a challenge for HUD.

Our audits continue to report instances where inadequate controls over information technology operations and investments have put the information in HUD

systems data at risk. Since 1991, the OIG has reported as a material weakness slow

progress towards improving financial management systems, control weaknesses

over critical system applications, inadequate tracking of system development costs,

and poor contracting practices.

There is a lack of effective management in system development and operations

at HUD. The ability of the Department to control information technology costs is

limited because for many years the Department lacked an adequate project cost

accounting system. Another issue is constant scope and strategy changes. For

instance, the Financial System Integration (FSI) project, the most ambitious and

costly HUD information technology project, has suffered from frequent project

scope, strategy, and management changes. This project was an ambitious effort that

started in 1991 to integrate approximately 100 HUD financial and program systems

into 9 consolidated systems. The lack of an integrated financial system in compli

Information ormation

Systems Issues stems Issues
ance with federal financial system requirements has been reported as a material

weakness in OIG Financial Statement Audits since 1991. The FSI program in 1991

had projected a total cost of $103 million to develop and deploy the 9 consolidated

systems. In a benefit/cost study, Arthur Anderson indicated that the ongoing FSI

program costs through FY 1999 totaled $206 million.

Further, this year HUD’s flawed implementation of a standard general ledger for

the Department — a cornerstone of FSI — led to a disclaimer of opinion on the

Department’s Fiscal Year 1999 Financial Statements. As a result, the Department

is considering yet another approach without completing the planned solution decided

upon in 1997. This repeated shift in approach will further delay correction of longstanding deficiencies, such as insufficient information regarding individual multifamily loans, inability to support adequate funds controls for FHA, duplications of

accounting entries due to a lack of integration between program and accounting

systems, inability to timely identify excess funds remaining on expired project-based

Section 8 contracts, and problems in reconciling cash balances with Treasury

records.

The solution adopted in 1997 was made without a complete and thorough

analysis of alternatives, despite OIG objections at the time. As a result of a hasty

decision, the Department encountered unanticipated difficulties that led to schedule

delays and cost overruns. However, a number of technical difficulties with the

system interfaces between key transactions systems are now resolved. The Department must conduct a thorough analysis to determine whether the current solution is

no longer viable before moving to another approach. This analysis should follow

HUD’s process for information technology investment decisions which includes

feasibility studies and cost benefit evaluations. Without strong controls over information technology resource decisions, HUD systems may not meet business needs,

resulting in inaccurate and unreliable data, system failures, and excessive costs.

Despite all of these problems, in August 2000, HUD’s 2020 Progress Review and

Accomplishment Report noted “HUD’s once vulnerable financial management

system is now reliable, accurate and timely.”

* * * * ** *

HUD has been under continuous change since the 2020 Reforms were announced 3 years ago. Since the changes were not built on a solid infrastructure,

completing the reforms has been time consuming and complicated, and we are still

waiting to see the promised performance improvements.

There is also the question of whether the next HUD Secretary will want to

maintain the new, centralized organizational units. In organizing HUD by function,

program offices have lost control of many activities. For example, the REAC gives

direction to the Assistant Secretary for Public and Indian Housing and the FHA

Commissioner as to where they must focus their monitoring activities. Community

Builder staff may be in the public eye discussing Assistant Secretaries’ programs,

but reporting to the Deputy Secretary. The Enforcement Center may take a project

from the control of the FHA Commissioner because of failing inspection scores.

In the context of diminishing HUD resources, we should be looking for ways to

build incentives into programs that work to prevent fraud, waste, and mismanagement, thus requiring less onerous and unappreciated monitoring by the Federal

Government. We should be thinking about whether Government Corporations would
be a better way to gain efficiencies in profitable operations such as Ginnie Mae and

FHA. HUD needs to know what resources are needed and that staff have the appropriate skills. If insufficient resources exist to carry out programs, HUD and the

Congress need to make the tough choices in deciding what should and should not be

done.

Lastly, the OIG believes that the Congress and HUD should be looking for every

opportunity to consolidate, terminate, and streamline programs. We believe that

HUD’s future should not be in an expanding number of programs, but in better

pursuit of its core mission, providing housing for those in need.
Housing Fraud

Initiativ Initiativ Initiative

Chapter 2

FRAUD
The Housing Fraud Initiative (HFI) is a proactive law enforcement effort using

a unified approach to the detection and prosecution of fraud in HUD programs. The

concept combines OIG audit and investigative resources together with FBI Agents

and Assistant United States Attorneys for the sole purpose of rooting out corruption

and fraud in all HUD funded activities within targeted Federal Judicial Districts.

HFI arose out of concern by Members of the House Appropriations Subcommittee

on VA, HUD, and Independent Agencies that HUD funds may not be reaching those

needing federal assistance due to pervasive fraud.

In October 1998, the following Federal Judicial Districts were designated as

HFI sites: (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.

In our last Semiannual Report to the Congress, we reported that we were

starting to see the first substantive results from HFI initiatives. During this reporting period, our collaborative work has resulted several major indictments and

convictions of those perpetrating fraud in HUD programs. Fraud in single family

loan origination continues to be the most pervasive problem uncovered by HFI

investigations.

The following are examples of HFI results this reporting period.

Karen Christensen, a former Single Family Housing Specialist at the HUD

Santa Ana Homeownership Center, was sentenced to 2 years incarceration and 3 Santa Ana

years supervised release, and ordered to pay $1.4 million in restitution to HUD,

with an immediate payment of $2,500, and a $300 special assessment. Christensen

was also ordered to stop working in any capacity which would involve HUD business

after it was revealed that, since her termination from HUD, she has been working

as a mortgage consultant doing quality control work on FHA loans for lenders.

Christensen previously pled guilty to one count of accepting a bribe and two counts

of tax evasion. A joint investigation by the FBI, OIG, and the IRS Criminal Investigation Division disclosed that from 1996 to 1998, Christensen sold 82 HUD properties

to various individuals that were valued by HUD at approximately $9.1 million. She

sold the properties for a total of $2 million, resulting in a loss to HUD of over $7

million. Christensen sold 20 of these homes to Hadi Kailani, a real estate agent,

for approximately $700,000. These properties were appraised at $2.1 million.

Kailani resold the properties for $2.2 million. Christensen received over $80,000 in

bribe payments and a BMW 325 convertible from Kailani in September 1997.

Christensen’s BMW and a bank account with $7,200 were seized. Forty-six of the

82 properties have also been seized.

A joint FBI/OIG investigation in Los Angeles resulted in four guilty pleas and eles

seven sentencings in a multi-million loan fraud scheme. Eddie Joe Gonzalez was

sentenced to 5 years probation and 2,500 hours of community service, and was

fined $5,000 and ordered to pay a $100 special assessment, while Elia Cardenas

pled guilty to 1 count of mail fraud. Both Gonzalez and Cardenas recruited unqualified homebuyers, ordered false and fraudulent documents to support the loan

Housing Fraud Initiative

Central District of

California
applications, and then submitted the applications containing the false documents to

HUD in order to obtain FHA insured loans. Gonzalez’s scheme involved FHA insured

loans valued at over $3,331,360, while Cardenas’ scheme involved loans in excess

of $3,300,000.

Daniel Hernandez was sentenced on a mail fraud charge to 10 months in prison

and 3 years supervised release, fined $3,000, and ordered to pay $110,000 in

restitution and a $100 assessment. Hernandez, along with his partner, operated

Rengar Mortgage, packaging fraudulent loans throughout the Los Angeles area.

Hernandez was responsible for over $1,000,000 in fraudulent FHA insured loans

between 1996 and 1999.

Javier Munoz was sentenced to 2 years probation and 100 hours of community

service, fined $3,000, and ordered to pay a $100 special assessment. Munoz was a

real estate agent at Century 21 Opportunity from 1997 to 1999. As a real estate

agent, he located unsophisticated buyers for residential properties, and then contacted a forger to create loan support documents that would allow these otherwise

unqualified buyers to purchase properties with FHA insured mortgages. Munoz then

caused the FHA loan binders, containing the false documents, to be submitted to

HUD. Munoz was responsible not only for over $120,000 in fraudulent FHA loans,

but also 4 fraudulent conventional loans.

Rene Moya was sentenced to 5 years probation, fined $20,000, and ordered to

pay a $100 special assessment fee. She previously pled guilty to one count of mail

fraud. Moya, currently the owner of Fred Sands Real Estate Company, used a

forger to obtain false documents for borrowers who were unable to qualify for FHA

insured mortgages. She then caused those false documents to be included in the

mortgage applications.

Eliot Texiera was sentenced to 3 years probation and ordered to pay $5,302 in

restitution and a $100 special assessment fee. Texiera pled guilty in March 2000 to

mail fraud. He had been a loan officer at Global Mortgage, Pacific Cities Mortgage, and Pacific Coast Mortgage. Beginning in January 1995 and continuing until

September 1998, Texiera used documents created by a forger to assist homebuyers

in obtaining FHA insured mortgages. Typically, Texiera requested forged loan

support documents such as W-2s, pay stubs, IRS Forms 1099, and letters of credit

reference. He then caused the unqualified borrowers’ loan applications to be

submitted to HUD. Texiera was responsible for $4,930,407 in fraudulent home

mortgage loans.

Ivar Pugliese was sentenced to 15 months incarceration and 3 years supervised

release, and was ordered to pay $400,000 in restitution, a $10,000 fine, and a $100

special assessment fee. Pugliese pled guilty in March 2000 to two counts of mail

fraud. Pugliese was a real estate investor working from his mother’s real estate

office, Pugliese Reality. He had also worked as a loan processor at City Mortgage

Bank Corporation and Great American Reality. Pugliese’s scheme involved the

submission of false and fraudulent loan support documents, such as W-2’s and pay

stubs, so that unqualified individuals were able to purchase homes with FHA

insured loans. Pugliese hired a forger to create the false loan support documents.

Pugliese was responsible for over $16,000,000 in fraudulent loans.

Ana Lopez was sentenced to 3 years probation, fined $1,000, and ordered to

pay a $100 special assessment fee. In June, Lopez pled guilty to one count of mail

fraud. From May 1998 to November 1999, Lopez was a loan processor at Great

American Realty, where she participated in a scheme to defraud various commercial lending institutions and HUD. Lopez’s scheme involved the submission of false
and fraudulent loan support documents so that unqualified individuals were able to

purchase homes with FHA insured loans. The fraudulent loans were valued at over

$1,200,000.

Joseph F. Diestel pled guilty to one count of mail fraud. From June 1997 to

November 1999, Diestel was a loan officer at Manhattan Mortgage Corporation in

Artesia, CA. Diestel’s scheme involved the submission of false and fraudulent loan

support documents, such as W-2s and pay stubs, so that unqualified individuals

were able to purchase homes with FHA insured loans. Diestel hired a forger to

create the false loan support documents. Diestel was responsible for over

$5,600,000 in fraudulent loans.

Lucy Aquije pled guilty to mail fraud. Beginning in 1993, Aquije worked as a

loan officer at the following companies: Sun West Mortgage, National Pacific

Mortgage, Citifed Diversified, Milestone Mortgage, Capital Funding Group, and

New World Mortgage. From 1993 to at least April 1999, Aquije submitted false

and fraudulent proof of employment, income tax forms, pay stubs, bank deposit

slips, and bank cashiers’ checks to commercial lenders and to HUD. Aquije employed a forger to create the false documents for unqualified home loan applicants,

and then inserted the false documents in FHA loan applications. She then knowingly

submitted those loan applications to commercial lenders and to HUD so that she

would be paid a substantial commission for each transaction. Aquije was responsible for a stipulated loss to HUD of $798,845.

Andres Ocampo, a forger who was instrumental in several indictments issued

in December 1999, pled guilty to charges of conspiracy and mail fraud. About $1

million in losses to HUD were attributed to Ocampo.

Following an investigation by the FBI and OIG, Raul Miranda, a co-owner of

West Coast Investment Group, Inc. in Los Angeles, pled guilty to 20 counts of eles

conspiracy, wire fraud, false statements, and money laundering. Miranda and coconspirator Andres Martinez, who pled guilty to 31 counts of conspiracy, wire

fraud, false statements, money laundering, and aiding and abetting, purchased

properties valued between $80,000 and $100,000 and then arranged for fictitious

sales of these properties to strawbuyers at inflated prices of up to $300,000. Both

Miranda and Martinez paid for forged loan documents and submitted them in

support of the FHA insured mortgages. Miranda caused these loans, totaling $4.5

million, to go into default. HUD’s loss is between $2.5 and $5 million. Additionally,

West Coast Investment Group, through Miranda and others, continued to collect

money on the properties from renters, after putting the properties in the names of

strawbuyers. Martinez also solicited notaries to notarize the fraudulent loan

documents on behalf of the strawbuyers.

Donaldo Nunez also pled guilty to conspiracy and mail fraud against HUD.

Nunez, who owned and operated a tax preparation and accounting business,

fraudulently created 1099 tax forms, W-2 statements, pay stubs, cashier’s checks,

bank records, and credit letters, and then used the false documents to fraudulently

originate more than $3 million of FHA insured mortgages. Nunez assisted his two

co-conspirators, Miranda and Martinez. Another co-conspirator, mortgage broker

Matthew Dunne, was sentenced to 2 years in prison and 3 years supervised release,

and was ordered to pay $957,000 in restitution to HUD. Dunne aided real estate

agents and loan officers, for the purpose of obtaining FHA insured mortgages, by

knowingly making false statements and submitting fraudulent “cash and certifications.”
In Riverside County, Ray Tomlinson and Penny Lubanko were charged with side County

five counts of bankruptcy fraud, single family equity skimming, conspiracy, false

representation of a Social Security number, and false statements in a bankruptcy;

both entered plea agreements with the U.S. Attorney’s Office. An investigation by

the FBI and the HUD and Department of Veterans Affairs OIGs disclosed that

Tomlinson and Lubanko contacted homeowners whose mortgages were in default

and stated that the homeowners could avoid foreclosure by deeding their properties

over to them. They told the homeowners to sign deeds that transferred the properties to individuals or entities that had filed bankruptcy. This caused foreclosure

proceedings to stop. This case involved approximately 200 single family dwellings

on which the loans were in default at the time of purchase, or within 1 year following the purchase. These properties were then rented out. Although rents totaling

approximately $3 million were collected, no mortgage payments were made. As a

result of this scheme, mortgage lenders were unable to carry out any debt collection proceedings against their borrowers, and the bankruptcy court was defrauded

by having to administer fraudulently filed bankruptcies.

Ramon Osuna Moran pled guilty to 10 counts of mail fraud. From June 1996 to

August 1998, Moran worked as a loan officer at Progressive Loan Funding in Seal

Beach. From August 1998 to December 1998, he worked as a loan officer at Beach

Sunstate Home Loan in Downey. At each company, Moran assisted investors, real y

estate agents, and homebuyers in obtaining funding for the purchase of properties

with FHA insured mortgage loans. Moran participated in a scheme to defraud HUD

by submitting false and fraudulent loan documents in support of the FHA loan

applications. He conspired with a forger to create false documents such as pay

stubs, W-2s, and credit letters, and then included the false documents in the loan

applications that he processed and submitted to HUD. The fraudulent loans were

valued at $11,569,412. This investigation was conducted by the FBI and OIG.

In Los Angeles, Maria Olmos, David Sazegar, and Bart Trow each pled eles

guilty to two counts of wire fraud. The three participated in a scheme to defraud

commercial lending institutions and HUD by submitting false and fraudulent loan

support documents, such as W-2’s and pay stubs, so that unqualified individuals

were able to purchase homes with FHA insured loans. The scheme also involved the

submission of false gift letters showing that someone other than the borrowers

made the down payments.

In the same case, brothers Pascual and Jorge Gomez, along with friend Frank

Gomez, each pled guilty to six counts of structuring transactions to evade reporting

requirements. From 1996 to 1997, the Gomez’s were real estate agents at ReMaxSoutheast Properties, and then later at ReMax/Specialist. The Gomez’s participated in a scheme that involved cashing First State Bank cashiers’ checks in

amounts just below the reporting level of $10,000, but with an aggregate totaling

more than $10,000.

Olmos, Sazegar, Trow, and the Gomez’s were responsible for over

$75,000,000 in fraudulent loans involving over 500 properties. This investigation

was conducted jointly by the FBI, IRS Criminal Investigation Division, and OIG.

In another particularly significant case in Los Angeles, eight individuals were eles

indicted on charges of conspiracy, wire fraud, mail fraud, bank fraud, monetary
transactions in criminally derived property, identity fraud, and aiding and abetting

causing an act to be done. The individuals allegedly engaged in various schemes to

defraud HUD and commercial lending institutions by purchasing property using

false information, such as names, Social Security numbers, bank account information, and appraisals. The properties were then occupied by people who were not

qualified to purchase the properties, or were sold at inflated prices to third parties.

There were hundreds of properties that were affected by these transactions, which

totaled over $10,000,000.

In the same case, Andrew Allen Bills pled guilty to one count of conspiracy to

commit offense or to defraud the United States and two counts of mail fraud. Bills

created and sold false documents for use in qualifying borrowers to purchase

homes both with and without FHA mortgage insurance. He also set up a shell

business called Home Financial Consolidated Credit Union (HFCC) which purported to be a financial institution. He used HFCC documents to produce fraudulent

financial statements for inclusion in loan packages. Bills also created false documentation for the purchase of his FHA insured personal residence. In total, Bills

participated in the purchase of $2 million worth of properties.

Real estate agent Marilyn Yvonne Skipper also pled guilty to one count of

conspiracy and two counts of wire fraud. Skipper assisted co-conspirator Donald

Carroll by acting as his real estate agent and signing Carroll’s alias, Donald Allen,

to loan documents. Using the fraudulent documents, she helped Carroll in purchasing $1,010,000 worth of FHA insured property. OIG and the FBI conducted this

investigation.

A real estate mortgage investor in Los Angeles was indicted for mail fraud eles

and aiding and abetting. Following the indictment, OIG Agents arrested the investor. This indictment superseded a previous indictment against a mortgage broker,

who was a co-conspirator with the investor. An OIG/FBI investigation disclosed that

the two carried out a flipping scheme to defraud HUD. They allegedly recruited

strawbuyers, typically individuals renting apartments in properties owned by them,

and then used the strawbuyers to act as purchasers of more than $1 million in FHA

insured properties. The investor and broker fraudulently provided the necessary

down payments on behalf of the strawbuyers, and caused fraudulent mortgage

applications to be completed which contained false identification, employment,

income, and tax information.

Bernard Gross, also known as Paris Love, a real estate speculator doing

business in Los Angeles and eles San Bernar San Bernardino Counties, was sentenced to 6 dino

months home detention followed by 3 years probation. Gross had already served 4

months of incarceration while awaiting trial. He was convicted of bankruptcy fraud

in March 2000 in conjunction with a scheme he used to obtain control of numerous

single family properties in Southern California. Gross convinced homeowners

facing foreclosure to deed their properties to him at little or no cost. He then

collected rents from the property occupants, failed to make the mortgage payments, and encumbered the properties through bankruptcy proceedings in order to

prolong the scheme. The properties involved had FHA, Department of Veterans

Affairs (VA) and conventional mortgages. The loss to HUD and the VA exceeded $1

million. This was a joint investigation by the FBI and OIG.
Real estate agents Elizabeth Salcedo and Alba Pena were sentenced for their

involvement, along with a previously sentenced mortgage lender, in a single family

loan origination fraud scheme in Los Angeles. Salcedo and Pena were respon- eles

sible for providing various false documents, including gift letters, verifications of

employment, and false W-2’s. They originated approximately $325,000 in fraudulent FHA insured mortgages using these documents. Pena was sentenced to 5

months incarceration and 3 years supervised probation. Salcedo was sentenced to 1

month in prison, 4 months home detention, and 3 years supervised probation, and

was ordered to pay $41,000 in restitution to HUD. This was an OIG investigation.

Following an FBI/OIG investigation, an individual was charged with two counts

of mail fraud and aiding and abetting. Beginning in 1986, the individual worked as a

loan officer in the Los Angeles Office of Sun State Mortgage. From January eles

1993 to at least January 1998, the individual is accused of being involved in a

scheme to defraud commercial lending institutions and HUD by submitting false and

fraudulent proofs of employment, income tax forms, pay stubs, credit letters, and

bank cashier’s checks. The individual allegedly obtained the false and fraudulent

documents from a forger whom she paid a fee ranging from $25 to $150 per forged

document. She then allegedly inserted the forged documents in FHA loan applications to create the appearance that the borrowers were qualified for the loans when

in fact they did not meet minimum FHA income standards. The individual is also

accused of knowingly submitting those fraudulent loan applications to commercial

lenders and to HUD in order to receive a commission for each transaction. Losses

to the government are estimated at more than $2,000,000.

In Los Angeles, Darryl A. Woods pled guilty to three counts of mail fraud. eles

An investigation by the FBI and OIG found that Woods participated in a $10 million

loan origination fraud scheme involving Title I, Title II, and conventional loans, as

well as property flips. Woods is specifically responsible for about $350,000 in

losses to the government.

Olivia Hurtado was sentenced to 2 years probation, fined $500, and ordered to

pay a $100 special assessment. In March 2000, Hurtado pled guilty to one count of

fraud involving a program insured by HUD. Hurtado worked as a loan processor for

Ideal Financial in Rancho Cucamonga. She ordered false and fraudulent pay ga

stubs, W-2’s, letters of credit reference, and income tax forms from several

forgers, and then caused those false documents to be included in loan applications

for FHA insured home mortgages. Hurtado was responsible for over $1,940,000 in

fraudulent loans. This investigation was conducted by the OIG and FBI.

Following an FBI/OIG investigation, an individual was charged with one count of

wire fraud. From 1996 to 2000, the individual was the owner of Manhattan Mortgage and Prudential American Realty and Escrow in Los Angeles. During that eles

time, he bought and sold over 35 investment properties. As the seller, he allegedly

provided the down payments for the borrowers on FHA insured home loans, and

created false gift letters to cover the true source of the funds. The individual also

allegedly ordered false and fraudulent documents from a forger for the buyers on

his properties. Those documents included W-2s, pay stubs, Social Security cards,

and bank statements. The buyers would not have qualified for the FHA loans without

the forged documents. Losses to HUD are estimated at more than $1,200,000.
Jose Luis Arreola was sentenced in Los Angeles to 3 years imprisonment eles

and 5 years probation and ordered to pay $153,546 in restitution to HUD. Sindy

Barrios was sentenced to 5 years probation and ordered to pay $400,000 in restitution to HUD. An investigation by the FBI and OIG disclosed that Arreola and Barrios

used strawbuyers to act as purchasers of properties that were insured by FHA for

over $1,000,000. They caused fraudulent mortgage applications to be completed

which contained false identification, employment, income, and tax information.

They also fraudulently provided the necessary down payments for the mortgages

and falsely verified that the source of the down payments was either the borrowers’

personal funds or a gift. In addition, Arreola and Barrios enlisted co-conspirators

to fraudulently notarize signatures of the strawbuyers on loan files, and fraudulently

created and provided credit references. One of these co-conspirators, Francisco

Vasquez, was sentenced to 6 months imprisonment. Vasquez used his company,

Fiesta Parties Supplies, as a front to falsely verify employment for the strawbuyers.

In addition, real estate agent German Barrios, also sentenced to 6 months imprisonment, fraudulently notarized the loan documents that were used in the scheme.

William Mel Ivy, Jr., co-owner of American Properties International, was

sentenced to 1 year imprisonment and 3 years probation, and ordered to pay

restitution of $130,661. Ivy pled guilty to diverting over $130,000 from various

homeowner associations and HUD. He deposited funds earmarked for property

maintenance into personal bank accounts and admitted to using the money for

personal expenditures. This investigation was conducted by the Tustin Police ustin

Department and the OIG.

Sebouh Caloosian was sentenced in Los Angeles to 2 years probation and was eles

ordered to pay a $100 special assessment after being charged with 1 count of HUD

fraud. Rodney Joe Tyson, also known as Erwin Johnson, was also charged with

HUD fraud. Tyson has agreed to enter a guilty plea at his arraignment. Caloosian

and Tyson conspired with others to obtain Title I home improvement loans using

false identities. Caloosian charged $1,500 for his assistance in producing the false

loan documentation, and falsely notarized loan documents and provided false

California driver’s licenses and Social Security cards as verification of identity.

Tyson recruited other borrowers by offering $3,000 to co-conspirators if they would

pretend they were married and lived at the properties when they applied for the

loans. Agents assigned to the Los Angeles Housing Fraud Initiative intercepted a

$40,000 check during a controlled delivery to Caloosian; Tyson was also arrested

during a controlled delivery of Title I loan proceeds.

In the same case, Geraldine Thomas, a notary public, was sentenced to 1 year

probation and ordered to pay a $100 special assessment after pleading guilty to 1

count of conspiring to fraudulently obtain a Title I loan. As part of Thomas’ term of

probation, she must complete 25 hours of community service and cannot be employed or re-certified as a notary public.

The estimated loss to the government as a result of the scheme participated in

by these individuals is approximately $350,000. The FBI and OIG conducted this

investigation.

As part of OIG HFI efforts in the Central District of California, the Chief of the

FBI Headquarters Government Fraud Unit, Financial Crimes Section, visited the
HFI staff in Los Angeles. HFI staff briefed him on the overall operation of the

Housing Fraud Initiative in this Judicial District. The briefings included the HFI

from its inception to the present. In addition to the briefings, the Chief was given a

tour of the office space and was able to visit with many of the OIG Agents and

Auditors on hand.

Terrie L. Sims was sentenced to 3 years supervised probation with the first 6

months under electronically monitored house arrest, and was ordered to pay

$35,000 in restitution to HUD and a $100 court assessment fee. She was also

ordered to take part in mental health and financial counseling, and is barred from

applying for or obtaining any loans or credit cards during her 3-year probationary

period. Sims fraudulently obtained an FHA insured home loan which she then

allowed to go into default and foreclosure. As part of the scheme, Sims purchased a

Social Security number belonging to someone else and created fraudulent income

and credit documentation to obtain the FHA loan. This investigation was conducted

by the OIG.

The owners of a 122-unit HUD subsidized apartment complex, known as R

Street Apartments, settled a civil lawsuit filed in March 2000 by the U.S.

Attorney’s Office, Civil Division, under federal asset forfeiture laws and local drug

related nuisance laws. The lawsuit sought relief from the owners for failing to

provide decent, safe, and sanitary housing. Under the settlement agreement, the

owners will install fencing, lighting, security cameras, video monitors, and alarms,

and hire 2 security officers to patrol the property 56 hours per week. The District

of Columbia Housing Fraud Initiative provided financial analysis of the owner’s

project accounts.

As a result of an OIG investigation, Lawrence D. Walker, a vice detective with

the Metropolitan Police Department, pled guilty to making a false statement to

HUD in regard to the Officer Next Door Program. Walker purchased a property

under the program in 1997 with a $25,000 law enforcement discount, with no

intention of ever occupying the property. Instead, he refinanced it as an investment

property and rented it out for $755 a month. Walker has resigned from his position

with the Police Department. A sentencing date has not been set.

In Chicago, 20 individuals were charged in a 16-count indictment relating to a o

$10 million, 80 property flipping scheme. Those named in the indictment included

an attorney, two paralegals, two mortgage brokers, two real estate appraisers, two

real estate agents, mortgagor recruiters, investors, and mortgagors. Approximately

$3 million of the $10 million included FHA insured mortgages with losses exceeding

$750,000. Additional claims are pending. The alleged scheme, which included mail

fraud, wire fraud, and false statements to HUD, involved the individuals buying and

selling properties on the same day, wherein the inflated second sale would actually

fund the first purchase with cash. This amounted to the buyer’s closing on a property that the seller had not yet purchased. The defendants purportedly reaped the

benefits of the fraudulent appraisals on the second sales and split the proceeds

through a variety of pay-offs. In virtually every instance, the second sale would

require a variety of fraudulent loan documents, including fictitious identities,

occupancy affidavits, W-2s, verifications of deposit and employment, pay stubs, and

gift letters. This investigation was conducted by the FBI and OIG.

District of Columbia f Columbia

Northern District of

Illinois Illinois
Three individuals were sentenced in Chicago on various fraud charges. David o

Mandel was sentenced to 12 months and 1 day in prison and 36 months supervised

release, and fined $50,000. John Carcerano was sentenced to 36 months probation

and ordered to undergo a psychological evaluation. Belinda Lopez was sentenced to

60 months probation. The three defendants were also ordered to pay a total of

$243,350 in restitution. All three individuals previously pled guilty to mail fraud

and making false statements on loan applications. They had been indicted for their

part in a loan origination fraud scheme during which they caused the creation and

submission to lending institutions of false and fraudulent documents purporting to

establish the eligibility of prospective purchasers for FHA insured mortgages. The

documents included false gift letters and false existence of earnest money on

deposit. The OIG and FBI conducted this investigation.

In Chicago, Kevin Holliday was sentenced to 4 months home confinement and o

5 years probation, and ordered to pay $50,000 in restitution to HUD. Holliday

earlier pled guilty to one count of submitting false statements to HUD and one count

of bankruptcy fraud in a scheme to defraud HUD, the Social Security Administration, and the U.S. Bankruptcy Court in the purchase of his FHA insured home. He

later testified at trial against his co-defendant, Hermilyn Strong, also known as

Shirley Taylor. Strong’s sentencing is scheduled for December 2000. This was a

joint investigation by the FBI and the HUD and Social Security Administration OIGs.

Herman Williams was sentenced in federal court in Chicago after previously o

pleading guilty to his role in a scheme to defraud conventional lenders,

homeowners, and HUD. He received 5 months incarceration, 5 months house

arrest, and 24 months supervised release, and was ordered to pay $84,604 in

restitution. Janet Dockett, Charles Crawford, and Ida Reed each pled guilty to one

count of mail fraud in the same case. The defendants were charged with participating in a scheme to falsify the conveyance of 13 vacant properties in the Chicago

metropolitan area. These same 13 properties were used to collect rental income

and as collateral for obtaining mortgages. Two of the properties were in HUD’s real

estate owned inventory at the time the illegal conveyances occurred. This investigation was conducted by the FBI, OIG, and Postal Inspection Service.

Brett O’Neil, the former finance director for the Rockford Housing Authority, d

who was already on probation from the State of Wisconsin on convictions for strong

armed robbery and attempted rape, was indicted on 2 counts of official misconduct

and 1 count of theft by deception for his alleged role in the embezzlement of

$10,800. The State of Wisconsin revoked the probation order and sentenced him to

5 years imprisonment with credit for time served. He will be transferred to Illinois

after he completes his sentence. Proceedings on his indictment in Illinois are

pending. The OIG conducted this investigation.

OIG Agents and U.S. Postal Inspectors arrested two individuals on charges of

bank fraud. The first individual was an official at a mortgage company in Baltimore. She allegedly assisted mortgagors in qualifying for e FHA insured home loans

by altering their verifications of employment, pay statements, wage and tax statements, and income tax returns. She also assisted mortgagors in obtaining the

required down payments by providing them with gift funds and arranging illicit and

District of Maryland
undisclosed loans through the second individual. The mortgage company official

orchestrated $3.6 million in FHA loans as part of this scheme.

A 21-count federal indictment was unsealed in Baltimor Baltimore charging 4 individu- e

als in a property flipping scheme that allegedly bilked lenders and buyers out of

more than $2 million. An investigation by the FBI and OIG found that two of the

individuals charged, operating through a series of corporations, allegedly bought

inexpensive houses for the purpose of fraudulently reselling them after making only

cosmetic improvements. Investors were recruited to buy packages of houses at

much higher prices, while the individuals promised to sell the properties for little

or no down payment, and pay the buyers’ settlement expenses. False information

and fraudulent documents were submitted to make the prospective borrowers

appear more financially secure. The other two individuals indicted were appraisers

who allegedly inflated appraisals on the houses.

Following an investigation by the FBI and OIG, Edward A. Brockmeyer, Sr., a

HUD approved property inspector, was sentenced in Baltimor Baltimore to 6 months home e

confinement and 5 years probation. In March 1999, Brockmeyer pled guilty to

count one of a superseding indictment charging him with conspiracy to defraud the

United States. The indictment alleged that from March 1995 to March 1997,

Brockmeyer conspired with others to defraud HUD in an effort to secure mortgages

and funds under HUD’s Section 203(k) Program. The 203(k) funds were obtained

through the use of false and fraudulent inspection reports, which verified the

completion of rehabilitation work which, in fact, had never been performed. The

court ordered Brockmeyer to pay $727,735 in restitution to HUD and $611,100 in

restitution to Atlantic First Mortgage Corporation. Two of Brockmeyer’s coconspirators are former loan originators with Atlantic First Mortgage Corporation.

A property speculator, two loan originators, and a settlement attorney pled

guilty to one count of mail fraud, and another settlement attorney pled guilty to one

count of wire fraud for their involvement in dozens of property flips made possible

by fraudulent documents concerning FHA insured mortgages and misrepresentations to borrowers and lenders. The property flipper, Robert Beeman, the two

mortgage originators, Scott Shinskie and Michael Fishman, and the settlement

attorneys, Robert Ness and Robert Friedman, conspired to overstate the value of

properties sold and the funds paid by homebuyers. Lenders then purchased the

mortgages based on the false information. An appraiser is still scheduled for trial.

The investigation revealed that the majority of over 100 settlement statements

generated by Beeman’s flipping business contained misrepresentations about the

buyers’ and seller’s monetary contributions to the transactions. This scheme

significantly increased the risk of default and financial loss to loan backers, while

greatly destabilizing some of Baltimor Baltimore’s most troubled communities. The s

mortgages totaled over $750,000. This was a joint investigation by the Postal

Inspection Service and the OIG.

Following an FBI/OIG investigation, two individuals were indicted in Greenbelt eenbelt

on five counts of money laundering. The indictment alleges that they participated in

a scheme to use HUD real estate owned (REO) properties in order to defraud

mortgage lenders. These two individuals, along with a third person, were originally
indicted in April 2000 on charges of conspiracy, mail fraud, wire fraud, and aiding

and abetting. An investigation disclosed that the three allegedly purchased HUD

REO properties and then falsified documents related to the purchase of the properties. Appraisals and deeds were two of the more crucial documents falsified. The

individuals then used the false documents to fraudulently secure $700,000 in

residential mortgage refinancing loans. Additional information obtained subsequent

to the April indictment revealed that two of the individuals allegedly used the

proceeds from several of the fraudulent mortgage refinancing loans to purchase

five HUD REO properties. The June 2000 superseding indictment requests forfeiture

of all funds and real property obtained as a result of money laundering.

In Baltimor Baltimore, Richard M. Schlesinger, the former general partner of e

Riverdale Village Apartments, a HUD insured project, agreed to pay a settlement

of $500,000 in lieu of standing trial in U.S. District Court. Schlesinger was previously ordered to pay HUD an additional sum of $185,000 as a result of a complaint

filed by the U.S. Attorney’s Office. Schlesinger has also been debarred from

participation in all HUD programs. The complaint charged Schlesinger with breach

of contract and unjust enrichment. The charges stem from his unauthorized use and

unsupported expenditure of assets and income of Riverdale Village. Schlesinger

used his identity-of-interest firms to manage and maintain the property. However,

due to gross mismanagement and lack of proper maintenance, Riverdale Village

fell into disrepair and was eventually deemed uninhabitable. Subsequently,

Schlesinger defaulted on the mortgage. HUD acquired Riverdale Village through

foreclosure and demolished the property in 1999. The OIG conducted this investigation.

A previously sealed federal indictment was released in Baltimor Baltimore charging e

four individuals with nine counts of conspiracy and submitting false statements

relating to HUD loans. On the same day, the FBI, OIG, and Postal Inspection Service

executed six search warrants and took all four targets into custody. The main target

was the owner and operator of Morningside Associates, Inc. and Kensington

Associates, Inc. The individual purchased 14 FHA distressed properties which he

then allegedly sold at inflated prices. He also allegedly provided the buyers with

fictitious W-2’s, wage and tax statements, verification of employment forms, and

gift funds. The target also had one of his employees purchase one of his homes

using false documentation. Potential losses in this case total $1.2 million.

The owner and vice president of Adler Services Group, Inc. were charged in a

scheme to defraud the Housing Authority of Baltimor Baltimore City ( e City HABC) by submitting

false invoices to HABC containing billings for employee hours that were not worked

and for parts that were not replaced. An investigation by the OIG and FBI disclosed

that over a 5-year period, the defendants submitted approximately 3,500 inflated

invoices for service and/or replacement of HABC owned gas-fired and oil-fired

residential furnaces located throughout Baltimore City. In many cases, the labor

charges on these invoices were inflated by more than 200 percent, parts were billed

as replaced but were not replaced, and, on some invoices, parts were billed which

were not compatible with the furnaces being serviced. Losses totaled approximately $229,000.
In Greenbelt eenbelt, Mohammad Sallah was sentenced to 90 months in prison to be eenbelt

followed by 5 years supervised release, and was ordered to pay $77,145 in restitution. Sallah previously pled guilty to one count of conspiracy to distribute heroin,

four counts of distribution of heroin, and three counts of bank fraud. The bank fraud

involved Sallah’s role in stealing at least $119,000 from the escrow account maintained by Lawyers Advantage Title Group (LATG), HUD’s closing agent for Maryland and Northern Virginia, and an additional $129,000 from two other private

companies. Sallah and another individual, who appear to have no connection to

LATG, obtained specimen checks from the closing agent, which they counterfeited

and negotiated. This investigation was conducted by the FBI and OIG.

A couple in Greenbelt eenbelt was charged with conspiring to make false statements eenbelt

to obtain an FHA insured mortgage to purchase a townhouse for $130,000. An

investigation by the FBI, OIG, and the Postal Inspection Service disclosed that the

defendants allegedly conspired to use their 13-year old son as the mortgagor. They

created documents to represent their son as being the woman’s 23-year old brother

and working at a fictitious company. They also created fraudulent power of attorney

documents to allow them to represent the “brother” at settlement.

Following a joint investigation in Far Rockaway conducted by y OIG and the

Postal Inspection Service, an unlicensed real estate broker who was previously

debarred by HUD was arrested for making false statements to HUD. The broker

allegedly used strawbuyers to purchase properties which were insured by FHA for

approximately $15,000,000 under the 203(k) and 203(b) Programs. The broker

allegedly assisted with the creation of fraudulent mortgage files containing false

documents relating to personal identification, employment histories, annual income, and reportable tax information, and created the means necessary to supply

the required down payments by providing fraudulent gift letters for the strawbuyers.

After the arrest, a search warrant was executed on the broker’s place of

business, resulting in the confiscation of additional evidence. Subsequent to the

arrest and search warrant, seizure warrants were executed against 2 condominiums in Garden City, 3 luxury automobiles, and 15 bank accounts. O den City IG Agents

from the New York and Miami Offices, along with New York City Postal Inspectors, also executed seizure warrants against two properties and four additional

luxury automobiles in Boca Raton, FL. The seizure warrants have resulted in the

freezing of approximately $9,000,000 in real property assets.

Carlos Sanchez, a former mortgage broker in Brooklyn, ooklyn, was convicted on all ooklyn, 

13 counts of a December 1999 indictment. The charges included 1 count of conspiracy to defraud 2 banks, Country Wide Home Loans, and HUD, 2 counts of bank

fraud, and 10 counts of HUD fraud. The jury also ordered criminal forfeiture of his

assets, amounting to $700,000. Sanchez, along with others, engaged in a conspiracy

to defraud the FHA by purchasing properties at distressed values, flipping the

properties to paid strawbuyers at highly inflated prices, and then collecting the

proceeds from the second sale. The majority of the flips happened on the same day

the properties were initially purchased. Three other co-defendants in this investigation previously entered into cooperation agreements with the government. John

Stolarenko, former president of Eastwood Mortgage Bankers, pled guilty in February 2000 to one count of bank fraud. Stolarenko has also agreed to forfeit his

interest in four pieces of real property from which he benefited as a result of the

Eastern District of

New York
conspiracy. The estimated value of the forfeiture is $1 million. Lennox Slinger, a

real estate agent, pled guilty in December 1999 to one count of bank fraud, and has

agreed to forfeit his interest in three pieces of real property from which he benefited as a result of the conspiracy. The estimated value of the forfeiture is

$700,000. Daniel Doran, a former closing attorney, pled guilty in February 2000 to

one count of tax evasion and agreed to repay the IRS tax due and owing, plus interest

and penalties. Doran failed to report to the IRS earnings he made as closing attorney for Eastwood Mortgage Bankers. Sanchez is scheduled to be sentenced in

February 2001. No other sentencing dates have been scheduled.

Sanchez is responsible for the origination of 133 flipped properties whose

fraudulent mortgages were insured by the FHA. Of those, only five mortgages are

current and only seven have had their insurance terminated by HUD. To date, 2

loans are in default, 39 loans are in foreclosure, and 80 loans have already had

claims paid by HUD totalling over $14.6 million. Of the 80 properties conveyed to

HUD after claims were paid, HUD has resold only 48 properties for a net loss of

$4,909,679. Based on these numbers, we project an estimated net loss on all

properties (excluding active and terminated loans) of over $12.3 million. The

government will seek restitution of the $12.3 million. This investigation was conducted by the OIG, FBI, and IRS.

Joseph Crennen, a real estate salesperson for a Long Island homebuilder, g Island

and Dean Graber, a senior loan officer at Executive Mortgage Bankers, Ltd., both

pled guilty to submitting false statements to HUD. These are the fourth and fifth

guilty pleas to result from an investigation of the homebuilder and several mortgage

bankers. Twelve others have also been charged. The investigation, conducted by the

FBI, OIG, Postal Inspection Service, Treasury Inspector General for Tax Administration, and the Department of Veterans Affairs OIG, disclosed that the

homebuilder, with the knowledge and participation of his salespeople, in-house

counsel, outside real estate closing attorneys, mortgage bankers and others, staged

bogus gifts and/or arranged undisclosed side financing deals on behalf of

homebuyers in order to pay off customers’ debts, judgments, and down payments.

HUD losses are expected to exceed $6 million.

In Queens, three of the remaining five defendants in the Blackstone Realty Queens

management investigation were sentenced. Bella Schon was sentenced to 1 year

probation, and Joseph Sochaczewsky was sentenced to 6 months house arrest and 2

years probation. Schon and Sochaczewsky previously submitted to the U.S. Treasury certified checks in the amount of $20,000 and $15,000, respectively, as

settlements to the concurrent civil action against them and others. David

Abrahamson was also sentenced to 4 months house arrest and 1 year probation,

and was ordered to pay $30,000 to settle the concurrent civil action against him.

The two other defendants, Abraham Woldiger and Abraham Taub, principals of

Blackstone Realty Management, were each sentenced to 10 months incarceration

and ordered to pay a total of $1.8 million in restitution. Blackstone Realty Management owned and operated Section 8 project-based housing developments in New

York, New Jersey, Rhode Island, Pennsylvania, and Illinois. Blackstone used

identity of interest companies to maintain all of the developments. A joint investigation by the OIG, FBI, and the Department of Labor disclosed that Blackstone Realty,

through its identity of interest companies, charged HUD exorbitant costs for work

that was either not done, poorly done, or completed but with costs inflated by at
least 100 percent for the market area. Woldiger and Taub paid themselves over $1

million each in “profits” from the identity of interest companies when, in fact, they

were merely skimming the equity from properties that did not meet housing quality

standards.

The chief operating officer of a Long Island not-for-profit corporation was g Island

charged with making false statements to HUD. An investigation disclosed that the

officer allegedly allowed his corporation to be used for 17 property flips in exchange for $5,000 per flip. The officer, who is a real estate investor, also flipped

numerous properties on his own, creating and submitting false and fraudulent

documents on behalf of homebuyers, including bogus pay stubs, W-2s, verifications

of employment, verifications of rent, certified checks, and gift affidavits. The

officer has admitted making the false statements and receiving the cash payments,

and is cooperating in the investigation being conducted by the Postal Inspection

Service, FBI, Treasury Inspector General for Tax Administration, and the HUD and

Department of Veterans Affairs OIGs. HUD losses could exceed $3 million.

David McKay, a public safety officer for the Town of Huntington, pled guilty gton

to multiple counts of conspiracy to defraud HUD, extortion, and income tax evasion,

and was sentenced to 13 months in prison and 3 years supervised release, and

ordered to pay $30,000 in restitution to HUD. McKay caused the theft of over

$200,000 in HUD funds through multiple schemes over a 10-year period. In one

scheme, he hid his ownership interest in a house, and used nominee landlords to

collect rent on behalf of a Section 8 tenant who did not reside there. In addition,

McKay obtained $170,000 in Section 8 benefits for two of his friends who did not

qualify for benefits. McKay also pled guilty to using his position as a union shop

steward of a labor union to threaten violence and labor shutdowns in order to extort

thousands of dollars from construction companies that were forced to pay him for

“no show” jobs. The construction companies performed renovations of industrial

chimneys and smokestacks in Long Island. McKay allegedly derived his power

from his association with the Luchese organized crime family. Additionally,

McKay pled guilty to income tax evasion for failing to report extortion payments

and embezzled HUD funds to the IRS. This was a joint investigation by the FBI, IRS,

and OIG.

In Patchogue, Matthew S. Reitzel, a Long Island Railroad engineer who was atchogue

convicted on charges of defrauding the Section 203(k) Rehabilitation Mortgage

Insurance Program, was issued a notice of debarment by the Departmental Enforcement Center, precluding him from participation in any federal programs or

contracts through May 15, 2003. A joint investigation by OIG and the Postal Inspection Service found that Reitzel fraudulently obtained a HUD property by certifying

that he was a first-time homebuyer, and that the property he was purchasing would

serve as his primary residence. Shortly after purchasing the property, Reitzel

rented it for $1,300 a month to a HUD funded social service organization, and never

utilized the property as his residence. Reitzel was arrested at his actual residence

in June 1999. He later pled guilty to submitting false statements to HUD. He

refinanced his Section 203(k) mortgage as part of the plea agreement, and was

sentenced to 1 year probation, fined $2,500, ordered to pay a $25 special assessment, and was required to surrender his firearms to the U.S. Probation Office. A
separate referral by OIG to the Departmental Enforcement Center for civil action

has initiated a Program Fraud Civil Remedies Act case against the defendant.

A New York City Housing Authority ( ork City NYCHA) borough supervisor pled guilty

to bribery concerning federal programs. John Honohan accepted $5,500 in payments between December 1998 and June 1999 from a contractor after Honohan

assured him that environmental rules and New York City housing specifications

would not have to be followed during preliminary construction. Honohan was

sentenced to 5 months in prison, 5 months home detention, and 3 years supervised

release, was fined $3,000, and ordered to pay $5,500 in restitution. Two other

NYCHA supervisors, Christopher Bamberger and Emmanuel Lawrence, also pled

guilty to bribery as a result of the 3-year undercover investigation into the NYCHA

Contract Administration Department by the New York City Department of Investigations and NYCHA OIG, with assistance from the FBI and OIG. Bamberger received 4 months in prison, 4 months home detention, and 300 hours of community

service. Lawrence received 6 months in prison and 3 years supervised release, and

was fined $20,000. All three were terminated from NYCHA.

The vice president of Ingersoll Tenants Association, Inc., a nonprofit organization established by the tenants of the Ingersoll housing development, was arrested

and charged with arson. The arrest resulted from an investigation of real estate

agents, mortgage lenders, and appraisers allegedly involved in a scheme to sell to

the Ingersoll Tenants Association artificially appreciated FHA insured properties.

Between November 1998 and April 1999, the Tenants Association purchased 34

single family homes in Brooklyn and ooklyn Queens, all of which are currently in Queens

default. The vice president was charged with setting the fire that burned down one

of the houses purchased through the Section 203(k) Program. This was a joint

investigation by the FBI, OIG, ATF, New York City Fire Marshals, New York City

Housing Authority OIG, and the Postal Inspection Service.

In Fort Worth, Milton K. Raybould, a former closing attorney contracted by orth

HUD, pled guilty to one count of theft of public funds. HUD contracted with

Raybould to provide sales closing services for its single family properties in the

Dallas/Fort Worth area. From 1995 through 1998, Raybould closed 2,113 properties

totaling $92,689,477. An investigation by the FBI and OIG revealed that Raybould did

not remit the closing proceeds to HUD on 9 properties totaling $427,044, but instead

kept the funds for personal use. Raybould provided the same sales closing services

for HUD in Houston, and admitted that he fraudulently kept fees for title policies

paid to him by HUD or the buyer. He never researched the titles and/or never

provided the policies. The investigation identified 48 title policies at a dollar loss of

about $47,000. As part of the plea agreement, Raybould has agreed to assist the

government by supplying information on other HUD related crimes associated with

his closing activities.

Tonya Raper, a former employee of Infinity Mortgage Company in Dallas, and Dallas

a mortgagor, pled guilty to one count of false statements. In exchange for the plea,

Raper agreed to provide information concerning other fraudulent loans originated

by Infinity. An OIG investigation disclosed that while unemployed, Raper applied for

an FHA insured mortgage and misrepresented her income and employment information in order to qualify for the loan. Subsequent to obtaining the mortgage,

Northern District of

Texas
which ultimately went into default and foreclosure, Raper was employed by Infinity

and participated in the preparation of fraudulent loan documents for otherwise nonqualified homebuyers. Infinity originated over $11 million in FHA insured mortgages.

David R. Auther, a former Officer with the Fort Worth Police Department, orth

was sentenced to 5 years supervised release and 180 days home confinement, and

ordered to pay $58,000 in restitution. The sentencing followed Arther’s guilty plea

to conspiracy. Arther and his spouse paid $58,000, half of the value of their home,

under HUD’s Officer Next Door Program. The program provides homes to law

enforcement Officers for one-half of the value of the home if the Officer agrees to

live in the home as a primary residence for a period of 3 years from the date of

purchase. The program is intended to help revitalize economically distressed

communities. However, the Officer and his spouse continued to live in their old

home and leased out the residence purchased under the Officer Next Door Program to another couple for $1,325 per month for 2-1/2 years. The monthly lease

was approximately three times the amount of the mortgage payment on the home.

The FBI and OIG conducted this investigation.

Glenda Bryant Langdon, the former executive director of the Pineland Hous- Pineland

ing Authority, was sentenced to 10 months in prison and 2 years supervised release,

and ordered to pay $16,530 in restitution and a $100 special assessment. Langdon

previously pled guilty to theft of funds from a government program. An OIG investigation disclosed that Langdon failed to deposit any tenant rent receipts during her

10-month tenure as executive director. She collected cash payments and used the

money to buy furnishings for a residence which was under construction. In addition, she used the Authority’s charge card to purchase major appliances for personal use. A search warrant executed at Langdon’s residence resulted in the

seizure of a number of appliances.

A federal grand jury returned a 45-count indictment against the owner of the

Park Creek Manor apartment complex, who is also a former director of housing

management in the HUD Dallas Office. The owner was charged with 4 counts of Dallas 

mail fraud, 14 counts of theft of government funds, 14 counts of theft concerning a

federal program, 11 counts of money laundering, and 2 counts of criminal forfeiture. The indictment resulted from an investigation by the FBI, OIG, and IRS Criminal Investigation Division which disclosed that the owner participated in a scheme

to defraud HUD by unlawfully diverting over $340,000 of project funds for personal

use rather than for necessary expenses of the apartment complex.
Chapter 3 Audits
Single Family Housing Programs

In addition to evaluating HUD’s management reform issues, conducting audit

work in support of the Housing Fraud Initiative and Operation Safe Home, 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 10 audit-related memoranda on internal HUD operations, and 23 reports and 20 audit-related memoranda

on grantees and program participants. (See Appendix 1 for a listing of the audit

reports and memoranda issued.) Collections amounted to $6.84 million, with

another $22.9 million in management decisions on audits with questioned costs.

Investigative recoveries (out of court settlements, court ordered fines, penalties, and

restitution) totaled $1.5 million.

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, we reviewed activities concerning the Property

Disposition Program, loan origination, closing agents, and the demolition of HUD

owned properties.

As part of HUD’s continuing reinvention efforts, FHA developed a 2020 Field

Consolidation Plan for Single Family Housing. In accordance with its plan, FHA

awarded 7 companies a total of 16 management and marketing (M&M) contracts to

manage and market its Real Estate Owned (REO) properties nationwide. These

contracts had an estimated 5-year value of $927 million. The contractors were

responsible for nearly all aspects of management and marketing REO properties.

We audited 7 of the 16 contracts in effect as of May 31, 2000. The results of those

individual audits are reported below. Our nationwide audit showed that FHA has

realized some success from its M&M contracts.

We reported that sales volume had increased and the number of properties in

inventory was down. Also, contractors implemented new marketing tools such as

bidding through the Internet. Despite these positive strides, FHA did not accomplish

other core elements of its program mission. It did not maximize the return to the

mortgage insurance fund or maintain properties in a manner that strengthened

neighborhoods and communities. FHA has had numerous other problems with the

contractors including bankruptcy by one, inability to meet contract performance

deadlines, countless complaints from homebuyers and real estate professionals, and

billings for ineligible costs. Employees of two contractors were arrested for taking

kickbacks. Nevertheless, in his May 16, 2000 testimony before the Senate Committee on Banking, Housing and Urban Affairs, Subcommittee on Housing and Transportation, Assistant Secretary/FHA Commissioner Apgar declared, “Since assuming responsibility for all property management and marketing activities approximately one year ago, FHA’s M&M contractors have performed extremely well by

any measure commonly used in the real estate industry to evaluate performance.”

Our audit results indicate such optimism is premature and misleading. We found

problems with all seven contracts we reviewed.

Outsourcing resulted in reduced returns to the mortgage insurance fund of about

$188 million from June 1, 1999 to May 31, 2000. This occurred, in part, because

Property Property

Disposition Disposition

Program
M&M contractors’ sales produced lower returns than FHA staff historically obtained

prior to outsourcing operations. The poor sales performance accounted for $103

million of the loss. Outsourcing also resulted in substantially increased program

costs compared to prior FHA performance, reducing returns another $85 million.

FHA’s decision not to perform a cost benefit analysis in accordance with A-76 may

prove to be a costly mistake. We attribute the losses to poor M&M contractor sales

performance and substantially increased program costs.

FHA measures performance by sales volume, inventory levels, sales to owner/

occupants, percent of appraised value realized upon property sale, and net recovery.

These indicators provide information on FHA’s success in meeting its mission. In its

annual Government Performance and Results Report, HUD cited management

improvements as the factor which resulted in FHA’s reaching its new recovery

performance goal for FY 1999. It boasted that the new recovery rate increased

about 12 percent for FY 1999 resulting in savings to the insurance fund. Net recovery is the per property average sales prices less the per property average expenses.

While average sales prices and net recovery have increased, this measure is not a

valid assessment of performance or a reflection of success. In fact, although FHA

claims success based on the indicators, it has not established performance benchmarks. Without benchmarks, it cannot fully measure performance.

In his Congressional testimony, the FHA Commissioner claimed the average

sales price had increased by more than 13 percent, and the overall recovery as a

percent of the mortgage insurance claim increased by nearly 10 percent. This is

misleading as an indicator of property disposition operations. The analysis is based

on an increase in sales price less the claim payment. Property disposition operations do not have a direct influence on claim amounts. Property disposition program

operations should be evaluated based on the percent of appraised value returned on

sales less program operating expenses.

Appraised values are determined by independent appraisers that are approved

by FHA. Appraised values are driven by real estate market forces including comparable property sales, and thus they provide the best benchmark for evaluating

program success and comparing performance between various periods.

Maintenance and operating (M&O) expenses have historically represented about

one-third of the expenses associated with single family operations. M&O expenses

include M&M contractor fees and monitoring contractor costs. Other expense

categories include repairs, taxes, and selling expenses.

Our analysis showed that while other expense categories remained fairly stable

(increasing only 5 percent), M&O expenses increased 51 percent. For over 2-1/2

years prior to outsourcing, M&O expenses increased a total of 21 percent, an annual

increase of only 8.5 percent. Since other expenses remained fairly stable and M&O

expenses increased only marginally over the prior 2-1/2 years, the recent increase

is attributable largely to the cost of outsourcing, i.e., contractor costs.

M&O expenses averaged $3,051 per property sold for the 12 months prior to

outsourcing operations. For the 12 months ending May 31, 2000, the average M&O

expense was $4,615. If M&O expenses increased at the same 8.5 percent rate as in

recent years, the expected M&O expenses should have been about $3,310 per property sold if operations had not been outsourced. Thus, we attribute $1,305 ($4,615-

$3,310) of the increase to the costs of outsourcing. Given that FHA sold 77,772

properties for the period, the additional M&O expense resulted in about $101 million

(77,772 x $1,305) of increased program costs. In addition, FHA was able to reduce
the number of full time equivalent program staff from 420 to 168. This resulted in a

cost savings of about $16 million for the period. In total, outsourcing resulted in

increased program costs of $85 million ($101 million - $16 million).

Our audit also confirmed what FHA has repeatedly found in its monthly performance assessment reports. None of the contractors we audited managed properties

according to contract requirements. Contractors did not perform timely initial

inspections, perform adequate inspections, correct hazardous conditions, make

repairs, or perform routine maintenance to preserve and protect properties. Also,

contractors failed to obtain timely property appraisals, approve disposition programs timely, or perform other essential contract requirements. Of the 189 properties we inspected across the country, 94 percent required some immediate attention. This occurred because the contractors did not have adequate controls to ensure

requirements were met, and FHA did not have effective tools to compel them to

implement appropriate controls. We also believe that because maintenance and

repair costs must be borne by the contractors, contractors have elected not to

comply since profits would be reduced. Consequently, the poor property conditions

decreased marketability, increased FHA’s holding costs, negatively affected surrounding communities, reflected poorly on the Department, and, in some cases,

threatened the health and safety of the public. Although FHA has repeatedly reported

the deficiencies in its monthly performance assessment reports, property conditions

have not improved under private management.

The audit recommended that FHA: (1) establish performance benchmarks and

critical success factors that show when the costs of outsourcing exceed the benefits;

(2) not renew options for contractors who have proven unable or unwilling to comply

with critical contract provisions; and (3) implement other controls to ensure efficient and effective operations. (Report No. 00-AT-123-0001)

In Atlanta, GA, the A, OIG Midwest District audited Golden Feather Realty

Services, Inc., an M&M contractor. Golden Feather’s management controls did not

provide reasonable assurance that employees did not exceed or abuse their assigned

authorities. Due, in part, to the lack of separation of duties and supervisory oversight, a Golden Feather employee was able to solicit a kickback from two appraisers in exchange for increased work assignments. In addition, Golden Feather did not

notify the OIG of the solicitation, as prescribed by the Federal Acquisition Regulations.

Management controls necessary to help deter nonprofit organizations from

abusing HUD’s discount sales program were weak. Land use restrictions were not

executed or recorded for properties sold to nonprofit organizations. Because the land

use restrictions were not executed or recorded, several nonprofit organizations

resold properties to trusts and investors that then resold the properties for amounts

ranging between 177 percent and 597 percent greater than the HUD discounted sales

amount. Some properties were resold on the same day the nonprofit organization

purchased the property from HUD, and multiple properties were sold to the same

buyer.

Weak management controls over property inspections and reported deficiencies

resulted in poor inspections and deficiencies not being corrected. Golden Feather

did not always identify serious health and safety deficiencies; correct reported

hazardous conditions within the mandatory 24 hours; properly secure properties;

and preserve, protect and maintain each property in a presentable condition at all

times. Poor property conditions contribute to performance problems such as de-
creased marketability, increased costs, possible decreased value of surrounding

homes, and possible conditions that threaten the health and safety of neighbors and

potential buyers.

Golden Feather did not ensure that appraisers were HUD approved. Four

appraisal companies appraised 213 properties using 7 unapproved appraisers.

Because unapproved appraisers were used, HUD’s risk in obtaining an inaccurate

list and sales price has been increased.

Golden Feather’s management controls did not always prevent untimely appraisals and disposition problems. Delays in obtaining property appraisals and

approving disposition programs cause properties to remain in HUD’s inventory

longer than necessary, resulting in additional property holding costs and exposure to

vandalism.

The audit recommended that HUD ensure Golden Feather: (1) establishes and

implements procedures to provide supervision, segregates key duties of its employees, and complies with Anti-Kickback Act reporting requirements; (2) executes and

records land use restrictions for sales to nonprofit organizations; (3) develops and

implements oversight procedures for inspections; (4) reports and corrects hazards

and other maintenance deficiencies identified by OIG and Golden Feather’s inspectors; (5) uses HUD approved appraisers; and (6) makes sure the contractor develops

and implements controls for processing appraisals and disposition programs timely.

(Report No. 00-CH-211-1005)

In Irvine, CA, anOIG audit of Golden Feather Realty Services, Inc.’s disposition of HUD owned properties disclosed that Golden Feather, an M&M contractor,

significantly reduced the number of properties in the Southern California inventory.

However, the audit also found that Golden Feather needed to fully comply with

certain requirements for its property disposition activities. Specifically, Golden

Feather did not always adequately protect, preserve, and maintain HUD owned

properties. On-site inspections of 30 selected properties within the Los Angeles and

San Bernardino, California areas disclosed that Golden Feather did not always:

correct health and safety hazards and remove defective paint surfaces; protect

properties from the elements to prevent further deterioration; repair damages

caused by routine vandalism; secure properties against unauthorized entry; and

remove debris and maintain the lawns in order to maintain the physical appearance

of the properties. As a result, these conditions reflected a negative image of HUD’s

REO Program, but more importantly, they hampered HUD’s efforts to fully accomplish its mission of strengthening neighborhoods and communities. HUD was also

less assured that sales of HUD owned properties provided the maximum return to

the mortgage insurance fund.

Golden Feather also incurred delays in processing sales of HUD owned properties in 24 of 45 properties reviewed. These delays occurred during: (1) performing

initial inspections; (2) obtaining appraisals; (3) approving disposition programs; and

(4) reviewing sales contracts. The delays caused these properties to remain in

HUD’s REO property inventory longer than necessary. The delays could also increase property holding costs and exposure to deterioration or damage due to

vandalism.

The audit recommended that HUD’s Santa Ana Homeownership Center require

Golden Feather to fully comply with its M&M contract to ensure that HUD owned

properties are always adequately protected, preserved and maintained, as well as

marketed and sold in a timely manner. (Report No. 00-SF-222-1002)
In Denver, CO, since the inception of , HUD’s M&M contract in March 1999,

First Preston Management, Inc. has successfully reduced the single family property inventory level through increased property sales. First Preston has also improved its fixed fee and pass through costs vouchering procedures and its property

sales closing operation, including the accounting for HUD’s sales proceeds.

However, an OIG audit found that the average sales price per property and the

amount of revenue recovered as a percent of the appraised value have continued to

decrease over the past 12-month period ending May 31, 2000. Because of the

significant decreases in selling prices, HUD has realized decreased average revenues per property. During the 12-month period ending May 2000, First Preston

sold 4,435 properties for an approximate total of $177 million. If First Preston had

sold these properties for their “as is” appraised value, instead of the reduced sales

amount, the FHA insurance fund would have received an additional $17 million.

Also, over the same period, the number of property sales to owner/occupants has

decreased while sales to investors have steadily increased. In May 1998, 59 percent

of the property sales were to owner/occupants, while in May 2000, only 45 percent

of the property sales were to owner/occupants. During the same period, property

sales to investors have increased from 37 percent to 52 percent.

The audit also found that HUD properties were not always being secured or

maintained in a presentable condition, health and safety hazards were not always

reported and repaired within 24 hours of discovery, and First Preston was not

always marketing HUD properties in a timely manner.

The report recommended that First Preston provide additional training to

subcontractors and its own employees on the proper procedures for performing and

documenting property inspections, and the proper procedures for the protection and

preservation of HUD properties. Additionally, First Preston should establish and

implement a more detailed oversight review of HUD owned properties to ensure that

inspections and repairs are timely and accurately performed. (Report No. 00-DE222-1003)

In Blue Bell, PA, First Preston Foreclosure Specialists has demonstrated A,

success in several key areas. It has instituted an electronic bidding system, reduced

the number of properties in inventory, and increased the sales of properties. An OIG

audit, however, found that despite these accomplishments, improvements are still

needed.

Physical inspections performed by the OIG, and by subcontractors of First

Preston, showed numerous deficiencies, evidencing inadequate maintenance and

safeguarding of property assets. The unfavorable property conditions occurred

because First Preston did not always repair, maintain, and properly secure properties in accordance with contract provisions. Consequently, efforts to effectively

market assets for sale diminished, while health and safety hazards became more

prevalent. In our opinion, this increased the risk of potential liabilities to HUD, and

may have caused property values in surrounding neighborhoods to decline. Unless

First Preston enacts adequate controls that ensure prompt and complete recognition

of existing property deficiencies, and establishes procedures necessary to correct

deficiencies identified, marketing efforts will be impeded, properties needing

repair will remain in inventory as unsold, neighboring communities may be adversely affected, and shoddy property conditions will likely occur.

In the 8 months since executing the M&M contract, First Preston has reduced

the overall inventory by 8 percent; however, the number of properties held in the
inventory longer than 12 months increased by 63 percent. In our opinion, this

occurred because First Preston has not placed enough emphasis on the sale of

properties that have been in the inventory for long periods of time. The failure to

dispose of these properties results in higher holding costs. More importantly, such

properties have a negative effect on the surrounding neighborhoods.

Furthermore, First Preston has not complied with all the requirements in its

contract. Specifically, First Preston: (1) charged for ineligible costs; (2) did not

perform tasks in a timely manner; (3) did not always include the required documentation in the appropriate files; and (4) did not report all problems to the Government

Technical Representative. We believe these deficiencies occurred because First

Preston did not implement the necessary controls to ensure that all contract provisions were met. As a result, First Preston’s performance may have led to excessive

costs and properties remaining in the HUD inventory for extended periods of time.

The audit recommended, among other things, that First Preston be required to

establish procedures that ensure all significant property deficiencies are identified,

monitor the accuracy of subcontractor property inspections, and provide assurance

that needed repairs are completed promptly. In addition, HUD should work with

First Preston to increase the emphasis on the sale of older properties and/or

develop incentives to encourage the sale of older properties. (Report No. 00-NY229-1006)

In Norcross, GA, anOIG audit of Southeast Alliance of Foreclosure Specialists, LLC, an M&M contractor, disclosed that the contractor reduced both the

number of properties in inventory and the number of properties in inventory over 6

months, and reduced the average losses from property sales. Despite these accomplishments, improvements are still needed. Specifically, the contractor did not

perform timely initial property inspections, did not always identify serious property

defects, did not conduct routine inspections, as required, and did not correct

hazardous conditions within the mandatory 24 hours.

The contractor also failed to comply with other contract requirements. For

example, the contractor did not review settlement statements, did not obtain timely

property appraisals, and billed FHA for unauthorized and ineligible expenses. Such

noncompliance could significantly increase the risk of loss to the insurance fund.

The audit recommended that HUD require the contractor to ensure property

inspectors are adequately trained, develop and implement procedures to perform

timely initial and routine inspections, promptly correct hazardous conditions, and

make necessary repairs to preserve and protect properties. HUD should also

closely monitor the contractor’s compliance with maintenance requirements, and

take necessary actions to ensure requirements are met. (Report No. 00-AT-222-

1009)

In Hartford, CT, anOIG audit of CitiWest New England, Inc., an M&M

contractor, disclosed that CitiWest did not: (1) perform initial property inspections

within 24 hours; (2) always identify imminent hazards through routine property

inspections; (3) correct imminent hazards and other deficiencies when identified;

and (4) properly secure its properties. CitiWest is also not complying with other

contract requirements. For example, properties are held off market for unreasonable periods of time; case management processing is not timely; sales closing
responsibilities are not followed; and unallowable costs are charged to HUD. As a

result, HUD’s Property Disposition Program in New England may not be operating

efficiently and economically.

The audit recommended that HUD instruct CitiWest to establish procedures to

ensure timely initial property inspections; ensure that CitiWest monitors its property inspection subcontractors through quality control reviews and discontinues its

use of poor performing subcontractors; and ensure that imminent hazards and other

deficiencies are corrected and defective paint is properly identified and treated.

The audit further recommended that HUD require CitiWest to process properties

held off market in a reasonable time to reduce applicable holding costs and increased costs to HUD, accurately review settlement statements and submit weekly

reports of closing agent noncompliance, and conduct thorough reviews of all monthly

pass through vouchers to ensure late fees, interest, and penalties are not included.

(Report No. 00-BO-222-1005)

In Huntington Beach, CA, anOIG audit of Michaelson, Connor & Boul

(MCB), an M&M contractor, found that MCB’s monthly property sales have steadily

increased, and the number of properties in its inventory has steadily declined since

MCB assumed M&M. However, we did identify a number of areas where improvements need to be made by the contractor. Specifically, MCB failed to repair and

maintain assigned properties according to contract requirements. MCB did not: (1)

perform timely initial inspections and property appraisals; (2) ensure property

inspectors accurately reported property conditions; (3) make needed repairs or

perform routine maintenance to preserve and protect properties; or (4) correct

hazardous conditions. MCB relied exclusively on subcontractors and third party

service providers to perform its inspection, appraisal, and property repair responsibilities, but did not adequately monitor their work to ensure it was completed

according to contract provisions.

Contrary to contract requirements, MCB processed, invoiced, and received

payment from HUD for voucher items which were not properly supported and/or

approved. This occurred because MCB’s oversight of its invoicing and voucher

payment process did not ensure services were provided, complete and accurate

files were maintained, and invoices included only eligible costs. As a result, MCB

received over $28,000 for duplicate and ineligible costs.

The audit recommended that MCB develop and implement a comprehensive

monitoring plan over its subcontractors. At a minimum, the plan should include: key

contract performance requirements and outputs; a methodology for conducting

periodic and systematic reviews of subcontractor performance; and procedures for

documenting review and follow-up results. We also recommended that MCB develop

and implement procedures to ensure pass through vouchers are processed in

accordance with contract specifications. (Report No. 00-PH-222-1005)

In Washington, DC, as a follow-up on issues relating to gton, DC HUD’s decision to

award contracts to the In Town Management Group to perform services as an M&M

contractor, the OIG reviewed HUD’s contract award process with a focus on the two

M&M contracts awarded to other firms in June 2000. Our review included a comparison of selected elements of the March 1999 and June 2000 award processes. We

concluded that HUD’s Contracting Office followed procedures prescribed in the

Federal Acquisition Regulations as they relate to ensuring awards are made to
responsible contractors. However, greater emphasis is needed on verifying past

performance and improvements should be made in supporting the evaluations of the

bid proposals. Also, procedures are needed to ensure the required security provisions are added to all contracts where contractors have access to HUD’s sensitive

automated systems.

The review of the preaward files for the June 2000 contracts showed that the

number of references contacted to verify prospective contractors’ past performance was limited. The past performance of the successful contractors was

verified only to the extent of the contractors’ performance on existing M&M contracts. Moreover, there was no verification of references apart from soliciting the

views of HUD personnel. A General Accounting Office report issued in May 2000

indicated that 11 of the 13 current M&M contractors were rated as high risk in at

least 1 or more of the performance dimensions, such as property maintenance and

security. The rating of high risk was an indication of the contractor’s failure to

adequately perform a required service under the contract.

A comparison of the technical evaluations for the proposals for the June 2000

contracts and March 1999 contracts showed that HUD had improved in documenting

evaluations. However, our review of the technical evaluation reports for the new

contracts found that the reports did not clearly distinguish the qualitative differences

in the relative strengths and weaknesses between and among competing proposals.

Also, the documentation of the individual evaluations did not always assess the

evaluation factors and sub-factors by documenting the relative strengths, deficiencies, weaknesses, and risks for the three most significant evaluation factors.

Our report on our attempt to audit HUD’s Fiscal Year 1999 financial statements

identified that security checks should be completed for access to HUD’s automated

systems. Considering the recommendation for security checks, HUD revised the

Acquisition Regulations by adding several new security provisions, which included

background investigations of contractor and subcontractor personnel, security

breach notification, nondisclosure of information, minimum security procedures,

and termination of contractors/subcontractors for lack of compliance. As a followup, we checked the implementation of the recommendation and found that although

the new contracts required employee information for security checks, the contracts

did not include the contract clause for the new security provisions.

We recommended that HUD’s Office of Procurement and Contracts: (1) develop

procedures to ensure that sufficient meaningful information is provided on bidders’

past performance from their references; (2) require technical evaluation panels,

when evaluating competitive proposals, to provide a meaningful comparison and

discrimination between and among competing proposals, and to document the

relative strengths, deficiencies, significant weaknesses, and risks of the factors and

sub-factors; and (3) develop procedures to ensure that required contract provisions

are included in applicable contracts with regard to contractors’ access to HUD’s

sensitive automated systems. (Report No. 00-FO-177-0802)

OIG reviewed the circumstances at HUD’s Los Angeles Office that enabled

Allstate Mortgage Company to generate $97 million in fraudulent FHA insured

loans between June 1996 and July 1997. We found that the Los Angeles Office did

not perform required field and supervisory reviews of property appraisals rated as

poor, evaluate or take corrective action for cases rated as poor due to faulty appraisals, or conduct critical supervisory reviews of faulty underwriting reviews. At

the same time, we also reviewed the Santa Ana Homeownership Center’s proce

Loan

Origination Origination
dures after it assumed responsibility in March 1998 for the single family workload

previously assigned to the Los Angeles Office. We found that the same practices

that allowed Allstate to generate fraudulent loans continued to exist, but to a lesser

extent. If adequate controls had been in place, Allstate’s fraudulent loan origination

scheme would have been detected earlier and the damage resulting from it could

have been significantly reduced.

We believe the problems occurred due to changes resulting from the implementation of HUD’s 2020 Management Reform Plan and a policy revision that was

designed to achieve targeted staff reductions and streamline program operations.

The policy revision was instituted to enable HUD field offices to operate their single

family loan programs with fewer staff and less direct monitoring of direct endorsement lenders by doing away with individual “report cards.” The “report cards”

were previously sent to the underwriters informing them of the results of postendorsement technical reviews. The Los Angeles Office’s staff misinterpreted the

policy revision to mean follow-up on poorly originated loans with direct endorsement lenders was no longer required. This misinterpretation and resulting inaction

to follow-up thwarted the Office’s ability to detect and act on the improperly, and, in

the case of Allstate, fraudulently originated loans.

The audit recommended that the Acting Director, Santa Ana Homeownership

Center, assess the Center’s Production Division staffing and take necessary action

to ensure staffing is appropriate to properly monitor contractors and direct endorsement lenders; establish and implement specific policies and procedures to monitor

post endorsement review contractors’ work products and take corrective action,

including contract termination, if the contractor is not properly performing its

duties under the contract; and establish and implement policies and procedures to

monitor results of post endorsement technical reviews and take appropriate action

when these reviews identify problems with a particular loan or lender, appraiser,

underwriter, or other party. (Report No. 00-SF-121-0802)

We are conducting a nationwide audit of closing agents to determine whether

internal controls are adequate to prevent fraud, waste and abuse in the program.

During this semiannual report period, we issued the four reports discussed below.

We have two more audits in process and then we will issue a nationwide report with

appropriate recommendations for this program.

In Austin, TX, the ustin, TX OIG audited the law offices of Pope & Booth, P.C. (P&B), a

closing agent for HUD. Overall, we found that P&B’s controls were sufficient to

ensure substantial compliance with its HUD contract. However, we also found that

P&B split title insurance fees and overcharged HUD for wire transfer fees. Even

though P&B performed no additional services beyond those required in the closing

agent contract, it received a 40 percent split of title insurance premiums from 2

title insurance companies. The Real Estate Settlement Procedures Act (RESPA)

prohibits fee splitting and receiving unearned fees for services not actually performed. From February 1998 to June 1999, P&B received unearned fees up to

$454,000.

P&B’s contract required it to charge HUD the actual cost of wire transfer fees.

For the 45 closing files we reviewed, P&B charged HUD $25 for each wire transfer.

However, P&B’s bank only charged $12. P&B may have overcharged HUD on every

file that it closed, and thus may owe HUD almost $29,000 for wire transfer fee

overcharges on the remaining 2,199 closings reported.

Closing Agents Closing Agents
The audit recommended that HUD pursue P&B and the two title insurance

companies for RESPA violations, and recover amounts received from the two companies. In addition, the Denver Homeownership Center should require P&B to

reimburse HUD for ineligible wire transfer fees. HUD should also determine the

actual number of closings performed by P&B and recover the amount overcharged

on those closings. (Report No. 00-FW-222-1003)

In Boston, MA, the Boston, MA OIG audited the law offices of Portnoy & Greene, P.C., a

closing agent for HUD. Portnoy & Greene’s overall performance as a closing agent

was substandard. Portnoy & Greene did not: (1) deposit sales proceeds in a timely

manner; (2) wire the proceeds to HUD in a timely manner; (3) accept only cash or

certified funds; (4) properly itemize closing costs; (5) maintain sufficient documentation in their closing files; and (6) limit charges to only allowable expenses. Substandard performance occurred because Portnoy & Greene lacked or did not follow

management controls to ensure contract compliance. Their inability to perform

their duties negatively impacted HUD financially. In addition, HUD has no assurance

that Portnoy & Greene properly conducted closings.

The audit also found that Portnoy & Greene improperly collected the full

closing agent fee even though another entity conducted the closing. Portnoy &

Greene’s closing agent contract limited its fee for third-party closings to 50 percent

of the full closing agent fee. Portnoy & Greene charged the full fee because, in

their opinion, they were not conducting third-party closings. Third-party closing

agents closed 98 percent of the 60 closing files reviewed. Thus, one-half of the fee

Portnoy & Greene received on the 59 identified files, or nearly $17,000, is ineligible. In addition, Portnoy & Greene may owe HUD an additional $258,000 for 98

percent of the remaining 901 closings conducted under their current HUD contract,

if the closings were performed by a third-party closing agent.

The audit recommended that HUD terminate its closing agent contract with

Portnoy & Greene, recover from Portnoy & Greene any ineligible charges, require

Portnoy & Greene to review all closings conducted under this contract to identify

and repay any other improper charges, recover nearly $17,000 in fees on the 59

files reviewed where third-party closings occurred, require Portnoy & Greene to

review the other 901 closings conducted under this contract to disclose all other

instances where a third-party closing occurred, and recover one-half of the fee paid

to Portnoy & Greene for any other third-party closing. (Report No. 00-FW-222-

1005)

An OIG audit of the law offices of Shapiro & Ingle, Inc., a closing agent for

HUD in Raleigh, NC, gh, NC, found that overall, Shapiro & Ingle’s controls were insuffi- gh, NC, 

cient to ensure substantial compliance with its HUD contract. Specifically, Shapiro

& Ingle did not always forward documents to HUD, deposit sales proceeds, wire

sales proceeds, or record deeds timely; collect an extension fee; maintain sufficient documentation in its closing files; prepare a settlement statement with the

correct sales price; calculate the tax proration correctly; exclude home warranty

fees for investment properties; and keep within approved closing costs.

Shapiro & Ingle overcharged to perform title searches. HUD’s closing agent

contract stated that Shapiro & Ingle would clear any routine title problems and

resolve any title problems prior to closing as part of a closing fee. Nonetheless,

Shapiro & Ingle billed additionally for title searches and inappropriately collected

up to $139,000 for the period April 1998 through April 1999.
There are approximately 3,300 public housing agencies (PHAs) which are

established by local governments pursuant to state enabling legislation, and which

receive financial assistance from HUD. HUD provides both project-based and

The audit recommended that the Director, Atlanta Single Family

Homeownership Center, require Shapiro & Ingle to reimburse HUD for the home

warranty fees, outside attorney fees that were not reasonable and customary for the

area, and for any amounts that Shapiro & Ingle received in excess title search fees,

which could potentially amount to $136,000. Shapiro & Ingle should also reimburse

HUD and/or the buyers for the title search overcharges. HUD should also determine

the number of sales closed by Shapiro & Ingle as part of its closing agent contract

with HUD. Further recommendations are moot because Shapiro & Ingle’s contract

expired on October 31, 1999. (Report No. 00-FW-222-1007)

In Glendor Glendora, CA, theOIG audited Fortune Escrow, Inc., a closing agent for

HUD. Overall, Fortune substantially complied with its HUD contract. However,

Fortune overcharged HUD for wire transfer fees. Fortune’s contract with HUD

included any wire transfer fees in the closing agent fee.

The audit recommended that the Santa Ana Homeownership Center Director

require Fortune to determine the number of sales closed by Fortune during its

closing agent contract with HUD and require that it reimburse HUD for any additional ineligible wire transfer fees, potentially $39,000. (Report No. 00-FW-222-

1006)

For the past 10 years, the City of Chicago, IL’s Buildings Department has been ’

demolishing HUD owned single family properties. An OIG audit found that HUD has

not effectively dealt with Chicago’s overly aggressive demolition of vacant HUD

properties. HUD also lacks accountability for properties demolished by the City. As

a result, HUD’s FHA mortgage insurance fund suffered estimated losses between

$446,000 and $729,000 from the City’s demolition of 30 HUD owned single family

properties sold as vacant lots between June 1998 and February 2000. HUD will

continue to lose an estimated $883,000 to $1,494,000 per year if it does not stop the

City from demolishing its single family properties. Furthermore, the unwarranted

demolition of HUD owned properties has reduced the stock of affordable housing

available to meet HUD program objectives.

The City improperly used nearly $95,000 of HUD Community Development

Block Grant funds to demolish 15 HUD owned single family properties in 1998 and

1999. The City also received over $100,000 from HUD FHA in payment of demolition

liens it placed against the demolished properties.

The audit recommended that HUD prevent the City of Chicago’s unwarranted

demolition of HUD owned properties by implementing its Office of Regional

Counsel’s proposal to initiate a civil action against the City if the City refuses to

make a written commitment to refrain from demolition proceedings. (Report No.

00-AT-123-0002)

Demolition o Demolition of

HUD Owned HUD Owned

Properties Properties

Public and Indian Housing Programs
Office o Office of Nativ f Native

American American

Programs Programs

tenant-based housing assistance to PHAs, in addition to homeownership and other

grant assistance. HUD also provides assistance directly to PHAs’ 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 PHAs are designed to enable low-income

families, the elderly, and persons with disabilities to obtain and reside in housing

that is safe, decent, sanitary, and in good repair.

During this reporting period, we reviewed the validity of complaints concerning

the Office of Native American Programs’ staff training conference. We also

performed reviews of some PHAs’ administration of various public housing programs and grants including the Low-Income, Section 8, Low-Rent and Comprehensive Improvement Assistance Programs, besides reviewing the Tenant Rental

Assistance Certification System (TRACS) and the general administrative and procurement activities of other PHAs.

In Reno, NV, the eno, NV OIG received three complaints regarding a staff training

conference conducted by the Office of Native American Programs (ONAP) in

December 1999. One of the complaints alleging that insensitive or offensive material was presented during skits performed at the conference was provided to us

through a Senate inquiry. The other two complaints alleged that an unauthorized

individual attended the training conference at government expense, and that the

conference was not an effective or efficient use of government resources.

We concluded that Alaska ONAP management personnel were involved in the

development and presentation of a skit containing material that was, at a minimum,

insensitive to Native Alaskans and derogatory toward their culture.

We also found that Headquarters ONAP officials did not hold those responsible

for presenting offensive or insensitive material at the training conference accountable for their actions and have not been proactive in oversight and management of

Alaska ONAP.

Our review also found that an unauthorized individual attended the training

conference at government expense because ONAP management officials failed to

consider all relevant criteria before allowing the person to attend. However, overall,

we concluded that the training conference was an efficient and effective use of

government resources.

We recommended that the Assistant Secretary for Public and Indian Housing:

(1) have the Alaska ONAP Administrator issue a public apology; (2) require sensitivity training courses for Alaska ONAP management and staff; (3) consider if

disciplinary action against responsible parties is appropriate; (4) ensure that there

will be no tolerance for insensitive or offensive actions or behavior in the workplace; (5) ensure that work environment issues are made part of ONAP Office

reviews and issue a policy on zero tolerance for material that is offensive or insensitive; and (6) ensure that adequate controls are in place over attendance at future

organizational training events. (Report No. 00-SE-107-0002)
An OIG audit of the Low-Income Public Housing and Section 8 Programs of the

Bridgeport, CT Housing Authority found substantial deficiencies in the T

Authority’s operations that had existed for a number of years. Specifically:

➢ The Authority received $750,000 of excess operating subsidies and incurred

$300,000 of unnecessary utility expenses for units at Trumball Gardens that have

been vacant for 4 years. Management negligence resulted in many of these

vacant units being severely damaged by vandalism, water, and avian infestation.

➢ Poor management of a duplex development project resulted in a $2.5 million

loss of federal low-income housing funds. The Authority used $2.5 million of

low-income public housing operating funds to complete a nonprofit development

which was not financially sound. In addition, three duplexes were sold to families who did not qualify for housing assistance, as their incomes exceeded HUD

income limits. The Authority has not verified that the families living in the

rental unit of each duplex meet HUD low-income requirements in 12 of 21 cases.

➢ A consistently high vacancy rate exists for low-income public housing units.

Despite a waiting list of 1,900 families, the vacancy rate averaged 11 percent for

Fiscal Years 1997 through 1999. The vacancy rate at February 8, 2000, was 13

percent. The Authority’s failure to reduce vacancies resulted in a loss of

opportunity for low-income families to obtain affordable housing and reduced

rental income to the Authority by $1 million. In addition, HUD provided the

Authority approximately $2.5 million in operating subsidies for these vacant

units during Fiscal Years 1997, 1998, and 1999.

➢ The Authority had ineffective procurement practices, including payment for

services without a contract; selecting contractors without competition; awarding contracts with inadequate competition; unsupported sole source contracts;

contracts with unclear terms; and awarding contracts to the high bidder without

proper documentation.

➢ The Authority failed to meet the time schedule on a court ordered directive to

replace 1,063 demolished Father Panik Village low-income housing units. The

$89 million replacement effort started in 1987 and was less than half completed

at February 29, 2000. An outside developer hired in 1996 to speed up the

replacement effort has produced only 20 units in 3 years at a cost of $1.8

million and is now suing the Authority for $1.3 million for additional services.

➢ The Authority has a consistently low utilization rate for Section 8 vouchers and

certificates. The utilization rate averaged 89 percent for Fiscal Years 1997,

1998, and 1999. The utilization rate at February 29, 2000, was 88 percent

despite a waiting list of 2,600 families. A utilization rate of under 95 percent is

considered a failing indicator by HUD.

➢ Reconciliation of portable vouchers and certificates is not performed in a

timely fashion. Therefore, the Authority does not know if the accounts receivable in excess of $307,000 due from other housing authorities is accurate.

Authority officials were aware that significant weaknesses existed for a number

of years, but lacked the capacity to implement effective corrective action. We

attribute this condition to poor management practices and a lack of effective

leadership, and are recommending that HUD take administrative sanctions against

appropriate Authority officials. The Authority’s board of commissioners is ultimately responsible for allowing the deficiencies to continue, and should be held

Low-Income w-Income

Public Housing Public Housing

and Section 8 and Section 8

Programs Programs
accountable for improving the Authority’s operations. In addition, the audit provided

specific recommendations to assist in correcting the reported deficiencies. Authority management must change its focus from increasing its operating reserves and

obtaining additional business to providing needed services to its existing clients —

the residents. Unit vacancies must be reduced and utilization of Section 8 vouchers

and certificates must be improved. A realistic plan to complete replacement of

Father Panik units must be developed and implemented, and its progress monitored.

Finally, internal controls over procurement and accounting must be followed to

assure that assets are protected. (Report No. 00-BO-204-1004)

An OIG audit of the Low-Income Public Housing and Section 8 Programs of the

New Britain, CT Housing Authority found that since January 1995, the Authority T

has incurred approximately $1.5 million dollars in legal expenses and related costs.

In one instance alone, the Authority expended over $242,000 for legal expenses

incurred in its defense against a lawsuit filed by a former executive director only to

eventually settle the lawsuit for $150,000. The Authority did not execute a Litigation

Services Contract and did not aggressively seek reimbursement for legal expenses

from its liability insurance carriers. As a result, the Authority unnecessarily

incurred substantial legal expenses that may have otherwise been avoided.

➢ During inspections of the Authority’s low-income and Section 8 units, recurring

smoke detector violations were noted. In some instances, as much as 62 percent of a development’s units inspected had smoke detector violations.

➢ The Authority did not demonstrate that its procedures for determining contract

rent reasonableness were adequate. The Authority has not performed a current

market survey of private unassisted rental units in the area to assure that

assisted contract rents are comparable.

➢ The Authority reported Comprehensive Grant Program (CGP) expenditures to

HUD which were not reflective of its financial records. The Authority’s public

accountant also noted discrepancies between the CGP funds advanced to the

Authority and the CGP funds expended by the Authority.

The audit recommended that the Authority be advised in writing of the federal

regulations regarding litigation, or potential litigation matters, seek reimbursement

for legal expenses from its liability insurance carriers, and provide status reports

indicating its progress. The Authority should also adhere to its new procedures

regarding smoke detector violations, document that it has completed a market

survey of private unassisted units in the area, and provide a detailed schedule of

drawdowns and expenditures for closed grants under CGP. (Report No. 00-BO-202-

1003)

An OIG audit of the Poughkeepsie, NY Housing Authority’s Low-Rent Hous- , NY

ing Programs found that although the Authority is generally providing decent, safe,

and sanitary housing to its residents, it is not always complying with program

requirements and regulations. The noncompliances were generally caused by

inadequate controls. Specifically: (1) an ineligible payment (finance charge) was

made from the Authority’s operating account for not paying prior year utility billings

on time; (2) over $268,000 in Comprehensive Grant Program (CGP) activity funding

was not allocated to participating programs; (3) questionable incentive bonuses

were paid to administrative employees; (4) nearly $46,000 in payments were made

for services provided under three contracts that were contrary to program requirements; (5)

Low-Rent Housing

Programs Programs
controls over legal services and costs were inadequate, resulting in over $39,000 in

unsupported costs; (6) ineligible and unsupported travel costs were incurred; (7)

discrepancies exist between the Authority’s personnel and the employees’ union

agreements and leave records; and (8) various deficiencies involving administrative

and accounting controls and procedures have weakened the Authority’s system of

internal controls.

The audit recommended, among other things, that the Authority be required to

reimburse ineligible costs from non-federal funds; adopt controls to ensure that

when an activity identified for CGP funding benefits programs other than public

housing, the costs are properly allocated among all of the benefiting programs;

adopt controls to ensure that the personnel policy is consistent with the provisions

contained in the employee union agreements; document unsupported costs so that an

eligibility determination can be made; and adopt necessary controls to ensure

compliance with federal procurement regulations. (Report No. 00-NY-202-1005)

In response to a complaint, the OIG reviewed the Leesville, LA Housing , LA

Authority’s use of Comprehensive Improvement Assistance Program (CIAP) funds.

The complainant alleged that the executive director improperly used Authority

funds to roof his personal residence, and that the Authority prematurely replaced

the roofs on its buildings and did not follow applicable procurement requirements in

using CIAP funds. The executive director provided documentation to invalidate the

complaint made against him. However, the Authority could not support the need to

re-roof its buildings within 5 to 7 years, and therefore may have used over $333,000

in CIAP funds ineffectively. Further, the Authority did not follow procurement

requirements in the purchase of nearly $500,000 in roofing materials and security

screen doors and windows, and in securing the services of architectural and engineering firms.

The audit also found that the Authority failed to adequately determine and

document the necessity of its CIAP projects. The Authority obtained the funds to

complete the roof replacements by either canceling or substantially reducing other

projects.

The audit recommended that the Authority either support its need to replace the

roofs or repay the funds that it spent ineffectively, develop and implement a procurement policy that is consistent with HUD requirements and state law, ensure that

it documents the need for its CIAP projects, and does not repeatedly request funding

for projects that it cancels or reduces, and strengthen its internal controls relative

to the order, receipt, and payment of goods. (Report No. 00-FW-202-1803)

An OIG audit of the Wilmington, DE Housing Authority ( gton, DE WHA) found that the

WHA lacked fiscal responsibility over its operations. This occurred because the

former executive director (ED) ignored federal regulations and WHA operating

guidelines. Specifically, the former ED routinely allowed expenditures to be made

and/or approved expenditures that were contrary to the WHA’s approved operating

budget. As a result, the WHA incurred over $1.3 million of ineligible costs and over

$373,000 of unsupported costs. In addition, we identified another $175,000 in

expenditures which, although they were considered eligible to the program to which

they were charged, should have been deferred due to the nature of the expenditures

and the deteriorating financial position of the WHA.

Comprehensive

Improvement

Assistance Pr ssistance Program
Within a 2-year period, the actions of the former ED depleted the WHA’s operating reserve by more than $2.3 million while operating expenditures rose to a record

high of $12.4 million. The operating reserve decreased from over $2.9 million in

1997 to only $596,000 by the end of 1999. The former ED’s financial mismanagement has placed the WHA in a difficult financial situation that will likely have longterm effects on its financial stability. The condition is further magnified by deficiencies in the WHA’s procurement operations. We found that the WHA allowed various

departments to make purchases contrary to policy; awarded contracts without

competition; did not perform cost estimates of planned work; did not obtain the

board of commissioner’s required approval; did not ensure that work was performed

in accordance with contract requirements; and did not obtain services properly.

These conditions occurred because the former ED and WHA’s staff ignored federal

and WHA procurement requirements.

The State of Delaware, Office of Auditor of Accounts, performed an audit of the

WHA and on September 29, 1999, issued an audit report with 21 findings. In addition, the WHA’s independent auditor performed a Single Audit of WHA activities for

the 2-year period ending March 31, 1999. That report, issued on January 11, 2000,

contained 53 findings. The conditions in those reports also indicate a need to improve the financial management of the WHA’s operations.

Because of the questions and problems raised during the OIG and State audits,

local press coverage, and the concerns expressed about the WHA’s operations, the

Mayor of Wilmington removed four members of the nine-member board of commissioners and three others resigned. On March 23, 1999, the Mayor appointed seven

new commissioners to the board. The new board immediately suspended the former

ED and former deputy ED, and on June 11, 1999, terminated their employment with

the WHA. A new ED was hired in March 2000. The WHA’s new board and new

management team have taken appropriate actions to improve WHA’s operations.

Since a new board was appointed and the former ED and deputy ED were

removed during the audit, no recommendation to replace the WHA’s management

was necessary. However, we did recommend that administrative action be taken

against the former ED to prevent this situation from occurring at another housing

authority in the future. We also recommended that the WHA: (1) update its procurement policy and improve its contract administration; (2) update its travel policy to

improve the method of budgeting, authorizing, reporting, reimbursing, and accounting for official travel; (3) establish a policy for credit card purchases; and (4)

reimburse HUD for all ineligible costs and unsupported costs which it cannot adequately support. (Report No. 00-PH-204-1004)

In Rocky Boy Reservation, MT, atHUD’s request, we reviewed the

Chippewa Cree Housing Authority’s administration of its HUD housing programs.

Our review identified basically the same conditions that have been presented in

reports issued by both HUD and the Authority’s independent public accountant. We

found that the Authority’s management control structure over its housing operations

is deficient. Although various policies and procedures have purportedly been

established by the Authority’s board of commissioners, these policies and procedures have been insufficient to provide reasonable assurances that HUD program

monies have been used for eligible and supported program activities and related

costs.

Specifically, the Authority failed to implement and exercise adequate controls

over its travel related activities and expenditures; has not adequately implemented

General General General

Administr dministrative

Activities ctivities
its occupancy and leasing policies and procedures; did not have an effective collection procedure, as evidenced by the fact that as of September 30, 1998, the amount

due from tenants totaled $695,000; failed to maintain preventive controls over its

cash receipts; and was not depositing its monies intact and in a timely fashion.

The audit recommended that the Authority’s board take action to ensure that all

its intended policies and procedures have been properly adopted and that such

actions are fully communicated to Authority staff. In addition, the Authority needs

to establish and implement adequate administrative and management controls and

procedures to fully implement the directives of the board. (Report No. 00-DE-207-

1004)

In response to a Congressional complaint, the OIG reviewed the Hoboken, NJ

Housing Authority to determine the validity of alleged improprieties. The OIG

concluded that three of the ten complaints reviewed are valid and considered

significant as discussed below:

➢ The complainant alleged that there are over 50 empty units, most of which have

been empty for at least 4 months. The complainant stated that the renovation of

a vacated apartment unit should only take 30 days. Our review disclosed that at

January 31, 2000, the Authority had 58 vacant units, or 4.2 percent of the total

units. Although 58 vacant units are within HUD standards, according to Public

Housing Management Assessment Program criteria, the vacant unit turnaround

rate needs improvement. We found that the number of days it took for a vacant

unit to be renovated and made ready for lease is high. HUD’s goal in turning

around vacant units is 30 days. The Authority is turning vacant units around in

85 days.

➢ The complainant alleged that poor work by a contractor in renovating bathrooms in various units has compounded an insect and rodent problem. The

complainant contended that contractors and Authority management have left the

bathrooms in deplorable and unsanitary condition. The Authority has a $1.6

million contract for bathroom renovation work at 3 Authority developments. Our

review disclosed that the Authority had numerous documents revealing that the

contractor was performing poorly. The contractor was supposed to ensure that

any bathroom that had been dismantled during the day was fully restored at the

end of the day. However, on one occasion, the contractor left 18 units unfinished

at the end of a Friday. The Authority is now closely monitoring the renovation

work and the contractor is adhering to contract specifications.

➢ The complainant alleged poor physical condition of resident buildings, i.e.,

doorways, elevators, and lighting. The complainant provided us with several

photos of the poor physical condition of Authority buildings. This was further

supported by the 1999 Inspection Survey Report prepared by the Authority’s

Office of Risk Management. The inspection results indicated that over 82

percent of the total 1,353 units failed housing quality standards (HQS) inspections. In addition, in September 1999, HUD conducted Section 8 inspections on a

limited number of units which yielded similar results. The current Authority

management is now aggressively trying to upgrade the physical condition of all

project buildings.

The audit recommended that the Authority be required to develop procedures

that will ensure that its vacant unit turnaround time continues to be reduced until it
meets HUD’s standard of 30 days per unit; continue to implement the actions necessary to ensure timely and satisfactory completion of bathroom renovation work; and

submit a workout plan showing the procedures it will take to ensure that Authority

buildings meet HUD’s minimum HQS. (Report No. 00-NY-209-1803)

The OIG District Inspector General for Audit in the Southwest District agreed

with the HUD New Orleans Field Office’s recommendation that the Alexandria, andria,

LA Housing Authority retain an Independent Public Accountant to perform an LA

Agreed Upon Procedures audit of the Authority’s administration/management and

operations. The Authority retained a CPA to perform the agreed upon procedures

audit. The CPA issued his final report on December 6, 1999, which addressed

serious problems at the Authority. Furthermore, the New Orleans Field Office sent

the Authority a memorandum, dated March 1, 2000, detailing the required actions

needed to correct deficiencies noted in the report. The New Orleans Field Office

has been in the process of clearing these findings.

The CPA report identified serious internal control weaknesses and mismanagement at the Authority, including potential leave abuse by the former executive

director; not following procurement requirements; lack of controls over fixed assets

and property disposition; lack of controls over inventory; dispute with the City over

its payments in lieu of taxes; questionable payments made for the former executive

director’s annuity; and misallocation of costs among its various programs.

These conditions jeopardize the effective and efficient operation of the Authority and make the Authority susceptible to waste and abuse. As a result, the OIG has

decided to control the recommendations listed below under the Departmental

Automated Audits Management System. We have made recommendations that

address the conditions cited in the CPA report. Furthermore, we have made the

recommendation that HUD take administrative action against the former executive

director. We base this recommendation on the appearance that the former executive

director abused his leave, and may have directed staff to pay for his annuity benefits,

which were substantially more than the benefits paid for other employees. These

conditions demonstrate a lack of business integrity on the part of the former executive director. Also, we attribute many of the problems identified in the report to the

executive director’s management of the Authority. We believe his actions, or his

failure to take appropriate actions, indicate a violation of HUD requirements so

serious as to affect the integrity of the Authority’s operations. (Report No. 00-FW202-1802)

An audit of the San Antonio, TX Housing Authority’s procurement activities San Antonio, TX

disclosed that the Authority violated federal conflict-of-interest, procurement, and

cost requirements and used HUD program funds to pay over $865,000 in questionable costs. Authority managers entered into a noncompetitive arrangement with

their affiliate, the San Antonio Housing Assistance Corporation (SAHAC), resulting

in over $822,000 of questionable costs paid from HUD program funds for the 3 fiscal

years ending at June 30, 1999. HUD program funds paid for excessive disposal

service operating costs of nearly $337,000; SAHAC disposal service operating costs

of over $461,000 above the agreed fee; and almost $25,000 for debris removal at

non-HUD properties. Authority managers also permitted SAHAC to use Authority

equipment and facilities without paying rental or utility costs.
The Authority paid excessive fees to a former commissioner for child care

services provided to residents of Springview Apartments, a HUD funded property.

The former commissioner over-billed for the services by over $31,000. Authority

managers paid for the services from HUD funds and, although they were aware of

the over-billings as early as 1997, they have not yet reimbursed HUD programs from

non-federal funds.

Due to a conflict of interest, the Authority paid $25,000 to a local nonprofit

organization for furniture appraised at only $12,000. The Authority’s former board

chairperson negotiated the purchase while occupying positions on both the nonprofit

and Authority boards. The former President/CEO approved the payment, apparently

knowing the appraised value of the furniture. Authority managers allocated costs of

over $11,000 in excess of the appraised value to the HUD Low-Rent, Drug Elimination, Comprehensive Grant, HOPE VI and Section 8 Programs.

The audit also found that the Authority’s former Economic Development Program Director did not follow procurement guidelines or properly monitor a consultant, and opened unauthorized bank accounts. Authority management conducted a

review and took appropriate actions. No outstanding issues existed at the completion

of the audit.

The audit recommended the Authority repay ineligible costs of almost $811,000

and provide support for or repay salaries and benefit expenses of nearly $55,000.

The audit also recommended that HUD consider taking administrative sanctions

against those Authority officials and commissioners involved in the conflict-ofinterest decisions. (Report No. 00-FW-201-1004)

Following a complaint received by HUD concerning alleged irregularities, the

OIG audited the procurement practices of the St. Petersburg, FL Housing g, FL

Authority. During the audit, we expanded the audit scope to include administration

of the Section 8 Program, controls over and uses of funds received from a refinancing transaction, and use of a master fund.

The Authority’s procurement methods and contract administration needed

improvement. Management did not ensure that procurement was conducted in

compliance with HUD and local requirements. As a result, contract solicitations

and awards did not meet related guidelines; records lacked sufficient documentation of procurement histories; and procurements did not always promote fair and

open competition. The Authority had no assurance that it received services under

noncompetitive contracts at the most advantageous cost or from the most qualified

source. Furthermore, the Authority did not always follow its contract administration

procedures, and contract administrators did not always monitor contracts or approve payments based on contractor performance.

The audit also found that the Authority had not effectively administered its

Section 8 Program for many years. It had not established financial and management

controls to monitor its budget, cash reserves, or leasing rates. Consequently, the

Authority’s Section 8 bank accounts were in a deficit position and its operating

reserves were depleted. Furthermore, in Fiscal Year 1999, the Authority lost an

opportunity to house an additional 181 families and to earn additional income of over

$93,000. Instead, the Authority accumulated excess funds of nearly $858,000 which

it had to return to HUD. The Authority was already in debt to HUD for almost

$174,000 for its 1997 and 1998 Moderate Rehabilitation Program, and had overspent its 1999 Moderate Rehabilitation Program by nearly $132,000 and its 2000

Section 8 Program by almost $189,000.

Procurement Procurement Procurement

Activities ctivities
The Authority did not establish adequate controls over funds received from

refinancing Rogall Congregate. As a result, the Authority did not fully document

how it spent over $558,000 received from the refinancing transaction, and lacked

controls to ensure an additional $400,000 to $900,000 it will realize over the next

several years will be spent as approved by its board. In addition, the Authority’s

master fund did not meet HUD requirements, did not provide a clear accounting for

cash transactions, and allowed improper use of funds. The OIG identified misuse of

the fund in a 1992 audit. HUD instructed the Authority to discontinue its use and the

Authority agreed to do so. Despite such agreement, the fund was still in use and

transfers of public housing funds had continued to be made for another 7 years with

virtually no accountability. At September 30, 1999, the Authority had misused at

least $410,000 that we could identify.

The audit recommended that HUD take specific actions to ensure proper control

of the Authority’s operations. (Report No. 00-AT-202-1007)

Multifamily Housing Programs

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 Operation Safe Home equity skimming work during this

period, the OIG reviewed the Section 8 contract renewal process, HUD’s use and

disposition of residual receipts, the up-front grant process, the terms of a settlement

agreement with a realty corporation, and a cooperative apartment complex formed

by residents following foreclosure by HUD against the previous owners.

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 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.

In Grand Rapids, MI, an , MI OIG review of Eenhoorn LLC, a management agent,

disclosed that Eenhoorn misused about $60,000 of funds from River Oaks Apartments for ineligible and unsupported payments. The payments, which were not

made for either the operation or repair of the project, were made when the project

was in a non-surplus cash position, needed over $160,000 worth of repairs, and/or

had not maintained sufficient funds in its reserve for replacement account.

During the audit, HUD executed a settlement agreement with Eenhoorn, LLC to

deposit $60,000 into the project’s reserve for replacement account to replace funds

Equity

Skimming Skimming
depleted by “certain inappropriate expenditures and owner distributions” and to

assist in making needed repairs; repair the items cited by HUD; pay HUD $41,000

for OIG audit costs and for inspecting the project to determine whether the needed

repairs were made; and pay the cost of the repairs from its own funds if the

project’s reserve for replacement account falls below $75,000. Eenhoorn sent a

check to HUD for $60,000 to be deposited into the project’s reserve for replacement

account and paid HUD $41,000 for audit costs and for inspecting the project. (Report

No. 00-CH-211-1810)

As a result of an OIG audit, the general partner for Donaldson Court and two

other HUD insured multifamily apartments in St. Louis, MO, signed an agree- ,

ment to settle an equity skimming civil case for over $96,000. Prior to signing the

settlement agreement, the wife of the general partner had repaid $40,000 to settle

her part of the equity skimming action. In addition, the general partner, Dean

Burns, will serve a voluntary debarment from all HUD programs for 6 years.

Burns, as managing general partner for the 3 projects, diverted in excess of $1

million from the projects over a 3-year period for non-project related uses, but

eventually reimbursed the projects for all but $162,000. Some of the funds diverted

by Burns went through a joint bank account, thus making his wife liable for repayment of some of the diverted funds.

Prior to signing the civil settlement agreement, Burns paid nearly $30,000 in

restitution as part of a plea agreement of a criminal case brought against him for

diverting the security deposits from the same 3 HUD insured projects.

The U.S. Magistrate Judge for the Eastern District of Missouri ruled against

the owners of Crosswinds Apartments in St. Louis, MO, for improper distribution , MO

of project funds. In October 1992, the general partners received a distribution of

about $300,000 in excess bond proceeds and related interest after bonds supporting

the project mortgage were called. Instead of returning the money to the project, the

partners divided the money and kept it for personal use. At the time, the project was

in default on its HUD insured mortgage and had no surplus cash. In his ruling, the

Judge stated “...the excess bond proceeds constituted a windfall to the partners, and

HUD was left holding the bag.” The partners were ordered to pay $480,000 to HUD.

In Wilmington, NC, the U.S. Attorney for the Eastern District of North gton, NC

Carolina filed a civil complaint against the owners of Dove Meadows Apartments.

The complaint seeks to recover double damages for nearly $608,000 of improper

distributions of project funds. The improper distributions were disclosed during a

HUD OIG review. Debarment actions are also pending against the four owners.

The OIG evaluated the appropriateness, economy, and efficiency of Section 8

contract renewals and Departmental efforts to encourage owners not to opt out of

affordable housing programs. The United States is experiencing a very strong

economy. In 1999, rents rose faster than inflation for the third consecutive year.

Under this strong economy, many owners of HUD subsidized properties are finding

it more attractive to opt out of their Section 8 contracts. HUD needed to take steps to

reduce the number of opt outs within the Section 8 Program. In Spring 1999, HUD

created Mark Up to Market (MUTM) to offer owners a financial alternative to

opting out of their Section 8 contracts.

We found that MUTM retains affordable housing at an increased cost; however,

MUTM properties are not being renewed on a timely basis. Owners are continuing

Section 8 Section 8

Contract Contract Contract

Renewal Process
to opt out despite MUTM because they find the conventional marketplace offers

increased financial rewards with fewer restrictions. Owners also cite frustrations

with changes to the Section 8 Program regulations, and the uncertainty of the

federal budget funding appropriations as motivators to opt out. In our discussions

with owners of 68 properties in 14 states who elected the MUTM option, we learned

that owners of 61 percent of the properties would have opted out if MUTM had not

been available. MUTM helped HUD to retain 4,164 units of project-based affordable

housing at these properties. Only 48 of the 68 properties had completed processing

and executed contracts at the new, higher rents.

MUTM properties are not being renewed on a timely basis—on average, 180

days after the prior Section 8 contract expires. Under ideal circumstances, owners

submit their requests to participate in MUTM and rent comparability studies 120

days in advance of the expiration date of their contract. HUD then utilizes the 120

days to determine if the property is eligible for MUTM; have a contractor conduct a

second rent comparability study to determine market rents for HUD; compare its

study to the owners’ study; calculate the new rental level; calculate the anticipated

monetary need of the contract and obligate funds for the contract; and execute the

contract for 1 year with 4 1-year renewals. For the contracts in the 14 states we

examined:

➢ Owners submitted documentation 10 days, on average, after the Section 8

contract expired (or 130 days late).

➢ HUD’s determination of the property’s eligibility is delayed due to the owners

changing their minds about the type of renewal being requested and the need to

evaluate owners’ waiver requests.

➢ HUD’s rent comparability studies are obtained and returned 116 days, on average, after the previous Section 8 contract(s) expire.

➢ Funding for the MUTM Section 8 contract(s) is being completed 159 days, on

average, after the previous Section 8 contract(s) expire.

Owners are continuing to opt out because they find opting out more attractive

than continuing in the Section 8 Program. Streamlining the MUTM process could

result in fewer opt outs.

The audit recommended that HUD: (1) analyze the Section 8 renewal process to

develop the means to complete MUTM processing before the expiration of Section 8

contracts; (2) complete the development and issuance of the Section 8 User Guide

to provide details and instructions as to what is needed to expeditiously process

waiver requests and authorize Field Offices to deny retroactive contract increases

in contract rents to owners who fail to submit appropriate renewal data in a timely

manner and who refuse to enter into short-term contract renewals; and (3) ensure

that the Section 8 User Guide is implemented. (Report No. 00-BO-111-0802)

Based on information obtained during the financial statement audit for Fiscal

Year 2000, the OIG initiated an audit of the use and disposition of multifamily

properties’ residual receipts. We found that HUD does not use residual receipts as a

source of funds when renewing expiring Section 8 Housing Assistance Payments

(HAP) contracts for insured multifamily properties. As a result, HUD is committing

additional funds for Section 8 HAP to properties that have millions of dollars in

residual receipts accounts under HUD’s direct control. Using residual receipts as a

Use and Use and

Disposition o Disposition of

Residual esidual esidual

Receipts eceipts
supplemental source of funding gives HUD additional funds to assist more of its

customers. We also found that HUD does not have adequate controls to ensure

residual receipts are properly safeguarded. In one case, due to inadequate HUD

controls, a former property owner prepaid an insured property’s mortgage and

withdrew over $64,000 in residual receipts. The funds should have stayed with the

property and been remitted to HUD upon termination of the HAP contract. In the

absence of adequate controls, there may be other instances where a similar situation occurred or will occur.

The audit also found that the Loan Management Set-Aside Program (LMSA)

should be subject to the same residual receipts rules as other Section 8 Programs.

Unlike other major Section 8 contracts for multifamily properties, current regulations for properties in the LMSA Program do not allow HUD to recover residual

receipts at contract termination. As a result, property owners may realize windfall

profits when the mortgage is paid off. HUD could use recovered residual receipts to

assist other properties. According to property financial information in the Real

Estate Assessment Center’s database, there are 645 LMSA assisted properties that

have balances in their residual receipts accounts totaling over $81 million. It appears HUD did not revise Section 8 rules for LMSA properties because these were

financially troubled properties and HUD did not expect these properties to accumulate residual receipts.

Additionally, the audit found that HUD does not monitor residual receipts for

uninsured, assisted properties administered by State Housing Agencies. As a result,

HUD is not aware of or monitoring millions of dollars accumulating in uninsured

properties’ residual receipts accounts that will be remitted to HUD when Section 8

HAP contracts terminate. This occurred because HUD does not require State Housing Agencies to provide financial information, specifically on residual receipts, for

uninsured, assisted properties.

The audit recommended that HUD, and those responsible for contract renewals,

be required to consider using residual receipts as a source of funds when renewing

expiring Section 8 HAP contracts. Moreover, HUD should: recover the $64,000, and

determine if there have been any other mortgage prepayments where residual

receipts that should have stayed with the property, and if so, take appropriate action

to recover those funds; strengthen controls and issue guidance to safeguard residual

receipts; and revise the Section 8 regulations for LMSA assisted properties that

would affect new contracts to require a property’s residual receipts be returned to

HUD upon termination of the HAP contract. In addition, the audit recommended that

HUD require State Housing Agencies to provide HUD with financial information on

residual receipts balances for uninsured, assisted multifamily properties, and

determine if HUD has authority to use the residual receipts accumulating in uninsured, assisted property accounts prior to termination of the HAP contracts. (Report

No. 00-SE-119-0003)

HUD is not following many of its key program guidelines for awarding Up-Front

Grants and is not adequately monitoring grantees that have received Up-Front

Grants. Under the Up-Front Grant Program, HUD may provide grants and loans for

rehabilitation, demolition, rebuilding, and other related development costs as part of

the disposition of a multifamily housing project that is HUD owned, upon making a

determination that such a grant or loan would be more cost effective than projectbased rental assistance and economically viable on a long-term basis, and would

preserve affordable rental housing in a tight rental market. An OIG audit disclosed

Up-Front Grant Up-Front Grant Up-Front Grant

Process Process
that the Department does not perform financial feasibility or economic viability

studies to determine whether projects it considers and awards Up-Front Grants will

be cost effective and self-sufficient after rehabilitation. In addition, the Department

is not determining whether the selected projects are located in tight rental markets

to ensure there is a need to develop the affordable housing. HUD officials have

indicated program regulations allow the Department to exercise its discretion in

awarding grants. However, the Department has not documented its decisions when

applying this flexibility. It is therefore questionable whether grants awarded under

the Up-Front Grant Program, as currently administered, meet the eligibility

requirements and will be viable on a long-term basis. In the long run, this may

jeopardize the program’s mission of preserving affordable rental housing, and has

resulted in the use of general insurance funds for projects that are not cost effective.

HUD is not adequately monitoring Up-Front Grant awards during the project

rehabilitation process, nor has HUD implemented any post rehabilitation monitoring. Due to staff limitations, HUD’s Atlanta and Fort Worth Multifamily Property

Disposition Centers rely on contracts with architectural firms and one HUD engineer to monitor grants during project rehabilitation. However, the architects and

engineers only assess grantee progress during rehabilitation, not a grantee’s

financial administration and compliance with the grant agreements. Because of

these monitoring deficiencies, HUD has approved and paid significant funds to a

number of grantees that are not complying with grant requirements, and HUD is

now in the position of dealing with grantee performance problems. In addition,

since HUD has not implemented any post rehabilitation monitoring, it has no assurance that completed projects meet the program mission of preserving affordable

rental housing.

We recommended that HUD ensure Up-Front Grant award determinations are

made according to program requirements, and award determinations and decisions

are clearly documented in the program files. We also recommended that HUD

strengthen its monitoring process during the rehabilitation period and implement a

system to monitor grant awards after rehabilitation is completed in order to ensure

grantees are complying with the terms and conditions of grant agreements. (Report

No. 00-PH-119-0001)

The OIG reviewed HUD’s settlement agreement with Associated Estates Realty

Corporation in Richmond Hei Richmond Heights, OH. The agreement affected the Rainbow , OH

Terrace Apartments, Longwood Apartments, Park Village Apartments, and Vanguard Apartments. The settlement agreement was entered into because of HUD’s

desire to settle a rent increase lawsuit filed by Associated Estates. HUD also wanted

to remove Associated Estates from the four projects to protect residents from

unhealthy and unsafe living conditions. The settlement agreement required HUD to

pay Associated Estates $1.78 million for requested rent increases, and Associated

Estates to find new owners for Rainbow Terrace and Park Village Apartments, or

transfer the projects to HUD. HUD agreed not to take administrative actions against

Associated Estates and released Associated from any and all claims except tax or

criminal fraud.

Because of apparently extremely poor communication between the various HUD

Offices affected by the settlement agreement, HUD staff who negotiated the agreement were not aware that the U.S. Attorney’s Office for the Northern District of

Terms of

Settlement Settlement Settlement

Agreement Not Agreement Not Agreement Not

Properly Properly

Executed
Ohio had previously accepted a civil false claims and double damages case against

Associated Estates. They were also not aware of a previous cost savings agreement

that required Associated Estates to share with HUD the savings from refinancing the

mortgage on Rainbow Terrace Apartments. The negotiators also violated federal

laws and HUD’s own requirements by settling the civil suit and waiving civil action

without approval from the Department of Justice. HUD lacked documentation to

justify $1.67 million of the $1.78 million paid directly to Associated Estates under

the settlement agreement and did not pursue funds owed by Associated under the

previously negotiated cost savings agreement.

While HUD enforced the terms of the settlement agreement, it did not take

possession of Rainbow Terrace and Park Village Apartments as permitted, but not

mandated, by the agreement. HUD’s Director of Asset Management said HUD did

not want to take possession of the projects because of the costs associated with

repairing them. By not taking possession of Rainbow Terrace and Park Village

Apartments, HUD contradicted one of its stated reasons for negotiating the settlement agreement and failed to protect the projects’ residents from unhealthy and

unsafe living conditions. We also found it incongruous that HUD could find $1.78

million to pay a large real estate management company but was unwilling to find the

funds needed to protect the residents.

We recommended that the Assistant Secretary for Housing-Federal Housing

Commissioner assure that HUD’s Office of Multifamily Housing: (1) establishes

protocols, procedures, and controls to ensure that when future settlement agreements are negotiated, all applicable HUD Headquarters and Field Offices are

contacted and requested to provide input about outstanding agreements and actions,

any pending matters, and any other concerns that may impact, or be impacted by,

the agreements; (2) establishes controls which will assure that HUD Departmental

officials consult with the Department of Justice on any future proposed actions

which could affect pending cases at the Justice Department, and Justice Department approval is obtained before proceeding with those actions; (3) takes immediate

action to ensure that the residents of Rainbow Terrace, Longwood, and Park Village

Apartments are residing in decent, safe, and sanitary conditions; and (4) issues

formal apologies to the U.S. Attorney’s Offices for the District of Columbia and the

Northern District of Ohio for failing to obtain their approval on the settlement

agreement and/or for compromising cases they had accepted and were pursuing.

(Report No. 00-CH-119-0801)

At the request of the Director, Multifamily Hub, Illinois State Office, the OIG

audited Neighborhood Commons Cooperative, a HUD insured multifamily property

in Chicago, IL. H o, IL UD performed a management review of the Cooperative in

January 1999 that resulted in a number of concerns, including excessive tenant

accounts receivable and inadequate collection efforts by the management agent;

ineligible expenses charged to the project; actions by the former board of directors

that exceeded its authority; and the granting of rent free units without HUD approval.

Our audit found that unpaid rents of current tenants exceeded $270,000 as of May

1999. The unpaid balance would have been significantly higher if the Cooperative

had not received excess subsidies from the Chicago Housing Authority. The former

property management agent did not adequately collect monthly rent payments

because it did not adhere to the HUD approved rent schedule. The agent claimed that

delinquencies were high because records of unpaid balances received from the

Rents Not ents Not ents Not

Collected at Collected at Collected at

Cooperative
previous management agent were confusing, and that subsidy payments from the

Chicago Housing Authority were not received for a 9-month period.

The former board of directors abused its authority and mismanaged the Cooperative by undermining the management agent and taking control of the daily

operations of the property. The former board president hired a close personal

associate to serve as on-site manager, who took instructions from the board president rather than the management agent. In addition, the on-site manager was

provided with a rent free unit, an action that HUD did not approve, and therefore,

violated the Regulatory Agreement. The audit also found that the former board

president, a Section 8 rental assistance recipient, was hired by the management

agent and paid from non-project funds for a 3-month period to reconcile the tenant

accounts receivable, and that she was employed at a temporary employment service

but failed to report her income from both sources to HUD. As a result, she received

excess rent subsidies to which she was not entitled.

The audit recommended that the Director, Chicago Multifamily Hub, ensure

that the new management agent collects all outstanding rent payments, initiates

reasonable payment plans, or evicts tenants as appropriate; ensure that all Section 8

subsidies received by the Cooperative are based on the correct rent schedule;

assess the former management agent’s maintenance of tenant records when conducting management reviews of other projects managed by the agent; initiate

proceedings to debar the former board president from participation in all federal

programs; initiate proceedings to debar the former board president’s personal

associate from participation in all federal programs; provide technical assistance to

the current board stressing how much authority it has and the rules it must adhere

to while the Cooperative’s mortgage is insured by HUD; perform a follow-up

management review at the Cooperative; sanction members of the current board if

they interfere with the daily operations of the property and violate applicable

agreements; and declare a technical default of the Regulatory Agreement and

initiate foreclosure proceedings if such interference does occur. (Report No. 00-

CH-212-1004)

Community Planning and Development Programs

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 and job development. Grantees are responsible for planning and

funding eligible activities, often through subrecipients. During this reporting period,

the OIG reviewed a state’s Community Housing Improvement Program, a grantee’s

administration of the HOME Program, a Mortgage Loan Subsidy Program funded by

the Community Development Block Grant (CDBG) Program, and the Continuum of

Care Programs.

Grantees participating in the Community Housing Improvement Program,

established to provide housing rehabilitation assistance to low- and moderateincome individuals, receive funding from both the HOME and CDBG Programs. 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 low-income families,
Community Community

Housing Housing

Improvement

Program

through eligible forms of assistance, such as loans, loan guarantees, equity investments, interest subsidies, and other assistance approved by HUD. 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 Continuum of Care Program is designed to

fight against homelessness by linking key housing services and expediting movement

toward housing for the homeless.

The OIG audited the State of Ohio’ f Ohio’s Community Housing Improvement s

Program and found that the State did not have adequate controls over the program.

The State’s subrecipients we reviewed inappropriately used nearly $464,000 of HUD

funds to provide housing rehabilitation assistance that was not in accordance with

HUD regulations, the State’s requirements, and/or the subrecipients’ policies and

guidelines for the program. The inappropriate disbursements included paying for

housing rehabilitation work that was improperly performed or not provided; for

rehabilitation work that exceeded our estimates of reasonable costs; and to correct

items that did not meet the State’s residential rehabilitation standards after HUD

funds were used to pay for the deficient housing rehabilitation work.

The audit also disclosed that the State’s subrecipients: incorrectly certified that

the housing rehabilitation services provided to 42 houses met the State’s residential

rehabilitation standards when they did not; did not take action to repair items

identified by the State that did not meet the State’s standards; failed to follow HUD’s

regulations or the State’s requirements for full and open competition regarding the

procurement of housing rehabilitation and consulting services; and did not ensure its

contracting policies met HUD requirements for the award of fixed price or cost

reimbursement contracts.

The audit recommended that the Director of CPD, Ohio State Office, assure

that the State of Ohio implements controls to correct the weaknesses cited in the

audit; ensure the housing rehabilitation work that was improperly performed or that

was not provided is completed correctly; and reimburse its Community Housing

Improvement Program from non-federal funds for rehabilitation work that exceeded

our estimates of reasonable costs and for the inappropriate use of HUD funds to

correct items that did not meet the State’s residential rehabilitation standards.

(Report No. 00-CH-255-1003)

In response to several complaints received from program recipients

(homeowners), the OIG reviewed the Maine State Housing Authority’s ( Maine State MSHA) FIX

ME Program. The FIX ME Program is part of MSHA’s HOME Program, and represents a commitment to address a major State housing need by repairing the homes

of low- and very low-income homeowners. The complainants alleged shoddy workmanship, violations of local codes, incomplete and illegal electrical work, coercion

to pay contractors for unsatisfactory work, and lack of adequate inspections. We

determined that, although most of the homeowners were satisfied with the program,

there were problems that needed to be corrected. We reported that: contractors did

not obtain the required local building permits and local building inspections; work

write-ups/cost estimates were not prepared by Community Action Program (CAP)

agencies; and MSHA’s monitoring reviews of CAP agencies, which administer the

day-to-day operations of the program, were limited in scope and did not disclose the

types of problems identified by the complainants. We believe the overall design and

HOME Program
structure of the FIX ME Program allowed these problems to occur because of a lack

of adequate controls.

In March 1999, the HUD Massachusetts State Office of Community Planning

and Development issued a monitoring review report on the FIX ME Program which

addressed deficiencies including lack of sufficient oversight of CAP agencies by

MSHA; inadequate program complaint resolution procedures; improper charging of

management fees to homeowners; use of HOME funds for ineligible activities;

contractors not adhering to local building codes and obtaining permits; and lack of

detailed work specifications, cost estimates, and cost reasonableness determinations for repair projects. At the time of our review, all of the findings and recommendations remained outstanding except two monetary findings, which were

resolved prior to issuance of the audit.

The audit recommended that HUD: (1) resolve all outstanding findings included

in the March 1999 monitoring review report; (2) review and concur, as appropriate,

with MSHA’s implementation of a new HOME Program which should address all

noted deficiencies; and (3) review and concur with MSHA’s plans to determine

which prior completed projects required follow-up actions. (Report No. 00-BO-255-

1803)

Following a citizen complaint, the OIG reviewed the Broadway Street Mortgage

Loan Subsidy Program, which is funded by the City of South Bend, IN’ South Bend, IN’sCDBG

Program. The complainant alleged that CDBG funds were misappropriated and that

houses purchased under the Mortgage Loan Subsidy Program were substandard.

We found that the City did not follow the Housing and Community Development Act

of 1974 in ensuring that houses assisted through the Loan Subsidy Program met the

City’s building code. The City assisted 20 participants in purchasing houses under

the program. We inspected 7 of the 20 houses and concluded that at each of the 7,

construction work was either not provided or was improperly performed. The

housing inspector for the housing assistance office, with which the City contracted

to administer the program, incorrectly certified that six of the seven houses met the

City’s building code when they did not. We determined that these problems occurred because the housing assistance office did not have proper procedures and

controls to ensure that the houses met the building code before the participants

received assistance. The City also failed to monitor the housing assistance office to

ensure it administered the program as required. As a result, CDBG funds were not

used efficiently and effectively.

The audit recommended that HUD assure that the City determines that construction work paid for with CDBG funds has actually been completed, and if it has

not, require the City to reimburse its CDBG Program from non-federal funds;

establishes procedures and controls to ensure assisted houses meet the City’s

building code before participants receive housing assistance; and establishes

procedures and controls to monitor the contractor who administers the Mortgage

Loan Subsidy Program. (Report No. 00-CH-249-1811)

The OIG is conducting a nationwide review of HUD’s Continuum of Care. The

Continuum of Care approach is a community based process of identifying the needs

of the homeless and building a comprehensive and coordinated housing and service

delivery system to address those needs. The Continuum is an organization of local

governments, not-for-profit, and for-profit organizations that assist in the compila

CDBG Program

Continuum o Continuum of

Care
tion of a consolidated application for grant funds. The Continuum of Care includes

three programs that are competitively funded: the Supportive Housing Program,

the Shelter Plus Care Program, and the Section 8 Moderate Rehabilitation Program. We will select a sampling of grantees to review in order to evaluate the

Continuum of Care, and will report the results to HUD. In addition, we will perform

work at HUD Offices and Continuum of Care entities to accomplish our audit

objectives. The results of two of our audits are reported below. Our work is continuing, and additional reports will be issued during the next reporting period, along

with a national report on the overall operation of HUD’s Continuum of Care.

An audit of the 1996 Supportive Housing Program grant awarded to the Houston, TX Regional ton, TX HIV/AIDS Resource Group, Inc. concluded that the Resource

Group generally implemented its activities consistent with its application, provided

technical assistance to its subgrantees, and reviewed its subgrantees’ single audit

reports, monthly expense reports, and quarterly and annual progress reports.

However, the Resource Group paid for ineligible participants and did not document

homelessness, as required by HUD, and did not maintain sufficient documentation to

determine whether it met the purpose of its grant. Two subgrantees did not maintain sufficient documentation to support the eligibility of their participants, and one

subgrantee, Trinity Life, inappropriately charged its grants over $73,000 in ineligible costs and over $109,000 in unsupported costs. The Resource Group performed

reviews of Trinity Life and noted several problems. On August 1, 1999, the Resource Group terminated its grant with Trinity Life.

The audit recommended the Resource Group: (1) ensure that its grantees

obtain and verify the necessary information to determine participant eligibility and

track goals achieved; (2) analyze its current operations and create measurable

criteria to accurately report grant results; (3) revise its monitoring policies and

procedures for programmatic and financial site visits to include all grants; (4)

improve monitoring of subgrantees; (5) reimburse its grant for ineligible costs and

provide supporting documentation or reimburse its grant for improperly supported

costs; and (6) revise its monitoring procedures to require that subgrantees submit

all documentation for operating costs. (Report No. 00-FW-251-1806)

The City of Boston, MA, has taken positive steps in administering its Support- Boston, MA

ive Housing and Shelter Plus Care Programs. The City’s Department of Neighborhood and Development (DND) is ensuring that the City is administrating its homeless programs effectively and efficiently. To supplement the HUD application, the

City’s DND requires that each Supportive Housing Program applicant organization

complete a “City Application” calling for specifics about program budgets and

detailed instructions and charts for the providers to detail their anticipated spending

and the source of their match funds. In addition, the DND requires Shelter Plus

Care Program applicants to complete a “City Application” which DND staff

created from the information outlined in the HUD Shelter Plus Care application.

Each Shelter Plus Care applicant is required to provide specific information

regarding project sponsor direct service match. Rental assistance provided through

the Shelter Plus Care Program must be matched in the total, on a dollar for dollar

basis, with supportive services.

The audit also found that the City of Boston has four basic ways in which to

monitor the performance of those who received Supportive Housing and Shelter
Plus Care grants: Annual Site Visit, Annual Progress Report, McKinney Scoring,

and Billing. The audit made no recommendations. (Report No. 00-BO-251-1802)

Other Significant Audits

Information ormation

Technology echnology

Integrated

Disbursement and

Information System

The OIG audited HUD’s ongoing development efforts for improving the

Department’s Integrated Disbursement and Information System and concluded that,

although improvements are being made to the system, additional programming

errors are being introduced because of inadequate testing of the program code

(software) changes. The Quality Assurance staff was not testing all system changes

and lacked an automated testing tool to ensure that adequate baseline testing was

performed. Reliance on supplemental testing by grantee users and others of the prereleases of new software versions is not justified because few of these parties are

using the pre-production facility.

Due to various data problems, such as those caused by a lack of system functionality and input edit features, the Office of Community Planning and Development had to allow its contractor staff to make data corrections directly to the

system database files bypassing normal online entry edits. In the process, the audit

trail identifying entry sources and entry times was destroyed. Our review of drawdowns of grant funds found that 60 percent were requested and approved by the

same grantee users. Our contact with a sample of grantees found that they have

adequate staff available to permit better segregation of duties for reducing the risk

of fraud, waste, and abuse.

The audit made several recommendations to improve the effectiveness and

efficiency of the ongoing development processes and system security. Many of the

testing inadequacies can be corrected by forcing the testing of all system revisions

and by purchasing and using an automated testing tool. Adequate data security and

integrity can be established by enforcing the principle of segregation of duties for all

data entries. This segregation includes discontinuing data entries by HUD contractors, and ensuring that grantee entries for requesting and approving grant funds are

performed by different individuals. (Report No. 00-DP-166-0003)

The OIG provided an audit memorandum to HUD’s Deputy Secretary to alert

him to the OIG’s concerns over the September 1, 2000 purchase of a Commercial

Off-the-Shelf (COTS) software package for the Department’s and FHA’s core

financial management systems. We believe the Department may be repeating a past

mistake of a hasty decision without adequate studies and analyses. In an OIG memorandum dated January 28, 1998, we outlined several risks associated with the

Department’s decision to implement the existing COTS integrated financial system.

These risks included an incomplete evaluation of viable solutions, user requirements, costs, and data conversion. Since that decision, the Department has encountered delays and cost overruns, resulting in the OIG’s inability to render an opinion

on the FY 1999 financial statements.

Contrary to Departmental requirements, we were not notified that a new

financial management system was being purchased, thus we could not express our

concerns prior to the Department spending $1.45 million for the new procurement.

COTS Financial inancial inancial

Management Management Management

System
Fair Housin air Housing

and Equal and Equal and Equal

Opportunity Opportunity

Programs Programs

Fair Housing

Initiatives Program

Our primary concern about the September 1, 2000 COTS purchase was the lack of

analysis of both the solution and software alternatives and the apparent haste of the

software decision. Although we agree that FHA system improvements are necessary,

the rush to purchase a software system in such a short time frame was not warranted. We are also concerned that this software selection may be used as the

Departmentwide system prior to completion of the required Departmentwide

feasibility and cost/benefit studies. In order to minimize the risk of another failure,

we recommended that before any development work starts for this new initiative,

adequate feasibility and cost/benefit analyses be completed and user requirements

be defined. (Report No. 00-DP-166-0804)

The Office of Fair Housing and Equal Opportunity (FHEO) enforces the Fair

Housing Act and other civil rights laws to ensure the right of equal housing opportunity and free and fair housing choice without discrimination based on race, color,

national origin, religion, sex, disability or family composition. Among the goals of

the Office of FHEO are promoting geographic mobility for low-income and minority

households; integrating fair housing plans into HUD’s consolidated plans; furthering

fair housing in other relevant programs of the Federal Government; and promoting

substantial equivalency among state, local, and community organizations involved in

providing housing.

In response to an anonymous complaint, the OIG reviewed the Fair Housing

Initiatives Program (FHIP) grant award process. FHIP funds grants, contracts, or

cooperative agreements with state and local government agencies, public or private

nonprofit organizations, or other entities that conduct programs to prevent or eliminate discriminatory housing practices. The complainant alleged that the Secretary

of HUD used FHIP funds inappropriately. According to the complainant, the Secretary had awarded or was about to award FHIP funds to a public housing authority

illegally; used FHIP Program National Education Component funds for ineligible

activities; and allocated $200,000 of FY 1998 FHIP funds for Fair Housing Month

activities which were never conducted in 1999.

We found that two of the three allegations were credible. Specifically, HUD

violated the FHIP authorizing statute by granting the Boston Housing Authority (BHA)

a $297,000 conditional award for clearly prohibited purposes. The BHA FHIP award

was to fund activities specified in a July 1999 settlement agreement and court

order. The FHIP law specifically prohibits use of FHIP funds for activities which are

part of a legal settlement. In addition, HUD allocated $200,000 to another grantee

for national fair housing activities which were never conducted in 1999. We determined that the $200,000 allocation for Fair Housing Month activities was included

in the $2 million grant HUD awarded to Consumer Action of San Francisco on

January 17, 1999. However, the Fair Housing and Equal Opportunity (FHEO) Grant

Officer did not sign the grant award document until July 22, 1999, 3 months after

National Fair Housing Month. Therefore, the grant was signed and executed too late

for Consumer Action to sponsor Fair Housing Month activities in 1999. According

to FHEO, Consumer Action planned to use the $200,000 to support April 2000 Fair

Housing Month activities. Although this portion of the complainant’s allegation was

factually accurate, HUD had no legal obligation to use funds for Fair Housing Month

activities. We found that the allegation concerning misuse of National Education

Component funds lacked merit.
Resource

Estimation and Estimation and

Allocation Allocation

Process Process

In reviewing the specific allegations, we identified other deficiencies relating to

funding diversity and audit trails for scoring applications. Until these weaknesses

are addressed satisfactorily, HUD’s Office of FHEO, which is responsible for

administering the FHIP, cannot assure the Congress and taxpayers that FHIP funds

are awarded as intended and that the program is operating efficiently and effectively. (Report No. 00-AO-174-0801)

The OIG audited the Department’s progress in developing and implementing a

Resource Estimation and Allocation Process (REAP) and found that on October 18,

1999, HUD conveyed to the Congress the realization that it needed a resource

management system and that it planned to implement such a system within 18

months. HUD, in conjunction with the National Academy of Public Administration

(NAPA), then developed a methodology for resource estimation and allocation.

Further, NAPA briefed each Assistant Secretary on the REAP methodology and the

impact it would have on their programs. HUD also selected a contractor to implement the methodology and do the measurement studies at various program offices

throughout the Department to determine resource estimate requirements.

Despite these positive actions, the Department’s implementation of REAP has

not proceeded with the urgency we expected for a priority project having the admitted support of the Offices of the Secretary and Deputy Secretary. From the outset,

REAP has experienced and continues to experience schedule slippages. On October

18, 1999, the HUD Secretary advised the Chairman on the Senate Committee on

Governmental Affairs that the Department would develop and institute a REAP

phased in over an 18-month period. However, the project has moved much more

slowly.

The REAP contract is to be implemented in three phases. At the time of our

audit, which was conducted in July and August 2000, only Phase 1 had been funded.

Though HUD and the contractor estimated $1.5 million for Phase 1, because of

salaries and expenses funding constraints, the Department was able to commit only

$1 million for Phase 1. However, in responding to our preliminary draft memorandum, the Deputy Secretary reported that the Department had fully funded the REAP

project at the required amount of $3.165 million, that the Department’s top level

management was in complete support of REAP, and that the REAP project was on

target. We welcome these affirmations from the Deputy Secretary. Though we

believe the Department should have moved with greater energy to fund and contract

for the REAP project, recent events show a reinforcement of HUD’s commitment to

REAP. We look forward to reviewing the project results. The Department’s full

funding for the REAP project satisfied the recommendation we made in our draft

memorandum. (Report No. 00-PH-169-0802)

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 result, TRACS provides no

assurances about controls over assistance payments or data accuracy. HUD acknowledges there are data inaccuracies within the TRACS database, but does not

recognize the negative impact on and lack of positive contribution in other areas

Tenant Rental

Assistance ssistance

Certification Certification

System
using the owner generated database. New plans for TRACS extend its use to contract

administrators in much the same manner as the Department currently uses it.

HUD needs to improve internal controls over Section 8 special claims payments

to ensure that inappropriate payments are not made to project owners/agents.

Section 8 special claims are not uniformly reviewed and approved by HUD field

offices. Individual field offices use their own rules and procedures for processing

Section 8 special claims because HUD lacks an overall special claims processing

policy or regulation. As a result, HUD lacks assurance over the accuracy of claims,

project owners/agents may not be equitably treated, and the potential exists for

project owners/agents to submit and be paid for fraudulent, undocumented, ineligible, and duplicate claims.

In addition to these findings, previous OIG audits reported that the management

controls relevant to verification of applicant and tenant income did not adequately

prevent or detect cases of unreported income. HUD has reported this control as a

material weakness in its annual Federal Managers’ Financial Integrity Act report

since fiscal year 1996. HUD needs to continue reporting this control as a material

weakness.

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. Further, the Office of Housing should reevaluate its special claims program, weighing the options of implementing uniform policies and procedures that

will be effective versus eliminating the program as a form of payment. (Report No.

00-KC-103-0002)
Chapter 4 Investigations gations gations
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 presents results from: (1) white collar investigations relating to HUD’s

Multifamily, Single Family, Public and Indian Housing, and Community Planning

and Development Programs; (2) other significant white collar investigations; and

(3) investigations relating to violent crime and drug trafficking in HUD’s Public and

Assisted Housing Programs.

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 period, OIG investigations uncovered criminal

equity skimming under Operation Safe Home, as well as conspiracy, embezzlement, extortion, and false statements in connection with Multifamily Housing

Program 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:

In Tampa, FL, 10 individuals and 1 partnership pled guilty to criminal equity ampa, FL

skimming and obstruction of investigations and audits in their efforts to defraud HUD

of over $1.16 million. The schemes resulted in the diversion of funds from 17 HUD

insured multifamily properties, 13 of which were located in the Middle District of

Florida. The properties were owned by separate Florida and New Jersey partnerships. The property owners and their agents, the property management owners and

their agents, the certified public accountant contracted to perform property financial audits, and a roofing contractor doing business with the properties all entered

guilty pleas and were each sentenced to probation ranging from 3 to 5 years, home

detention ranging from 2 to 4 months, a total of $31,000 in fines, and $949,641 in

restitution. This investigation, conducted by the FBI and the OIG Offices of Audit and

Investigation, resulted in the first ever prosecution of property management fee

splitting and accounting fee splitting under the equity skimming statute.

Ernest Trice, the former manager of two HUD subsidized apartment complexes

in Hot Springs, AR, was sentenced to 13 months in prison and 3 years supervised , AR

release, and was ordered to pay $37,579 in restitution and a $50 special assessment.

Multifamily Housing Programs

Equity

Skimming Skimming
Trice previously pled guilty to submitting false statements. He misappropriated

approximately $110,000 in funds belonging to the complexes over a period of about 4

years. Trice allowed the utilities of one complex, which housed the severely disabled, to be shut off for non-payment of water and electric bills, while he utilized

the funds for personal expenditures. Only intervention by the HUD Little Rock

Office resulted in the restoration of utility service to the project. The investigation

was conducted by the FBI and OIG.

The management agent for Villa San Carlos Garden Apartments, a HUD

insured multifamily complex in San Jose, CA, was charged with improperly A

diverting project money. The agent allegedly converted approximately $60,000 in

project funds to his own use and/or to the use of family or friends. This was a joint

investigation by the OIG Offices of Audit and Investigation.

Streuby L. Drumm, Jr., a multifamily property owner, pled guilty to three

counts of multifamily equity skimming and three counts of mail fraud. Drumm, as

the owner of Sharlo Apartments in Baton Rouge, LA, diverted $468,956 during , LA

the period of June 1992 through September 1995 while the mortgage was in default

and the property had no surplus cash. Drumm also caused false and misleading

financial statements to be submitted to HUD and the property’s limited partners

during the same period. Prior to Drumm’s indictment, Standard Enterprise (the

management company) entered into a settlement agreement to make an $84,000

payment for allowing the diversion of funds to occur. This investigation was a joint

endeavor with OIG Offices of Audit and Investigation, the Louisiana State Police,

and the U.S. Attorney’s Office.

Donald Ray Heyen, the former accounting manager for Calhoun Property

Management in Shreveport, LA, eport, LA, pled guilty to one count of theft from programs eport, LA,

receiving federal funds. A joint investigation by the HUD and Department of Agriculture (USDA) OIGs disclosed that Heyen diverted about $719,000 in federal funds

from the accounts of HUD insured and USDA funded multifamily projects in Louisiana and Texas.

In Philadelphia, PA, Michael Rivera, former general contractor for a A HUD

funded multifamily project, was sentenced to 5 years supervised release and fined

$30,000. Rivera pled guilty in October 1999 to one count of conspiracy and three

counts of bribery. He engaged in a bid rigging scheme which guaranteed that his

company would be the successful bidder for a $200,000 laundry room renovation

contract. Rivera received an $80,053 advance payment which was later shared with

his co-conspirators. None of the federal funds received were ever used to purchase

laundry room supplies or make laundry room renovations, but instead were used to

purchase motorcycles, a truck, computer equipment, and a large screen television.

Both the contractor and the former management agent have been sentenced. The

third defendant, plumbing contractor Joseph Paige, was also sentenced during this

reporting period to 66 months imprisonment and 6 years supervised release, and

was fined $6,000. No restitution was ordered for Paige because the management

agent for the project previously repaid the $80,053 project loss. The sentencing

stems from Paige’s October 1999 guilty plea to embezzlement of funds from the

project and his April 2000 failure to appear for sentencing. Paige admitted conspiring with the property manager in this scheme. Paige is the last of the defendants to
be sentenced for their roles in this fraud scheme. In addition to the embezzlement

charge, Paige also pled guilty to one count of a felon in possession of a firearm.

This plea is related to Paige’s May 2000 arrest during which he assaulted and

threatened arresting Officers with a weapon as they were taking him into custody

for jumping bail. This investigation was conducted by the OIG Offices of Audit and

Investigation.

Dr. Roberto Kutcher, former owner of Hato Rey, PR Community Hospital, , PR

was sentenced in Federal District Court for multifamily equity skimming. He

received 10 months of house arrest and 2 years probation, and was fined $10,000.

An OIG audit and investigation disclosed that Kutcher authorized the use of over $6

million of assets, proceeds, income, or other funds belonging to the hospital for

personal benefit. He used hospital funds to provide interest-free loans to himself

and other affiliated companies which he owned or controlled, endorsed checks

payable to the hospital which were then cashed or deposited into his personal

accounts, and charged personal expenditures to a credit card which was paid by the

hospital. He also improperly disposed of hospital owned equipment and retained the

sales proceeds, and leased several luxury automobiles paid for by the hospital.

Kutcher and his wife, both of whom were indicted on equity skimming charges, also

executed a settlement agreement in 1997 to settle the civil case in this matter and

agreed to pay restitution to the U.S. of $5.9 million.

Burleigh Ashby Hobson, a real estate agent who served as a deacon under the

Reverend Henry Lyons, former Director of the Southern Baptist Convention in

Tampa, FL, was sentenced in federal court to 2 years probation and 100 hours of ampa, FL

community service, and fined $1,000. Hobson was previously indicted on 10 counts

of conspiracy, wire fraud, and lying to federal investigators. Lyons has already been

convicted and sentenced. The charges against Hobson stem from activities at Bethel

Village, a failed project to build an assisted living retirement complex, which he

and Lyons spearheaded between 1995 and 1997. Hobson, who served as secretary

and treasurer of the Bethel Village project, was charged with conspiring with Lyons

to dupe bank and federal housing officials. Hobson transmitted a National Baptist

Convention (NBC) letter of credit for $472,365 to a Syracuse, NY banking group,

and sent federal officials an NBC letter guaranteeing $750,000 in conventional

funding to enable the project to obtain FHA mortgage insurance for a $5.4 million

loan. Both letters were transmitted electronically and contained the forged signature

of the NBC’s general secretary. Hobson also lied to federal Agents investigating

Bethel Village financing. The investigation was conducted by the FBI, IRS, and OIG.

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 single family equity

skimming and instances of wrongdoing by mortgagee personnel and real estate

brokers in the origination of single family loans.

Other

Significant Significant Significant

Investigation

Single Family Housing Programs
Other individuals and officers of MSRV Development, a property speculation

company in Norfolk, VA, were sentenced for conspiracy to commit wire fraud, A

bank fraud, and making false statements to HUD. MSRV’s officers routinely provided the buyers of their properties with phony gift funds, unreported cash for down

payments, and unreported cash incentives of $2,000 to $5,000 for buying properties.

The officers also created sham limited partnerships through which they provided

their investors with down payments, disguising the down payments as capital

contributions by the partnerships’ limited partners. The defendants often falsely

inflated their acquisition costs for properties, which they would then sell to investors

in back-to-back closings. To accomplish this, they used bogus real estate commissions and consulting fees. Questionable activities by MSRV Development were cited

in a 1997 OIG audit of the Section 203(k) Program; this audit helped lead to the

exclusion of investors from the program.

Jack Jacovides, former owner of Manjac Construction Company and Century 21

Manjac Realty, was sentenced to 5 years probation, 6 months home detention, and

100 hours of community service, and was ordered to pay $250,000 in restitution to

HUD and a mortgage company after pleading guilty to conspiring to make false

statements to HUD. Jacovides falsified employment and income for two clients of

MSRV Development, and also accepted, then returned to MSRV, a bogus $1 million

consulting fee which MSRV used to falsely inflate its acquisition costs for properties

later sold with FHA insured mortgages.

John Beaton, a former title company and closing attorney, was sentenced to 5

years probation, 4 months home detention, and 150 hours of community service,

and was ordered to pay $100,000 in restitution to HUD for his role in falsifying

closing documents for MSRV and its clients. Beaton falsely certified that buyers of

MSRV’s properties made their own down payments when he knew these down

payments were actually made by MSRV. Beaton surrendered his law license prior to

his sentencing.

Both defendants’ sentences of probation were the result of a motion by the

government for leniency in view of the defendants’ cooperation in the prosecution of

former MSRV Development officers. Both defendants received administrative

suspensions from HUD following their guilty pleas.

David Haplea and David John Roland were sentenced to probation and ordered

to make restitution. Haplea, a former real estate broker, received 5 years probation, including 180 days home detention, and was ordered to pay $75,000 to HUD.

Haplea submitted false loan applications to obtain 203(k) loans to purchase investment properties and was paid unreported incentives by the sellers to purchase these

properties. He also assisted a property speculation company in falsely inflating its

acquisition cost for properties by accepting, then returning to the speculation

company, false real estate commissions. Haplea’s real estate license was revoked

following his conviction. Roland, the husband of an officer of the property speculation company, was sentenced to 3 years probation, including 180 days home detention, and ordered to pay $31,000 to a mortgage company. He falsely certified on

several settlement statements that he had made his own down payments to purchase

investment properties with 203(k) loans when in fact the payments had been made

by the sellers.

Clinton Van Nocker and Jacques McEntee, former officers of MSRV, were

sentenced and ordered to pay restitution to HUD on charges of conspiracy and bank

fraud. They received 50 and 56 months in prison, respectively, to be followed by 5

years supervised release. Additionally, each was ordered to pay $350,000 in restitu
tion to HUD following their release from prison. Another MSRV officer, Marie Elana

Roland, also pled guilty to conspiracy to commit wire and bank fraud. Over 180

fraudulent HUD insured loans were identified, most of which eventually went into

default. This was an OIG investigation.

The following actions are the result of a joint Task Force investigation in Houston, TX, ton, TX, by the ton, TX, FBI, OIG, and the IRS Criminal Investigation Division which has

been designated “Operation Straw House.” The overall fraud may involve 3 criminal organizations and an estimated $74 million in fraudulent loans obtained by

approximately 75 individuals in a scheme to defraud HUD and commercial lenders.

Matthew W. Kelly, a former office manager and salesperson for AA Quality

Construction, a contractor specializing in Title I contracts, pled guilty to one count

of making false statements concerning employment and income on a loan application. Kelly also made false statements on a construction completion certificate,

which resulted in a Title I lender’s providing him with a $15,000 HUD insured loan.

Kelly further admitted that no home improvement work was completed with the

loan funds, and after the proceeds were split with the contractor, the remaining

funds were used to pay his debts.

David Willis and Cheryl Willis pled guilty to making false statements. An

investigation disclosed that the Willises secured two $25,000 HUD insured home

improvement loans by making false statements on the loan applications and on the

construction completion certificates which were relied on by the HUD approved

lenders. They both admitted to making false statements to secure the loans, that no

home improvements were made, and that the loan proceeds, given to them in cash

by the contractor, were used to pay off debt and make additional purchases.

Real estate investor Matthew Minchich pled guilty to one count of bank fraud

and admitted obtaining 7 loans in excess of $1.4 million by submitting false information on loan applications. Investor Juan Garcia pled guilty to one count of bank

fraud. Garcia admitted submitting false information on loan applications, including

sources of down payments and employment history.

Investor David Lasko pled guilty to one count of submitting false statements.

Lasko admitted obtaining a $25,000 HUD Title I home improvement loan based on

false statements. Lasko received $19,500 of the loan proceeds in cash from a

contractor and used the money to pay personal debts. The contractor kept $5,500 as

a “cut” for arranging the loan. No work was ever performed with the loan proceeds.

William Kyle Triplett, the construction manager for American Eagle Construction, pled guilty to one count of bank fraud. Triplett participated in a scheme to

defraud HUD and commercial lenders by obtaining Title I home improvement loans

and single family mortgage loans, both conventional and HUD insured, via deceptive

means. Triplett admitted fraudulently obtaining 2 home improvement loans totaling

$50,000 and 5 single family mortgage loans totaling in excess of $1.2 million.

Homeowner Leslie Jones pled guilty to one count of submitting false statements.

Jones was involved in a scheme to defraud HUD by obtaining a $25,000 HUD insured

Title I home improvement loan using false statements. Jones certified that construction had been completed when in fact no work was ever performed on his property.

He received about $20,000 of the loan proceeds in cash, while the contractor kept

the remaining $5,000 as the “cut” for arranging the loan. Jones used the loan

proceeds to pay off personal debts. Michael Waggett pled guilty to one count of bank

fraud in connection with a scheme to defraud HUD and commercial lenders.
Waggett admitted to submitting false information to a Federal Deposit Insurance

Corporation (FDIC) bank on a $300,000 loan.

Leonard W. Dennis, III, a commercial loan officer with a major Title I home

improvement lender, was charged with one count of bank fraud. The charge was

filed as part of a plea agreement in which Dennis admitted obtaining a $292,000

loan from an FDIC insured bank as part of the scheme.

Christine Nagy, a co-owner of Lone Star Remodeling Company, a home improvement contractor, pled guilty to one count of bank fraud. Nagy admitted

making false statements on loan applications to obtain loans from insured banks.

The U.S. Attorney’s Office filed a superseding criminal information charging

Reginald Guinn with false statements. Guinn pled guilty and was sentenced to 4

years probation and ordered to pay $22,500 in restitution and a $100 special assessment. Guinn admitted to falsely stating that he received no money from BCM

Builders, a contractor, when in fact, he received $20,000 in cash from BCM and

used the money to purchase a residence. BCM kept $5,000 of the loan proceeds as a

“cut” for arranging the HUD insured home improvement loan.

In Ft. Lauder Ft. Lauderdale, FL, investors Lynda Roseman and James Lowe were , FL

sentenced on charges of conspiracy to commit bank fraud, making false statements

on FHA insured mortgage applications, mail fraud, and wire fraud. Roseman was

sentenced to time served and 3 years supervised release, and was ordered to pay

$37,700 in restitution. Lowe was sentenced to 57 months in prison and 3 years

supervised release.

Leo Brovilette and Miriam “Mimi” Lawrence pled guilty to conspiracy to

commit bank fraud, making false statements on FHA insured mortgage applications, mail fraud, and wire fraud. Lawrence, a real estate broker and tax preparer,

also pled guilty to her participation in a mortgage fraud scheme. Elizabeth

Velazquez and Stanley Lerner pled guilty to making false statements on mortgage

applications for their part in a mortgage fraud scheme. Marcus Gordien and John

Kudron pled guilty to bank fraud, making false statements on FHA insured mortgage applications, mail fraud, and wire fraud.

From 1993 to 1996, these individuals conspired to fraudulently purchase HUD

owned properties by paying strawbuyers to pose as owner/occupants. The properties were then refinanced with FHA and conventional mortgages and sold to unqualified buyers at inflated prices, using fraudulent employment and income information. The loans totaled over $15 million. This investigation was conducted jointly by

the OIG, IRS and FBI.

In a different investigation in Ft. Lauder Ft. Lauderdale, FL, Kenneth Duquette, Cristie , FL

Gallucci, Lee Garber, Marie LaFargue, and Annette Gonzalez pled guilty to

making false statements on FHA mortgage applications and Social Security fraud.

Eric Silverman and Jean Dufralessi pled guilty to conspiracy to commit bank fraud

and making false statements on FHA mortgage applications.

From 1996 to 1999, the individuals 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. Eight of the loans have been foreclosed and resold by

HUD at a loss of over $230,000. The average loss on the properties is over $30,000

and the total loss to HUD is expected to be over $3.6 million. The individuals involved held positions as closing attorneys, real estate brokers, investment company

owner, mortgage brokers, loan officers, loan processors, title company employees,

and the owner of a printing company who created the false documentation. The

investigation was conducted jointly by the FBI and the OIG Offices of Investigation

and Audit.

In another investigation in Ft. Lauder Ft. Lauderdale, FL, a closing attorney, who was , FL

also an investor, was charged with one count of making false statements to obtain

FHA insured mortgages. The closing attorney allegedly participated in a scheme

with the mortgagee to originate fraudulent Section 203(k) mortgages by not making

the required down payments. The scheme involved over 80 properties with mortgages totaling over $3.2 million. The investigation was conducted by the OIG Offices

of Audit, Investigation, and Counsel.

Barbara Polaski, also known as Barbara Jemison or Barbara Polasici, was

sentenced to 10 months confinement, 3 years supervised release and ordered to pay

$230,558 in restitution. Polaski was also ordered to relinquish ownership of the FHA

insured property she obtained fraudulently. She had earlier pled guilty to one count

each of bankruptcy fraud, making false statements to the government, credit card

fraud, and unlawful possession of a Social Security number.

While employed at the Housing Authority of the City of Pittsbur Pittsburgh, PA,

Polaski stole the identities of two public housing tenants and later used their biographical data to conceal her fraudulent actions. She ultimately damaged their

credit ratings by engaging in credit card and loan fraud. Polaski purchased 4 FHA

insured properties, 3 of which were purchased using the stolen identities and which

resulted in defaults and a HUD loss of almost $140,700. She also defaulted on the

fourth property which she purchased using her own identity. This was a joint investigation by the FBI, Postal Inspection Service, and the OIG.

Roland Square, owner of Square One Realty in St. Louis, MO, was sentenced ,

following his guilty plea to one count of money laundering and one count of bank

fraud. Square received 12 months and 1 day in prison and was ordered to pay

$94,146 in restitution. Square used drug proceeds to purchase several FHA insured

single family and multi-unit properties, and used false Social Security numbers in

an effort to secure credit. Michael Square, owner of Square Accounting Service,

was indicted and pled guilty to making false statements to HUD for providing false

tax returns to mortgagors during their loan origination process. Five others were

indicted and three were sentenced in connection with this case. This was an FBI and

OIG investigation.

Rodney McWilliams, a City of New Orleans, LA Police Department Officer, , LA

was sentenced in federal court to 1 year and 1 day in a halfway house, fined $3,000,

and ordered to pay $19,074 in restitution for submitting false statements and conspiracy. His wife, Linell McWilliams, received a pre-trial diversion. The sentencing was the result of an OIG investigation which disclosed that the Officer and his

wife falsified documents in an effort to influence HUD to allow them to purchase a

home under the Officer Next Door Program. The HUD sponsored program allows
Police Officers to purchase residential properties at a reduced rate of 50 percent

below market value with the requirement that the Officer occupy the property as a

primary residence for 3 years. The investigation found that the Officer failed to

occupy the property as the primary residence, and instead rented the residence to a

fellow Police Officer for several months, resulting in a $19,074 loss to the government.

In Kansas City, MO, Jamil Thompson, son of resigned Missouri State , MO

Representative Vernon J. Thompson, was sentenced to 10 months in prison for a

misdemeanor conviction on 1 count of falsely certifying to the IRS on his federal tax

form. The false tax return furthered a conspiracy on the part of Vernon Thompson

and others to commit mail fraud and money laundering which ultimately resulted in

the embezzlement of over $250,000 from HUD insured and/or subsidized developments. The conspiracy scheme involved creating ghost employees of the multifamily

complexes so funds could be laundered through various bank accounts. Kevin

Sallard, a ghost employee and aid to Vernon Thompson, who received a pre-trial

agreement in February 2000 in connection with the embezzlement, was sentenced

in connection with a separate investigation of the State Representative and a now

defunct community housing entity receiving HUD Community Planning and Development funds. Sallard was sentenced to 90 days already served, 3 years probation,

and restitution of $9,100 in connection with a Department of Justice youth anticrime grant. Vernon Thompson previously pled guilty to one count of mail fraud.

Tuscon Redd, Omega Realty owner, and Robert Wilp, Omega accountant, both pled

guilty to charges of conspiracy to commit mail fraud and money laundering. Redd

was sentenced earlier to 1 year and 1 day in prison and ordered to pay $260,840 in

restitution. This investigation, conducted by the FBI, OIG Offices of Audit and

Investigation, and the Kansas City Police Department, resulted from a hotline

complaint.

In Richmond, VA, Joseph Allen Johnson was sentenced to 5 years in prison A

for uttering a false loan application, with all but 1 year suspended, and was given a

5-year suspended sentence for forging the same loan application. He is scheduled

for a show cause hearing stemming from his previous criminal history. Should the

Judge deem appropriate, the full sentence received for both of these FHA fraud

offenses may be imposed. In 1998, Johnson applied for an FHA loan, but was denied

due to poor credit. Johnson later assumed the identity of Wesley McMeans, a

mentally challenged man under the supervision of Johnson’s mother, and obtained a

$136,650 FHA insured mortgage. The mortgage was approved based on Johnson’s

presentation of McMeans’ identification documents. Johnson and his mother

occupied the FHA insured property, but McMeans was left to reside in a rooming

house. An OIG investigation led to a referral to the Philadelphia Homeownership

Center (HOC); the HOC has asked the originating lender to indemnify the mortgage

because of numerous loan originating deficiencies.

Following an OIG investigation in St. Louis, MO, Aliscia Payne was sentenced , MO

to 1 year probation and fined $250. Payne was previously charged with bank fraud,

and a warrant was issued for her arrest. Payne used false information and documents to obtain an FHA insured home loan. In April 2000, Payne pled guilty to a

separate charge of false statements and using false information to obtain an FHA

loan. The most recent charge of bank fraud resulted from a review of records
recently received that revealed that the same mortgagee processed a second loan

for Payne using information that differed from the first loan processed. This investigation was conducted by the OIG, DEA, and Postal Inspection Service.

William and Charles King pled guilty in U.S. District Court to submitting false

statements. They also agreed to each pay $269,822 in restitution for their involvement in a single family housing fraud scheme. The Kings purchased several homes

in Buffalo, NY, between 1996 and 1997 for a minimal amount of money. Most of ,

the homes were either occupied by elderly people who wanted to move out of the

City, or were purchased at foreclosure estate sales. The Kings then made superficial repairs to the properties, such as painting and installation of inferior carpeting,

and solicited unsophisticated first-time homebuyers to purchase the homes for

inflated prices, even though the homebuyers lacked the financial resources to

purchase the homes. The Kings arranged everything for the buyers, including a

mortgage company that would provide FHA financing, an insurance company, and a

closing attorney. They then provided the homebuyers with the necessary down

payments, which came in the form of gift donor funds. The Kings also instructed the

homebuyers to have a relative or friend fraudulently sign the gift donor letters

provided to the bank stating that they provided the homebuyers with the funds. At the

time of the plea agreement, the majority of the FHA insured loans solicited by the

Kings for the unqualified buyers were either in default or foreclosure, causing

significant financial losses to HUD. This was an OIG investigation.

Individuals in Atlanta, GA, involved in fraudulently originating 46 mortgages A,

totaling over $7.5 million pled guilty to conspiracy to commit money laundering,

mail fraud, using false Social Security numbers, and witness tampering. Freddie

H. Allen, a bank manager, prepared false verification of deposit forms and Social

Security numbers to qualify individuals for mortgages.

Miriam Elizabeth Rebecca Heflin, a loan processor, prepared false verification

of deposit and income forms and used fictitious Social Security numbers to qualify

individuals for HUD insured mortgages. The loans were originated in Atlanta, GA,

and Chicago, IL.

Ryan Steven Pendergraft pled guilty to preparing false verification of deposit and

employment forms and creating fictitious Social Security numbers to qualify

individuals for mortgages. A mortgage broker was arrested and charged with bank

fraud, wire fraud, money laundering, mail fraud, witness tampering, using false

Social Security numbers, and filing false reports to his Probation Officer. The

mortgage broker allegedly conspired with others to originate fraudulent mortgages.

The broker was previously convicted of mortgage fraud and, as a condition of his

probation, was prohibited from employment in the mortgage business. This investigation was conducted by the HUD and Social Security Administration OIGs, the FBI,

and the IRS.

Yasha Ayers, a former civilian employee of the U.S. Naval Service in New

Orleans, LA, and Elva Ayers, his daughter, were sentenced. Yasha Ayers was , LA

convicted of 4 counts of conspiracy and submitting false statements, and was sentenced to 3 years supervised release. His daughter, also convicted of 4 counts of

conspiracy and submitting false statements, was sentenced to 7 months in prison.

The sentencings were the result of a joint investigation by the FBI, OIG, and the

Naval Criminal Investigative Service which disclosed that Yasha Ayers falsified
U.S. Navy documents, personal documents, W-2 forms, and HUD forms to assist

his daughter in seeking approval for an FHA insured loan to purchase a home. The

daughter has never worked for the Navy and did not have the necessary income to

be approved for the loan. There was no loss to the government due to the fact that a

member of the subjects’ family made several payments to the mortgage company,

thus preventing the loan from going into default. The loan amount was about

$70,000.

Ayisha Abney, a former HUD employee, was arrested by OIG Agents in Philadelphia, PA, pursuant to a criminal complaint charging her with embezzlement A

and false statements. The arrest stems from Abney’s involvement in a fraudulent

real estate owned transaction which resulted in a $12,300 loss to HUD. Abney was

also charged with theft of $150 in federal funds. Following her arrest, she pled

guilty to 1 count of embezzlement of government funds and was sentenced to 1 year

supervised release and ordered to pay $150 in restitution to HUD.

In St. Louis, MO, Kelly Klamen, part owner of , MO K&K Investments, was

sentenced to 2 years probation, fined $15,652, and ordered to pay $53,241 in

restitution to HUD regarding false statements made to HUD. K&K sold between 40

and 50 properties and had their buyers obtain loans through a specific loan officer

at a mortgage company. Many of these buyers had state and federal aid as their

only source of income but they were able to obtain financing through the use of false

information after the Klamen’s instructions. One mortgagor’s employer’s address

was a vacant house. In another mortgagor’s file, this same “employer” was listed

as the landlord and credit reference. The majority of the buyers also used gift

letters from family members in order to qualify for the loans. These loans totaled

in excess of $1 million. Two of the loans where Kelly Klamen provided false

information defaulted, resulting in the $53,241 loss to HUD. Harold Klamen also

signed an agreement and admitted to submitting false statements to HUD. Klamen

has agreed to pay restitution of $33,064. Klamen is part owner of Klamen and

Associates, BRICs, Inc., DRM Partnership, Harold M. Klamen Real Estate Group,

Inc., Klamen Investment Co., and K&K Investments, Inc. This was an FBI/OIG

investigation.

In Phoenix, AZ, a real estate agent was arrested and indicted on charges of Phoenix, AZ

misuse of a Social Security number and submitting false statements to HUD. He

allegedly used the Social Security number and other fraudulent documents to obtain

an FHA insured loan for his residence. Documents seized during the execution of

search warrants in September 1999 at the agent’s real estate office and home

disclosed that employees of the real estate firm created numerous false documents,

including pay stubs, W-2 forms, Social Security cards, and credit letters. These

documents were used by the broker and his employees in a loan origination fraud

scheme involving over 200 FHA insured loans. This investigation was conducted by

the FBI and the OIG Offices of Audit and Investigation.

Following an OIG investigation, Michael Fernsted, the real estate asset manager for First Preston Management Company in Buffalo, NY, pled guilty to one alo, NY

count of extortion. Fernsted oversaw approximately 1,500 HUD foreclosed properties in the Western New York area. He forced inspectors and contractors hired by

First Preston to kick back a percentage of their monthly earnings. Fernsted in
structed the inspectors and contractors to submit bogus billings or inflate the

monthly billings in order to make more money.

There are approximately 3,300 public housing agencies (PHAs) which are

established by local governments pursuant to state enabling legislation, and which

receive financial assistance from HUD. HUD provides both project-based and

tenant-based housing assistance to PHAs, in addition to homeownership and other

grant assistance. HUD also provides assistance directly to PHAs’ 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 PHAs are designed to enable low-income

families, the elderly, and persons with disabilities to obtain and reside in housing

that is safe, decent, sanitary and in good repair.

During this reporting period, under Operation Safe Home, the OIG discovered

instances of fraud, false statements, conspiracy, theft, and illegal gambling involving

Public and Indian Housing Programs.

In Newark, NJ, Meir Hertz, executive director of the Lakewood Housing ark, NJ

Authority and the Lakewood Tenants Rental Assistance Program, and owner of the

Brick Towers multifamily housing development, pled guilty to a felony charge of

preparing a false tax return. The charge pertained to funds Hertz diverted from

Brick Towers. BTA Properties, Inc. also pled guilty to false statement charges and

was ordered to pay over $300,000 in restution and fines. In addition, the company

was ordered to be dissolved. Hertz entered into a separate civil settlement agreement by which he paid $1 million to HUD. He was also debarred for 5 years, relinquished his position as executive director of the Housing Authority, deeded Brick

Towers over to HUD, was sentenced to 3 years probation and 2 months confinement,

and was fined $5,000. This investigation was conducted by the FBI, OIG, and IRS.

Jean R. Faires, a former administrative assistant and interim executive director

of the Drumright, OK Housing Authority, was sentenced to 6 months electronic ght, OK

monitoring and 5 years supervised release, and ordered to pay $38,955 in restitution

and a $100 special assessment. The sentencing resulted from an OIG investigation

which found that Faires embezzled about $21,000 from cash tenant rent payments

from the Authority from 1990 to 1996 and covered the thefts with funds from other

Authority accounts.

In San Juan, PR, the president of Ingenieros y Proyectistas, a contractor uan, PR

doing business with a private management agent hired by the Puerto Rico Housing

Authority to manage its public housing developments, pled guilty to two counts of

bribery. The president, Fernando Vigil, Jr., paid kickbacks in the amount of $36,000

to officials at the Central Housing Corporation and $40,000 to officials at the Inter

Island Rental Corporation. Both corporations are management agents contracted by

the Authority to manage housing developments. Additionally, the president of

Servicios de Plomeria del Este, Inc., another contractor doing business with a

Public and Indian Housing Programs

Fraud in Public Fraud in Public

Housing Housing

Administr dministration
private management agent hired by the Authority to manage its public housing

developments, was sentenced to 2 years probation and ordered to pay $27,500 in

restitution. The president, Victor M. Lopez-Santos, had previously pled guilty to

making kickbacks. Lopez paid kickbacks to Authority employees and/or employees

of Inter Island. The investigation was conducted by the FBI and the OIG Offices of

Audit and Investigation.

Patricia Wilson pled guilty to one count of making a false statement and report

to HUD, and was sentenced to 3 years probation and 100 hours of community

service, and ordered to pay $14,515 in restitution to HUD. As a resident of Coventry

Gardens Apartments, Wilson has received Section 8 benefits since 1988. In November 1995, Wilson was hired by the Richmond, VA Redevelopment and Hous- A

ing Authority (RRHA) as a tenant selection interviewer in the Section 8 Department.

On numerous HUD certifications, she failed to report any income from her employment at the RRHA, and thus received Section 8 benefits to which she was not

entitled. This was an OIG investigation.

Claud Loyd Ferrington, a former City of Ruston, LA Housing Authority uston, LA

project manager, was sentenced for theft of money from federal programs. He was

ordered to serve 6 months in a halfway house, placed on 5 years supervised release,

fined $3,000, and ordered to pay $9,750 in restitution. The sentencing was the

result of a joint FBI/OIG investigation which disclosed that Ferrington solicited and

received more than $10,000 in bribes from a contractor who had been awarded a

roofing contract on several buildings owned by the Authority.

Charles Clay, former executive director of the Mt. Gilead, NC Housing Mt. Gilead, NC

Authority, was sentenced to 6 months home confinement and ordered to pay $8,754

in restitution and perform 250 hours of community service. In February 2000, Clay

pled guilty to one count of mail fraud. He forged the signature of one of the members of the Authority’s board of directors on Authority checks and converterd the

proceeds to his own use. The investigation was conducted by the OIG Offices of

Audit and Investigation and the Mt. Gilead Police Department.

Carolyn White, the former deputy executive director of the Palatka, FL

Housing Authority, pled guilty to one count of embezzlement and was sentenced to 5

years probation and ordered to pay $6,409 in restitution. White charged over $6,000

worth of personal items on the Authority’s credit card. The charges included

jewelry, trips, meals, gifts, furniture, and hotels. The former executive director has

already pled guilty and been sentenced. This investigation was conducted by the

OIG, FBI, and the Florida Department of Law Enforcement.

Nury Pando, an assistant manager of the Casa Hermosa Apartments, was

sentenced to 90 days detention and 12 years probation, and ordered to pay $1,384 in

restitution. The sentencing is the result of a joint investigation by OIG and the

Hobbs, NM Police Department which disclosed that Pando, who is also a resident , NM

at Casa Hermosa, embezzled tenant rent proceeds.

Valeria Swafford Morales, an eligibility specialist with the Texas Department of

Human Services in Houston, TX, was sentenced to 8 months in prison and 3 Houston, TX

years supervised release, and ordered to pay $630 in restitution and a $100 special
assessment after pleading guilty to one count of false statements. An OIG investigation disclosed that Morales, a single parent with 4 children, received about $30,000

in excess rental assistance over a 10-year period. At various times during the 10-year

period, Morales falsely claimed that 3 of her children lived with her, and failed to

disclose sources of income from Aid to Families with Dependent Children, child

support, and a military dependent allotment. The fact that Morales is a state

welfare eligibility specialist and former public housing authority clerk was especially pertinent in the 8-month sentencing.

Louis Lorenzo, a New York City Housing Authority ( ork City NYCHA) employee for

over 20 years, along with his wife Elizabeth, a New York City Police Officer,

defrauded HUD from 1994 through 1999 by providing falsified annual recertification

forms and notarized affidavits of non-income, claiming that Elizabeth was unemployed in order to receive excess rental assistance payments. The Lorenzos fraudulently obtained about $24,000 in rent subsidies from HUD and about $19,000 from

NYCHA by not declaring Elizabeth’s income. Louis Lorenzo previously pled guilty

and is awaiting sentencing. He was also suspended without pay by NYCHA. Elizabeth

Lorenzo is scheduled to be sentenced in November 2000. She is being terminated

from employment by the New York City Police Department (NYPD). Both have been

suspended by HUD from participation in federal programs; debarment actions are

pending. This investigation was conducted by OIG and NYPD.

Hazel Ann Mike, former executive director of the Moapa Indian Housing

Authority in Las Vegas, NV, pled guilty to two counts of embezzlement. Mike , NV

embezzled $37,268 from the Authority between May 1995 and March 1997 by

processing additional payroll checks for herself. This investigation was conducted by

OIG.

In Moab, UT, Sandra Sommer, a former Grand County Housing Authority , UT

employee, pled guilty to three felony counts of misuse of public monies. She was

previously charged with embezzling Housing Authority funds. Sommer also pled

guilty to embezzling over $35,000 from a previous employer and is currently

incarcerated in the Utah Women’s Correctional Prison in Salt Lake County. This

was a joint investigation by OIG and the Grand County Sheriff’s Office.

Laverne Moore, manager of Kennett, MO Apartments, pled guilty to one ennett, MO

count of submitting a false statement. Moore overcharged Section 8 residents on

their monthly rent and security deposits. She then converted those funds to her own

use. Moore also created false monthly rent subsidy billings by entering the incorrect

rent amounts on the owner’s certification and application for housing assistance

payments. Her theft from residents amounted to about $12,600. Moore also falsified documents to obtain a Section 8 unit for herself by using a false name and

Social Security number. This was an OIG investigation.

A joint investigation by the FBI and the OIG Offices of Audit and Investigation

discovered that individuals were involved in the solicitation and acceptance of bribes

by San Francisco, CA Housing Authority employees in exchange for placing A

ineligible individuals in the Section 8 Program or in conventional low-rent housing

units.
A superseding indictment was handed down by a federal grand jury as a result

of the investigation which charged the Authority relocation manager with eight

counts of aiding and abetting bribery and three additional counts of making false

statements to HUD.

Patricia Williams, manager of relocation and support services at the Authority,

was convicted of 30 felony counts, including 1 count of conspiracy, 22 counts of

making and causing false documents to be submitted to HUD, and 7 counts of aiding

and abetting bribery.

Anthony Talley, a Section 8 housing applicant, was convicted of one count of

making a false statement in connection with his application for relocation benefits

under the HUD funded HOPE VI Relocation Program administered by the San

Francisco Housing Authority.

William Bender, a public housing resident, pled guilty to making a false statement in connection with his application for benefits under the HOPE VI Relocation

Program. Dontez Anderson, also a public housing resident, was sentenced for

making a false statement on his application for benefits under the Program. He

received 3 years probation, including 4 months in a community corrections center,

and was ordered to vacate his public housing unit. Additionally, Tameka Cato was

sentenced to 3 years probation, 120 hours of community service, and a $100 special

assessment. Sherrie Ross also pled guilty to making a false statement in connection

with her application for relocation benefits.

Ena Coleman, a public housing resident, was indicted and pled guilty to one

count of conspiring with the relocation manager; two counts of aiding and abetting

the making and using of false documents submitted to HUD; and one count of aiding

and abetting.

A 2-year investigation of the Housing Authority of the City of Tampa, FL, ampa, FL,

resulted in the announcement of a superseding federal indictment by the U.S.

Attorney’s Office, charging the former executive director and two contractors doing

business with the Authority with 126 counts of conspiracy, bribery, wire fraud, and

money laundering. The indictment alleges that the contractors received over $25

million in contracts from the Authority by providing cash and gifts to the former

executive director. The indictment contained a forfeiture count that included real

estate, vehicles, construction equipment, and over $1 million in cash.

The former executive director of the Authority was indicted for wire fraud,

conspiracy, bribery, receiving gratuities, bribery concerning programs receiving

federal funds, money laundering, and making false statements to a federal agency.

A physician practicing in the State of Florida and a third individual, who were an

officer and a principal, respectively, in a corporation that received Authority work

and payments for such work, were charged with wire fraud, conspiracy, bribery,

giving gratuities, bribery concerning programs receiving federal funds, and money

laundering.

A federal indictment was unsealed by the U.S. Attorney’s Office charging the

former deputy director of the Authority’s Planning and Development Department

with one count of misprision of a felony and one count of making false statements.

The misprision charge was the result of the individual’s failure to report fraudulent

activity at the Authority. The false statement charge was the result of a letter

written by the former deputy director to HUD which covered up the former executive director’s involvement in awarding a fraudulent contract. Additionally, Bill

Williams, Jr. pled guilty to bribery in connection with payments made to the former
executive director of the Tampa Housing Authority. This investigation was conducted

by the FBI, Department of Justice, IRS Criminal Investigation Division, and the OIG

Offices of Audit and Investigation.

The former executive director of the Sanford, FL Housing Authority was d, FL

indicted on charges that she lied and provided bogus documents after selling an

Authority vehicle to her son. The indictment states that the former executive director purchased a 1994 Ford Explorer for the Authority and a short time later sold the

vehicle to her son for $14,500, which was approximately $4,500 less than the

vehicle’s estimated value. She then signed a contract on behalf of the Authority to

purchase a 1995 Dodge Caravan with the $14,500 and a personal check of $806.

During a yearly audit, the former executive director stated that the Explorer had

been exchanged for the Caravan as an “even trade” and that the dealership did not

give her any paperwork. She later provided a bogus invoice purportedly from a

Daytona Beach dealership showing that the vehicles had been exchanged, and that

each one was valued at $16,806. A second bogus invoice showed that the son purchased the Explorer from a Daytona Beach dealership. In addition, she gave false

statements and fraudulent invoices to the Authority’s Auditor and to a HUD Special

Agent investigating the case. The investigation was conducted by OIG.

A former resident initiative coordinator for the Housing Authority of Fulton,

MO, was indicted on 1 count of stealing $30,568 from the Authority and 1 count of ,

making a false statement to conceal the thefts. From November 1998 through

March 2000, the coordinator allegedly collected rent checks, did not record them,

and took the money for herself. She also intercepted a check for $10,300 in HUD

funds, cashed it, and did not record it. A new computerized accounting system

revealed the discrepancy that tipped off Authority officials. The former coordinator

had not taken a vacation in a year in an effort to try to cover up her defalcations. The

investigation was conducted by the OIG.

Five individuals, including two housing authority employees, were indicted on

charges of theft from an Indian Tribal Organization, false statements, embezzlement, and theft of public money. A search warrant was served on the home of an

Oglala Sioux Tribal Councilwoman who was suspected of housing fraud. These

charges are the result of a collaborative investigation by OIG Offices of Audit and

Investigation, VA OIG, the Bureau of Indian Affairs, and the Oglala Sioux Tribe

Public Safety Office into irregularities at the Oglala Sioux Housing Authority, Pine

Ridge, SD Indian Reservation. , SD

The former executive director of the Benson, NC Housing Authority was Benson, NC

issued a limited denial of participation for a period of 1 year. This action resulted

from a recommendation in a March 2000 OIG audit report. The audit disclosed

serious mismanagement by the former executive director, including violations of

conflict of interest requirements, improper procurement of $1.6 million of repair

services and materials, inadequate controls over cash receipts and disbursements,

inadequate maintenance of books and records, and improper determination of tenant

rent amounts. In addition, the board did not provide adequate oversight of Authority

activities or safeguard Authority assets.
Ronald G. Bersaglia, the former executive director of the Hazard, KY

Housing Authority, and his wife, Lisa M. Campbell, who replaced her husband as

the executive director, have been debarred from participation in federal programs

until April 26, 2002. In 1999, the couple was convicted for falsely certifying that

Hazard public housing developments met HUD’s housing quality standards. The

investigation was conducted by the FBI, Kentucky State Police and the OIG Offices

of Investigation and Audit.

Rafael A. Monroig, president, M&V Steel Contractor, a contractor doing

business with a private management agent hired by the Puerto Rico Housing Puerto Rico

Authority to manage public housing developments in Puerto Rico, was sentenced to

4 months home confinement and 25 months supervised release, and fined $5,000.

In addition, the HUD Enforcement Center negotiated a settlement agreement with

Monroig, whereby Monroig agreed to pay $100,000 to HUD in exchange for terminating his suspension from participating in HUD programs. Monroig previously pled

guilty to one count of violation of the Anti-Kickback Statute. Monroig paid $20,000

in kickbacks to Authority employees and employees of the Inter Island Rental Puerto

Rico Corporation, a management agent that contracted with the Authority to

manage Authority developments. This investigation was conducted by the FBI and

the OIG Offices of Investigation and Audit.

In Minneapolis, MN, Joseph and Norma Amato, former Section 8 tenants, , MN

each pled guilty to one count of conversion of public money. The husband and wife

were indicted by a federal grand jury on 5 counts of false statements and 1 count of

conspiracy for allegedly receiving about $100,000 in Section 8 and other welfare

benefits by fraudulent means. By failing to report all of their income, the couple

received benefits to which they were not entitled. The Amatos failed to make their

first appearance in court and arrest warrants were issued for the couple. As part of

the plea agreement, they agreed to make full restitution in the amount of $98,609.

This was a joint investigation by OIG and the Stearns County Police Department.

Jason and Chad Smeby, owners of North Country Lumber, Inc. in Duluth, Duluth,

MN, were sentenced following their guilty pleas to one count of making a false MN

statement. Both received 4 months home confinement and 3 years probation.

Additionally, Jason was fined $100 fine; Chad was fined $25. They were also

ordered to jointly pay $94,000 in restitution. North Country Lumber, Inc. billed the

White Earth Housing Authority for building materials which it never received. The

investigation was conducted by the OIG Offices of Audit and Investigation.

In Philadelphia, PA, Gary Lupo, president of a major heating and mechani- A

cal company doing business with the Chester Housing Authority, was sentenced to

37 months incarceration and 3 years supervised release, and ordered to pay

$62,252 to HUD and $37,748 to other federal and local entities. Lupo was previously

arrested by Agents from the HUD and Department of Labor OIGs, and was convicted of conspiracy to defraud HUD, conspiracy to make false statements, wire

fraud, and embezzlement from a bankruptcy estate. Lupo was involved in a variety

of fraudulent schemes between 1994 and 1995 while he performed contract work at

the Authority. During that time, he fraudulently billed the Authority for approximately $1.5 million in construction change orders.

Other

Investigations gations
Additionally, Edward Kravitz, the former controller of a major plumbing and

heating contractor doing business with the Chester Housing Authority, was convicted for his role in a conspiracy to defraud an insurance company (company). The

company was retained to provide performance and payment bonds on mechanical

work awarded to the contractor. The scheme involved the conversion of bonding

company funds and was masterminded by the plumbing contractor president. The

company, through its authorized representative, attempted to monitor the

contractor’s payroll and related expenditures by establishing a joint trust account.

The contractor payment submissions, as well as the company’s capital, were placed

into this account in order to payroll the costs of the company funded work. Kravitz

conspired with the plumbing contractor president to falsely inflate the contractor’s

payroll reports, causing the company to release more money than that to which the

contractor was entitled. Between December 1994 and November 1995, Kravitz

diverted approximately $85,000. This was a joint investigation by the OIG Offices of

Investigation and Audit and the Department of Labor OIG.

Former Section 8 recipient Penelope A. Kinsman was sentenced to 6 months

confinement in a halfway house and 2 years probation, and was ordered to pay

$37,709 in restitution to HUD and a $100 special assessment fee. Kinsman, also

known as Penny Gallimore and Penny Clark Bennett, previously pled guilty to theft

of public funds. An investigation by the Lexington, MA Police Department and gton, MA

OIG found that Kinsman failed to report her true income to the local housing authority in order to receive housing assistance benefits to which she was not entitled.

In Kansas City, MO, Edward E. Davis was sentenced to 3 months detention, , MO

3 months in a halfway house, and 3 years probation, and was ordered to pay $20,668

in restitution for making a false statement on an annual Tenant Eligibility certification form. Davis failed to report that his spouse, Betty Jean Davis, worked for the

Internal Revenue Service. Betty Davis was also sentenced to 6 months home detention and 3 years probation and ordered, along with her spouse, to pay restitution.

Besides pleading guilty to providing a false statement, Betty Davis also pled guilty to

one charge related to workmen’s compensation fraud. This investigation was

conducted by OIG, IRS and the Department of Labor.

Dona Lee Rawlings-Varner, a former Section 8 resident, was sentenced to 3

years incarceration and 5 years supervised probation for her role in defrauding the

Baltimore County Department of Public Services Housing Office of $19,548.

Varner began working for the Baltimor Baltimore, MD Mass Transit Administration ( , MD MTA)

in 1995 and had an annual salary of over $30,000. She used her maiden name with

the MTA and never reported her MTA employment to the Department of Public

Services when recertifying for Section 8 assistance. She has been terminated from

the Section 8 Program and ordered to pay $19,000 in restitution. This was an OIG

investigation.

Barbara Alston-Johns, a former Department of Veterans Affairs (DVA) employee in Montrose, NY, who was indicted on 1 count of submitting false state- , NY

ments to the government to obtain Section 8 rental assistance, was sentenced to 5

years probation and ordered to pay $10,152 in restitution to HUD. Alston-Johns had

falsely underreported her income on HUD recertification forms since 1995 by

submitting false verifications of employment to the management agent, claiming she
made only half of what she actually earned. She also forged the signature of the

human resources director at the DVA hospital on the suspect verification of employment forms. This investigation was initiated after a complaint was filed with the

DVA OIG. OIG assistance was requested in conducting the investigation.

In Pittsbur Pittsburgh, PA, Joyce Emerick, a former Section 8 recipient, and her ex- A

husband, Robert Emerick, pled guilty to mail fraud and wire fraud. From 1986 to

March 2000, Joyce Emerick received a total of $76,000 in HUD rental assistance

and Social Security benefits to which she was not entitled. During this period, the

Emericks failed to disclose both Robert’s income and their joint assets, i.e., a

Florida vacation home and eight automobiles. This was a joint investigation by the

HUD and Social Security Administration OIGs.

In Uniondale, NY, Betty J. Suggs, also known as Betty Heeraman, a Postal ,

Service employee, pled guilty to one count of submitting false statements to HUD.

She concealed her employment in order to fraudulently obtain federal rent subsidies. Suggs, along with previously convicted co-defendants Aldemar Quintero,

Amparo Quintero-Baron, Angel Heeraman, and Paula Vasquez-Flores, was

arrested in August 1996 by Task Force Special Agents of the HUD and Social

Security Administration OIGs, FBI, Secret Service, and Postal Inspection Service at

the Ocean View I multifamily assisted housing development. These defendants,

along with 21 residents of Ocean View II, were found to have defrauded the HUD

Section 8 Program out of more than $350,000 in federal rent subsidy payments

which they were ineligible to receive. The majority of the defendants were aliens

residing in the United States illegally, and who used fraudulent birth certificates,

Social Security cards, W-2s, and verifications of income in order to qualify for

Section 8 Program assistance. The ringleader of the fraud conspiracy and his wife

were also arrested and convicted; both cooperated in the investigation and helped to

identify residents who were part of the fraud in both buildings.

Kalia Durham, former Housing Our Family (HOF) financial manager, pled

guilty to two counts of theft from programs receiving federal funds. HOF receives

funding not only from HUD, but from state and local governments, as well as lowinterest loans from the Portland, OR Development Commission, to provide low- ortland, OR

income housing. Durham embezzled over $20,281 of commingled funds by giving

herself pay advances and salary increases. Durham also retained HOF equipment

for personal use. The investigation was conducted by the FBI and OIG.

Gloria Taveras, a teacher’s assistant of the New York City Board of Educa- ork City

tion, pled guilty to fraudulently obtaining nearly $14,000 in HUD Section 8 rent

subsidy payments and was sentenced to 12 months conditional release. A joint

investigation by OIG and the New York City Police Department’s Internal Affairs

Bureau disclosed that Taveras’ boyfriend, a New York City Board of Education

school safety officer, resided with her at her subsidized apartment, a fact that

Taveras concealed. Their combined incomes exceeded the threshold levels for

participation in the HUD Section 8 Program.

In Houston, TX, Andronic Lu-Shaun Harding, an accountant with El Paso Houston, TX

Energy Corporation, was sentenced to 3 years supervised release for submitting

false statements. The sentencing followed an OIG investigation which disclosed that
Harding reported child support as her sole source of income in order to receive

Section 8 rental assistance, while she was in fact earning wages as a full-time

accountant. In a plea arrangement, Harding paid full restitution of $6,300.

In Kansas City, MO, following an investigation by the , MO FBI, OIG, and the

Missouri Department of Social Services, Section 8 resident Julienne Blair pled

guilty to one felony count for theft by deceit. Blair provided false statements/

information to qualify for Aid to Families with Dependent Children benefits and

Section 8 subsidies between 1994 and 1996. Blair failed to report that he purchased

properties, rehabbed them, and then resold the properties. Blair reported he had no

income, as any profit was used to buy other properties.

A federal grand jury in Salt Lake City, UT, returned a 28-count indictment , UT

charging a former Section 8 recipient and a former landlord with conspiracy to

defraud the United States, theft of government property, and false statements. Both

individuals allegedly provided false information to the Housing Authority of the

County of Salt Lake in order to receive rental assistance. The charges are the result

of a joint investigation by the HUD, Social Security Administration, and Department

of Agriculture OIGs. The overall fraud involves several different federally funded

programs and is estimated to be over $100,000.

The Ventura County District Attorney’s Office filed a three-count felony complaint against two individuals for theft and conspiracy to obtain Section 8 subsidies

and welfare assistance. One of the counts alleges that the individuals conspired to

commit grand theft of $11,075 in Section 8 subsidies from the Housing Authority of

the City of Oxnard, CA. Pursuant to the complaint, both of the individuals volun- A

tarily surrendered to authorities and are awaiting further court proceedings. This

felony complaint resulted from an investigation by OIG and the District Attorney’s

Office for the County of Ventura.

In Newark, NJ, a federal grand jury indicted two individuals as a result of an ark, NJ

investigation by the West African Task Force (WATF) into a conspiracy to obtain HUD

subsidies based on fraudulent documentation. The WATF is a multi-agency group

made up of the OIG, U.S. Attorney’s Office, Postal Inspection Service, Secret

Service, FBI, IRS Criminal Investigation Division, and the INS, tasked by the Department of the Treasury to investigate instances of widespread fraud. These indictments supersede similar indictments obtained by the WATF in November 1999.

Specifically, each defendant was charged with 10 counts of mail fraud, 4 counts of

wire fraud, 2 counts of producing false identity documents, and 1 count of conspiracy to commit mail/wire fraud and produce false identity documents.

An individual was arrested following an investigation by INS and OIG Agents.

The individual had been living in public housing with his common-law wife for about

2 years, and allegedly qualified for public housing with counterfeit documents. He

had also been deported on two prior occasions, and was in this country illegally for

a third time. The individual was charged with making a false statement to the

Oklahoma City, OK Housing Authority and reentering the United States after , OK

prior deportation. He also had an outstanding felony arrest warrant which was

served at the time of his arrest. Eviction proceedings have begun.
In St. Louis, MO, an individual was charged with 2 counts of stealing by , MO

deceit ($750 or more), burglary in the second degree, and failure to return rental

property. The individual allegedly sublet her Section 8 apartment, then burglarized

the apartment after her scheme was discovered by the Housing Authority. A state

warrant has been issued for her arrest. This was an OIG investigation.

A former Section 8 tenant was indicted by the Middlesex, MA District x, MA

Attorney’s Office on 2 counts of larceny over $250 and 2 counts of larceny by false

pretenses. The tenant allegedly failed to report income to the Metropolitan Boston

Housing Partnership, a Section 8 contract administrator, in order to receive housing assistance benefits to which she was not entitled. This was an OIG investigation.

A former Senator for the Commonwealth of Puerto Rico was arrested after Puerto Rico

being indicted for soliciting and receiving more than $96,000 in kickbacks from

contractors in exchange for the Senator’s promise to use his political influence to

resolve difficulties which had arisen in contracts with the Office of the Liquidation

of Assets of Puerto Rico Urban Renewal (OLAPRUR) and the Puerto Rico Ports

Authority (PRPA). The 44-count indictment charged the Senator with soliciting over

$20,000 in exchange for his promise to resolve difficulties with the contractors’

efforts to purchase the Extension Los Robles property for the OLAPRUR. The

indictment also charged the Senator with soliciting over $75,000 in exchange for his

promise to resolve difficulties with the contractors’ efforts to purchase the Tropical

Acres project to remodel and sell as low-income housing units.

This public corruption investigation of the Puerto Rico Housing Authority has

resulted in 10 indictments, 2 criminal informations, and 9 guilty pleas. The investigation is being conducted by the FBI, the OIG Offices of Audit and Investigation, and

the Puerto Rico Comptroller’s Office.

The owner of Acadian Manor Apartments in Lafayette, LA, doing business as , LA

Housing Network, Inc., was charged with one count of conspiracy. A joint investigation by the FBI and OIG revealed that the property owner had devised a scheme to

inflate the monthly applications for Section 8 housing assistance. The falsified

applications resulted in the owner’s receiving in excess of $200,000 over a 3-1/2

year period.

Walter J. Turnbull, president of the Boys Choir of Harlem in New York, NY, ork, NY

provided the Department with a check for $3,000 as an initial restitution payment.

This action resulted from a joint investigation by the IRS Criminal Investigation

Division and OIG which disclosed that Turnbull concealed his true income from the

IRS from 1984 through 1994, falsified his tax returns, and submitted false certifications to the management agent at Manhattan Plaza, a HUD subsidized housing

development, in order to obtain $21,840 in Section 8 rent subsidies to which he was

not entitled. Turnbull was previously sentenced to 1 year probation, ordered to

make full restitution to HUD and the IRS, and ordered to pay a $50 special assessment. Turnbull has been suspended from participation in HUD programs; debarment action is pending.

Following his conviction on one count of wire fraud and two counts of false

statements, Victor Abdullah was indefinitely debarred from participation in HUD

and other federal programs. A joint investigation by the FBI and OIG disclosed that
Abdullah, on behalf of a bonding company, issued a counterfeit performance bond in

the amount of $2.2 million in connection with a HUD public housing modernization

project under the jurisdiction of the Michigan City, IN Housing Authority. The , IN

counterfeit bond was detected when the construction contract had to be terminated

by the Authority due to the inability of the contractor to meet construction deadlines.

The investigation found that Abdullah had no authority to issue the bond on behalf of

the bonding company. He previously pled guilty and was sentenced to 21 months

imprisonment and 3 years probation, and ordered to pay $1.4 million in restitution.

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 criminal conspiracy, false statements, misuse of funds,

and theft.

The former deputy director, Philadelphia, PA Housing Development Corpo- A

ration (PHDC), was indicted on 30 felony counts, including criminal conspiracy, bid

rigging, and theft of services. An investigation disclosed that over a 3-year period,

the former deputy director used his position for personal gain. He allegedly engaged

in a conspiracy with a major PHDC contractor to ensure that the contractor was the

successful bidder for all PHDC contracts involving HUD funded rehabilitation work.

In return for this arrangement, the contractor paid money to the deputy director and

performed and provided construction services and materials for the deputy

director’s personal residence. The indictment follows a 2-year investigation conducted by the HUD and City of Philadelphia OIGs. The investigation focused on

allegations of a kickback scheme to award $1.3 million in City contracts for rehabilitation at 4 HUD insured multifamily dwellings to 1 construction contractor.

In Schenectady, NY, John Gundrum pled guilty to 1 count of making a false , NY

claim to the United States and was sentenced to 6 months home detention and 3

years probation, and ordered to pay $55,039 in restitution to HUD. This resulted

from an OIG audit of the City’s Community Development Block Grant (CDBG)

Program and a subsequent investigation by the FBI and OIG. Gundrum submitted

fraudulent invoices, receipts, and copies of checks that were never executed for

rehabilitation work purported to have been performed with CDBG funds.

Derek Salley, former lead account assistant for Northwest Housing Alternatives, Inc. (NWHAI) in Portland, OR, was sentenced to 3 years supervised proba- ortland, OR

tion and 6 months home detention with a monitoring device, and ordered to pay

$52,137 in restitution, a $100 special assessment, and any other fees associated with

the monitoring equipment. Salley previously pled guilty to theft from programs

receiving federal funds. NWHAI received commingled funds from the HUD CDBG

Community Planning and Development Programs
Program and the City of Portland. Salley embezzled over $51,000 in commingled

funds by altering vendor checks and issuing unauthorized checks to himself, and

paid personal expenses with company checks. This was an OIG investigation.

Following an investigation by OIG and the Minnesota Department of Economic

Security, Orson Matlock was charged with 2 counts of theft by swindle of over

$500, a felony, and theft by swindle of less than $250, a misdemeanor, and pled

guilty to 1 count. Matlock was employed by “Project Off-Streets,” a HUD funded

nonprofit agency in Minneapolis, MN, that helps homeless teenagers. He was , MN

ordered to pay $1,484 to “Project Off-Streets” and received 60 months probation

and 90 days at a work house. He was also ordered to remain alcohol and drug free.

During this reporting period, other significant white collar OIG investigations

resulted in one sentencing, one indictment, and one pre-trial diversion agreement.

In San Juan, PR, Alejandro Diaz-Giral was sentenced to 18 months in prison uan, PR

and 4 years supervised release, and was ordered to pay $83,000 in restitution.

Diaz-Giral previously pled guilty to nine counts of mail fraud and one count of

impersonating a federal employee. An investigation by the FBI, OIG, and the Puerto

Rico Police disclosed that Diaz-Giral devised a scheme in which he claimed to be a

representative of the U.S. Federal Government, working for an agency known as

the “HUD Liaison Office,” which he claimed was responsible for monitoring HUD

funds in Puerto Rico. He was arrested at a “seminar” at which he promised

federal jobs with the “HUD Liaison Office” to those who attended. He required job

applicants to pay $237 to participate in training that was supposedly scheduled in the

Dominican Republic. The investigation disclosed that over 250 individuals paid the

training costs and expected federal employment.

A HUD Community Planning and Development Specialist in Beaumont, TX, Beaumont, TX

was indicted on 14 counts of submitting false statements. The indictment resulted

from an OIG investigation of official travel associated with the employee’s position

at HUD. The investigation disclosed that between September 1996 and February

2000, the employee allegedly submitted false statements and representations on

documents, including the falsification of hotel receipts while the employee stayed

with friends at their private residences, which were attached to numerous government travel forms and submitted for reimbursement. The employee was arrested in

April, and is on suspension without pay. No judicial proceedings have been scheduled at this time.

In Orlando, FL, a former intern in the Orlando, FL HUD Office of General Counsel signed

a pre-trial diversion agreement and agreed to pay back $14,215 to HUD for Lexis

Nexus charges that he incurred after he left HUD and moved to Florida. The intern

still had access to Lexis Nexus because his password had not been cancelled, and

he used the Lexis Nexus information for personal use. This was an OIG investigation.

Other Significant White Collar Investigations
As part of their regular workload, OIG Special Agents investigate violent crime

and drug trafficking in public and assisted housing. These investigations are part of

an initiative known as Operation Safe Home. The investigations are 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 are primary partners in Operation Safe

Home 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).

Some of our significant investigative results in the violent crime area are as

follows.

The South Jamaica, NY Task Force, consisting of the New York City Police amaica, NY

Department’s Organized Crime Control Bureau, Southeast Queens Narcotics

Division, and the Housing Bureau, OIG, and the Queens County District Attorney’s

Office Narcotics Investigation Bureau, was established in July 1998 to target drug

trafficking, violent crime, and gang activity in and around the South Jamaica public

housing development. During this reporting period, 3 individuals were sentenced to

a total of over 18 years in prison. A fourth person was sentenced to life in prison.

All four were members of the Chomp Crew, a violent gang that controlled a $3

million per year drug trafficking enterprise in and around the South Jamaica

development. Thirteen people were also arrested on drug charges during this

reporting period. To date, operations by the Task Force have resulted in the arrest of

over 100 drug dealers and their associates belonging to the Chomp Crew, the Corley

Crew, and the Forty’s Freelancers gangs. In addition, the Task Force has seized 288

glassines of heroin, 288 vials, 448 ziplock bags, and 11 ounces of crack, 5-1/2

ounces of heroin, 5-1/2 ounces of cocaine, 3-3/4 ounces of marijuana, $66,423 in

cash, 1 shotgun, 4 pistols, 1 revolver, 1 stun gun, 220 live rounds of ammunition, and

8 vehicles. Eighteen drug dealers have also been evicted from the development by

the New York City Housing Authority. In addition, the Task Force has been responsible for dismantling the Chomp Crew, the Corley Crew, and the Forty’s

Freelancers gangs.

In Topeka, KS, several Safe Home Task Force operations yielded significant S

results during this reporting period. Investigations by the FBI Violent Crime Task

Force, Kansas National Guard Counter Drug Operations Unit, OIG, DEA, USMS,

Shawnee County Sheriff’s Department, Kansas Bureau of Investigation, and the

Topeka Police Department resulted in the sentencing of seven individuals and the

indictment of three others. Four were sentenced to a total of nearly 30 years in

prison and 16 years supervised release after selling over $9,800 worth of drugs to

undercover Agents in public housing developments; all 4 were ordered to attend a

substance abuse program. Another person was sentenced to 22 months in prison

and 2 years supervised release for possession with intent to sell or distribute nearly

Violent Crime in Public and Assisted Housing
10 grams of methamphetamine at a HUD subsidized housing complex. Two others

were sentenced to a total of 10 years in prison and 8 years supervised release, and

were ordered to attend a substance abuse program, after selling cocaine in public

housing developments.

In another case, William Johnigan, Jr. was sentenced to 139 months in prison

and 36 months supervised release, fined $500, and ordered to pay $13,941 in

restitution. Johnigan previously pled guilty to two counts of bank robbery and three

counts of robbery. Johnigan was also recently sentenced to 15 months in prison and

36 months supervised release in the Western District of Missouri, and ordered to

pay $22,802 in restitution and a $100 fine. He had pled guilty to one count of conspiracy to commit bank fraud. Both sentences resulted from Johnigan’s arrest

during “Operation Clean-Up.” To date, this Safe Home initiative has resulted in 37

arrests and involved undercover drug purchases in 4 Topeka public and assisted

housing developments. The “Operation Clean-Up” Task Force consists of the OIG,

Kansas Bureau of Investigation, and the Topeka Police Department.

Julius Black, Robert Hayes, Robert Calchado, Sherman Shirley, Marvin Hayes,

Walter James Johnson, and Jay Hall were sentenced in Louisville, KY, to a total , KY

of over 52 years in prison, 31 years supervised release, $1,900 in special assessments, and 1 year of home incarceration. The sentencings resulted from an Organized Crime Drug Enforcement Task Force investigation called “Operation

Hardline.” The individuals were responsible for importing marijuana and cocaine

from Texas to Louisville, and ultimately into Louisville public housing developments. Over $700,000 in cash and 500 pounds of marijuana were seized during the

investigation. This Task Force is made up of the USCS, DEA, IRS, OIG, and the

Louisville Police Department.

In Omaha, NE, Reginald Hawkins and Djuan Beverly pled guilty to three Omaha, NE

counts and one count of distribution of crack cocaine, respectively. Donald R. Pitre

was convicted on 1 count of unlawful possession with intent to deliver a controlled

substance (crack cocaine) and was sentenced to 1 year in prison. Pitre, a Section 8

resident, was previously arrested for possession of 38 grams of crack cocaine and

78 grams of marijuana. Lorenzo Moss was sentenced to 18 months in state prison

for distributing crack cocaine in public housing. In addition, an individual was

indicted for selling 2 ounces of crack cocaine with a street value of $5,600. This

individual allegedly was a supplier to various drug dealers who were selling in and

around public/assisted housing. These actions followed Safe Home initiatives by the

OIG, DEA, ATF, USPS, and the Omaha Police Department, some of which targeted

the Vietnam Gangster Bloods, also known as the Deuce Four Bloods, a violent

street gang dealing narcotics in public and assisted housing developments.

The Greensbor eensboro, NC Violent Crimes Task Force, which is made up of the o, NC

FBI, DEA, ATF, OIG, USMS, U.S. Attorney’s Office, Greensboro, Kernersville,

Winston-Salem, and Burlington Police Departments, North Carolina State Bureau

of Investigations, the North Carolina Probation Office, and the Guilford County

Sheriff’s Department, has been addressing violent crime in public and assisted

housing for about 1 year. In total, Task Force operations have resulted in the indictment of more than 100 criminals on both state and federal narcotics and firearms

violations. During this reporting period, 7 individuals were sentenced to a total of

148 years in prison, 34 years supervised release, and 820 hours of community
service. Another person pled guilty to possession of cocaine with intent to distribute

in public housing, and another was indicted for distributing crack cocaine and

conspiracy to distribute crack cocaine in public housing. In addition, 2-1/2 pounds of

cocaine, over $16,000 in cash, 5 weapons, and 6 vehicles were seized.

As part of their Safe Home effort, the Task Force conducted a “zero tolerance”

operation in response to a rash of recent shootings in Greensboro public housing.

Approximately 90 Officers were included in the operation, in part to show the

community that the Police are there and are concerned for their safety, and in part

to demonstrate that they are serious about prosecuting the persons involved in the

recent shooting spree. The first day of the operation included the execution of search

warrants and the arrest of six individuals for state narcotics violations. Consent

searches were conducted at 21 other properties, and Officers were allowed to look

for several wanted subjects. With community support, the second day turned up the

main suspect in the shootings. The North Carolina Highway Patrol and North

Carolina Division of Motor Vehicles also assisted in the operation by setting up

drivers’ license checks within the immediate area.

As a result of a covert drug operation conducted by the OIG at Blue Hills Apartments, a Section 8 complex in Kansas City, MO, which has been plagued with , MO

drugs and violent crime, Michael J. Gant was sentenced to 92 months in prison and

36 months probation and fined $100. In addition, Steven A. Gant was sentenced to 37

months in prison and 36 months probation and fined $100. The Gants were convicted

of selling crack cocaine to an undercover OIG Agent on several occasions. Kelvin

Coleman was also found guilty of distribution of a controlled substance at Blue Hills

Apartments. These initiatives were conducted by OIG and the Kansas City Police

Department.

“Operation East Orange” continued to significantly impact drugs and violent

crime in public and assisted housing in East Or East Orange, NJ. During this reporting , NJ

period, three individuals pled guilty and were sentenced on drug distribution and

possession charges. The three were identified as major distributors of heroin and

cocaine in the vicinity of the Arcadian Gardens public housing development. James

Jones was sentenced to 4 years in state prison; Alexander Cross was sentenced to 5

years in state prison; and Bertrand Roe, also known as Berton Roe, received 364

days in county jail and 4 years probation. In addition to these sentencings, 116 people

were arrested in or near Arcadian Gardens on charges including purchasing heroin

and cocaine, possession of heroin, loitering with intent to buy and/or sell controlled

and dangerous substances, distribution of narcotics, and distribution within 500 feet

of public housing. In total, 239 packets of heroin, 115 vials of cocaine, 20 bags of

marijuana, 1 weapon, $2,668 in cash, and drug paraphernalia were confiscated.

“Operation East Orange” is a multi-agency law enforcement effort comprised of the

OIG, FBI, DEA, ATF, East Orange Police Department, and the Essex County

Prosecutor’s Office Narcotics Unit.

Task Force efforts by OIG, the Houston, TX Police Department, and the Houston, TX

Harris County Constable’s Office continued to produce significant results during this

period. In one operation, conducted as part of the Greenspoint Anti-Drug Initiative,

96 individuals were arrested in the Arbor Courts Section 8 complex on charges

including narcotics violations and outstanding fugitive warrants. Over 39 grams of

marijuana and a small amount of cocaine were confiscated. Another operation
resulted in the arrest of 46 individuals in and around the Lincoln Park, Irvinton

Village, Kelly Village, Kennedy Place, and Clayton Homes public housing developments. Charges included possession with intent to distribute, delivery of a controlled

substance, felon in possession of a firearm, outstanding fugitive warrants, trespassing, assault, evading arrest, and unauthorized use of a motor vehicle. About 240

grams of codeine, 29 grams of marijuana, and 42 grams of cocaine were seized.

Anti-Drug Initiative operations also led to a guilty plea by Phillip Dwight Smith for

possession with intent to distribute a controlled substance. Smith distributed narcotics to residents, visitors, and dealers in and around Arbor Courts and the

Townhomes Section 8 developments.

Larry Chalmers and Patrick Andrews pled guilty to distributing crack cocaine

in Memphis and Jackson, TN public housing developments. They sold over 110 son, TN

grams of cocaine to members of various street gangs at the Tulane Apartments, a

HUD subsidized complex. They also attempted to purchase 1 kilogram of cocaine in

a reverse sting operation in McKenzie, TN, when they were apprehended by the , TN

Tennessee Highway Patrol (THP) and Task Force Agents. The Task Force is comprised of OIG, THP, and the 24th Judicial District Drug Task Force.

Hillsbor Hillsboro and Beaverton, OR Safe Home initiatives resulted in the sentenc- erton, OR

ing of Marcelo Olvera-Cornea to 22-1/2 years incarceration following his guilty

plea to possessing a controlled substance with intent to distribute, felon in possession of a firearm, and eluding examination and inspection on 2 occasions. An

investigation, conducted by the Hillsboro Street Crimes Unit, ATF, and OIG, identified Olvera-Cornea as the source for a street level narcotics dealer near HUD

assisted housing and an elementary school. During the investigation, Officers and

Agents served a state search warrant at the dealer’s residence where they observed

a suspect travel to Olvera-Cornea’s residence. A subsequent search of OlveraCornea’s residence netted 4 pounds of methamphetamine with a street value of

$35,000, 2 rifles, 1 handgun, $812 in cash, and fictitious Social Security and

resident alien cards.

Officers from the Beaverton Police Department (BPD) and Westside Interagency Narcotics Team (WIN) executed a state search warrant at a Washington

County Section 8 apartment. OIG and WIN had been investigating allegations that

the resident and accomplices were producing methamphetamine. BPD conducted a

traffic stop on the resident and two other individuals, arrested the driver, and

searched the vehicle. Approximately 4 grams of methamphetamine, packaged for

distribution, were found in the vehicle. The resident and one associate were arrested for possession/distribution of a controlled substance. The resident then

consented to a search of the Section 8 apartment, where a methamphetamine lab

was discovered. In total, approximately 1 ounce of methamphetamine was recovered. The investigation reports were submitted to Washington County Housing

Services officials for eviction consideration.

As a result of operations by the Oklahoma City, OK Safe Home Task Force, , OK

Cipriano Alvarez was sentenced to 36 months in prison followed by 5 years supervised release. Alvarez was a supplier to multiple level drug dealers who sold

cocaine and methamphetamine to Section 8 residents in Oklahoma City and

Chickasha. The sentencing is the result of a 6-month investigation by the Oklahoma

City Safe Home Task Force targeting suppliers of narcotics to HUD funded housing.
In another Task Force operation, Agents and Officers executed 2 federal search

warrants in a Section 8 complex and arrested an individual for selling over 23 grams

of crack cocaine. The search warrant stemmed from multiple undercover buys and

surveillance operations and resulted in the seizure of over 300 grams of marijuana,

30 grams of cocaine, 1 loaded pistol with laser sights, 2 digital scales, and 1 vehicle.

The Task Force is made up of OIG and the Oklahoma City Police Department.

In pre-dawn raids, over 200 federal and state law enforcement officers dismantled the violent crime enterprise responsible for drug distribution and violent

criminal activity at public housing developments in Ponce and San Juan, PR. uan, PR

Thirty-two members of the criminal organization were indicted by a federal grand

jury for money laundering and distribution of cocaine and heroin. Since 1992, this

organization has been responsible for over 35 drug related murders in furtherance

of their criminal activities. The successful execution of 12 arrest warrants was

coordinated by the HUD and Social Security Administration OIGs, FBI, ATF, DEA,

INS, USMS, USCS, Puerto Rico National Guard, Puerto Rico Police Department, and

the San Juan Municipal Police.

Another effort was undertaken by DEA, OIG, and the Puerto Rico Police Department to dismantle a violent crime enterprise responsible for drug distribution

and violent crime, this time at Las Acasias, a HUD subsidized development. Search

warrants netted 377 bags of marijuana, 27 bags of marijuana cigarettes, 243 bags of

cocaine, and 1 firearm. This operation was initiated after an individual recently

shot a firearm at two DEA Agents while they were gathering information at the

development.

In Cleveland, OH, a total of 19 individuals were indicted for possession with eland, OH

intent to distribute crack cocaine and conspiracy to distribute crack cocaine. The

indictments stemmed from a 10-month investigation at the Riverside Park Estates

public housing development. The individuals were previously convicted felons who

plagued the development with drug transactions and violence. Ten of the individuals

have been arrested. In addition, 11 other individuals were arrested on state charges.

Eight residents are being processed for eviction. During the investigation, 180

grams of cocaine, 1 revolver, 3 semi-automatic handguns, and $82,000 in cash were

seized. This investigation was conducted by the OIG, DEA, Cuyahoga Metropolitan

Housing Authority Police, and the Cuyahoga County Sheriff’s Office.

OIG and the Worcester, MA Police Department Vice Crimes Unit, at times , MA

assisted by the Massachusetts State Police, the Oxford, Webster, West Boylston, and

Shrewsbury Police Departments, Worcester Police Department Detective Bureau,

Massachusetts Department of Youth Services, DEA, and the Central Massachusetts

High Intensity Drug Trafficking Area Task Force, continued to pursue violent

crime, drugs, and gang activity in public and assisted housing developments. During

this period, their efforts netted 37 arrests on charges of drug distribution and

trafficking, conspiracy, and armed home invasion, and the seizure of $38,895 in

cash, about 1,790 grams of cocaine, 673 grams of heroin, 1 weapon, drug packaging materials, and ammunition. One public housing resident was ordered to vacate

her apartment, another entered into an agreement with the Worcester Housing

Authority to vacate her apartment and terminate her housing benefits rather than

face eviction proceedings, and one Section 8 resident had his housing assistance

payments terminated. Evictions proceedings were initiated against several public/
assisted housing residents. In addition, public housing residents Jimmy Saez and

Luis Ortiz were convicted in connection with an August 1999 drive-by shooting in

the Great Brook Valley public housing development. Both were convicted on

charges of armed assault with intent to murder and assault and battery with a

dangerous weapon, and were sentenced to prison for 15 to 20 years.

Sixteen individuals, who were arrested in December 1999 in predawn raids by

OIG, DEA, and the Key West, FL est, FL Police Department for distributing heroin and est, FL 

crack cocaine in public housing developments, pled guilty. Seven were sentenced to

a total of 12-1/2 years in prison and 18 years supervised release. Sentencing for the

remaining nine individuals is pending.

Over the past 6 months, the Greater Little Rock, AR Safe Home Task Force ock, AR

has made significant inroads into drug activity in public and assisted housing

developments. A total of 176 individuals were arrested on drug and weapons

charges and 8,000 tablets of the designer drug ecstasy with an estimated street

value of $140,000, 680 grams of cocaine, 52,590 grams of marijuana, 4 grams of

heroin, 25 weapons, ammunition, $15,000 in cash, drug paraphernalia, substances

used for illicit drug manufacturing, and 2 scales were confiscated. The drug ecstasy

was the topic of a recent national news prime time program suggesting that the

effects of the drug are arguably more insidious than even crack cocaine. Several

deaths have been linked to its usage. This Task Force is made up of members of the

Pulaski County Sheriff’s Office, the Little Rock and North Little Rock Police

Departments, and OIG.

The Inglewood, CA Task Force, comprised of the A DEA Mobile Enforcement

Team, ATF, OIG, USMS, and the Inglewood Police Department, is focused, through

“Operation Sentinel,” on apprehending violent fugitives, combatting narcotics and

firearms trafficking, and decreasing gang activity, most notably Tepas 13 and other

street gangs, in public and assisted housing. During a recent investigation, several

drug purchases were made near various housing developments, resulting in an

aggregate of 88 felony arrests and 17 misdemeanor arrests. Of the 105 arrested, 39

were suspected members of the following gangs: Inglewood 13, Tepas 13, Osage

Legend Crips, Crenshaw Mafia Bloods, and Inglewood Family Bloods. Thirty-seven

individuals were on probation/parole at the time of their arrest. A total of 21 search

warrants were executed during this operation, leading to an aggregate seizure of 2

pounds (910 grams) of cocaine, 5 pounds (2,571 grams) of heroin, 1 pound (474

grams) of methamphetamine, 2-1/2 pounds (1,168 grams) of marijuana, 4 ounces of

PCP, 8 firearms, and $6,300 in cash.

As a result of operations by the Denver, CO Safe Home Task Force, Wilfredo , CO

Tauler Gomes, a heroin trafficker, was sentenced to 27 months in prison after

being convicted of 4 counts of distribution and 1 count of conspiracy to distribute a

controlled and dangerous substance in public housing. In addition to this sentencing,

14 others were arrested during the reporting period, including 1 public housing

resident who had an outstanding fugitive warrant for distribution of narcotics, 1

Section 8 resident who was a fugitive on a robbery warrant, 1 person who was

wanted on out-of-state warrants for forgery, criminal threats, burglary, possession of

a firearm, and parole violation and who attempted to sell a stolen car in public

housing, and 1 federal fugitive who was wanted for conspiracy to distribute cocaine
in public housing. Task Force members also seized 23 grams of crack cocaine, 3

handguns, $2,000 in cash, and 1 vehicle. The Task Force is made up of OIG and the

Denver and Glendale Police Departments.

“Operation Riptide” is an Organized Crime Drug Enforcement Task Force

investigation conducted by the FBI, OIG, and the Newport, RI wport, RI Police Department wport, RI

targeting narcotics traffickers operating in the Tonomy Hill/Park Holm public

housing developments. During this reporting period, Section 8 resident Wesley A.

McClinton was sentenced to 46 months in prison and 36 months probation following

his guilty plea to 3 counts of distribution of cocaine base. Another individual was

indicted on four counts of distribution of cocaine base. Eight other individuals were

arrested on charges ranging from narcotics violations, assault and battery on a

Police Officer, and obstructing a Police Officer, to assault and murder charges

following a shooting at Tonomy Hill. During one operation, Task Force members

observed an exchange between two known narcotics dealers in front of a unit at the

development. One of the individuals, who was driving a vehicle, fled the scene. His

knapsack, which contained over 3 pounds of suspected marijuana, was seized and a

search warrant was obtained for his vehicle; the warrant yielded 15 grams of crack

cocaine. A search warrant executed on another individual’s Section 8 apartment

netted approximately 3 pounds of suspected marijuana and drug paraphernalia.

Five individuals were indicted by a federal grand jury for selling heroin in HUD

subsidized Section 8 developments in Charleston, SC. The charges were the Charleston, SC

result of a search warrant executed in a Section 8 unit during which 4 individuals

were arrested, including the Section 8 resident, and 126 bags of heroin and about

$1,600 in cash were seized. Another search warrant was executed at the hotel room

of the alleged suppliers of the arrestees. Eviction procedures against the Section 8

resident are underway. This investigation was conducted by the FBI, OIG, Charleston

and Mount Pleasant Police Departments, and the Charleston Sheriff’s Department.

As a result of operations by the Albuquer Albuquerque, NM Safe Home Task Force, an , NM

individual was indicted by a federal grand jury on three counts of distributing crack

cocaine and one count of possession of a firearm in furtherance of a drug trafficking

crime. The individual, who was a public housing resident, was arrested on July 14.

After a detention hearing, the U.S. Magistrate ordered the individual to be detained

because he was a danger to society. In another operation, the Task Force executed 1

search warrant and 2 arrest warrants at C&A Auto Salvage, where 2 individuals

were arrested and a small amount of marijuana, 7 firearms, and $21,896 in cash

were confiscated. Over 1-1/2 kilos of cocaine were previously purchased from the

arrestees throughout the course of this 4-month initiative. The arrestees had been

identified as major distributors of cocaine to residents of Section 8 housing throughout the Albuquerque area, particularly in an area known as the “War Zone.” These

arrestees would purchase the cocaine, convert it into crack cocaine, and distribute it

throughout the “War Zone,” an area comprised primarily of assisted housing.

Following the arrests, consensual searches were conducted of the arrestees’ residences, which consisted of personal residences as well as a rental property, and a

safety deposit box. In addition, three illegal aliens who were working at C&A were

turned over to the INS for deportation proceedings; C&A Auto Salvage may possibly

be forfeited. This Task Force includes the OIG, DEA, FBI, and the Albuquerque

Police Department.
Over 100 people were arrested in New Orleans, LA public housing develop- , LA

ments and Section 8 neighborhoods during the past 6 months. Charges included drug

violations, outstanding fugitive warrants, possession of firearms, possession of

stolen property, vehicle theft, criminal damage to property, and burglary. The Task

Force confiscated 4,228 grams of cocaine, 772 grams of marijuana, 108 grams of

heroin, $11,452 in cash, 11 weapons, 1 vehicle, ammunition, drug paraphernalia,

and 1 walkie-talkie. This Task Force is made up of the ATF, OIG, and the New

Orleans Police Department.

In Washington, DC, search warrants related to a 58-count Racketeering gton, DC

Influenced and Corrupt Organization/Corrupt Criminal Enterprise indictment,

charging 30 individuals from Washington, DC, Maryland, and Northern Virginia

with conspiracy to distribute and possession with intent to distribute heroin in public

housing, were executed by Officers and Agents from the Metropolitan Police

Department, FBI and OIG. This action produced one of the largest combined drug

and cash seizures in Washington, DC history. Thirty individuals were arrested. To

date, seizures include 6 kilos of pure heroin with a street value of $20 million, 20

guns, $950,000 in cash, and 15 vehicles.

More than 40 Agents and Officers from OIG, ATF, the Allegheny County

Police, Pittsbur Pittsburgh, PA Housing Authority Police, and Pittsburgh Police Depart- A 

ment attempted to serve arrest warrants for 57 individuals implicated in a 2-year

undercover investigation which focused on drug and gang related criminal activity

at the Bedford Dwellings and St. Clair Village public housing communities. About

130 undercover drug transactions took place during this operation, along with the

purchase of 3 handguns. Twenty-four individuals were arrested on June 14, 9 more

surrendered the following day, and several more are currently negotiating their

surrender to law enforcement. The Pennsylvania State Police provided air support

for this operation, and while assisting in Bedford Dwellings discovered two clandestine marijuana “grow” sites in a wooded area adjacent to the complex. OIG is

coordinating with the Pittsburgh Housing Authority to ensure that eviction actions

are initiated against those Authority residents who were arrested or who assisted

any suspects.

This enforcement operation received extensive media coverage in Western

Pennsylvania. The president of the Bedford Dwellings Tenant Council was quoted in

the Pittsburgh Tribune-Review as saying: “All the residents have been complaining

about the drug problem for a long time.... So, of course people are excited that the

streets have been cleaned up. This has been a long time coming.”

The OIG, Manchester Police Department Special Investigations Unit, New

Hampshire State Police Narcotics Unit, and the High Intensity Drug Trafficking

Area Task Force, consisting of the FBI, DEA, USMS, IRS Criminal Investigation

Division, and various state and local law enforcement agencies, carried out a

number of Safe Home initiatives in and near Manchester Manchester, NH Section 8 and , NH

public housing developments. In one particularly significant case, Agents and

Officers executed a controlled delivery and subsequent seizure of 250 grams of

ketamine sent from China. The ketamine has an approximate street value of

$175,000. It was an unprecedented seizure in the Manchester area, where only

several grams of ketamine have been seized previously. The person arrested was

charged with violating state narcotics laws. The arrestee has been involved in
substance distribution for several years, including ecstasy and other narcotics.

Eleven other individuals were arrested during this reporting period, and 3 pounds of

marijuana worth about $3,600, 100 ecstasy pills worth about $1,300, over 1/2

kilogram of cocaine, $800 in cash, and drug paraphernalia were confiscated following other operations by Task Force members.

Following the execution of a search warrant, the OIG discovered a methamphetamine drug lab located between two HUD subsidized multifamily complexes in Salt

Lake City, UT. The lab was one of the most contaminated and hazardous sites , UT

ever found in Utah. The City’s Hazardous Materials Group decontaminated approximately 20 people adjacent to the complexes and the City condemned the

buildings in the area. A 20-day old child found at the scene tested positive for having

methamphetamine in his body and being addicted to the drug. A booby trap was also

found connected to the front door, which would electrocute anyone who touched the

front door knob. Two individuals were arrested and charged federally with manufacturing drugs within 1,000 feet of a public housing property, possession of a

clandestine drug lab, felon in possession of a firearm, illegal sale and manufacturing of a synthetic drug, and felony child abuse.

A few days later, the OIG executed another search warrant in a HUD funded

multifamily development, found 30 grams of methamphetamine, and arrested 2

individuals on charges of possession of a controlled substance with intent to distribute. The 2 individuals were also charged with felony child abuse because narcotics

were found under a 4-year old child’s bed.

The following day, OIG Agents seized 4 grams of methamphetamine and materials consistent with those used in a drug lab after they executed a search warrant in a

neighborhood of HUD funded developments. One individual was arrested and

charged with possession of a controlled substance.

In New Haven, CT, Safe Home Task Force members, including T OIG, the

Connecticut State Police, and the New Haven Police Department, conducted numerous operations in Section 8 neighborhoods and public housing developments. A total

of 43 individuals were arrested on various charges including possession of narcotics,

possession of marijuana and heroin, possession within 1,500 feet of a school,

operating a drug factory, possession of drug paraphernalia, violating probation,

criminal possession of a firearm by a convicted felon, illegal possession of body

armor, and interfering with a Police Officer. In addition, Section 8 assistance was

terminated for two residents and one public housing resident was evicted. An

aggregate of 35 bags of heroin, 88 bags of crack cocaine, over $50,000 worth of

marijuana, $11,240 in cash, 1 vehicle, proof of residence, 2 stun guns, 1 revolver, 1

handgun, ammunition, 1 scale, 4 cell phones, 1 State of Connecticut identification

card, 2 scanners, and gang photographs were confiscated.

OIG Agents and Baltimore City Police Detectives executed a search warrant

and seized over $13,700 worth of illegal narcotics, including 540 gelcaps of heroin,

300 ziplock bags of crack cocaine, and 115 ecstasy pills, at the O’Donnell Heights

public housing development in Baltimor Baltimore, MD. Cash totaling $1,240 was also , MD

seized. Six occupants were arrested and charged with distribution of illegal narcotics. The O’Donnell Heights Task Force believes that this particular apartment is one

of the main distribution points for illegal narcotics in the development. The Housing
Authority of Baltimore City has been advised to begin eviction proceedings against

the resident of record.

In another O’Donnell Heights initiative, and as a deterrent to would-be drug

purchasers in the development, OIG Agents and Baltimore City Police Detectives

executed 2 reverse sting operations during which 31 individuals were arrested and

charged with attempting to possess a controlled substance. Cash totaling $1,843 and

12 vehicles were seized. Of those arrested, 13 were identified as residents of

O’Donnell Heights. OIG has notified the local housing authority to begin eviction

proceedings against violators of the “One Strike and You’re Out” policy.

As a result of a sting operation conducted by “Operation Southside Crackdown”

Task Force members, two people were arrested. The first arrestee is a member of

the 16 Street Boyz gang and a major heroin dealer in the Afton Avenue Apartments,

a public housing community in Richmond, VA. He was arrested on federal A

charges of conspiracy and distribution of heroin. Subsequent to the arrest, a search

warrant was executed at the individual’s residence; he lives one block away from

Afton Avenue Apartments. The individual is also a suspect in two homicides. The

dealer’s supplier was also arrested on federal charges of conspiracy and distribution of heroin, following a transaction videotaped and witnessed by Task Force

members. The supplier has major heroin connections in the New York/New Jersey

area. The Task Force seized 6 ounces of heroin, $7,200 in cash, 2 vehicles, 1

bullet-proof vest, 1 police scanner, 1 handgun, and a small amount of marijuana. A

juvenile was also arrested on state charges of possession of a small quantity of

heroin. Heroin previously purchased from this dealer has been tested and identified

as 95 percent pure. Heroin use has become a growing problem in the Richmond

Metropolitan area. Eighteen individuals have died due to heroin overdoses this year.

This operation was conducted by the OIG, DEA, FBI, Virginia State Police, and the

Richmond and Chesterfield County Police Departments.

The OIG, USMS, DEA, Chicago, IL Police Department’s 5th District Gangs/ o, IL

Tactical Team and Organized Crime Division Gang Unit, the Cook County High

Intensity Drug Trafficking Area Task Force, and the Cook County State Attorney’s

Office conducted “Operation Alligator” by executing 12 state arrest warrants on

members of the Black P Stones, Concrete Vice Lords, and Four Corner Hustler

gangs. These gangs operated a $10,000 per day crack organization in the Altgeld

Gardens public housing development. The arrest warrants were executed after the

Task Force conducted numerous undercover drug purchases. The defendants were

charged with criminal drug conspiracy and delivery of a controlled substance.

During execution of the warrants, Task Force members seized 1/2 ounce of crack

cocaine, 1 ounce of marijuana, and $3,000 in cash. Following this first phase of

“Operation Alligator,” the Cook County State Attorney’s Office authorized 10

additional arrest warrants for members of the Black Disciples and Black P Stones

gangs involved in the distribution of crack cocaine to undercover Agents and Officers.

In Tacoma, WA,OIG Agents participated with the Tacoma DEA Task Force,

including the IRS, INS, Washington State Patrol, and Tacoma and Puyallup Police

Departments, in conducting a buy/bust operation involving 455 grams of heroin.

The operation resulted in the execution of two search warrants in public and as
sisted housing. About 750 grams of black tar heroin, $10,000 in cash, and 4 vehicles

were seized. In addition, four individuals were arrested.

In another operation, the Tacoma Police Department’s Special Investigations

Division served a search warrant at a residence located next to assisted housing.

The search warrant was executed as part of an investigation by OIG and the Tacoma

Police Department targeting the trafficking of cocaine from the residence. The

warrant resulted in the seizure of over 3 grams of cocaine and 3 grams of methamphetamine. Four individuals were arrested.

The Atlanta, GA High Intensity Drug Trafficking Area Task Force executed A

two arrest warrants on two individuals conducting business around the Jonesboro

North and South public housing complexes. One of the arrestees was a licensed

firearms dealer. An ATF analysis concluded that over the course of 2 years, the

dealer sold 100 firearms, and 25 of those firearms were associated or involved with

violent criminal acts. The second arrestee was a “straw” purchaser, who falsified

ATF forms at the time the firearms were purchased. Another operation by the Task

Force at the Jonesboro complexes netted the arrest of 5 people and the seizure of 2

pounds of marijuana, 8 grams of packaged marijuana, 1 gram of packaged crack

cocaine, 1 digital scale, and drug paraphernalia. This Task Force is made up of the

FBI, DEA, OIG, ATF, INS, USCS, the Atlanta Police Department, and the Georgia

Bureau of Investigation.

Seven people were arrested and over 100 ounces of cocaine, a large variety of

controlled substances, including Valium, Xanax, Rohypnol, Percodan, and

Propoxyphene, $15,000 in cash, 5 weapons, and 1 vehicle were confiscated as a

result of Safe Home initiatives undertaken by the OIG, DEA, IRS, USCS, USMS,

Mississippi Bureau of Narcotics, Jackson Police Department, Mississippi Safe

Home/High Intensity Drug Trafficking Area Task Force, and the Hinds County

Sheriff’s Office. The initiatives were focused on public and assisted housing developments in Jackson, MS. In one case, a suspect was armed with a revolver, but son, MS

an arrest was made without incident. Most of the arrestees were charged with

distribution of drugs and drug trafficking. As part of these Safe Home efforts, a

long-term investigation known as “Operation Safe Harbor” was initiated.

In Las Vegas, NV, a state search warrant executed at an apartment in the , NV

Hullum Homes public housing development led to the arrest of 1 person for possession of marijuana with intent to distribute. Over 100 grams of marijuana and $4,000

in cash were confiscated. Two state search warrants executed at the Miller Plaza

public housing development resulted in the arrest of two individuals for trafficking in

cocaine. Thirty grams of cocaine, 54 grams of rock cocaine, and $1,590 in cash

were seized from the apartment. These operations were conducted by a Task Force

made up of the Las Vegas Metropolitan Police Department and OIG.
Legislation, Legislation, Legislation,

Regulations and Other egulations and Other egulations and Other

Directives

Chapter 5
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 139 legislative, regulatory, funding notices, and

other HUD directive proposals. In addition, the OIG submitted one legislative proposal to the Congress. This chapter highlights some of the OIG recommendations.

In July 2000, the OIG submitted a legislative proposal to a Member of the House

Committee on Appropriations, Subcommittee on Veterans Affairs, HUD, and

Independent Agencies. The Member had expressed concern, during HUD’s appropriation hearing, about Community Development Block Grant (CDBG) funds being

used to benefit persons and entities other than low- and moderate income (LMI)

individuals.

We proposed that section 104(b) of the Housing and Community Development

Act of 1994 be revised to require a more effective methodology for measuring

benefits provided to LMI individuals. The Act requires that CDBG funding be targeted

to LMI individuals. In 1983, the Congress required that not less than 51 percent of

CDBG funds benefit LMI individuals. The Congress increased the benefit threshold to

60 percent in 1988, and to 70 percent in 1990, to better target funding.

An audit by the OIG (Report No. 93-HQ-141-0008, dated April 27, 1993) reviewed CDBG expenditures for 18 grantees and found that the Department’s LMI

benefit claims were based largely on speculative estimates and inappropriate

methodologies. As a result, those benefit claims were significantly overstated. The

audit showed that the actual benefits to LMI individuals were 65 percent, even though

the Department continually reported that the annual LMI benefits exceeded 90

percent. The Department takes the position that all grant expenditures for a particular activity may be counted towards satisfying the 70 percent overall LMI benefit

requirement if 51 percent of the residents of the activity area, or 51 percent of the

individuals benefiting from the activity, are LMI individuals. Using the Department’s

methodology, the full amount of these grants and their related administrative costs

could be counted toward the 70 percent LMI benefit test, even though as little as 51

percent of the funds may have directly benefited LMI individuals.

In our view, a simple legislative change would ensure a more realistic methodology for measuring benefits to LMI individuals. We proposed that section 104(b) of

the Housing and Community Development Act of 1974 be revised to specifically

provide that only the proportionate share of activity expenditures benefiting LMI

individuals be used in measuring the overall LMI benefit. For example, if a grant

activity benefits all the residents of a particular community but only 51 percent of

those residents are LMI, then only 51 percent of the grant expenditures should be

counted towards the LMI benefit test. This simple change could have a profound

effect on how communities target their CDBG funds.

Legislation

OIG Legislative

Proposal Proposal
This proposed rule would establish a requirement for public housing agencies to

give preference to responsible companies when purchasing firearms. Proposed

Section 965.905 defines a responsible company as one that has demonstrated a

commitment to producing safer firearms and is following sales and distribution

procedures designed to minimize suspect sales that might lead to illegal firearms

possession, or misuse by criminals, juveniles, or other persons.

We nonconcurred with the proposed rule because we questioned HUD’s authority to implement the rule. The preamble suggests that HUD is authorized to implement the proposed rule as an incentive for contractors to comply with public policy.

However, there is no statute, regulation, or other policy that establishes the criteria

in proposed Section 965.905. The criteria appear to be the product of an ad hoc

coalition of government officials, the Communities for Safer Guns Coalition. This

coalition is not chartered or endorsed by legislation or regulation, and therefore

lacks the authority to establish public policy. A similar proposal is the subject of a

lawsuit currently in the United States District Court for the Northern District of

Georgia, National Shooting Sports Foundation, Inc. et al. V. Cuomo, et al., Civil

Action No. 00-1063. The Department has not issued the proposed rule, and at the

end of the semiannual reporting period, stated that it is still under consideration.

This proposed final rule would establish administrative processes for multifamily housing, including notifying owners of HUD’s assessments of the physical condition of their housing, providing the owners an opportunity to seek technical review

of those assessments, and prescribing actions that HUD may take when housing is

found not to be in compliance with physical condition standards. The proposed final

rule takes into consideration public comments received on the proposed rule

published in the Federal Register on November 26, 1999.

We nonconcurred with the proposed final rule because of concerns with lack of

resident involvement in the inspection process, elimination of requirements for

Section 542 projects, and risks associated with owner self-certification of completed repairs. The proposed rule did not provide adequate provisions for resident

input on physical condition of properties or physical problems. While the interim

rule covered Section 542 projects, the Housing Finance Agency Risk Sharing

Program, the final rule excluded Section 542 projects from the inspection process.

Considering HUD assumes considerable risk for Section 542 projects, those projects

would benefit from the inspection process. We also disagreed that owners should

self-certify to completed repairs. Many owners are certifying on their monthly

Section 8 vouchers that their properties are decent, safe, and sanitary, when the

properties, in fact, are not. Additional controls, such as certification by a tenant or

a licensed inspector, would provide greater assurance that physical problems have

been corrected. If needed repairs are not made, the entire inspection process loses

its value as a program control and protection mechanism. The Department agreed

to revise the final rule to address our concerns, but had not yet issued the rule at the

end of the semiannual reporting period.

Regulations

Public Housing

Purchasing

Preference for

Responsible Firearms

Companies Companies

Uniform Physical

Condition Standards Condition Standards
The interim rule prohibits a mortgagee that has received a notice of proposed

termination of its origination approval agreement under HUD’s Credit Watch Initiative from establishing new branch offices in the lending area covered by the termination notice. The purpose of the rule is to ensure that mortgagees that are not

performing satisfactorily in specified geographic areas do not circumvent HUD’s

Credit Watch Program. Additionally, the rule allows HUD to amend the default and

claim rate thresholds for placing mortgagees on credit watch.

We nonconcurred with the interim rule because it did not adequately explain

why there was a need for a regulatory change as it pertained to amending default

and claim rate thresholds. Currently, HUD focuses its attention on those mortgagees

with the most egregious default and claim rates and announces the thresholds that

mortgagees will be evaluated against for each round of credit watch. The Department agreed with our comments and explained that, currently, each time it changes

the thresholds, it must issue a waiver of the regulations. The regulatory change

would eliminate the need for waivers in the future. The Office of Housing revised

the rule to explain why the regulatory change was necessary, but had not yet issued

the interim rule as of the end of the semiannual reporting period.

This interim rule implements section 223(f) of the National Housing Act, which

authorizes the Secretary of HUD to issue mortgages executed in connection with the

financing of debt of existing acute care hospitals. The purpose of the 223(f) Program

is to provide hospitals the opportunity to refinance their long-term debt service and

thus improve their financial viability.

We nonconcurred with the interim rule because of concerns with the use of

mortgage proceeds, geographic concentration of risk, and certification requirements. Contrary to the National Housing Act, the rule allows for mortgage proceeds

to be used for repairs, improvements, and equipment replacement. The Act requires that mortgage proceeds be used only to retire existing debt and pay necessary

costs of refinancing. The rule indicated that it is not anticipated that the requirement

for a certificate of need will be applicable unless required by state law. Section 242

of the Act states that HUD shall not issue a mortgage unless it receives a certification that there is a need for the hospital. The OIG believes that it is prudent to obtain

a certificate of need when refinancing to ensure that the need for the hospital still

exists. The General Accounting Office (GAO) suggested that HUD reduce risks

caused by the hospital portfolio’s geographic concentration by limiting the exposure

in a particular state and capping the mortgage insurance amounts. The proposed

rule states that the use of Section 223(f) for hospitals will address those concerns by

lowering HUD’s insurance risks through geographic diversification and additional

premium income. However, the OIG believes that expanding the hospital program

without the type of limiting factors suggested by GAO may, in fact, increase exposure

to risks by allowing the concentration to continue. At the end of the semiannual

reporting period, the Department was still considering OIG comments and had not

yet issued the interim rule.

Credit Watch

Termination

Initiative

Section 223(f) Section 223(f)

Mortgage Insurance Mortgage Insurance

for the Refinancing

of Debt of

Existing Hospitals Existing Hospitals
We nonconcurred with the proposed reorganization of the Office of HousingFederal Housing Administration Comptroller because one of the proposed duties is

specifically assigned to the Office of Inspector General.

Under the proposed reorganization, one of the primary functions proposed for

the Management Control Branch is to perform internal audits. This is not in compliance with the Inspector General Act. The Act states that the Inspector General’s

responsibilities and duties include conducting, supervising, and coordinating audits

and investigations relating to programs and operations of HUD. The Office of

Housing revised the reorganization plan by deleting performance of internal audits

from the duties of the Management Control Branch to address our nonconcurrence.

This Notice supersedes instructions provided in Housing Notice H 99-36, and

gives guidance to owners, management agents, contract administrators, and HUD

staff on two initiatives: the Mark-Up-To-Market Nonprofit Transfers (Transfer

Program) and the Budget-Based Rent Increase for Capital Repairs by Nonprofit

Owners (Capital Needs Program). The Transfer Program allows HUD to mark up

rents up to market to facilitate a change in ownership from a for-profit owner to a

nonprofit, or from one nonprofit to another nonprofit. Under the Capital Needs

Program, HUD permits Section 8 budget-based rent increases for nonprofit projects

to perform capital improvements.

We nonconcurred that projects must have a Real Estate Assessment Center

inspection score of greater than 30 to be eligible as a transfer project. The Transfer

Program permits the current owner to be under administrative sanctions. While it

is desirable to replace a poor performing owner, a transfer owner subject to

sanctions should be prohibited from receiving cash or other benefits as a result of

transfer under these circumstances. We also questioned why unassisted tenants

were exempt from rent increases when transfer projects are marked up to market.

Unassisted tenants should be subject to rent increases to bring their rents up to

market levels so they pay a fair share in the cost of improving or maintaining the

project. While we agree rent increases on Capital Needs projects should be limited

to 10 percent, their rents should also be increased to market. However, we believe

the rent increases should be spread over a number of years to avoid creating hardships for tenants. The Department addressed our comments and we removed our

nonconcurrence on May 24, 2000. The Notice had not been published at the end of

the semiannual reporting period.

This Mortgagee Letter announced changes to the Section 203(k) Program

relating to mortgagee responsibilities, 203(k) consultant requirements, and processing procedures. We nonconcurred with the proposed Mortgagee Letter because it

did not prohibit the use of any consultants other than those that are approved by HUD

and appear on the FHA 203(k) consultant roster, and did not provide adequate

procedures for monitoring consultant performance. The Department addressed our

concerns and issued the Mortgagee Letter on July 26, 2000.

Notice on Guidelines Notice on Guidelines

for Mark-Up-ToMarket Nonpr et Nonprofit

Transfers and

Budget-Based Rent

Increase for Capital or Capital

Repairs by Nonpr y Nonprofit

Owners

Section 203(k) Section 203(k)

Rehabilitation

Mortgage Insurance Mortgage Insurance

Program - Single Program - Single

Family Loan

Production

Other HUD Directives

Reorganization:

Office of HousingFederal Housing

Administr dministration

Comptroller Comptroller
This Mortgagee Letter announced revisions to FHA credit policy on gift letter

verification, underwriting procedures in community states, blanket verification for

loan documents, and other items. We nonconcurred with the Letter and recommended changes for improvement. We suggested that gift donors be required to

provide a copy of their bank statements as evidence of funds being available for the

gift and that the debt of non-purchasing spouses be considered during loan origination in community property states. We also suggested that the lender certify the

authenticity of each document in the case binder for FHA insurance endorsements,

rather than using the Department’s proposed blanket certification. The blanket

certification weakens accountability and makes it difficult to identify the individual

who certified any fraudulent documents that may be found during audits. The

Department revised the Letter to address our concerns regarding blanket certifications and debts of non-purchasing spouses. While the Department did suggest that

donors’ bank statements be obtained, it was not required. Instead, donors are

required to certify that they are providing the gift from their own funds and that the

funds were not received from a party in the real estate transaction. We removed our

nonconcurrence on July 27, 2000. The Mortgage Letter was issued on August 7,

2000.

Gift Documentation, Gift Documentation,

Mortgage Forms,

and Other Credit and Other Credit

Policy and Appr y and Appraisal

Issues
Chapter 6 Audit

Resolution esolution esolution
Audit resolution is the process where OIG and HUD management agree to

needed changes and timelines for action in resolving audit recommendations.

Through this process, we hope to see 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 issues where actions on audits have been delayed, where OIG

disagreed with management decisions, and where management decisions were

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 9/30/00,” and Table B, “Significant Audit

Reports Described in Previous Semiannual Reports Where Final Action Had Not

Been Completed as of 9/30/00.”

First issued June 30, 1992. HUD has been preparing financial statements under

the requirements of the Chief Financial Officers Act for 9 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 1999, we were unable to

perform sufficient procedures to opine on HUD’s financial statements in time to

meet the March 1, 2000 statutory due date. We were unable to express an opinion

on HUD’s principal financial statements because our scope was limited based on:

(1) the undetermined effects of the problems in converting the general ledger from

the Program Accounting System (PAS) to HUD’s Central Accounting and Program

System (HUDCAPS); (2) the inadequate state of HUD’s reconciliation efforts and

documentation for the general ledger accounts for the fund balance with Treasury;

and (3) the late manual posting of numerous and significant adjustments directly to

the financial statements, for which we lacked sufficient time to test their legitimacy.

In addition, results from our FY 1999 report on internal controls are consistent

with results reported in Semiannual Reports from prior years. Although there has

been some 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 multifamily projects. Corrective action plans have continued to change over the last 9 years.

First issued March 27, 1992. FHA has been preparing financial statements for 9

years under the Chief Financial Officers Act, beginning with FY 1991. The audit of

FHA’s FY 1999 financial statements discussed problems similar to most of 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 accounting and financial

management systems; (2) place more emphasis on early warning and loss prevention for insured mortgages; (3) more quickly resolve Secretary held mortgage notes

and minimize additional mortgage note assignments as well as note servicing

responsibilities; and (4) 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

Delayed Actions

Audits of HUD’s

FY 1991 through

1999 Financial 1999 Financial

Statements Statements

Audits of FHA’s FY

1991 through FY

1999 Financial 1999 Financial

Statements Statements
application level security controls. The FY 1998 report added a new issue — that

FHA must improve federal basis and budgetary accounting to develop support for

preparing future federal basis financial statements. The FY 1999 FHA report, issued

February 29, 2000, revised the budgetary accounting issue to include the need for

improved funds control and added a new issue that FHA must improve its review

process for estimating reserves for the insured portfolio.

FHA’s latest action plan continues to report efforts toward resolving these longstanding issues. The FY 2001 financial statement audit will assess FHA’s accomplishments in correcting these conditions

Issued October 30, 1992, and April 30, 1993. In our Semiannual Report for the

period ending March 31, 1997, we identified these as two reports for which we

reopened several recommendations because corrective actions were not implemented. Almost 8 years have gone by since we first reported to HUD officials that

some State Housing Finance Agencies (HFAs) were violating federal regulations by

collecting duplicate fees for administering Section 8 contracts.

We reported that two of three HFAs reviewed were collecting duplicate fees. The

excessive fees for 1 of these HFAs amounted to over $640,000 for the 8-year period

covered by our audit. The Office of Housing’s current position is to prevent HFAs

from collecting both fees on future deals. HFAs will be allowed to continue to collect

duplicate fees on previous deals if they request a waiver and justify keeping both

fees. We believe it would be illegal to grant HFAs retroactive waivers to keep fees

inappropriately obtained from HUD. Also, allowing some HFAs to collect and keep

fees amounting to almost twice as much as those collected by HFAs who abided by

the regulations is inequitable and sends the wrong message to those doing business

with HUD. HFAs and other entities doing business with the Department may conclude that overbilling for services will be overlooked or later waived by HUD.

Despite numerous attempts to have this issue resolved, including involvement of

the Deputy Secretary, the Department is unwilling to require repayment of the

duplicate fees. HUD is of the view that the duplicate fees do not represent a debt

owed the government and allowing agencies to petition for a waiver of the regulation

is both fair and appropriate. OIG continues to maintain the position that the dual fees

are overpayments for the reasons originally cited in our 1993 audit report and that

the dual fees constitute a debt owed the government. On July 27, 2000, the OIG

recommended that HUD request a ruling from OMB or GAO to determine if the

overpayments represent a debt and are subject to the debt collection rules. We were

recently advised that the Office of Housing will not request a ruling from OMB or

GAO. Instead, they plan to allow agencies to petition for a waiver of the regulations.

The OIG will refer the matter to GAO for a ruling. (Report Nos. 93-HQ-119-0004 and

93-HQ-119-0013)

Issued November 17, 1997. We reviewed complaints received from the Seattle

Displacement Coalition related to the City of Seattle’s Section 108 loan guarantee for

acquisition of the Frederick and Nelson building. Our review focused on the regulatory and programmatic issues in the complaints. We identified four programmatic

issues that HUD needs to address to further its efforts to empower grantees and

citizens. To address these issues we recommended that HUD:

➢ Remind grantees that they need to explain to citizens how the assistance to forprofit businesses meets the regulatory requirement that the assistance be

Audits of Bond

Refundings of

Section 8

Projects Projects

Section 108 Loan

Guarantee Program
appropriate to carry out an economic development project.

➢ Decide whether it should better define the criteria for “spot blight,” and inform

grantees of the importance of full disclosure to its citizens about how the project

meets the “spot blight” national objective.

➢ Inform grantees submitting Section 108 applications of the importance of complete disclosure of pertinent facts about the project, and require compliance

with HUD Reform Act disclosure requirements.

➢ Determine if there is a need to address citizens’ concerns and misconceptions

about the Section 108 Program through information statements or other means.

In January 1998, HUD management told the OIG they would take appropriate

action to correct the identified deficiencies. Over 2-1/2 years have passed since OIG

concurred with management’s decision to address the above program deficiencies.

The planned actions are currently over 750 to 900 days overdue. Since January 1999,

OIG staff have made numerous attempts to move local HUD officials to take action to

resolve these issues. To date, our attempts to prompt the Assistant Secretary to

correct the problems have not been successful. (Report No. 98-SE-148-0001)

Issued February 6, 1997. Our nationwide review of the Section 203(k) Program

disclosed numerous abuses by investors and a very high rate of default on their

loans. Because of the serious potential drain on the insurance fund, we recommended that HUD no longer allow investors to participate in the program.

Instead of permanently removing investors from the program, HUD placed a

temporary moratorium on investor participation. On June 9, 1997, this matter was

referred to the Deputy Secretary. On February 2, 1998, the former Deputy Secretary decided to maintain the suspension on investor participation, but postponed the

decision to permanently ban investors from the program until HUD decided whether

to implement a new rehabilitation program. While we believe HUD should permanently ban investors from the 203(k) Program as it had done in other Single Family

Programs, the suspension was an acceptable interim solution. Over the long term,

however, we are convinced that investors should be banned from the Section 203(k)

Program.

On June 14, 1999, the GAO issued its report entitled “Problems Persist With

HUD’s 203(k) Home Rehabilitation Loan Program.” The GAO reported that despite

the recognized risk associated with the 203(k) Program and the potential for mounting losses to the General Insurance Fund, HUD has done little to address the problems identified by the Inspector General and others. While the Department just

recently requested that GAO close the four recommendations in GAO’s report, they

are still open. The OIG is still waiting for the Deputy Secretary to direct the Office

of Housing to institute a permanent ban on investors in the 203(k) Program to

resolve this report. (Report No. 97-AT-121-0001)

Issued August 27, 1997. HUD’S procedures for approving consultants and

consultant trainers for the Section 203(k) Program were not properly documented

and resulted in inconsistent decisions by HUD Headquarters and Field Office staff.

The former Assistant Secretary for Housing/Federal Housing Commissioner

proposed to develop a certification examination for 203(k) consultants which would

be administered by a HUD approved testing organization. The improvements, which

were to have been completed by January 5, 1999, have not yet been made. On July

26, 2000, the Office of Housing issued Mortgagee Letter 00-25. According to the

Section 203(k) Section 203(k)

Rehabilitation

Mortgage Insurance Mortgage Insurance

Program

Section 203(k) Section 203(k)

Program Consultants Program Consultants
Letter, HUD plans to develop a formal examination process during FY 2001 similar

to the test FHA appraisers now complete. The Mortgagee Letter, which encompasses the improvements we recommended, has not yet been implemented. (Report

No. 97-AT-121-0803)

Issued May 1, 1998. Our audit of the Section 203(k) Program as it pertains to

owner/occupant borrowers found incomplete and poor rehabilitation work even

though inspectors had certified the work was properly completed. As a result,

HUD’s risks were increased and the borrowers’ living conditions were poor. The

Office of Housing drafted a Mortgagee Letter requiring lenders to field review the

final inspection report for a sample of lenders’ loans. We concurred in the proposed

corrective action and the January 4, 1999 draft Mortgagee Letter. The Mortgagee

Letter, which was to be completed by June 30, 1999, has not yet been issued and the

issues remain unresolved. The Mortgagee Letter issued on July 26, 2000, referenced in the paragraph above, did not address these issues. The OIG will meet with

Office of Housing staff to determine when and how they will address these recommendations. (Report No. 98-AT-121-0002)

Issued September 17, 1999. On March 29, 1999, after completion of a nationwide internal audit on the Property Disposition Program, most of the FHA property

disposition functions were contracted out to Management and Marketing (M&M)

contractors. M&M contracts did not contain sufficient information regarding FHA’s

reimbursement to contractors for property repair costs, or monetary penalties for

contractor noncompliance. Also, the new contract monitoring manual did not

provide comprehensive guidance for reviewing and approving reimbursement of

repair cost, conducting contract risk assessments, and documenting monitoring

results. While it was too early to evaluate performance under these contracts, we

recommended improvements to contract monitoring policies. FHA agreed to take

action to address all our recommendations, but actions have not been completed.

➢ By April 2000, FHA was to award a contract for technical support services to

evaluate current program procedures and standards to determine what revisions are needed. FHA was also to have completed a reassessment of program

controls by July 2000.

➢ By May 2000, FHA was to issue revised policies and procedures for: (1) approving reimbursement and documenting the need for repairs; (2) standardizing

monitoring assessments; and (3) enforcing contractor compliance and sanctions

for noncompliance.

As discussed in Chapter 1 of this Semiannual Report, a recently completed

nationwide audit of FHA’s Single Family Property Disposition Program found

problems with all seven M&M contracts we reviewed. The audit results showed the

recommendations from our previous report are still very much needed. (Report

No. 99-AT-123-0001)

Issued November 4, 1999. HUD has changed its development solution for the

new Departmental Grants Management System (DGMS) from a combined expansion of existing systems to a custom development solution. In September 1998, the

Financial Systems Integration Team, under the HUD Chief Financial Officer,

completed a feasibility study which concluded that the custom development solution

Single Family

Property Disposition

Program

Section 203(k) Section 203(k)

Rehabilitation

Mortgage Insurance Mortgage Insurance

Program

Initial De Initial Development elopment

Efforts of the

Departmental Grants Departmental Grants

Management System
was the most expensive and risky solution. The Department disagreed with four of

the five recommendations in our audit report. In two responses, dated January 3,

2000, and June 26, 2000, the Department refused to: (1) assign full project responsibilities to the Chief Information Officer; (2) perform new feasibility studies

including a cost benefit analysis of technical alternatives; (3) curtail further development until the recommended studies are completed; and (4) involve experienced

grantees to assist the Department in developing a new grants management system.

Subsequent to our review, on June 22, 2000, the Deputy Secretary announced

that due to contractor non-performance, development for Phase I of DGMS had been

suspended. HUD became concerned that delays in correcting software defects and

the software development approach being employed would neither provide a high

level of grant program functionality nor meet the needs of our business partners on

a consistent basis. DGMS costs through June 30, 2000, totaled $5.3 million.

In a memorandum dated August 25, 2000, we again requested the Deputy

Secretary to reconsider the Department’s position on the disagreed recommendations. The Deputy Secretary informed us on September 29, 2000, that he had

initiated a review of the issues we raised. He indicated that the review should be

completed by October 16, 2000, and he would, at that time, be prepared to discuss

our request for reconsideration. (Report No. 00-DP-166-0002)

Issued March 31, 2000. We found that the Oglala Sioux Tribe grant was inappropriate because the Appropriation Act required competitive awards. This position

was based on an OIG Office of Counsel opinion. Relying on HUD Counsel’s contradictory opinion, the Assistant Secretary for Public and Indian Housing disagreed

with the finding and did not provide management decisions.

On June 21, 2000, the OIG referred the legal question to the Comptroller

General for legal interpretation of the statute. However, in September 2000, the

Senate Committee on Appropriations (Report No. 106-410) referred to this audit and

supported the OIG’s position. The Committee stated the $2,000,000 grant award

made to the Oglala Sioux Tribe was “a clear violation of the law” because it should

have been made competitively. Noting that the Tribe cannot repay the funds, the

Committee “expects the Secretary to refund these amounts out of the overall

funding of the Native American Housing Block Grant Program.” We will evaluate

the Department’s FY 2001 appropriation bill to determine whether language concerning the grant award is included in the final appropriations report. If not included, we will continue to pursue the Comptroller General’s decision. (Report No.

00-DE-156-0001)

Issued March 31, 2000. We reported that HUD allowed nonprofit organizations

to operate down payment assistance programs that circumvent FHA requirements.

The down payment loan transactions do not meet the intent of FHA requirements in

that the down payment assistance is not a true gift because the sellers reimburse the

nonprofit for the assistance. Audit results indicate that default rates for buyers

receiving down payment assistance from nonprofit organizations are significantly

higher than for other FHA loans. Also, some sellers have raised the sale prices of

properties to cover the cost of the down payment assistance programs, causing

buyers to finance higher loan amounts. The circumvention of FHA requirements

occurred because HUD did not have an established process or specific criteria to

evaluate these programs.

HUD Office of

Native American

Programs —

Non-Competitive

1998 Rural

Housing and

Economic Economic

Development elopment

Grant Awards

Down Payment

Assistance Pr ssistance Programs
During the audit, HUD issued a proposed rule for comment which would preclude down payment funding derived from the seller of single family properties,

either directly or indirectly. The audit report provided evidence supporting HUD’s

proposed rule: the elimination of seller funded down payment assistance “gift”

programs, such as those operated by Nehemiah and HART, which circumvent FHA

requirements, result in significantly higher default rates and over-appraised properties.

Subsequent to the audit, FHA reversed the position taken in the proposed rule.

FHA now plans to draft and issue a final rule which we believe violates the intent

and spirit of Section 203(b)(9) of the National Housing Act, and contradicts the

proposed rule. There is no statutory exception to the buyer’s minimum down payment requirement of 3 percent. A final rule that permits seller funded down payments is contrary to existing HUD guidance. FHA would be hard pressed to legally

support classifying a seller funded down payment as a “gift” since the contribution

would not be made gratuitously without consideration. We strongly disagree with

the proposed decisions and question their legality. The matter will be referred to the

Deputy Secretary for decision in October 2000. (Report No. 00-SE-121-0001)

Issued October 14, 1999. Our review disclosed that HUD’s New Orleans Senior

Community Builder inappropriately interfered with a Public Trust Officer’s attempt

to bring the Alexandria Housing Authority within compliance of its Annual Contributions Contract. The Senior Community Builder’s interference created an atmosphere of confusion for Authority and local government officials. As a result, the

Authority did not know whose directions to follow. Further, HUD’s Director of

Community Planning and Development (CPD) attempted to impede our audit by

denying that his office had any files relating to Phoenix Point.

We recommended the Deputy Secretary clarify that the Senior Community

Builder has no program authority and inform the Authority it should follow the

Office of Public and Indian Housing’s instructions on programmatic issues. Finally,

the Deputy Secretary should direct the Senior Community Builder not to interfere

with Public Trust Officer duties and take appropriate action against the CPD Director for attempting to impede the audit.

The Deputy Secretary responded in December 1999 that the Department had

acted properly, and therefore, no actions were necessary. The Deputy Secretary

also said the Department had closely reviewed the circumstances of the CPD

Director’s release of information to the Auditors and concluded that the CPD Director had not deliberately withheld information. Therefore, no action was necessary.

In February 2000, and again in July 2000, we requested documentation of the

reviews made by the Department; none was provided. Since the Deputy Secretary is

the Department’s audit resolution official and makes the final decision, we closed

the recommendations in disagreement. (Report No. 00-FW-177-0801)

Significant Management Decisions With Which OIG

Disagrees

Community

Builder’ Builder’s Role in

Phoenix Point

Transitional Housing
Issued March 1, 2000. Our review of HUD’s compliance with significant laws

and regulations disclosed that HUD is not in compliance with the United States

Housing Act of 1937, as amended by the Quality Housing and Work Responsibility

Act of 1998 (the Act). HUD is not enforcing properly the Act’s requirements relating to housing authorities’ timely expenditure and obligation of public housing

modernization funds. We recommended that the Assistant Secretary for Public and

Indian Housing enforce the Act’s requirements and issue clarifying guidance in

accordance with the Act. Because HUD’s and OIG’s interpretation of relevant

provisions of the Act differ, HUD has decided not to implement our recommendations.

The Act provides that public housing modernization assistance shall be spent not

later than 4 years after the date on which funds become available for obligation. The

Act provides that the Secretary shall enforce requirements for expenditure of funds

through default remedies up to and including the withdrawal of funds. Our review of

expenditures of FY 1995 and prior years’ public housing modernization funds showed

$337 million in unexpended funds as of September 30, 1999. HUD believes the Act’s

provisions relating to expenditures do not become effective until FY 2000. It is our

opinion that the provisions do apply to the prior years’ funds, and the funds are

subject to the enforcement provisions of the Act.

The Act also expressly provides that FY 1997 and prior year modernization

funds be obligated by housing authorities no later than September 30, 1999. HUD

does not believe that the sanction and recapture provisions of the Act apply to FY

1997 and prior FY funds. Furthermore, HUD believes a December 22, 1999 Federal

Register Notice providing policy on the funds was a legal and reasonable exercise of

HUD’s authority to prescribe remedies for the unobligated FY 1997 and prior funds.

We agree that HUD can impose any number of improvised performance remedies;

however, it is our opinion that HUD must impose the Congress’s mandated remedy.

To resolve these differing opinions, on August 15, 2000, the Inspector General

requested that the Comptroller General provide a legal opinion on the appropriate

interpretation of the statutory language. (Report No. 00-FO-177-0003)

Issued January 13, 1997. The Memphis Housing Authority (MHA) has been

unable to provide decent, safe, and sanitary housing to its residents. Maintenance of

its units has been a long-standing problem. Our report recommended obtaining an

independent needs assessment of MHA’s maintenance and modernization programs

by a consultant or team of knowledgeable HUD individuals.

The Assistant Secretary for Public and Indian Housing requested our concurrence in revisions to the management decisions on this audit. Rather than contracting for private management of its maintenance department, the Assistant Secretary

wished to allow the newly appointed MHA executive director the opportunity to

improve his maintenance operations. In July 2000, we agreed with the revised

action, based on HUD’s negotiating a new Memorandum of Agreement with MHA.

The Memphis Troubled Agency Recovery Center will be monitoring the MHA to

ensure that critical goals established are achieved by October 2001. (Report No. 97-

AT-201-1001)

Attempt to Audit the udit the

FY 1999 Financial FY 1999 Financial

Statements Statements

Significant Revised Management Decisions

Memphis Housing

Authority
Issued March 26, 1998. The audit found the City spent over $5.2 million of

Community Development Block Grant funds for grant administrative expenses

without proper support and spent nearly $500,000 for ineligible grant administrative

expenses. Originally, HUD agreed that these amounts were to be repaid to the

program. The Comptroller’s Office and the Coral Gables, FL HUD CPD Office

reviewed additional documentation provided by the City and determined that $2.6

million were eligible costs. The Comptroller’s Office proposed and we agreed to

revise management decisions in June 2000 requiring repayment of the remaining

ineligible and unsupported costs of nearly $3.1 million. (Report No. 98-AT-241-

1003)

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 OMB’s concurrence if more time is needed. FFMIA requires us to

report in the Semiannual Report instances and reasons when an agency has not met

the intermediate target dates established in the remediation plan. HUD initially

determined in April 1998 under FFMIA that 38 of its systems were not in substantial

compliance. At the end of FY 1999, the Department reported that 18 systems were

not in substantial compliance with FFMIA. During FY 2000, the Department has

classified 9 of the 18 systems as either compliant, non-financial, immaterial, or

discontinued. As of the end of September 2000, the Department was working to

finalize remediation and corrective action plans for nine systems which remain

non-compliant. In our attempt to audit HUD’s FY 1999 financial statements, we

noted that remediation plans for systems needed to be updated to address weaknesses with transferring FHA general ledger data to the HUD general ledger,

correcting deficiencies with general ledger interfaces, and implementing funds

control in all FHA systems.

As of September 2000, the Department was in the process of developing plans

to address financial management system weaknesses and bring systems in conformance with FFMIA. Given that the Department is still in the planning stages of this

effort, it is likely that systems will not be in compliance by the April 2001 deadline.

As a result, the Department will need to obtain OMB’s approval for additional time.

City of Miami f Miami

Community

Development elopment

Programs Programs

Federal Financial Management Improvement

 Act of 1996 (FFMIA)
Report fraud, waste and mismanagement in HUD

 programs and operations by:

Calling the OIG Hotline: Sending written information to:

1-800-347-3735 Nationwide OIG Hotline

1-202-708-4200 in the DC area Office of Investigation

1-800-304-9597 by TDD Room 8270

1-202-708-4829 by fax 451 7th St., SW

Washington, DC 20410-4500

via the internet: www.hud.gov/oig/oighot.html

or contacting your local HUD OIG District Office:

New England District

Thomas P. O’Neill, Jr. Building

10 Causeway St.

Boston, MA 02222-1092

Tele: 617-565-5293

fax: 617-565-6916

States: CT, MA, ME, NH, RI, VT

New York/New Jersey District

26 Federal Plaza

New York, NY 10278-0068

Tele: 212-264-8062

fax: 212-264-4933

States: NJ, NY

Mid-Atlantic District

The Wanamaker Building

100 Penn Square East

Philadelphia, PA 19107-3390

Tele: 215-656-3410

fax: 215-656-3409

States: DE, MD, PA, VA, WV

Southeast/Caribbean District

Richard B. Russell Federal Building

75 Spring St., SW

Atlanta, GA 30303-3388

Tele: 404-331-3359

fax: 404-331-1243

States: AL, FL, GA, KY, MS, NC, SC,

TN, and Puerto Rico

Pacific/Hawaii District

Phillip Burton Federal Building &

Courthouse

450 Golden Gate Blvd., Room 8-5139

San Francisco, CA 94102-3448

Tele: 415-436-8108

fax: 415-436-8114

States: AZ, CA, HI, NV

Northwest/Alaska District

Seattle Federal Office Building

909 1st Ave., Suite 125

Seattle, WA 98104-1000

Tele: 206-220-5380

fax: 206-220-5160

States: AK, ID, OR, WA

Capital District

800 North Capitol Street, NW

Suite 590

Washington, DC 20002

Tele: 202-501-1200

fax: 202-501-1312

States: DC metropolitan area

Midwest District

Ralph Metcalfe Federal Building

77 W. Jackson Boulevard, Suite 2646

Chicago, IL 60606-3507

Tele: 312-353-4196

fax: 312-353-3188

States: IL, IN, MI, MN, OH, WI

Southwest District

819 Taylor St.

Ft. Worth, TX 76102

Tele: 817-978-9310

fax: 817-978-9373

States: AR, LA, NM, OK, TX

Great Plains District

Gateway Tower II

400 State Ave.

Kansas City, KS 66101-2406

Tele: 913-551-5866

fax: 913-551-5496

States: IA, KS, MO, NE

Rocky Mountains District

First Interstate Tower North

633 17th Street

Denver, CO 80202-3607

Tele: 303-672-5449

fax: 303-672-5087

States: CO, MT, ND, SD, UT, WY

All information is

confidential and

you may remain

anonymous.
HUD Office of Inspector General

Semiannual R Semiannual Report to the Con eport to the Congress

as of September 30, 2000

www.hud.gov/oig/oigindex.html

No. 44 HUD-2039-IG
U.S. Department of Housing and Urban Development

Office o Office of Inspector Gener f Inspector General

Semiannual Report to the Congress

for the 6-month period April 1, 2000 through September 30, 2000

Appendices Appendices Appendices
APPENDIX 1 - AUDIT REPORTS ISSUED

Internal Reports

Single Family Audit Reports

Multifamily

00-AT-123-0001

00-AT-123-0002

Single Family Property Disposition Program, 9/28/00.

Demolition of HUD Real Estate Owned Properties, Chicago, IL, 9/29/00. Questioned: $541,143; Better Use: $151,454.

00-PH-119-0001

00-SE-119-0003

Up-Front Grant Program, 9/29/00. Questioned: $1,123,826; Unsupported: $1,123,826.

Final Report on Nationwide Audit, Use and Disposition of Residual Receipts, 9/29/00. Questioned: $64,369.

PIH

00-DP-166-0003 Integrated Disbursement and Information System, Washington, DC, 5/11/00.

00-AT-106-0003

00-KC-103-0002

00-SE-107-0002

Atlanta Housing Authority, Atlanta, GA, 8/1/00.

Housing Subsidy Program, 9/29/00.

Final Report on Office of Native American Programs, Staff Training Conference, Reno, NV, 9/29/00.

Miscellaneous

Single Family Audit-Related Memor elated Memoranda

00-SF-121-0802 Los Angeles Area Office and Santa Ana Homeownership Center, Santa Ana, CA, 4/6/00.

Multifamily

00-BO-111-0802

00-CH-199-0801

00-PH-119-0801

Section 8 Contract Renewal Process, Boston, MA, 9/29/00.

HUD’s Settlement Agreement, Associated Estates Realty Corporation, Office of Multifamily Housing, Chicago, IL, 9/28/00.

HUD Pittsburgh Office’s Income and Age Waivers for Presbyterian Association on Aging Projects, Oakmont, PA, 5/3/00.
External Reports

Single Family Audit Reports

00-AT-222-1009

00-BO-222-1005

00-CH-211-1005

00-DE-222-1003

00-FW-222-1003

00-FW-222-1005

00-FW-222-1006

00-FW-222-1007

00-NY-229-1006

00-PH-222-1005

00-SF-222-1002

Southeast Alliance of Foreclosure Specialists, LLC, Norcross, GA, 9/15/00.

Citiwest New England, Inc., Management and Marketing Contractor, Hartford, CT, 9/29/00.

Golden Feather Realty Services, Inc., Management and Marketing Contractor for Atlanta Area A-1, Chicago, IL, 9/26/00.

First Preston Management Inc., Management and Marketing Contract, Denver, CO, 9/21/00.

Pope & Booth, P.C., Closing Agent Contract, Austin, TX, 5/24/00. Questioned: $391,058; Unsupported: $390,473.

Portnoy & Greene, P.C., Closing Agent Contract, Boston, MA, 8/16/00. Questioned: $275,625; Unsupported: $258,587.

Fortune Escrow, Inc., Closing Agent Contract, Glendora, CA, 8/23/00. Questioned: $43,900.

Shapiro & Ingle, Inc., Closing Agent Contract, Raleigh, NC, 9/29/00. Questioned: $139,575; Unsupported: $136,000.

First Preston Foreclosure Specialist, Marketing and Management Contract, Blue Bell, PA, 09/21/00.

Michaelson, Conor and Boul, Management and Marketing Contractor, Huntington Beach, CA, 9/29/00.

Single Family Property Disposition Program Management and Marketing Services Contract, Irvine, CA, 9/22/00.

APPENDIX 1

Miscellaneous

00-AO-174-0801

00-DP-182-0804

00-FO-177-0801

00-FO-177-0802

00-PH-169-0802

Use of Fair Housing Initiatives Program Funds, Washington, DC, 7/6/00.

Department’s September 2000 Purchase of COTS Financial Management System, 9/29/00.

Independent Accountant’s Report on HUD’s FY99 Detail Accounting Submission Report (Drug Control Funds), 5/15/00.

Survey of HUD’s Contract Award Process, 9/29/00.

Resource Estimation and Allocation Process Implementation, Progress Assessment, 9/29/00.

Internal Reports - continuted

PIH Audit-Related Memor elated Memoranda - continued

00-AO-185-0802 Tenant-Based Section 8 Program, Washington, DC, 8/10/00. Questioned: $82,780; Unsupported: $82,780.
PIH

00-AT-202-1007

00-AT-202-1008

00-BO-202-1003

00-BO-204-1004

00-DE-207-1004

00-FW-201-1004

00-KC-209-1002

00-NY-202-1005

00-PH-204-1004

00-SE-207-1001

APPENDIX 1

St. Petersburg, FL Housing Authority, 5/24/00. Questioned: $363,230; Unsupported: $363,230.

Cullman, AL Housing Authority, Public Housing Programs, 8/31/00. Questioned: $27,387; Unsupported: $23,272.

Housing Authority of the City of New Britain, CT, 6/12/00.

Housing Authority of the City of Bridgeport, CT, 7/5/00. Questioned: $811,413; Unsupported: $26,000.

Chippewa Cree Housing Authority, Review of Housing Activities and Related Management Controls, Rocky Boy, MT, 9/21/00.

Questioned: $126,679.

Housing Authority, City of San Antonio, TX, Procurement Activities, 8/9/00. Questioned: $865,409; Unsupported: $54,717.

Housing Authority of St. Louis, MO, Paul Simon Tenant Association, 5/31/00. Questioned: $15,158; Unsupported: $15,158.

Poughkeepsie, NY Housing Authority, Low-Rent Housing Program, 9/25/00. Questioned: $121,712; Unsupported: $106,262;

Better Use: $268,069.

Wilmington, DE Housing Authority, Public Housing Operations, 9/28/00. Questioned: $1,704,420; Unsupported: $373,105.

Housing Activities Administered by Lummi Indian Business Council, Bellingham, WA, 9/29/00. Questioned: $1,333,901;

Unsupported: $1,323,964.

External Reports - continued

Audit Reports - continued

CPD

00-CH-255-1003 State of Ohio, Community Housing Improvement Program, Columbus, OH, 6/15/00. Questioned: $450,987.

Multifamily

00-CH-212-1004 Neighborhood Commons Cooperative, Multifamily Rental Housing, Chicago, IL, 8/8/00.

Multifamily

00-BO-219-1801

00-CH-211-1809

00-CH-211-1810

00-DE-212-1801

00-DE-212-1802

Computer Learning Center-Greater Hartford Realty Management Corporation, Hartford, CT, 6/14/00.

Harbor View Estates, Multifamily Equity Skimming, Duluth, MN, 7/5/00.

Eenhoorn L.L.C., Multifamily Equity Skimming, Grand Rapids, MI, 8/31/00.

Village 88 Apartments, Review of Project Operations, Thornton, CO, 7/26/00.

Village Garden Apartments, Review of Operations, Aurora, CO, 8/18/00.

Audit-Related Memor elated Memoranda
APPENDIX 1

External Reports - continued

00-AO-202-1801

00-AT-202-1802

00-AT-201-1803

00-FW-202-1802

00-FW-202-1803

00-NY-202-1802

00-NY-209-1803

District of Columbia Housing Authority, Washington, DC, 4/4/00. Questioned: $82,714.

Fort Valley, GA Housing Authority, Misuse of HUD Funds, 4/26/00.

City of Atlanta, GA Housing Authority, Design and Construction Management Department, 8/4/00.

Alexandria, LA Housing Authority, Agreed Upon Procedures, 4/26/00.

Leesville, LA Housing Authority, 5/10/00. Questioned: $333,452; Unsupported: $333,452.

North Bergen, NJ Housing Authority, Low-Rent Housing Program, 9/1/00.

Hoboken, NJ Housing Authority, Low-Rent Housing Program, 9/25/00.

PIH

CPD

00-BO-251-1802

00-BO-255-1803

00-CH-249-1811

00-FW-251-1804

00-FW-251-1805

00-FW-251-1806

00-KC-241-1801

00-PH-255-1802

Continum of Care Program, Boston, MA, 8/14/00.

State of Maine FIX ME Program, Augusta, ME, 9/25/00.

City of South Bend, IN, Broadway Street Mortgage Loan Subsidy Program, 9/13/00. Questioned: $8,350.

Housing Crisis Center Supportive Housing Grants, Dallas, TX, 5/12/00. Questioned: $55,715.

Houston, TX Regional HIV/AIDS Resource Group, Inc., 9/5/00. Questioned: $34,150.

Houston, TX Regional HIV/AIDS Resource Group, Inc., Supportive Housing Grant, 9/27/00. Questioned: $182,398;

Unsupported: $109,314.

City Housing Policies, Kansas City, MO, 4/6/00.

Westmoreland County Consortium, HOME Program, Westmoreland, PA, 8/21/00.

Audit-Related Memor elated Memoranda - continued
APPENDIX 2

TABLE A 

AUDIT REPORTS ISSUED PRIOR TO START OF PERIOD WITH

NO MANAGEMENT DECISION AT 09/30/00

*Significant Audit Reports Described in Previous Semiannual Reports

REPORT NUMBER & TITLE REASON FOR LACK OF MANAGEMENT DECISION

ISSUE DATE/

TARGET FOR

MANAGEMENT

 DECISION

* 00DP0002 Initial Development Efforts of the

Departmental Grants Management System.

* 00AT1003 Puerto Rico Public Housing

Administration, Procurement Management,

San Juan, PR.

* 00AT1801 Puerto Rico Public Housing

Administration, Misuse of Funds, San Juan,

PR.

Management decisions have not been reached on 4 of the 5 reported recommendations. The Deputy Secretary initially disagreed that corrective action was necessary.

In August 2000, the OIG requested the Deputy Secretary to reconsider the

Department’s position on the 4 recommendations. On September 29, 2000, the

Deputy Secretary informed the OIG that the Department is reviewing the issues and

would be prepared to discuss our request for reconsideration upon completion of their

review in October 2000.

Management decisions were not reached for 15 of the 19 reported recommendations.

Subsequent to the semiannual reporting period, acceptable management decisions

were proposed by the Assistant Secretary for Public and Indian Housing for an

additional 4 recommendations, leaving 10 recommendations in disagreement as of

October 4, 2000. Because of disagreement between the OIG and the Assistant Secretary regarding the proposed actions and the urgency of implementing corrective

action, the 10 recommendations without management decisions were referred to the

Deputy Secretary for management decisions on October 17, 2000.

Management decisions proposed by the Assistant Secretary, Public and Indian Housing, for 2 of the 3 reported recommendations did not adequately address management

problems or the urgency of implementing corrective action. Accordingly, the 2

recommendations were referred to the Deputy Secretary for management decision on

October 17, 2000.

11/4/99

11/30/00

3/6/00

11/16/00

3/9/00

11/16/00
APPENDIX 2

TABLE A 

AUDIT REPORTS ISSUED PRIOR TO START OF PERIOD WITH

NO MANAGEMENT DECISION AT 09/30/00

*Significant Audit Reports Described in Previous Semiannual Reports

REPORT NUMBER & TITLE REASON FOR LACK OF MANAGEMENT DECISION

ISSUE DATE/

TARGET FOR

MANAGEMENT

 DECISION

* 00SF0001 Single Family Production -

Home Ownership Centers.

* 00BO0002 Office of Housing’s Use of

REAC’s Physical Inspection Reports.

* 00SE0001 Nationwide Audit Down Payment

Assistance Programs.

Management decisions were not reached on 21 of the 27 reported recommendations

during the semiannual period because the Assistant Secretary for Housing/Federal

Housing Commissioner was not responsive to OIG requests for information. On

October 4, 2000, subsequent to the end of the semiannual period, adequate information was provided to reach management decisions on 5 more recommendations. OIG

is awaiting additional information from the Office of Housing on the remaining

recommendation.

The Assistant Secretary for Housing/Federal Housing Commissioner was not responsive to OIG requests for additional information on proposed management decisions for

2 of the 5 reported recommendations. Subsequent to the semiannual reporting period,

management decisions were reached, on October 4 and October 12, 2000 for the 2

remaining recommendations.

Management decisions have not been reached on the 4 reported recommendations.

The Assistant Secretary for Housing/Federal Housing Commissioner reversed the

Department’s previous position on nonprofit organizations’ down payment assistance.

OIG responded to the Assistant Secretary on June 26, 2000, nonconcurring with 2

management decisions allowing seller funded down payment assistance and requesting

further information on 2 recommendations. The OIG believes the Office of Housing’s

position violates Section 203(b)(9) of the National Housing Act. On September 29,

2000, the Assistant Secretary for Housing notified the OIG he disagrees with OIG.

Because of the disagreement, the recommendations will be referred to the Deputy

Secretary for management decision in October 2000.

3/30/00

11/17/00

3/31/00

10/12/00

3/31/00

11/20/00
APPENDIX 2

TABLE B 

SIGNIFICANT AUDIT REPORTS DESCRIBED IN PREVIOUS SEMIANNUAL REPORTS

WHERE FINAL ACTION HAD NOT BEEN COMPLETED AS OF 09/30/00

90FW1004

92TS0007

92TS0011

92PH1009

92SF1009

93HQ0004

93FW1003

93HQ0005

93FO0003

93FO0004

93SF1014

93FW1016

94FO0002

95SF0001

95CH1009

96FW1001

Regency Place Apartments

Audit of Fiscal Year 1991 Financial Statements, Federal Housing Administration

Audit of Fiscal Year 1991 HUD Consolidated Financial Statements

Huntington, WV Community Development Block Grant Program

San Francisco, CA Housing Authority, Low-Income Public Housing Program

Interim Audit of Bond Refundings of Section 8 Projects

Grimmet Drive Apartments

Limited Review of HUD’s Management and Control of Staff Resources

Audit of Federal Housing Administration’s Fiscal Year 1992 Financial Statements

Audit of HUD’s Fiscal Year 1992 Consolidated Financial Statements

Tucson Health Care Limited Partnership

Anthony and Associates, Inc.

Audit of Fiscal Year 1993 Financial Statements - Federal Housing Administration

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

04/05/90

03/27/92

06/30/92

07/10/92

09/10/92

10/30/92

12/10/92

03/08/93

04/30/93

06/30/93

09/23/93

09/28/93

06/08/94

12/21/94

08/08/95

10/16/95

07/31/90

09/29/92

09/30/94

11/07/92

01/08/93

10/26/93

04/08/93

09/30/93

03/31/94

03/31/94

01/21/94

12/10/93

09/12/94

03/31/96

11/30/95

06/05/96

Note 1

Note 1

Note 1

03/31/01

Note 1

Note 1

Note 1

Note 1

Note 1

Note 1

Note 1

Note 1

Note 1

Note 2

Note 1

11/23/00

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action
96SF1002

96PH1016

96AT1821

96FO0003

96FW1002

96DP0002

97PH1002

97AT0001

97AT0002

97NY0802

97SF1002

97AT1806

97CH1007

97FW1003

97AT0803

97CH1010

97PH0001

98NY1001

Pascua Yaqui Housing Authority, Tucson, AZ

Montgomery County Department of Housing Services, Norristown, PA

Puerto Rico Public Housing Administration, Comprehensive Grant and Drug Elimination Programs, San Juan,

PR

HUD Fiscal Year 1995 Financial Statements

Credit Finance Corporation, Multifamily Management Agent, Dallas, TX

Multifamily Information Systems

Newport News General Hospital, Section 242 Hospital Program, Newport News, VA

Section 203(k) Rehabilitation Mortgage Insurance Program

Tenant Opportunity Program, Grantees of Atlanta Housing Authority Developments, Atlanta, GA

Riverside South Apartments, New York, NY

Granada Gardens, Granada Hills, CA

Limited Review of Martin Street Plaza, Atlanta, GA

Developing Economical and Better Living, Inc., Single Family Direct Sales Program, Chicago, IL

Medlock Southwest Management Corporation, Multifamily Management Agent, Lubbock, TX

Review of HUD Procedures for Approval of Section 203(k) Program Consultants

Major Mortgage Corporation, Section 203(k) Rehabilitation Home Mortgage Insurance Program, Livonia, MI

HUD Contracting

Limited Review of Braco I - Multifamily Operations, Buffalo, NY

02/13/96

05/20/96

06/26/96

08/16/96

08/19/96

09/30/96

12/09/96

02/06/97

02/21/97

02/21/97

04/14/97

04/17/97

05/22/97

08/26/97

08/27/97

09/17/97

09/30/97

10/24/97

06/11/96

09/17/96

12/10/96

02/12/97

10/17/96

03/31/97

03/26/97

07/01/98

06/18/97

09/30/99

07/16/97

07/14/97

09/19/97

01/16/98

01/05/98

01/06/98

02/10/99

12/23/97

Note 1

10/15/00

Note 1

Note 1

11/23/00

Note 1

Note 1

Note 2

Note 2

Note 2

Note 2

01/30/01

Note 1

Note 1

Note 1

Note 1

06/30/01

Note 1

TABLE B, APPENDIX 2

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action
98SE0001

98HQ0801

98CH1804

98SF1001

98SF1002

98AT1005

98AT0002

98AT1006

98SF1003

98SF0002

98AO1804

98CH1005

98CH1006

98DP0004

99AT1001

99PH0001

99CH1801

99BO1001

Acquisition of Frederick & Nelson Building, Section 108 Loan Guarantee, Seattle, WA

Review of HUD’s 2020 Management Reform Plan

Detroit, MI Housing Commission, Update of Progress Made on Agreements with HUD

Villa San Carlos Garden Apartments, Multifamily Mortgagor Operations, Santa Cruz, CA

Redwood Villa, Multifamily Mortgagor Operations, Mountain View, CA

Housing Authority of the City of Tampa, FL

Audit of Section 203(k) Rehabilitation Mortgage Insurance Program

Centro Campesino, Youthbuild Grants, Florida City, FL

San Francisco, CA Housing Authority, Drug Elimination Program

Audit of the Office of Fair Housing and Equal Opportunity

Upfront Grant for Ridgecrest Heights Apartments - Washington, DC

City of Atlanta, GA Empowerment Zone Program

City of Philadelphia, PA Empowerment Zone Program

Controls Over the Single Family Acquired Asset Management System

Municipality of Arecibo, PR, CDBG and Section 108 Loan Guarantee Assistance Programs

Youthbuild Program, Multiple Location Review

Assessment of Progress Follow-up, Chicago, IL Housing Authority

Narragansett Indian, Wetuomuck Housing Authority, Housing Development Grant, Charlestown, RI

11/17/97

11/25/97

12/11/97

03/24/98

03/31/98

04/23/98

05/01/98

05/19/98

07/22/98

09/15/98

09/24/98

09/28/98

09/30/98

09/30/98

11/05/98

11/10/98

12/02/98

01/29/99

04/30/98

07/14/98

03/09/98

09/24/98

08/14/98

10/21/98

01/04/99

03/25/99

12/09/98

02/24/99

05/25/99

09/20/99

09/20/99

09/29/99

03/09/99

03/08/99

03/31/99

04/08/99

Note 1

Note 1

Note 1

01/31/01

04/03/02

Note 2

Note 1

Note 1

Note 2

Note 1

Note 2

Note 2

Note 2

Note 2

09/15/05

Note 2

Note 2

Note 2

TABLE B, APPENDIX 2

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action
99PH1002

99NY1004

99CH1004

99AT1004

99FO0002

99FO0003

99CH0001

99CH1005

99DE1801

99PH0801

99AT1806

99SF1003

99SF1803

99CH1803

99AT0001

99NY1007

99KC1002

9DE0001

Norfolk, VA CDBG Program

Homestead Financial Services, Inc., Non-supervised Mortgagee, Syracuse, NY

Detroit Revitalization, Inc., Section 203(k) Mortgage Insurance Program & Partners for Affordable Housing, Detroit, MI

Housing Authority of the City of Sarasota, FL

Federal Housing Administration Audit of FY 1998 Federal Basis Financial Statements

U.S. Department of HUD FY 1998 Financial Statements

HUD’s Oversight of the Empowerment Zone Program

MCA Mortgage Corporation, Southfield, MI

Whitefish, MT Housing Authority, Review of Housing Activities and Related Controls

Chester, PA Housing Authority Receivership

Citizen Complaints, Housing Authority of the City of Winston-Salem, NC

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

Single Family Property Disposition Program

Alliance Mortgage Banking Corp., Non-supervised Mortgagee, Rochester, NY

Community Development Block Grant Program, St. Louis, MO

Nationwide Review of HUD’s Loss Mitigation Program

02/16/99

02/17/99

02/22/99

02/24/99

03/12/99

03/29/99

03/30/99

04/11/99

04/16/99

06/01/99

06/03/99

08/19/99

09/08/99

09/15/99

09/17/99

09/27/99

09/28/99

09/30/99

06/11/99

06/25/99

06/28/99

04/29/99

09/30/99

09/30/99

09/17/99

06/28/99

08/05/99

12/02/99

12/02/99

12/16/99

11/09/99

01/13/00

08/28/00

02/16/00

01/21/00

03/31/00

Note 2

Note 2

Note 2

Note 2

Note 2

Note 2

Note 2

Note 2

10/01/00

06/30/01

10/06/00

10/15/00

11/01/00

01/12/01

01/31/01

02/16/01

01/10/01

09/30/01

TABLE B, APPENDIX 2

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action
TABLE B, APPENDIX 2

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

99PH0002

00PH1001

00AT1001

00CH1001

00PH1801

00DP0002

00PH1002

00KC1001

00NY1002

00BO1002

00FW1801

00FW1001

00FW1002

00SF0801

00DE1001

00FO0002

00FO0003

00AT1003

HUD Contracting, Follow-up Review

Pittsburgh, PA Housing Authority, Public Housing Drug Elimination Program

Mego Mortgage Corporation, Title I Approved Lender, Atlanta, GA

Great Lakes Housing, Inc., Section 203(k) Mortgage Insurance Program and Partners, Wyoming, MI

Allegheny County, Supportive Housing Grants, Pittsburgh, PA

Initial Development Efforts of the Departmental Grants Management System

Philadelphia, PA Housing Authority Police Department

Omaha, NE Housing Authority, Housing Authority Operations

Target V Phase I Development Associates, Multifamily Housing Program, Bronx, NY

HOME Program, North Suburban Consortium, Malden, MA

Dallas, TX Jewish Coalition for the Homeless, Supportive Housing Grant

New Orleans, LA Housing Authority, Executive Monitor Contract with Moten & Associates

Texas Department of Housing and Community Affairs, HOME Investment Partnership Program Administrative Costs, Austin, TX

Limited Review - REO Division Operations

City and County of Denver, CO, Housing Opportunities for Persons with AIDS Program

Federal Housing Administration, Audit of FY 1999 Financial Statements

Attempt to Audit the FY 1999 HUD Financial Statements

Puerto Rico Public Housing Administration, Procurement Management, San Juan, PR

09/30/99

10/01/99

10/04/99

10/19/99

11/01/99

11/04/99

11/15/99

12/03/99

12/08/99

12/30/99

01/18/00

01/19/00

01/27/00

02/10/00

02/25/00

02/29/00

03/01/00

03/06/00

09/27/00

12/28/99

02/09/00

02/16/00

02/11/00

03/16/00

03/31/00

05/08/00

03/30/00

05/08/00

09/29/00

04/24/00

09/29/00

06/21/00

08/09/00

09/29/00

11/01/00

12/27/00

11/30/00

02/01/01

02/11/01

Note 3

03/06/01

10/31/00

12/31/00

11/30/00

12/31/00

09/22/01

11/30/00

11/15/00

06/15/01

12/31/05

05/15/01

Note 3
Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

00AT1801

00AT1004

00NY1801

00AT1005

00BO0001

00NY0001

00SF0001

00AO0001

00BO0002

00CH1002

00KC0001

00SE0001

00SF1001

Misuse of HUD Funds, Puerto Rico Public Housing Administration, San Juan, PR

Pinellas County Housing Authority, Clearwater, FL

Atlantic City, NJ Housing Authority, Low-Rent Housing Program

Benson, NC Housing Authority, Public Housing Programs

Office of Public and Indian Housing, Use of REAC’s Physical Inspection Assessments, Boston, MA

Nationwide Audit - Enforcement Center

Single Family Production

Nationwide Audit of Storefront Operations

Office of Housing, Use of REAC’s Physical Inspection Assessments, Boston, MA

Cuyahoga Metropolitan Housing Authority, Title V Account, Cleveland, OH

Assessment of Resident Association Grants, Multi-Location Summary Report

Final Report of Nationalwide Audit, Down Payment Assistance Programs

San Francisco, CA Housing Authority, Low-Income and Section 8 Programs

03/09/00

03/23/00

03/24/00

03/27/00

03/28/00

03/28/00

03/30/00

03/31/00

03/31/00

03/31/00

03/31/00

03/31/00

03/31/00

07/24/00

09/08/00

09/13/00

06/12/00

07/10/00

09/08/00

09/29/00

07/28/00

09/01/00

Note 3

03/31/01

04/30/01

03/31/01

12/31/00

12/30/00

Note 3

Note 2

Note 3

10/15/02

09/30/01

Note 3

09/30/01

AUDITS EXCLUDED:

20 audits under repayment plans

18 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.

3 No management decision.

TABLE B, APPENDIX 2
APPENDIX 2

TABLE C

INSPECTOR GENERAL ISSUED REPORTS WITH

QUESTIONED AND UNSUPPORTED COSTS AT 9/30/00

(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

14 $40,204 $15,7751

A2 For which litigation, legislation or investigation was pending at the commencement of the

reporting period

9 $15,153 $4,375

A3 For which additional costs were added to reports in beginning inventory 0 $1,196 $43

A4 For which costs were added to non-cost reports 2 $923 0

B1 Which were issued during the reporting period 24 $9,179 $4,720

B2 Which were reopened during the reporting period 0 0 0

Subtotals (A+B) 49 $66,655 $24,913

C For which a management decision was made during the reporting period 19 $22,940 $16,298

(1) Dollar value of disallowed costs:

• Due HUD

• Due Program Participants

5

2

15

$2,457

$19,654

0

$15,709

(2) Dollar value of costs not disallowed 3

3

$829 $589

D For which management decision had been made not to determine costs until completion of

litigation, legislation, or investigation

6 $12,781 $3,895

E For which no management decision had been made by the end of the reporting period 24

<62>4

$30,934

<$30,542>4

$4,720

<$4,328>4

 

1 Opening balance is $35,304 less than from prior 6-month period closing balance due to a reclassification of costs from unsupported to ineligible for Report Number 00-AO-201-

1001.

2 3 audit reports also contain recommendations with funds due program participants.

3 1 audit report also contains recommendations with funds agreed to by management.

4 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 09/30/00

(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 1 $4,128

A2 For which litigation, legislation or investigation was pending at the commencement of the reporting period 2 $3,911

A3 For which additional costs were added to reports in beginning inventory 0 0

A4 For which costs were added to non-cost reports 0 0

B1 Which were issued during the reporting period 3 $420

Subtotals (A+B) 6 $8,459

C For which a management decision was made during the reporting period 0 0

(1) Dollar value of recommendations that were agreed to by management:

• Due HUD

• Due Program Participants

0

0

0

0

(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

2 $3,912

E For which no management decision had been made by the end of the reporting period

4

<5>1

$4,547

<$4,547>1

 

1 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 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.

APPENDIX 2
APPENDIX 3

PROFILE OF PERFORMANCE

for the period

April 1, 2000 through September 30,2000

Audit and Investigation Results Audit Investigation Combined FY 2000

Recommendations That Funds Be Put to Better Use $419,523 $419,523 $4,603,096

Management Decisions on Audits with Recommendations

That Funds Be Put to Better Use

0 0 $1,752,772

Questioned Costs $11,298,266 $11,298,266 $56,620,398

Management Decisions on Audits with Questioned Costs $22,939,920 $22,939,920 $33,948,733

Indictments 301 301 430

Successful Prosecutions 141 141 200

Years of Prison Sentences 94 94 200

Investigative Recoveries $1,540,399 $12,123,463 $13,663,862 $32,914,307

Collections From Audits and Investigations $6,844,310 $1,850,500 $8,694,810 $19,311,243

Arrests 2,465 2,465 4,965

Search Warrants 456 456 789

Value of Drugs Seized $4,335,905 $4,335,905 $7,468,403

Weapons Seized 260 260 552

Administrative Sanctions 0 144 144 207

Subpoenas Issued 11 194 205 345