Office of Inspector General

Semiannual Report to Congress

October 1, 2002 through March 31, 2003

U.S. Department of Housing and Urban Development
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.

If you would like additional information or copies of the Report, please call (202) 708-0614, x 8195.

The Report is also available on our internet site at www.hud.gov/offices/oig
INSPECTOR GENERAL’S MESSAGE

I have just completed my first year as the HUD Inspector General. During

this time, I have set a new course based on innovation of ideas, collaboration

with program managers, and a challenge to our staff to excel. This Semiannual Report describes the results that we are beginning to see from this new

direction. I am proud of the efforts of the OIG staff in fulfilling the mandates

of the Inspector General Act of 1978.

To start this report, we discuss the most serious challenges facing the

Department. HUD is working diligently to address many of these challenges

and is making measurable progress. Of note are organizational changes such

as the placement of the Departmental Enforcement Center under the direction

of the General Counsel and the Real Estate Assessment Center under the Assistant Secretary for Public and

Indian Housing. Also of note is a Human Capital Strategic Plan recently issued by the Department’s Executive

Steering Committee that is a strong step towards better management of its staffing resources. Several other

changes are also reported in Chapter 1 of this Report that we see as positive steps towards improved service to

HUD’s customers. We will continue to carefully monitor the Department’s initiatives in this area and report on

both progress and shortcomings.

Our audits and investigations continue to reveal fraud and abuse in HUD’s Single Family Mortgage Insurance

Programs. Abuse in these programs receives significant media attention because of the tremendous economic

impact it has on the lives of citizens who are its victims, as well as the devastation its has on the housing markets

in many communities. Congress has requested that we allot additional resources for oversight of these programs,

which are plagued by various schemes such as “property flipping” and “predatory lending.” Our Report highlights numerous investigations around the nation of these types of abuses. We continue to work closely with

Departmental managers to eliminate these fraud schemes that are ruining family dreams of home ownership. OIG

is committed to working with the Department to identify problems and find systemic solutions to these fraudulent

practices. In this regard, we give special recognition to HUD’s Office of General Counsel and the HUD Quality

Assurance Division in the Home Ownership Centers for their cooperation in Single Family Program investigations.

OIG efforts in Public and Indian Housing Programs center on fraudulent payments of rental subsidies. Studies

have estimated about $2 billion are overpaid for these tenant subsidies because of fraud and error; this problem is

also cited in the President’s Management Agenda. We are aggressively investigating these crimes, and continue

to partner with the Department to find ways to prevent this type of fraud.

We continue to receive and respond to many requests from various Members of Congress. Congress mandates much of our work through legislation or through requests from individual Members or from Committees.

Significant results that we have to report for this period include:

 Work completed on Section 514 activities by HUD’s Office of Multifamily Housing Assistance Restructuring

(OMHAR). Our audit of OMHAR found management weaknesses; subsequent audits of 40 grantees found ineligible and unsupported expenses.
 The first of a series of reviews planned on the use of Disaster Assistance Funds provided to the State of

New York following the terrorist attacks on the World Trade Center. Our initial report focuses on $1.1

million of net overpayments, and $7.76 million of payments made to grant recipients that did not have

federal tax informationon their applications that matched Internal Revenue Service records.

 The mandated Financial Statement Audits for HUD, the Federal Housing Administration, and the Government National Mortgage Association. Of note here is that the audits identified $1.1 billion that could be

deobligatedand put to better use.

I have made outreach efforts to HUD staff as well as HUD constituent groups, such as the Mortgage Bankers

Association and public housing professional associations, a key initiative for our office. We are communicating

that OIG can be a useful tool to help accomplish the goals Secretary Martinez has set out. My staff and I are

getting the word out through speaking engagements and related training efforts that, although we are independent, we are not precluded from being a partner and coach in improving HUD management and operations.

During my short time at HUD, I have come to appreciate the men and women of the OIG who are consummate professionals. My thanks to them for their belief in, and support for, the mission of the Department.

I pledge to work with Secretary Martinez in an effort to achieve HUD’s goals while remaining steadfast in

my dedication to rooting out fraud and abuse in HUD wherever it is found.

Kenneth M. Donohue

Inspector General
Information About the HUD Office of Inspector General

HUD’s Office of Inspector General is one of the original 12 designated by the Inspector General Act of

1978. The OIG oversees HUD’s programs and operations with its audit and investigative personnel. While

organizationally located within the Department, the OIG has separate budgetary authority. The IG’s mission

is to provide independent and objective reporting to the Secretary and the Congress. OIG activities seek to:

 Promote efficiency and effectiveness in programs and operations;

 Detect and deter fraud and abuse;

 Investigate allegations of misconduct by HUD employees; and

 Review and make recommendations regarding existing and proposed legislation and regulations affecting HUD.

The Executive Office and the Offices of Audit, Investigation, Counsel, and Management and Policy are

located in Headquarters. Also, the Offices of Audit and Investigation have field staff located in ten regions

and many field offices.

OIG Return on Investment: $300.8/$46.9 = 6.4 to 1 return

OIG Cost of Operations 10/01/02 to 3/31/03 - $46.9 Million

Central 

Contracts

23%

Administration 

& Operations

7%

Personnel 

Services

70%

OIG Results 10/01/02 to 3/01/03 - $300.8 Million 

Investigative 

Recoveries

22%

Questions Costs

39%

Funds Put to 

Better Use

39%
Reporting Requirements

The specific reporting requirements as prescribed by the Inspector General Act of 1978, as amended by the

Inspector General Act Amendments of 1988, are listed below:

Section 4(a)(2)-review of existing and proposed legislation and regulations.

Section 5(a)(1)-description of significant problems, abuses, and deficiencies relating to the

administration of programs and operations of the Department.

Section 5(a)(2)-description of recommendations for corrective action with respect to significant problems, abuses, and deficiences.

Section 5(a)(3)-identification of each significant recommendation described in previous

Semiannual Reports on which corrective action has not been completed.

Section 5(a)(4)-summary of matters referred to prosecutive authorities and the prosecutions

and convictions that have resulted.

Section 5(a)(5)-summary of reports made on instances where information or assistance was

unreasonably refused or not provided, as required by Section 6(b)(2) of the Act.

Section 5(a)(6)-listing of each audit report completed during the reporting period, and for

each report, where applicable, the total dollar value of questioned and unsupported costs and

the dollar value of recommendations that funds be put to better use.

Section 5(a)(7)-summary of each particularly significant report.

Section 5(a)(8)-statistical tables showing the total number of audit reports and the total dollar

value of questioned and unsupported costs.

Section 5(a)(9)-statistical tables showing the total number of audit reports and the dollar value

of recommendations that funds be put to better use by management.

Section 5(a)(10)-summary of each audit report issued before the commencement of the reporting period for which no management decision had been made by the end of the period.

Section 5(a)(11)-a description and explanation of the reasons for any significant revised management decisions made during the reporting period.

Section 5(a)(12)-information concerning any significant management decision with which the

Inspector General is in disagreement.

Section 5(a)(13)-the information described under section 05(b) of the Federal Financial

Management Improvement Act of 1996.

Source/Requirement Pages

69-72

1-64, 73-75

7-64

Appendix 2,

Table B

7-64

No instances

Appendix 1

7-64

Appendix 2,

Table C

Appendix 2,

Table D

Appendix 2,

Table C

No instances

No instances

75
Table of Contents

Chapter 1 - HUD’s Management and Performance Challenges ..........................................................1

Chapter 2 - HUD’s Single Family Housing Programs

Audits ..................................................................................................................... 7

Investigations ............................................................................................................ 9

OIG Offices of Audit and Investigation - Joint Efforts ......................................................... 25

Chapter 3 - HUD’s Public and Indian Housing Programs

Audits .................................................................................................................. 27

Investigations ......................................................................................................... 32

OIG Offices of Audit and Investigation - Joint Efforts......................................................... 39

Fugitive Felon Initiative ..............................................................................................41

Chapter 4 -HUD’s Multifamily Housing Programs

Audits ................................................................................................................... 43

Investigations .......................................................................................................... 46

OIG Offices of Audit and Investigation - Joint Efforts ......................................................... 48

Chapter 5 -HUD’s Community Planning and Development Programs

Audits ....................................................................................................................51

Investigations .......................................................................................................... 55

OIG Offices of Audit and Investigation - Joint Efforts ......................................................... 59

Chapter 6 - Other Significant Audits and Investigations

Audits ....................................................................................................................61

Investigations .......................................................................................................... 64

Chapter 7 - Outreach Efforts ................................................................................................. 65

Chapter 8 - Regulations, Handbooks, and Other Directives

Regulations............................................................................................................. 69

Notices of Funding Availability (NOFA) .......................................................................... 69

Notice ................................................................................................................... 70

Handbooks ..............................................................................................................71

HUD Standard Forms ................................................................................................ 72

Chapter 9 - Audit Resolution

Delayed Actions ....................................................................................................... 73

Federal Financial Management Improvement Act of 1996 (FFMIA)......................................... 75

Appendix 1 — Audit Reports Issued

Appendix 2 — Table A - Audit Reports Issued Prior to Start of Period with No Management Decision at

03/31/03

Table B - Significant Audit Reports Described in Previous Semiannual Reports Where Final

Action Had Not Been Completed as of 03/31/03

Table C - Inspector General Issued Reports with Questioned and Unsupported Costs at

03/31/03

Table D - Inspector General Issued Reports with Recommendations that Funds Be Put To Better

Use at 03/31/03

Appendix 3 — Profile of Performance
Chapter 1— HUD’s Management and Performance Challenges 1

Chapter 1 — HUD’s Management and Performance Challenges

Major Issues Facing HUD

The Department’s primary mission is to expand

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

accomplish this through a wide variety of housing

and community development grant, subsidy, and

loan programs. HUD’s budget approximates $31

billion annually. Additionally, HUD assists families

in obtaining housing by providing Federal Housing

Administration (FHA) mortgage insurance for single

family and multifamily properties. FHA’s outstanding mortgage insurance portfolio is more than one

half trillion dollars. Ginnie Mae, through its mortgage-backed securities program, gives lenders

access to capital markets.

While HUD is a relatively small agency in terms

of staff, about 9,300 nationwide, it relies on the

performance and integrity of many outside entities

to administer a large number of diverse programs.

Among HUD’s administrators are hundreds of cities

that manage HUD’s Community Development Block

Grant funds, hundreds of Public Housing Authorities that manage assisted housing funds, thousands

of HUD approved lenders that originate and service

FHA insured loans, and hundreds of Ginnie Mae

mortgage-backed securities issuers.

With hundreds of separate programs, achieving

HUD’s mission is an ambitious challenge for its

limited staff. HUD management problems associated

with program operations have kept two major HUD

programs on GAO’s list of high-risk programs.

HUD’s management team, the GAO, and the OIG

share the view that improvements in human capital,

acquisitions, and information systems are essential

in addressing HUD’s high risks in the Rental Housing Assistance Programs and Single Family Housing Mortgage Insurance Programs. The inclusion of

HUD’s reported management challenges and highrisk areas as part of the President’s Management

Agenda is indicative of HUD’s important role in the

federal sector. The Federal Government places a

high priority on correcting those weaknesses to

remove HUD programs from GAO’s high-risk list.

Each year, in accordance with the Reports

Consolidation Act of 2000, the OIG is required to

submit a statement to the Secretary with a summary

assessment of the most serious challenges facing the

Department. We submitted our last assessment on

December 23, 2002. These reported challenges are

the continued focus of our audit and investigative

efforts. HUD is working to address these challenges

and in some instances has made progress in correcting them. The Deputy Secretary’s monthly Executive Management Meeting focuses on the actions

taken by each Assistant Secretary in meeting the

President’s Management Agenda (PMA). The PMA

includes government-wide and HUD specific initiatives. The HUD specific initiatives are intended to

formulate viable strategies and plans to address the

major problems facing the Department. The

Department’s management challenges and current

efforts to address these challenges are as follows:

Department-wide Organizational

Changes

For nearly 10 years, the Department has

struggled with organizational and management

changes in an effort to streamline its operations.

These changes were inevitable as HUD struggled to

manage more programs and larger budgets with

fewer staff. The past Administration made an effort

to realign the Department along functional lines,

separating outreach from program administration.

Also, they attempted to place greater reliance on

automated tools, processing centers, and contracted

services. As HUD implemented these realignments,

many employees were assigned new duties and

responsibilities and many new employees were

hired. While these organizational changes had good

intentions, the disruptions caused by these sweeping

changes further compounded problems in effectively managing HUD operations. Among the problems were unclear lines of authority, many staff in

the wrong location, staff not trained in new duties,

and difficulty in providing supervision to remote

staff.
Our past Semiannual Reports noted that many

organizational changes were slow to be put in place,

and some of those in place were ineffective. For

example, they lacked delegations of authority,

written policies and procedures, and training

support. HUD’s current management team likewise

found problems with the organizational and operational changes made by the previous Administration. For example, they found organizational and

staffing realignments, such as the Community

Builder function, an ineffective use of HUD’s human

capital. As a result, last year, decisions were made

and actions were taken to pursue separate realignments of Headquarters and Field activities to better

utilize resources. Changes included:

 The Departmental Enforcement Center (DEC)

was placed under the direction of the General

Counsel to consolidate legal resources in

support of a potentially stronger program

enforcement effort. HUD’s program enforcement efforts were previously under the Office of

General Counsel prior to the creation of a

separate DEC.

 The Real Estate Assessment Center (REAC) was

placed under the direction of the Assistant

Secretary for Public and Indian Housing in

order to improve REAC’s working relationships

with program staff and program partners and

strengthen accountability for resource use and

results.

 The Office of the Chief Procurement Officer

and Office of the Chief Information Officer

were placed under the direction of the Assistant

Secretary for Administration/Chief Information

Officer, to streamline HUD’s organizational

structure and improve service delivery to HUD’s

program and administrative components.

 The Office of Field Policy and Management was

established as an independent office reporting to

the Deputy Secretary, with responsibility for

oversight of HUD’s Field management and

assistance to program Assistant Secretaries in

meeting program goals at the Field Office level.

 Substantial numbers of staff in the outreach

function were redeployed to understaffed

program delivery and oversight functions,

where there was a critical need.

 New regional management positions were

created to give HUD’s field operations greater

operational control over the administrative

budget resources they need to pursue their

operating and program goals, and to strengthen

the local focus on workload management to

meet national performance goals.

These operational changes delegate additional

authority to the Field. We see these as positive steps

in bringing operational activities and authority

closer to the customers HUD serves. We continue to

see this as a management challenge as Departmental

realignments become fully functional.

Financial Management Systems

HUD needs to complete the development of its

financial management systems. The lack of an

integrated financial system in compliance with

federal financial system requirements has been

reported in our financial audits as a material weakness in internal controls since FY 1991. Some

progress is being made. For example, HUD has

made financial management systems improvement a

top priority. It has established an Executive Advisory Committee consisting of principals from key

offices to direct a HUD Integrated Financial Management Improvement Project. HUD has hired an

Assistant Chief Financial Officer for Systems and

has reorganized the Systems Office to ensure

additional emphasis and attention to the project.

However, a number of long-standing deficiencies

remain. HUD’s most significant financial management system deficiencies exist in FHA, where FHA

needs to convert its commercial accounting system

to a system that fully supports the federal basis of

accounting and budgeting.

Because of the large volume of financial transactions, HUD relies heavily on automated information systems. For several years, our financial audits

reported on security weaknesses in both HUD’s

general processing and specific applications such

that HUD could not be reasonably assured that assets

were adequately safeguarded against waste, loss,

and unauthorized use or misappropriation. Progress

Chapter 1— HUD’s Management and Performance Challenges 2
in improving these controls has been slow. The

weaknesses noted in our FY 2002 Consolidated

Financial Audit relate to the need to improve:

 Controls over the computing environment; and

 Administration of personnel security operations.

We also noted the need for HUD to improve

funds controls over public housing operating funds

and processes for reviewing outstanding obligations

to ensure that unneeded amounts are deobligated in

a timely manner. Major deficiencies include:

 The Office of Public and Indian Housing not

having an operational information system for

monitoring operating subsidy eligibility requirements and obligations during six months in FY

2002; and

 A lack of integration between accounting

systems and the need for accurate databases

which has hampered HUD’s ability to evaluate

unexpended obligations.

Adequate and Sufficiently Trained

Staff

For many years, the Department has lacked a

system for measuring work and reporting time,

thereby making it a difficult task to determine staff

resource needs. HUD worked with the National

Academy of Public Administration to develop a

methodology or approach for resource management

that would allow the Department to identify and

justify its resource requirements for effective and

efficient program administration and management.

HUD needs to more effectively manage its

limited staff resources. Many of the weaknesses

facing HUD, particularly those concerning HUD’s

oversight of program recipients, are exacerbated by

HUD’s resource management shortcomings. Accordingly, we consider it critical for the Department to

address these shortcomings through the successful

completion of ongoing plans. To operate properly

and hold individuals responsible for performance,

HUD needs to know that it has the right number of

staff with the proper skills.

To address staffing imbalances and other human

capital challenges, the Department has implemented

the Resource Estimation and Allocation Process

(REAP). The last phase of REAP (a baseline for

staffing requirements) was completed in January

2002. The next step in development of the

Department’s resource management strategy is the

implementation of the Total Estimation and Allocation Mechanism (TEAM). TEAM is the validation

component of REAP and will collect actual workload

accomplishments and staff usage data for comparison against the REAP baseline. TEAM implementation began in the spring of 2002. Our audit of the

TEAM process found the Department has made

significant progress in developing and implementing

the key components of its resource management

system. The Department is using the results from its

TEAM/REAP process to make better informed hiring

decisions.

Congressional staff have expressed concern over

HUD’s hiring practices. While the Department was

several hundred staff over its 9,100 FTE staff ceiling, there were no requests for additional FTEs. In

the Conference Report for HUD’s FY 2003 Appropriation, the OIG has been tasked to report to the

Conference Committee by August 2003. The report

stated, “The Office of Inspector General is also

requested to review the Department’s hiring decisions to determine whether these decisions have

been consistent with the Department’s staffing

needs, program requirements, and applicable

personnel practices.”

A HUD Executive Steering Committee has

developed a Human Capital Strategic Plan. The

Plan includes:

 To become a mission focused agency with work

aligned to promote adequate and affordable

housing, economic opportunity, and a suitable

living environment free from discrimination;

 To maintain a high quality workforce through

recruitment, staff development, and management improvements; and

 To implement effective succession planning

assuring qualified staff backfill for increasing

numbers of HUD retirements in the next five

years.

Chapter 1— HUD’s Management and Performance Challenges 3
FHA Single Family Origination and

Real Estate Owned (REO) Oversight

Procedures and practices pertaining to HUD’s

Single Family Loan Origination Program have

undergone considerable change, particularly in the

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

changes in loan underwriting requirements and the

transfer of virtually all aspects of single family

production and program monitoring from HUD staff

to lenders and contractors under the oversight of

HUD’s Home Ownership Centers.

Consistent with the GAO’s identification of

Single Family Mortgage Insurance Programs as a

high-risk area, the President’s Management Agenda

has committed HUD to tackling long-standing

management problems that expose FHA homebuyers

to fraudulent practices. HUD is taking steps to

protect homebuyers from a fraudulent practice

known as property flipping, changes are underway

to strengthen the property appraisal process, and

other actions are being proposed to better disclose

FHA closing costs. Our investigative efforts during

this reporting period continued to uncover widespread instances of schemes in which properties

were purchased at undervalued prices, minimal

repairs were made, and the properties were resold,

sometimes the next day, at inflated values. Numerous cases of fraudulent loan origination were also

found in which non-qualified buyers were recruited

to purchase properties with FHA insured mortgages,

false loan packages were submitted to FHA, and the

buyers ultimately defaulted on the mortgages,

resulting in millions of dollars in losses to HUD.

The FHA financial audit reported on the need to

place more emphasis on monitoring lender underwriting and continuing to improve on early warning

and loss prevention for single family. Recommendations were made to increase targeting of high-risk

lenders to include the addition of 30- and 60-day

delinquencies to the Default Monitoring System. A

series of other recommendations were made to

target lenders that would benefit from early intervention. FHA needs to increase its use and analysis

of other data now available to continue improvements in lender monitoring. Timely identification of

lenders with above average early default rates is a

key element of FHA’s efforts to target monitoring

and enforcement resources to single family insured

mortgages and lenders that represent the greatest

financial risks to FHA. Potential problem lenders

must be identified before FHA can institute loss

mitigation techniques and lender enforcement

measures that can reduce eventual claims.

During this reporting period, we completed

several reviews of lenders that were not prescribing

to HUD’s criteria in submitting loans for HUD

endorsement. Lenders that are late in submitting

endorsements must provide evidence to HUD that all

loan payments are current. We identified problems

with both lenders that did not provide the prescribed paperwork and HUD contractors that were

not diligent in questioning lenders with late submissions. We intend to look more closely at late endorsements in the coming months. This year we are

also committed to reviewing various risk factors for

lenders and targeting high risk lenders for audits.

The Department is taking several steps to

improve FHA risk management. An accurate appraisal is critical in protecting FHA’s insurance risk.

A proposed rule, published in January 2003, would

amend HUD regulations to make a lender and

appraiser bear equal responsibility for the quality of

the appraisal in meeting HUD guidelines. HUD

believes this rule would protect the FHA insurance

fund, ensure better compliance with appraisal

standards, and ensure homebuyers receive an

accurate statement of appraised value. The Department believes these controls will help deter the

flipping of properties.

Public and Assisted Housing

Program Administration

HUD provides housing assistance funds under

various grant and subsidy programs to multifamily

project owners (both nonprofits and for-profits) and

housing authorities. These intermediaries, in turn,

provide housing assistance to benefit primarily lowincome households. HUD spent about $23 billion

(consisting of Section 8, Operating Subsidies,

Housing for the Elderly and Disabled, and Rent

Supplement Programs) in FY 2002 to provide rent

and operating subsidies that benefited over four

Chapter 1— HUD’s Management and Performance Challenges 4
million households. In 2000, a HUD study found

that 60 percent of all rent and subsidy calculations

performed by administrative intermediaries contained some type of error. Weaknesses exist in

HUD’s control structure such that HUD cannot be

assured that these funds are expended in accordance

with the laws and regulations authorizing the grant

and subsidy programs.

The Office of Public and Indian Housing (PIH)

provides funding for rent subsidies through its

public housing operating subsidies and tenant-based

Section 8 Rental Assistance Programs. These

programs are administered by housing authorities

who are to provide housing to low-income families

or make assistance payments to private owners who

lease their rental units to assisted families. The

Office of Housing administers a variety of Assisted

Housing Programs, including parts of the Section 8

Program and the Section 202/811 Programs. These

subsidies are called “project-based” subsidies

because they are tied to particular properties;

therefore, tenants who move from such properties

may lose their rental assistance. This is a significant

responsibility because of the sizable number of

project owners HUD must monitor.

For many years, we have reported on material

weaknesses with the monitoring of housing authorities and multifamily projects. These monitoring

weaknesses seriously impact HUD’s ability to ensure

that its intermediaries are correctly calculating

housing subsidies. This material weakness was first

reported in our financial audit in 1991 and it has

been reported in every audit thereafter. The Secretary has made the reduction of subsidy overpayments a top priority of his Administration. Additionally, our investigative and audit focus in the

upcoming months will be concentrated on fraudulent practices in the Section 8 Program.

In conjunction with OMB, HUD has established a

goal for a 50 percent reduction in both the frequency of calculation processing errors and the

amount of subsidy overpayments by 2005. The

Rental Housing Improvement Project is a Secretarial initiative designed to reduce errors and

improper payments by: (1) simplifying the payment

process; (2) enhancing administrative capacity; and

(3) establishing better controls, incentives, and

sanctions. These improvements are expected to be

implemented through a series of actions over the

next two years.

HUD continues to implement its performance

oriented, risk-based strategy for carrying out its

housing authority oversight responsibilities. As

noted in previous financial audits, further improvements need to be made in the Field Offices’ monitoring of their housing authorities in key areas. As

in previous years, we could not fully assess HUD’s

measures aimed at improving oversight of housing

authorities since the Department’s plans to monitor

and improve performance are not yet fully developed and continue to experience delays. Finally,

HUD has been slow to implement additional strate0% 10% 20% 30% 40% 50% 60%

FY 2000

Baseline

FY 2005 Goal

Goal to Reduce Frequency of Calculation 

Processing Errors

$0 $500 $1,000 $1,500 $2,000

FY 2000 Baseline

FY 2005 Goal

Goal to Reduce Amount of Subsidy 

Overpayments - Amounts Shown in Millions

FY 2002 Public and Assisted Housing Programs 

(Dollars in Billions)

Tenant-based 

Section 8

$11

Other 

Programs

$1

Project-based 

Section 8

$7

Operating 

Subsidies

$4

Chapter 1— HUD’s Management and Performance Challenges 5
gies needed to improve quality control over rental

assistance subsidy determinations.

In prior years, we have also reported on longstanding weaknesses with the processing of subsidy

payment requests under the project-based programs

administered by the Office of Housing. Historically,

this process has been hampered by the need for

improved information systems to eliminate manually

intensive review procedures that HUD has been

unable to adequately perform.

Housing staff or their Contract Administrators

(CAs) are to perform management reviews to monitor tenant eligibility and ensure accurate rents are

charged at multifamily projects. The primary tool is

to conduct on-site reviews that assess the owners’

compliance with HUD’s occupancy requirements.

HUD’s continued implementation of the CA initiative

resulted in a substantial increase in the total number

of management reviews. However, a comprehensive

plan needs to be developed that would result in an

increase of on-site reviews that would assess and

ensure that all owners of assisted multifamily

projects comply with HUD’s occupancy requirements.

HUD’s plans include a variety of continuing

efforts. Principle among these are:

 Continued implementation of the CA initiative.

 Increased enforcement efforts.

 Implementation of more targeted property

inspections.

 Increased frequency of management/occupancy

reviews for assisted projects.

 Development of an integrated risk reporting

system.

We support these efforts.

Chapter 1— HUD’s Management and Performance Challenges 6
Chapter 2 — HUD’s Single Family Housing Programs 7

Chapter 2 — HUD’s Single Family Housing Programs

Audits

Single Family Housing Programs are meant to provide mortgage insurance that enables individuals to

finance the purchase, rehabilitation, and/or construction of a home. During this reporting period, we conducted

reviews of the activities of various non-supervised direct endorsement lenders, the Denver Home Ownership

Center, and a Denver Home Ownership Center contractor.

We completed an audit of Cendant Mortgage Corporation, a mortgage lender in Mount Laurel, NJ, approved to originate FHA insured loans. Cendant was selected for review because of the high default rate experienced in St. Louis, MO, and Kansas City, KS. Cendant was submitting FHA loans for mortgage insurance

untimely. Our audit objective was to determine how many of Cendant’s late requests for endorsement violated

HUD’s requirements.

We performed a review of all FHA loans submitted for endorsement by Cendant over a two-year period to

ensure that all late endorsement requests included appropriate payment histories to show loans were current. It

was concluded that Cendant improperly submitted over 1,300 loans totaling about $111 million for late endorsement during the two-year period. In addition, a review of 80 FHA defaulted loans totaling about $5.3 million

originated by Cendant under HUD’s Section 203(b) or 234(c) Programs disclosed that Cendant did not originate

73 of the 80 loans in accordance with HUD requirements.

Cendant provided comments in response to the audit that indicated it has planned and initiated corrective

actions. If Cendant follows through on these actions, it will prevent recurrence of the problems identified in this

report.

We recommended that Cendant indemnify HUD for over $100 million in loans that were improperly submitted for endorsement. Cendant agreed to indemnify HUD on loans totaling about $88 million. (Report No. 2003-

KC-1001)

National Mortgage News, January 20, 2003, Mount Laurel, NJ
Chapter 2 — HUD’s Single Family Housing Programs 8

We completed an audit of First Horizon Home

Loans, a non-supervised direct endorsement lender

in Irving, TX, approved to originate FHA insured

loans. First Horizon was selected for audit because

of its high number of late endorsements. Our

objective was to determine if First Horizon requested late endorsements for loans that had late

payments prior to submission.

We found that First Horizon Home Loans

improperly submitted 438 loans totaling over $48

million for endorsement more than 60 days after

closing when the borrowers had delinquent payments prior to submission. Although First Horizon

incorporated HUD’s late submission requirements

into its procedures, it did not ensure that its employees always followed them. Since FHA insures

these loans, these late endorsements increase the

risk to its insurance fund. As of September 30,

2002, HUD paid claims on 15 of the loans and

experienced losses of over $83,000 on three properties.

We recommended that HUD seek indemnification for the 423 active and claim loans (15 had

already been terminated). (Report No. 2003-KC1004)

We completed an audit of Choice Enterprises,

Inc., a Denver, CO Home Ownership Center

contractor performing insurance endorsement

review procedures. Our objective was to determine

if Choice followed HUD’s regulations and contract

terms for reviewing “Late Requests for Endorsement.” We found that Choice Enterprises inappropriately recommended endorsing 75 of the 297

loans we reviewed. The 75 loans, valued at over

$6.5 million, did not have the required documentation for processing. The improper late endorsement

of the 75 mortgages increases the probability that

HUD will have to pay insurance claims for loans that

default, thereby increasing the risk to the FHA

insurance fund.

We recommended HUD seek indemnification of

the 75 improperly endorsed loans from the mortgagees who originated the loans, and take appropriate administrative action against Choice Enterprises.

(Report No. 2003-KC-1005)

We also reported on an internal deficiency at the

Denver, CO Home Ownership Center in conjunction with the audit of Choice Enterprises. We

discovered that the Denver Home Ownership

Center provided instructions to the contractor that

were not in accordance with HUD handbook requirements. The Government Technical Representative made several changes to extend the period that

determines when a loan is submitted late and is,

therefore, subject to additional documentation

requirements. As a result, the contractor endorsed

19 loans valued at over $1.8 million with deficiencies that should have been detected if the HUD

handbook rules had been followed.

We recommended that the Director of the

Denver Home Ownership Center seek indemnification of the 19 improperly endorsed loans, and

instruct contractors to follow the appropriate HUD

handbook unless a waiver is obtained from Headquarters. (Report No. 2003-KC-0801)

We completed a review of Pryme Investment

and Mortgage Brokers, Inc., an FHA approved nonsupervised loan correspondent in Murray, UT. We

selected Pryme Investment for review because of its

high default and claim rates. We found that Pryme

Investment had not adequately implemented its

quality control process and was deficient in its

overall quality control activities. Further, Pryme

Investment did not administer or carry out its

activities in conformity with FHA mortgagee approval requirements and did not always originate

FHA insured loans in accordance with HUD requirements and prudent lending practices.

We recommended that Pryme Investment’s

participation in the HUD Single Family Mortgage

Insurance Programs be discontinued, and that HUD

take administrative action(s) deemed appropriate.

We also made recommendations to prevent the

recurrence of deficiencies should HUD determine

that removal of Pryme Investment’s approval as a

non-supervised loan correspondent is not warranted. (Report No. 2003-DE-1004)

We completed an audit of Chapel Mortgage

Corporation, a non-supervised mortgagee in

Rancocas, NJ, to determine whether Chapel
Chapter 2 — HUD’s Single Family Housing Programs 9

approved loans in accordance with HUD regulations. A review of 25 FHA insured loans valued at over $2.9

million disclosed that each of the 25 loans had at least one significant processing deficiency. Some of the deficiencies included: (1) inaccurate/excessive debt to income ratios; (2) unsupported employment income; (3)

unsupported rental income; (4) understated liabilities; (5) insufficient payroll data; (6) insufficient verification

of employment; (7) insufficient banking data; (8) insufficient cash gift information; (9) unexplained derogatory

credit; and (10) discrepancies with appraisals. These deficiencies could cause the loans to go into default and

subsequently result in mortgage insurance claims to FHA.

We recommended that HUD/FHA take appropriate action against Chapel for not adhering to HUD’s underwriting requirements, and require Chapel to indemnify FHA for all future losses pertaining to the 25 loans

reviewed. (Report No. 2003-NY-1002)

Investigations

Some of the cases in this report were conducted

by the OIG while others were conducted jointly with

federal, state, and local law enforcement agencies.

Defendant Graciela Salgado of Rancho

Cucamonga, CA, was sentenced in Federal Court

to 18 months incarceration and five years supervised release, and was ordered to pay $10,209,000

in restitution to HUD. Salgado previously pled guilty

in U.S. District Court, Central District of California, to nine counts of wire fraud. Defendant Sarai

Mora pled guilty and was sentenced to five years

probation and 2,500 hours of community service,

and was ordered to pay a special assessment fee of

$400. Along with Maggie Cuevas, Salgado and

Mora participated in a fraud scheme that involved

businesses owned and operated by Cuevas, such as

Maggie Cuevas Insurance, Serrano Telemarketing,

and L. Telemarketing. The businesses were used to

help unqualified borrowers obtain approximately

$100 million in fraudulent FHA insured loans. While

already on federal probation for a conviction on

similar charges relating to a document forging

business that she ran, Cuevas continued the scheme

by selling forged tax forms, check stubs, and credit

documents that were used to obtain FHA loans. She

created the fictitious businesses for the sole purpose

of providing creditability for the forged documents.

The women then sold the documents to real estate

brokers and agents for $75 to $300. Cuevas previously pled guilty, but has not yet been sentenced.

In Baltimore, MD, the following individuals

were sentenced or pled guilty for their participation

in a property flipping scheme masterminded by

defendant William Otto Schmidbauer. This case

involved the real estate activities of Schmidbauer

and his 58 Baltimore area real estate transactions

whereby $4.4 million in fraudulent loans were

obtained.

Defendants Stephen Todd Schmidbauer and

Crystal Perry, both property speculators, were

sentenced in Federal Court to eight months incarceration and three years probation, and four years

incarceration and four years probation, respectively,

for their roles in falsifying documents in order to

obtain FHA insured mortgages. In two instances,

Stephen Todd Schmidbauer signed falsified documents to obtain FHA insured mortgages arranged by

his father, William Otto Schmidbauer. In both

cases, Stephen Todd Schmidbauer defaulted on the

loans, costing the government over $161,150. Perry

also signed falsified documents in two instances to

obtain FHA insured mortgages arranged by William

Otto Schmidbauer. Perry defaulted on the loans,

costing the government over $197,000.

Defendant Mary Anne Kintop, who acted as a

straw purchaser and admitted signing $1 million

worth of government backed mortgages using

different names, was sentenced in Federal Court,

District of Maryland, to six months home detention

and five years probation, and ordered to pay

$790,744 in restitution to HUD. Kintop pled guilty

in June 2001 to conspiracy, admitting that at William Otto Schmidbauer’s request, she had signed 15

fraudulent mortgages that would eventually be

insured by FHA. Kintop used at least eight names in

the scheme, mostly variations on her name. In two

cases, Kintop’s daughter, then seven years old, was

named the borrower on two mortgages. Kintop

admitted that William Otto Schmidbauer paid her
Chapter 2 — HUD’s Single Family Housing Programs 10

$500 to $700 each time that she signed a fraudulent

mortgage and said that he provided the false identities she used.

Defendant Donna Hart, another straw purchaser, was sentenced in Federal Court, District of

Maryland, to five years probation for her role in the

property flipping scheme. On three separate occasions, Hart assisted William Otto Schmidbauer by

acting as a strawbuyer to obtain three FHA insured

mortgages. On the first property, William Otto

Schmidbauer provided Hart with a false letter which

stated that Hart had received gift funds from her

mother. On the other two properties, William Otto

Schmidbauer provided false supporting documents

for the loans, such as income and employment

verification documents, as well as fictitious gift

letters. Hart never lived in any of these properties.

The loss resulting from Hart’s part in the scheme is

approximately $150,000.

Defendant Sharon Sirbaugh, a property speculator, was sentenced in Federal Court, District of

Maryland, to five years probation and ordered to

pay $131,478 in restitution to HUD for her role in

the scheme. Sirbaugh pled guilty in June 2001 to

making false statements in applying for an FHA

insured mortgage. She admitted that she used false

information supplied by William Otto Schmidbauer

to obtain two mortgages insured by FHA. Sirbaugh

signed false employment documents at the request

of Robert Eshelman.

Defendants Robert Eshelman and Sandra

Johnson, both property speculators, were sentenced

in Federal Court, District of Maryland, to five years

probation and $82,307 in restitution to HUD, and

three years probation and $70,396 in restitution to

HUD, respectively, for their roles in the scheme.

Both defendants previously pled guilty to making

false statements on loan applications. Eshelman and

Johnson were assisted by William Otto

Schmidbauer. Since they could not qualify for FHA

insured mortgages, William Otto Schmidbauer

provided them with false supporting documents for

their loan applications, including Social Security

numbers, income information, and employment

verification. Both of Eshelman’s properties went

into foreclosure with a loss to HUD of $205,535,

while one of the three properties Johnson purchased

went into foreclosure with a loss to HUD of

$70,396.

Defendant Nancy Franklin, a former loan

officer at First Mariner Mortgage Company, was

sentenced to four months home detention and two

years probation, and ordered to pay $350,000 in

restitution to HUD for her role in submitting false

statements. Franklin admitted that on at least four

occasions, with the assistance of William Otto

Schmidbauer, she falsified wage and employment

documents to obtain FHA insured mortgages for

loan applicants who were not qualified. Eventually,

the loans went into default, resulting in over

$919,444 in claims paid by HUD.

Defendant Patricia Ann Robinson, a former

loan officer at First Mariner Bank, was sentenced to

three years probation and ordered to pay $350,000

in restitution to HUD for her role in submitting false

statements. On at least one occasion, with the

assistance of William Otto Schmidbauer, Robinson

falsified wage and employment documents to obtain

FHA insured mortgages for applicants who were not

qualified. Subsequently, the loans went into default.

Robinson’s fraudulent activities resulted in over

$538,550 in claims paid by HUD.

Defendant Donald F. Hanson, a former loan

officer at Baltimore American Savings Bank, pled

guilty in Federal Court to conspiracy for his role in

submitting false statements. Hanson admitted that

on at least one occasion, with the assistance of

William Otto Schmidbauer, he falsified wage and

employment documents to obtain FHA insured

mortgages for loan applicants who were not qualified. The loans eventually went into default, resulting in over $1,072,957 in claims paid by HUD.

Defendant Dale Schulz, a former FHA certified

appraiser, pled guilty in Federal Court, District of

Maryland, Baltimore, to a one-count information

charging him with submitting false statements to

HUD. In early 1996, William Otto Schmidbauer

hired Schulz to prepare and file appraisals for

properties which Schmidbauer was buying at low

prices and selling at much higher prices. In connection with the appraisals for these FHA insured

properties, Schulz falsely represented that he had

personally conducted the inspections and appraisals

when in fact, on numerous occasions, he had not.
Chapter 2 — HUD’s Single Family Housing Programs 11

On other occasions, the appraisals were prepared by

another individual and Schulz merely signed them.

As a result, some of the appraisals contained false

information. In some cases where the purchase of a

property by William Otto Schmidbauer had occurred and been recorded within the past year, it

was falsely reported that there had been no such

purchase. On other occasions where Schmidbauer

had not yet recorded a deed of purchase at the time

of appraisal, it was falsely reported that William

Otto Schmidbauer and/or Schmidbauer Realty was

the current owner of the property. As an example,

one property was sold for $68,700. There were

numerous and obvious structural defects in this

property at the time of the sale that were not noted

on the appraisal. William Otto Schmidbauer had

previously purchased this property for $27,500.

Losses to the government as a result of the false

appraisals signed by Schulz on properties that are

now in default or have been foreclosed amount to

about $800,000.

Defendant Michael Fanghella, founder and

director of PinnFund, USA, Inc., in Carlsbad, CA,

was sentenced in U.S. District Court, Southern

District of California in San Diego, to 10 years in

federal prison after he pled guilty to conspiracy to

commit wire fraud, conspiracy to commit money

laundering, tax evasion, and filing a false entry with

HUD. PinnFund USAWAS a sub-prime lender as well

as a HUD approved direct endorsement lender. In a

classic Ponzi scheme, Fanghella, with the assistance

of other PinnFund officers, concealed from investors the fact that PinnFund lost $200 million from

the mortgage business while, at the same time,

soliciting new investor money. From 1997 through

2000, through various partnerships, Fanghella gave

investors money contributed by new investors and

falsely represented to them that these funds were

earnings or returns on capital. Fanghella’s illegal

income was over $2.2 million for 1996, over $6

million for 1997, and over $5.7 million for 1998.

Fanghella also transferred approximately $17.3

million from PinnFund to Barbados for the eventual

benefit of his girlfriend, Kelly Cook. Cook, also

known as Kelly Jaye and Kelly Spagnola, was an

adult film actress who did not provide any service

to PinnFund. Fanghella also falsely reported to HUD

that the funds used to meet HUD’s net worth requirement for direct endorsement lenders were

personal funds. In truth and in fact, in 1998,

Grafton Partners loaned the funds to PinnFund.

Defendant Kimberly Hulihee, an employee of

PinnLease, USA, Inc., pled guilty to perjury in

U.S. District Court in San Diego. Previously, an

information was filed against Hulihee which stated

that she knowingly made a false statement while

under oath and testifying in a proceeding before the

United States. Hulihee’s testimony involved the

coordination, removal, and destruction of business

files from the offices of PinnLease. This took place

while PinnFund, USA, Inc., was under a court

ordered receivership.

Defendant Keith G. Grubba, former president

of PinnFund, pled guilty in U.S. District Court in

San Diego to an information charging him with

conspiracy to commit wire fraud, money laundering, conspiracy, income tax evasion, and false

entries in statements to HUD. In the plea, Grubba

stated that he conspired with Fanghella and John

Garitta, chief financial officer of PinnFund, USA,

to deceive investors and perpetuated the Ponzi

scheme by preparing and disseminating false financial statements. Grubba also admitted that he failed

to declare his full income on federal income tax

returns for tax years 1997 through 2000, when in

fact he had taxes due of approximately $2.5 million.

Defendant Michael A. Trap, former syndication

manager of PinnLease, USA, pled guilty in U.S.

District Court in San Diego to an information

charging him with making false statements regarding files being taken from the PinnLease offices,

when PinnFund was taken over by a U.S. District

Court appointed receiver. On the same day, two

indictments were filed against four individuals in

U.S. District Court in San Diego. A 29-count

indictment was handed down against James L.

Hillman, president of Peregrine Funding, Inc., the

business that raised capital for investments in

PinnFund’s mortgage business, and Piotr Kodzis,

director of operations for Peregrine. The indictment

charged Hillman and Kodzis with mail fraud, wire

fraud, conspiracy to commit mail and wire fraud,

and aiding and abetting. The indictment alleges that

Hillman and Kodzis intentionally defrauded investors out of millions of dollars by misrepresenting

PinnFund’s compliance with investor agreements. A
Chapter 2 — HUD’s Single Family Housing Programs 12

23-count indictment was also handed down against

Tommy A. Larsen and Kim A. Larsen for obtaining

fraudulent equipment leases and laundering funds

for PinnFund through sham transactions and false

invoices.

In March 2001, PinnFund was placed into a

court ordered receivership based on an enforcement

action by the U.S. Securities and Exchange Commission (SEC). The SEC’s civil case was considered

one of the largest securities fraud cases in San

Diego County history, and this investigation is

considered one of the largest white collar fraud

investigations in California history.

Defendant Palemon Sanchez was sentenced in

Federal Court, Central District of California, Los

Angeles, to 46 months in prison and three years

supervised release, and was ordered to pay $3.9

million in restitution. Sanchez was involved in a

fraud scheme in which he would locate residential

properties on the market for sale. These properties

were then purchased for the purpose of reselling

them. Potential buyers were recruited for the

properties who often did not qualify for FHA insured mortgage loans due to inadequate income or

insufficient assets for down payments. As a recruiter, Sanchez received a commission for every

purchaser he located. The buyers were then assisted

in finding co-signers for the loans. As a result,

fraudulent mortgage applications were completed

and submitted in the names of buyers and cosigners that contained false employment documents,

false verifications that the down payments were

made either with the buyers’ personal funds or were

gifts, false explanation letters concerning the relationships of the co-signers to the buyers, and false

notarizations of the signatures of buyers and cosigners.

Defendant Francisco Arana, a loan officer for

Progressive Loan Funding, was indicted by a

Federal Grand Jury in the Central District of California on charges of wire fraud and aiding and

abetting. Arana assisted the Sanchez brothers,

Palemon and Luis, in their scheme.

Defendant Alejandro Morales, a loan officer

associated with Trinity Mortgage located in Covina,

CA, was indicted by a Federal Grand Jury in the

Central District of California on one count of

conspiracy and two counts of wire fraud. Morales’

actions resulted in a loss to HUD of $892,000 and

caused at least $2 million in fraudulent loans to be

funded with FHA insured mortgages. Defendant Ala

Tabatabei was charged with a criminal information

filed in the same court on one count of conspiracy

and one count of wire fraud. While he was the

owner of the Performance Funding Group, and as a

loan representative for First Prestige Funding,

Tabatabei assisted homebuyers in fraudulently

obtaining mortgage loans. Tabatabei’s actions

resulted in a loss to HUD of $443,680 and caused at

least $2 million in fraudulent loans to be funded

with FHA insured mortgages.

Defendants Robert Jordan and Peter Tortorelli,

both principals and underwriters of County Mortgage Company, Inc., in Newark, NJ, Marlene

Schill, a loan officer, Philip Noce, a closing attorney, and Raul Torres, a real estate broker, were each

sentenced in Federal Court, District of New Jersey,

for mail fraud and conspiracy. Jordan and Tortorelli

were each sentenced to 18 months in prison, while

Torres was sentenced to 24 months in prison. In

addition, Jordan, Tortorelli, and Torres were each

sentenced to three years supervised release, each

ordered to pay $2,408,614 in restitution, and fined

a total of $10,100. Schill and Noce were each

sentenced to nine months home arrest and five years

probation. They were also ordered to pay

$2,408,614 in restitution. All five defendants were

ordered not to engage in any real estate or mortgage

business for various periods of time.

This investigation disclosed that the defendants

engaged in a scheme to fraudulently obtain over 40

FHA insured loans for ineligible borrowers. The

scheme, which resulted in over $2.4 million in

losses to HUD, involved the falsification of federal

income tax returns, gift letters, attorney gift certifications, verifications of employment and rent

documents, and credit explanation letters. Properties were flipped and the proceeds of the sales were

divided among the conspirators.

Defendant James E. Golden, Jr., a real estate

appraiser, was sentenced in U.S. District Court for

the District of Columbia to 88 months in prison and

ordered to pay $1.5 million to the government for
Chapter 2 — HUD’s Single Family Housing Programs 13

his role in what federal prosecutors described as an

extensive mortgage fraud scheme conducted in the

District of Columbia. Golden, of Upper Marlboro,

MD, was convicted by a jury in May 2002 of taking

part in a conspiracy to inflate the values of 45

houses in the District that were then insured by

FHA. Golden failed to appear in court for his

sentencing, but police subsequently arrested him in

Texas during a routine traffic stop. He was convicted of inflating appraisals on houses that were

sold between 1997 and 2000. Four other people

pled guilty to related charges in this case.

Defendant Elena Romero was sentenced in

Federal Court, District of Colorado, Denver, to five

years probation and ordered to pay a $100 special

assessment fee. Romero was also ordered not to

seek employment having anything to do with real

estate. She previously pled guilty to one count of

conspiracy for her part in a real estate scheme

involving her son, Andres Torres, her former

husband, Gilbert Martinez, Michael Slavens and

other strawbuyers. Torres would acquire properties

in the Denver metropolitan area, using Romero as

the real estate agent. Together they would obtain

strawbuyers to purchase properties and provide false

information in order to qualify the strawbuyers for

the loans. Slavens and Martinez acted as

strawbuyers on a number of properties. Martinez

also provided false income tax returns/W-2 forms

and both Slavens and Martinez provided false

income information for the strawbuyers. Once the

strawbuyers purchased the properties, Romero

would receive a large real estate commission. Torres

would then file false release of deeds with the

counties, indicating that the mortgages were paid

off and that he owned the properties free and clear,

when in fact he did not. Following the false filings,

Torres would obtain another loan from a different

mortgage company via another strawbuyer and

begin the process all over again. Slavens pled guilty

in April 2002 to one count of aiding and abetting in

the commission of mail fraud. He was sentenced in

August 2002 to four months home detention and

five years probation.

Defendant Gilbert Martinez was sentenced to

five years probation and ordered to pay $128,667 in

restitution and a $100 special assessment fine.

Defendant Andres Torres was sentenced in Federal

Court, District of Colorado, in connection with his

guilty plea to one count of conspiracy and one

count of money laundering. He was sentenced to 60

months confinement for conspiracy and 72 months

confinement for money laundering, to be served

concurrently, and three years probation. In addition,

Torres was ordered to pay $1,696,520 in restitution

and a $200 special assessment fee, and ordered not

to seek employment having anything to do with real

estate.

As a result of this investigation, defendant

Michael Slavens was notified that HUD is proposing

his three-year debarment from future participation

in procurement and non-procurement transactions

as a participant or principal with HUD and throughout the Executive Branch of the Federal Government. His suspension and proposed debarment are

based on his conviction in U.S. District Court,

District of Colorado, for mail fraud.

In U.S. District Court, Western District of

Washington, Seattle, defendant Leslie Charlene

Reisig was sentenced to 51 months imprisonment

and five years supervised release, and ordered to

pay $330,147 in restitution to HUD and to several

lenders who were victimized. Out of the full restitution amount, $89,696 is payable to HUD. The

sentencing followed a two-week jury trial in which

three subjects, Leslie Reisig, Mario Cacho

Figueroa, and Jaime Abrego, were convicted of

conspiracy, mail fraud, wire fraud, and bank fraud

in a scheme to defraud HUD, lending institutions,

and vulnerable Spanish speaking individuals. The

subjects arranged sham sales of single family

residences using strawbuyers to obtain the homes

for their own personal benefit and/or to obtain a

portion of the mortgage proceeds. Reisig and Cacho

previously pled guilty to one count of mail fraud

committed in the Eastern District of California,

where the subjects had relocated to continue the

scheme.

Defendant Anietie James Okpon, the president

of Countywide Financial Group in Los Angeles,

CA, was sentenced to 78 months incarceration and

ordered to pay $1,076,949 in restitution, $356,556

of which is owed to HUD. Defendant Oliver Maiben

was sentenced to 77 months incarceration and

ordered to pay $1,057,879 in restitution, $337,486
Chapter 2 — HUD’s Single Family Housing Programs 14

of which is owed to HUD. In July 2002, following a

two-week trial in U.S. District Court for the Central

District of California, Okpon and Maiben were

found guilty of 21 counts of conspiracy, false

statements, wire fraud, and mail fraud. An investigation disclosed that between 1995 and 1998,

Okpon, Maiben, and others used straw or fictitious

borrowers, forged documents, and false identities to

originate mortgage loans in order to receive Title I

loan proceeds and broker/agent fees from the

origination of the insured single family mortgage

loans. The individuals fraudulently originated a

total of 22 FHA Title I rehabilitation and Title II

single family mortgage loans, which caused approximately $560,000 in fraudulent loans to be

funded. This resulted in a loss to HUD of approximately $470,000.

An investigation disclosed that the owners of

April 8 Realty in La Puente, CA, fabricated and

sold thousands of false loan support documents to

numerous real estate agents. To date, the investigation has resulted in guilty pleas of 24 individuals

and sentences totaling 75 months incarceration, 33

years probation, $750,837 in restitution, and

$22,600 in fines. The following individuals were

sentenced or pled guilty during this reporting

period.

Defendant Raul Altamirano was sentenced to

six months incarceration and three years supervised

release, and ordered to pay $47,527 in restitution to

HUD. Altamirano obtained forged employment and

income documents in order to make ineligible

applicants appear qualified for FHA insured loans.

Altamirano, who worked as a real estate agent for

Dynamic Brokers in Montebello, CA, then caused

the false documents to be submitted to HUD.

Defendant Emma Barrientes was sentenced in

Federal District Court in Los Angeles, CA, after

pleading guilty to two counts of making false

statements to HUD. She was sentenced to four

months incarceration and two years supervised

release, and was ordered to pay $125,772 in restitution and a $200 special assessment. Barrientes

obtained forged employment and income documents

in order to make ineligible applicants appear qualified for FHA insured loans. As a loan officer at Star

Funding, Barrientes then caused the false documents to be submitted to HUD. The loans based on

false information from Barrientes have a total value

of approximately $5.2 million.

Defendant Antonio Esquivel was sentenced to

15 months incarceration and one year supervised

release, and ordered to pay $108,580 in restitution

to HUD. Esquivel previously pled guilty in U.S.

District Court for the Central District of California

to two counts of making false statements to HUD.

Esquivel, who was a real estate agent for Coldwell

Banker Real Estate in Van Nuys, CA, caused false

documents to be submitted to HUD. The loans based

on the false information from Esquivel have a total

value of approximately $1 million, and the loss to

the government based on these loans is $89,573.

Defendant Sandra Sansur was sentenced to eight

months incarceration and three years supervised

release, and ordered to pay $169,531 in restitution

to HUD. Sansur previously pled guilty in U.S.

District Court for the Central District of California

to two counts of making false statements to HUD.

Sansur, who was a real estate agent for Realty

Masters, caused false statements to be submitted to

HUD. The loans based on the false information from

Sansur have a total value of approximately $1.48

million, and the loss to the government based on

these loans is $322,529

Defendant Julio Rocha was sentenced in the

same court to six months incarceration and five

years supervised release, and was ordered to pay

$89,573 in restitution to HUD. Rocha, who was

Antonio Esquivel’s assistant at Coldwell Banker

Real Estate in Van Nuys, CA, caused false documents to be submitted to HUD. The FHA insured

loans based on false information from Rocha have a

total value of approximately $1 million, and the loss

to the government based on these loans is $89,573.

Defendant Martiza Portillo of Century 21 Bright

Horizons, was sentenced in U.S. District Court,

Central District of California, to three years probation and ordered to pay a one-third portion of

$29,500 in restitution to HUD. Defendant Amelia

Arias pled guilty in the same court to five counts of

wire fraud and five counts of making false statements to HUD. Arias, a real estate agent for CR

Homes Realty and Sunrise Realty & Investments in

San Bernardino, CA, caused false documents to be
Chapter 2 — HUD’s Single Family Housing Programs 15

submitted to HUD concerning FHA insured loans.

The loans were originated based on this false

documentation. The loans have a total value of

approximately $1.6 million, and the loss to HUD is

more than $206,000.

Defendant Michael Fox pled guilty in the

County of New York, Supreme Court of the State

of New York, to defrauding HUD in connection with

a $1.2 million mortgage fraud scheme involving the

HUD Section 203(k) Rehabilitation Home Mortgage

Insurance Program. Fox, while he was employed

with Community Home Mortgage Corporation,

assisted real estate investor John Fetkovich in

obtaining mortgages by providing false income,

asset, and down payment information to HUD, and

by structuring many of the transactions as property

flips to inflate the mortgage values. They also

directed 203(k) fee inspector Gary Westwood to

falsely certify that rehabilitation work was completed. All of the properties involved in the fraud

scheme have been foreclosed, with HUD losses

totaling $700,000.

Defendant Fetkovich was convicted of conspiring to defraud HUD. He used intermediaries to

acquire and flip properties to his wife at falsely

inflated prices. He also falsified his wife’s income

and asset information, and provided FHA 203(k)

completion certificates to HUD for work that was

not done.

Defendant Westwood was sentenced to six

months confinement and five years probation and

ordered to pay $51,120 in restitution to HUD.

Westwood was convicted of making a false statement to an OIG Criminal Investigator when he

advised that he performed all the physical inspections noted on the FHA 203(k) draw request for

multiple properties, and that the rehabilitation work

was completed. The investigation disclosed instances where the rehabilitation work was not done.

Over $400,000 in rehabilitation funds were released

to a contractor, whose wife was the mortgagor.

Defendant Kasing Cheng, a licensed Long

Island real estate agent and mortgage broker, was

sentenced in U.S. District Court to seven months

confinement and three years supervised release, and

ordered to pay $189,796 in restitution to HUD.

Cheng was convicted of conspiring to defraud HUD.

Cheng acted as a middleman and flipped four

properties to Fetkovich. The properties were sold at

falsely inflated prices, with Fetkovich and Fox

providing false income and asset information to

HUD. Cheng had fled to the Dominican Republic

and Malaysia for nine months upon being indicted.

A fugitive investigation was initiated, and Cheng

was apprehended on an OIG warrant when he

attempted to reenter the United States.

In a related investigation, from September 1997

until November 1999, while Fox was working at

Mortgage Lending of America, he originated 287

FHA insured loans under the Section 203(k) Program. These loans were obtained by several not-forprofits including, but not limited to, Family Preservation Center, Helpline Soul Rescue Ministries, St.

Stephens Baptist Church, St. Stephens Community

Development Corporation, St. Stephens Bible

College, Word of Life Ministries, Word of Life

Community Development Corporation, Advance

Local Development Corporation, and Federation of

Puerto Rican Organizations. Currently all 287

properties, most of them located within the New

York City area, are in default. The default amount

for the properties is $82,613,586. Many of these

properties have also been foreclosed. To date, HUD

has paid a total of $35,683,319 in claims to secondary mortgage banks that held these mortgages.

Defendant Lonny Brooks, a self-employed

computer technician in Phoenix, AZ, was sentenced in Federal Court, District of Arizona, to five

years probation and was ordered to pay $21,469 in

restitution to HUD. Brooks previously pled guilty to

one count of submitting false statements to HUD. An

investigation disclosed that Brooks created falsified

W-2 forms and pay stubs and provided them to

Marco Vasquez, a former branch manager at

American Financial Resources, Inc. (AFR), and to

other loan officers employed at Vasquez’s AFR

office. Vasquez and the other loan officers submitted these falsified wage documents to HUD in order

to qualify their clients for FHA insured home loans.

The investigation further disclosed that Brooks had

provided Vasquez with a CD ROM computer disk

containing blank templates of W-2 forms and pay

stubs, which Vasquez used to create the false wage

documents for the clients of his AFR office. Vasquez
Chapter 2 — HUD’s Single Family Housing Programs 16

pled guilty in the same court to one count of conspiracy.

Defendant Lorena Soledad, a former AFR loan

officer, was sentenced to five years probation and

ordered to pay $21,726 in restitution to HUD.

Soledad previously pled guilty to one count of

submitting false statements to HUD. From late 2000

through early 2001, Soledad prepared four FHA

insured home loan packages, with insured mortgages totaling $353,164, which contained falsified

wage documents she received from Vasquez.

Defendant Jose Alvarado, a former AFR loan

officer, was sentenced to five years probation and

ordered to pay $35,216 in restitution to HUD.

Defendant Sandra Rodriguez, another former AFR

loan officer, pled guilty to one count of conspiracy

to submit false statements to HUD. Defendant Stacy

R. Ghazi, a former branch manager at Credit

Reporters, was sentenced to five years probation,

fined $2,500, and ordered to pay $21,726 in restitution to HUD. Ghazi provided Vasquez with falsified

credit reports which were used to qualify the clients

of Vasquez’s branch office for FHA insured loans.

Ghazi admitted receiving $2,000 to $3,000 from

Vasquez for the preparation of 20 to 30 falsified

credit reports.

The scheme involved 138 FHA insured home

loans with a total value of $11.9 million that were

originated based on fraudulent documentation. Nine

loans have gone into foreclosure, and to date, losses

to HUD exceed $100,000.

Defendant Allen Wade Creek was sentenced in

U.S. District Court, Middle District of Florida,

Tampa, to 18 months in prison and three years

supervised probation, and ordered to pay $18,544

in restitution to HUD and a $100 special assessment

fee. Creek’s sentencing stemmed from a one-count

indictment issued against him in September 2002

for making a false statement to HUD on a uniform

residential loan application used to obtain an FHA

insured loan. Creek pled guilty the following

month.

Defendant Kelvin Barrow was sentenced in

U.S. District Court, Northern District of Ohio, for

violating the provisions of HUD’s Officer Next Door

Program. While employed as a Police Officer with

the Cleveland Police Department, Barrow participated in the program, which allowed him to purchase a HUD foreclosed property at a 50 percent

discount from fair market value on the condition

that he reside in the home for at least three years

and that he own no other residential property during

that time period. Barrow was sentenced to two years

probation and 200 hours of community service, and

was fined $500. Barrow previously paid $12,500 in

restitution to HUD when he pled guilty.

Defendant Darrel Lattimore, a real estate

investor, was sentenced in District Court, Chicago,

IL, to eight months in prison and two years supervised release, and ordered to pay $76,802 in restitution to a conventional lender. Lattimore fraudulently facilitated the purchase, sale, and/or refinancing of eight properties through a real estate land flip

scheme. Lattimore and his co-conspirators submitted falsified mortgage loan documentation, which

included inflated income figures and falsified

appraisals for himself and for other purchasers he

recruited. Lattimore shared portions of the land flip

proceeds with the other defendants who participated

in the fraud. The total losses in this case exceed $10

million; the HUD losses exceed $2 million.

Defendant Melva Crittenden-Wynn, an appraiser, was sentenced in District Court, Chicago,

to 15 months in prison and two years supervised

release, and ordered to pay $2,402,205 in restitution to conventional lenders. Wynn’s prison sentence and restitution amount were based on her

conduct in two real estate land flip schemes, one of

which was an OIG investigation. Crittenden-Wynn

conducted at least 31 inflated appraisals to facilitate

the second sale in the fraudulent land flip scheme.

Her appraisals were used to over-value properties

that were funded by private lenders. In addition to

Crittenden-Wynn’s standard appraisal fee, she

received a bonus kickback check under an alias. In

furtherance of the scheme, Crittenden-Wynn also

concealed her real identity by using her maiden

name to fraudulently appraise a property her

husband purchased from another defendant. At least

13 of the properties that she appraised went into

foreclosure. Lattimore and Wynn are the 18th and

19th people out of 20 defendants to be sentenced in

a 60-property FHA/conventional loan land flipping

scheme in Chicago.
Chapter 2 — HUD’s Single Family Housing Programs 17

Defendant Kevin J. Everson, a real estate

broker, property developer, and loan officer in

Boise, ID, was sentenced in Federal Court, District

of Idaho, to 24 months incarceration and ordered to

pay $132,685 in restitution and fines. Defendant

Jeanette Espinosa, a former mortgage loan officer

and Everson’s business partner, was sentenced to

three months home detention and three years

probation, and fined $10,000.

In the same case, defendant Clay Preuit, a

former supervisor at Transnation Title and Escrow

Company, pled guilty in Federal Court, District of

Idaho, to two counts of making false statements to

HUD as part of a plea agreement with the U.S.

Attorney’s Office in Boise. In July 2002, a Federal

Grand Jury indicted Preuit on 18 counts of wire

fraud, two counts of mail fraud, and one forfeiture

count for his part in the scheme to cause

Transnation Title and Escrow to approve numerous

fraudulent documents on behalf of unqualified

borrowers. Everson was the ringleader in orchestrating 59 fraudulent single family mortgages worth

$5.3 million. Twenty-four of the 59 mortgages were

FHA insured. Among the seven co-conspirators,

seven have been convicted and were indicted on

charges of mail fraud, bank fraud, and conspiracy.

Defendant Preston Randall was sentenced in

Federal Court, Eastern District of Missouri, to 12

months in prison and three years supervised release,

and ordered to pay $440,000 in restitution. Randall,

operating as a St. Louis, MO company called

HyRizing Investments, purchased dilapidated homes

and sold them to strawbuyers and used the identity

of individuals with good credit without their knowledge. In April 2002, Randall pled guilty to conspiracy to commit mail fraud. He admitted to

illegally flipping properties at inflated values and

obtaining loans using false identities and income

documentation.

Defendant B.C. Witt pled guilty to an information filed in the Eastern District of Missouri charging him with conspiracy to commit mail fraud. Witt

admitted providing false tax returns and other false

documents to Randall. Randall paid Witt to provide

false tax returns and other false documents to get

strawbuyers qualified for loans. The mortgage fraud

conspiracy caused losses to mortgage companies in

excess of $650,000. Along with Witt and Randall,

two other individuals have also been charged in this

investigation.

Defendant Kenny Shaw, a real estate agent, was

sentenced in Federal Court for the Western District

of Tennessee, Memphis, to 21 months in prison and

ordered to pay $315,042 in restitution and a $100

special assessment fee. The sentencing is the result

of an investigation into a single family property

flipping scheme of involving 300 FHA insured and

conventional properties. Straw purchasers were used

to flip the properties, and the proceeds from the

transactions were shared among the defendants. The

scheme has resulted in a potential loss to HUD of $3

million. As a result of the investigation, four

defendants have been charged and prosecuted.

Defendant Clyde Pate was sentenced in Federal

Court, Eastern District of Missouri, St. Louis, to

three years imprisonment and three years supervised release, and ordered to pay $170,126 in

restitution. Pate previously pled guilty to a twocount federal information charging him with misuse

of a Social Security number and filing false bankruptcy petitions. Pate pled guilty to two different

schemes. One of the schemes involved an insurance

scam whereby he purchased four properties using

false identifications, obtained homeowners insurance on the properties, set the homes on fire, and

then filed a claim on each property. He obtained a

total of $170,126 from two insurance companies.

The second scheme involved selling properties he

did not own via false quit claim deeds. He forged

and recorded false deeds at the St. Louis Recorder

of Deeds Office and sold the properties without the

true owners’ knowledge or consent. As part of the

scheme, Pate also falsely completed and filed

bankruptcy petitions in the names of the true owners

in order to keep the City from selling the properties

for delinquent taxes.

Defendant Carol Wynona Mercer was sentenced

in U.S. District Court, Eastern District of California, Fresno, to ten months in a halfway house and

one year supervised release, and ordered to pay

$140,850 in restitution. Mercer pled guilty to a

one-count information charging her with causing

false statements to be made to HUD. Mercer admit
Chapter 2 — HUD’s Single Family Housing Programs 18

ted the she caused false gift letters to be submitted

to HUD and that she provided the funds described as

gifts to the borrowers.

Defendant John C. Carlisle, Jr., was sentenced

in Federal Court, Southern District of Texas,

Houston, to 34 months in prison, fined $10,000,

and ordered to pay $78,000 in restitution. Carlisle

was previously charged with mail fraud and conspiracy. The investigation disclosed that Carlisle

operated as a home improvement contractor in the

Houston area and solicited homeowners, through

flyers and newspaper advertisements, to apply for

government insured home improvement loans of up

to $25,000 each. Carlisle then conspired with other

home improvement contractors, bank lending

officers, and homeowners to obtain these loans by

using false documentation, including false employment information and fraudulent bankruptcy discharge documents. In many instances, the loan

proceeds were shifted between the accounts of coconspirators to conceal Carlisle’s involvement

because he was convicted of fraud in November

1996 and barred from engaging in transactions

involving HUD insured home improvement loans.

The amount of loss to the Department is $370,150.

Defendant James Weatherly, a former professional football player and an agent of Allstate

Mortgage Company, was sentenced in U.S. District

Court, Central District of California, Los Angeles,

to six months incarceration and ordered to pay

$70,000 in restitution. Weatherly previously pled

guilty to five counts of mail fraud. He located

properties for Victor Noval, the owner of Allstate

Mortgage Company, and Douglas Estrada, his coconspirator. These properties were later significantly overvalued and sold to straw borrowers.

Weatherly and his co-conspirators attempted to

fraudulently originate about 450 FHA Title II single

family mortgage loans amounting to $100 million;

however, through early detection only one-third of

these loans were insured by HUD. This resulted in a

loss to HUD of approximately $10 million.

Defendant Daniel Rogof, a real estate investor,

was sentenced in Federal Court for the Southern

District of Florida, Ft. Lauderdale, to 21 months

in prison and ordered to pay $27,936 in restitution.

In October 2002, Rogof pled guilty to an information charging him with conspiring to commit mail

fraud, loan application fraud, and making false

statements to HUD. From September 1996 through

August 2001, Rogof conspired with a real estate

broker to falsify documents in seven loan files; four

of the loans were FHA insured. The false financial

documents consisted of verifications of employment, verifications of deposit, W-2 forms, W-4

forms, Form 1040 tax return forms, and payroll

stubs. Rogof purchased several of the properties in

his true name and used the aliases of Daniel Rokov

and Aviv Bachar to purchase others. Rogof also

provided false identification documents for

strawbuyers whom he paid to purchase properties.

He then collected rent from the tenants he placed in

those properties, through his corporation, Aviv

Enterprises, Inc., and failed to pay the mortgages.

Rogof is an Israeli citizen who is also wanted in

Israel on land fraud charges and was arrested in

South Africa before being extradited to the United

States to face these charges.

Defendant Yigal Rappaport, an Alexandria, VA

real estate agent, was sentenced in Federal Court,

Eastern District of Virginia, to 24 months probation, fined $2,500, and ordered to pay $8,875 in

restitution. Rappaport was involved in a mortgage

fraud scheme in which he used fraudulent gift

letters that allowed buyers to purchase FHA insured

properties with no cash investment. The borrowers

defaulted on the loans and the properties subsequently went into foreclosure, resulting in a loss of

$223,000 to FHA. In August 2002, Rappaport pled

guilty to a one-count information charging him with

submitting a false statement to HUD. One other

individual has been charged and sentenced in this

case.

Defendant Darrell Hill, a homebuyer/recruiter

located in New York City, was sentenced in U.S.

District Court to 24 months incarceration for his

involvement in a scheme to defraud the FHA Section

203(b) Insurance Program. Hill knowingly took

false writings and documents to assist unqualified

homebuyers in obtaining FHA insured mortgages.

He submitted and caused to be submitted loan

applications to banks which fraudulently overstated

the income of the homebuyers and misrepresented
Chapter 2 — HUD’s Single Family Housing Programs 19

the sources of funds used for down payments and

closing costs. Hill recruited several strawbuyers

who purchased a total of 21 homes with FHA insured loans. Of the 21 loans, 16 have already had

claims paid out by HUD, and the other five are in

default. The total loss to the government is over

$4.2 million.

Defendant Philemon Atugokoh, the owner of a

tax preparation company in Greenbelt, MD, was

sentenced in Federal Court to 12 months incarceration and two years probation for his role in creating

fraudulent W-2 forms and accompanying pay stubs

for individuals attempting to qualify for FHA insured mortgages. Atugokoh also created fraudulent

and fictitious verification of employment forms,

certifying that individuals were employees of his

company or other companies. In addition, he

supplied fictitious employment information to

mortgage company personnel seeking to verify the

employment of individuals as employees of his

company. The loss in this case was approximately

$250,000.

Defendant Mark Carter, a former employee of

Prime Construction, a Section 203(k) contractor,

pled guilty in District Court, Northern District of

Illinois in Chicago, to one count of mail fraud.

From 1994-1997, Carter and others were part of a

scheme to defraud lending institutions and the

Federal Government by assisting an unqualified

buyer in purchasing four FHA insured properties

using fraudulent documents. Specifically, Carter

admitted that he signed false verifications of employment, thus enabling the unqualified buyer to

qualify for the loan. In addition, Carter, while

acting as a contractor, falsely certified contractors’

affidavits, lien waivers, and draw requests to make

it appear that rehabilitation work was completed

when in fact no work had been done. Following the

closings on these loans, all of the phony rehabilitation money was released from escrow with no

repairs ever being completed. After the buyer

defaulted on the loans, the properties were demolished by the City of Chicago. The total loss to HUD

was $386,000.

In the same case, defendant Harrison Jeffries

was charged by information in District Court,

Chicago, with nine counts of bankruptcy fraud

regarding allegations that he filed 16 fraudulent

bankruptcy petitions from 1990 to 2000. Specifically, Jeffries was allegedly part of a scheme to

defraud two lending institutions and the Federal

Government. According to the information, Jeffries

filed the voluntary bankruptcy petitions using four

different aliases and Social Security numbers in an

attempt to stall the foreclosure process on his FHA

insured property in Chicago. The property was

purchased on two separate occasions with FHA

insurance by virtue of Jeffries’ using false names

and Social Security numbers for each of the loans.

He managed to forestall the foreclosure process for

several years while filing the bankruptcies. By

doing this, Jeffries repeatedly violated the bankruptcy court ban on serial filings.

An investigation discovered a fraud scheme

involving former employees of American International Mortgage Bankers (AIMB) who assisted in

obtaining FHA insured loads from questionable

homebuyers located in the New York City metropolitan area, including Nassau and Suffolk counties.

Over 90 percent of the FHA insured loans from

AIMB contained one or a variety of altered documents, including false pay stubs, bank statements,

W-2’s, rent, employment, and deposit verifications,

credit worthiness letters, gift letters, and credit

reports. Additional documents were also altered

with the help of other individuals outside of AIMB.

The Section 203(b) loans were subsequently endorsed; over 400 FHA loans are in question. It is

estimated that FHA has insured as much as $80

million in loans through AIMB that could result in

significant losses to the insurance fund.

Defendant William Skinner pled guilty in U.S.

District Court, Eastern District of New York, to

false statement charges and was sentenced to 18

months in prison. Skinner purchased and sold two

properties. Each property, which was bought and

sold on the same day, was insured through the FHA

Section 203(b) Program.

Defendants Donna Martin, senior underwriter,

Lenore Thomas, underwriter, and Emerick Martin,

Nicholas Graham, and Matthew Francis, loan

officers, all of whom were all formerly employed by

AIMB in Lake Success, NY, were indicted in U.S.

District Court for their alleged involvement in the

scheme.
Chapter 2 — HUD’s Single Family Housing Programs 20

Defendant Javier Jara surrendered in the Eastern District of New York and was charged with

conspiracy and mail fraud. Jara was a loan officer at

AIMB. Defendants Valerie Vineyard, a former loan

processor, and Francine Sweet, a contractor, were

indicted and charged with conspiracy to commit

offense or defraud and United States, making false

statements to HUD, mail fraud, fraud and swindle,

and using a fictitious name and/or address.

In Federal Court, District of Nevada, Las

Vegas, defendants Marisa Perez, Michelle

Montano, Andrea Hinojosa, and Karina Delgadillo

pled guilty to count one of a criminal information

charging them with making false statements to HUD

during the origination of FHA insured loans. Perez

and Montano, both loan officers, and Hinojosa, a

loan processor, worked for Nevada First Residential

Mortgage Company. Delgadillo worked as an

administrative assistant at General Realty. Together,

they helped provide false Social Security numbers

and fraudulent income and employment information

to buyers in order to obtain FHA insured loans.

Most of the buyers were illegal immigrants from

Mexico. This investigation involves 243 FHA

insured loans valued at over $26 million. To date,

the loans that have gone into default total over $3

million.

Defendant Michael Weathersby, an investor/

property rehabilitation specialist, pled guilty in

Federal Court, Northern District of Illinois, Chicago, to one count of wire fraud and one count of

money laundering. Weathersby masterminded and

participated in a scheme to defraud mortgage

lenders of approximately $2 million. After locating

apparently abandoned properties in Chicago and

illegally transferring ownership of the properties

through the filing of fraudulent deeds, he sold the

properties to strawbuyers. Weathersby continued the

scheme by directing the title companies to issue the

proceeds of the loan closings in various aliases and

his company’s name in order to launder the profits.

Some of these properties were FHA insured.

Weathersby later devised a scheme to defraud the

Chicago Housing Authority Corporation, a Housing

Authority contractor, out of approximately $28,000

in rent subsidy payments by collecting Section 8

benefits on behalf of properties that, as a result of

the fraudulent deeds, he did not actually own.

Defendant Joyce Primous, a notary public, pled

guilty to one count of wire fraud. Primous admitted

to conspiring with co-defendants Michael

Weathersby and Jermaine Weathersby, her nephews,

by participating in the fraud scheme. Specifically,

following the Weathersbys’ successful location of

properties in Chicago that appeared to be abandoned, Primous would assist in illegally transferring ownership of the properties through the filing

of fraudulent deeds. The properties were subsequently sold to various strawbuyers. Primous

improperly notarized the signatures of the codefendants, who signed the deeds using multiple

aliases. She also assumed the false identity of a

deceased relative in order to receive a title

company’s disbursement check during the closing

of one of the fraudulent mortgage transactions.

Primous negotiated the check for Michael

Weathersby, converting part of the proceeds into a

bank check made payable to a car dealership, which

Weathersby then used to purchase a vehicle.

Defendant Jermaine Weathersby pled guilty to

one count of wire fraud. Weathersby obtained

fraudulent identification documents and used a false

identity to pose as the buyer and/or seller of various

properties. He received numerous title company

disbursement checks from the closings on these

fraudulent mortgage transactions, which he negotiated for his brother, codefendant Michael

Weathersby. Cathleen Smith, a strawbuyer and a

strawseller, also pled guilty to one count of wire

fraud. Like Jermaine Weathersby, Smith obtained

fraudulent identification documents and used a false

identity to pose as the buyer and/or seller of various

properties.

Defendant Steven Johnson, a licensed real estate

broker, pled guilty to one count of wire fraud.

Johnson conspired with the Weathersbys. Johnson

provided appraisals which substantially overstated

the values of numerous properties in order to obtain

the maximum amount of mortgage proceeds possible.

In Charlotte, NC, defendants Willie Green and

Alice Green each pled guilty in Federal Court for
Chapter 2 — HUD’s Single Family Housing Programs 21

the Western District of North Carolina to one count

of making false statements to HUD. The Greens

were employees of First Beneficial Homes (FBH), a

subsidiary of First Beneficial Mortgage Company

(FBMC). While they were employed at FBH, the

Greens recruited strawbuyers to sign fraudulent

mortgage notes, knowing that the false notes were

going to be sold to the government. The notes were

sold to Government National Mortgage Association

(Ginnie Mae) investors by FBMC. The Greens also

received large sums of money for recruiting

strawbuyers.

Defendant RichieDean Gess pled guilty to one

count of conspiracy to defraud HUD through Ginne

Mae. Gess was employed as the vice president of

underwriting for FBMC, and was also approved by

HUD for direct endorsement authority. She and her

co-conspirators devised and executed a mortgage

fraud scheme whereby they obtained millions of

dollars from the secondary mortgage market by

making and selling fraudulent mortgage notes in the

names of fictitious borrowers. Gess used her authority to obtain and assign FHA case numbers to

the fraudulent mortgages. These mortgages were

sold to investors in the form of mortgage-backed

securities guaranteed by Ginnie Mae.

Defendants James McLean, president of First

Beneficial Mortgage Company, his wife, Macy, and

two of their employees, James and Debbie

Zimmerman, were convicted in federal court and

found guilty. The McLeans were found guilty on 66

counts of conspiracy, wire fraud, bank fraud,

making false statements, and money laundering.

James McLean was also ordered to forfeit $8

million in property owned by him and his company.

He was ordered held without bail pending his

sentencing. The Zimmermans were convicted of

one count of conspiracy and three counts of passing

counterfeit mortgages. The Government National

Mortgage Association suffered a loss of $28 million

as a result of the fraudulent scheme.

In Cleveland, OH, defendant Cherese

McDowell pled guilty in District Court, Northern

District of Ohio, to conspiracy and misuse of a

Social Security number. She was charged along

with 40 other individuals in the Northern District of

Ohio in a 100-count single family indictment. In

McDowell’s case, she was a Section 8 tenant at the

time she purchased the single family property.

Fraudulent statements made by the individuals

involved in this case included names, Social Security numbers, employment information, and fabricated down payments.

Husband and wife defendants Deon McAuley

and Tryna Wilson-McAuley, Cleveland, OH Police

Officers, pled guilty in District Court, Northern

District of Ohio, to making false statements to HUD

in relation to the purchase of each of their homes

through HUD’s Officer Next Door (OND) Program.

Through the program, McAuley received a $20,500

discount; however, he failed to live in the property

pursuant to HUD’s three-year occupancy requirement. Additionally, his wife, Wilson-McAuley, also

purchased an OND property and received a $27,500

discount. While married and living together, they

rented out each of their OND properties. Both pleas

stipulated their acceptance of responsibility, but did

not require either termination or resignation. Those

actions, according to the plea, were left up to the

Police Department.

Earlier, informations were filed against both

McAuleys, Kelvin Barrow, another Cleveland Police

Officer, and Jerome E. Newby, a former Federal

Probation Officer/Auxiliary Police Officer. All

were charged with making false statements in

transactions involving HUD’s OND Program. The

“Officer Next Door Program” allows Police Officers to purchase HUD foreclosed properties at a

substantial discount (50 percent of fair market

value), on the condition that they actually live in the

homes for at least three years. A primary purpose

of the program is to create a police presence in

those residential areas. Allegedly, each of the

defendants falsely certified to HUD that they intended to use the property they were purchasing as

their residence.

Defendant Javier Estrada pled guilty in Federal

Court, Northern District of Texas, Fort Worth, to

one count of misuse of a Social Security number

(SSN). Estrada, an illegal alien, admitted to using

another person’s SSN to secure an FHA insured loan.

Defendant Thomas Becerra was indicted on one

count each of misuse of a SSN. Becerra falsified
Chapter 2 — HUD’s Single Family Housing Programs 22

loan documents to obtain an FHA mortgage. Becerra

is also an illegal alien from Mexico who purchased

a SSN 10 years ago and used the false SSN to obtain

the FHA loan.

In the same case, defendant Leon Pope, a

former HUD closing attorney, signed a pre-trial

diversion agreement for charges of mail fraud and

agreed to pay the Department $47,152. Pope

admitted involvement in the fraudulent scheme to

overcharge HUD for tax certificates. Starting in the

early 1990’s, Pope entered into an agreement with

Texas Real-Tax, Inc., an Austin based corporation,

to defraud HUD by purchasing tax certificates for

single family closings at less than face value. Pope

is the second of three closing attorneys to admit to

this fraud. This investigation involves approximately $3 million in loans.

Defendant Lucas Reyes, a co-owner of Pacific

Investment Capital, a mortgage brokerage company

in Los Angeles, CA, pled guilty in U.S. District

Court for the Central District of California to one

count of wire fraud. Reyes and others knowingly

obtained fraudulent Title I home improvement loans

for properties with fraudulently obtained Title II

loans insured by FHA. The Title I loan applications

contained false wage and employment information,

and falsely represented that the loan proceeds would

be used to improve the properties. Instead, portions

of the loan proceeds were used to make the mortgage payments on the fraudulently obtained Title II

loans. The actions of Reyes and others caused a loss

of $241,000 to HUD. The fraudulently obtained

Title II home mortgage loans resulted in losses to

HUD of over $4.5 million.

Defendant Michael Mittler pled guilty in U.S.

District Court, Middle District of Florida, Tampa,

to one count of obstruction of justice. Mittler, a

former employee of Great Stone Mortgage Company, made a false statement to OIG. He entered into

a plea agreement and was sentenced to 36 months

probation and six months home detention, and

ordered to pay a $2,000 fine and a $100 special

assessment fee. Mittler was also ordered to obtain

drug rehabilitation counseling. This investigation

involves fraud against FHA and the Government

National Mortgage Association.

Defendant Michael James Fothergill, also

known as Lawrence Thomas, the owner of

Alexandra Financial & Property Management, Inc.,

pled guilty in Federal District Court, Southern

District of Florida, Fort Lauderdale, to one count

of conspiracy to commit bank fraud and money

laundering and one count of money laundering. A

co-conspirator, Fernando Cazaux, who acted as an

investor, pled guilty to one count of conspiracy to

commit bank fraud and money laundering and one

count of money laundering. A Federal Grand Jury

previously returned an eight-count indictment

against Fothergill and Cazaux charging them with

conspiring to defraud HUD/Wells Fargo and various

loan institutions by obtaining loans in fictitious

names and creating false documentation to secure

loans for 28 properties. Fothergill and Cazaux

developed a complex scheme to keep the loan payoff proceeds received from the loan institutions.

These proceeds amounted to over $2.9 million. The

losses to HUD on the FHA insured properties are

over $200,000.

In Houston, TX, defendants James Q. Nguyen,

branch office manager, and his identical twin

brother, Thomas Q. Nguyen, were both charged

with one count of conspiracy to commit money

laundering, three counts of bank fraud, five counts

of laundering criminally derived property, and ten

counts of money laundering. A Federal Grand Jury

in the Southern District of Texas returned a 19-

count indictment charging the two escrow officers

of American Title Company with engaging in a $20

million mortgage fraud scheme. The indictment

reflected the government’s intent to seek the forfeiture of all property traceable to the alleged criminal

conduct, and was sealed until the arrests were made

the next day. Allegedly, the Nguyens falsely represented to lenders that borrowers had provided down

payments to the title company, inducing the lenders

to allow funding and disbursement of single family

loan proceeds. The Nguyens then issued sellers’

proceeds checks to dummy corporations consisting

of conspirators who have already been prosecuted.

These proceeds checks contained the full loan

proceeds from the lenders and the down payment

money “fronted” to the conspirators by the title

company. The conspirators then took the sellers’

proceeds checks to a bank and exchanged them for
Chapter 2 — HUD’s Single Family Housing Programs 23

cashiers’ checks for the down payments. Analysis of

bank records revealed that the dummy corporations

did not have funds in their accounts to cover the

down payments prior to the deposit of the sellers’

proceeds checks. The $20 million in mortgage loans

consisted of insured loans (in excess of $1 million)

and conventional loans.

Defendants Ryan Bonneau, a mortgage broker

and loan officer, along with Misti Lynn Byrd,

Pauline Louise Gentry, Todd Mikal Troen, and

Mack James Gentry, were indicted by a Federal

Grand Jury in the District of Oregon charging the

five Portland individuals with real estate fraud.

The 28-count indictment charges the individuals

with conspiracy and fraud for their part in originating 24 fraudulent mortgages worth an estimated $10

million. The charges include conspiracy, wire

fraud, fraud against HUD, false statements in loan

applications, money laundering, and bank fraud,

and allege the use of false financial information and

falsely inflated appraisals in a complex scheme to

defraud HUD, banks, and other lenders. Fifteen of

the involved loans were FHA insured. HUD’s loss, to

date, has been estimated at approximately

$564,000.

A Federal Grand Jury in the Northern District

of Georgia returned a 22-count indictment against

defendant Sandra Rice, a real estate agent with Re

Max of Atlanta, GA. The charges include conspiracy, wire fraud, mail fraud, HUD fraud, and a

forfeiture provision for property obtained as a result

of the fraudulent scheme. The indictment alleges

that Rice was part of an organization that conspired

with other individuals to originate 22 fraudulent

mortgages amounting to over $3.1 million.

On the same day, a Federal Grand Jury returned

a 52-count indictment against defendant Glen

Allen, a loan officer at Bankers Financial Group,

Inc. The charges include conspiracy, wire fraud,

HUD fraud, and a forfeiture provision for property

obtained as a result of the fraudulent scheme. The

indictment alleges that Allen conspired with other

individuals to originate over 30 fraudulent mortgages amounting to over $4.3 million.

In Cleveland, OH, ten individuals were indicted on the following state charges that total 81

counts: engaging in a pattern of corrupt activity,

conspiracy, taking the identification of another,

falsification, securing writings by deception, forgery, uttering, possession of heroin, possession of

cocaine, identification theft, money laundering, and

tampering with records.

In this fraud scheme, defendant Damon Berry

sold James Smith the identity of a five-year-old

child named Isaiah Campbell. Defendants Errol

Howard, Linda Bivens, and Lisa Jones created false

tax returns and mortgage documents for Smith so

that he could purchase real estate using the name of

Isaiah Campbell. Gregorio Pimental, also known as

Nino, retained the services of James Smith to

receive, hold, and sell illegal controlled substances

in Cleveland, with the assistance of Stephanie

Walker, Dwight Walker, and Dennis McKenzie.

Smith used the proceeds from the sale of the illegal

controlled substances to purchase real estate.

Richelle Spears aided and abetted James Smith in

receiving money from the Cuyahoga Metropolitan

Housing Authority as a Section 8 landlord under the

identity of Isaiah Campbell, while failing to make

mortgage payments on the single family properties.

Additionally, defendants Gregorio Pimental and

Carlos Abreu were arrested when they attempted to

enter one of the single family properties that was in

foreclosure. Pimental was one of the Massachusetts

Parole Authority’s ten most wanted persons. The

value of assets seized exceeds $220,000.

A Federal Grand Jury in the District of Massachusetts indicted Angel Serrano on one count of

conspiracy, one count of mail fraud, and one count

of false statements. The indictment is the result of

an investigation of property flipping in Westfield,

MA. Serrano allegedly acted as an unlicensed

broker who steered low-income, first-time

homebuyers, primarily Hispanics, toward purchasing properties. In order to qualify the buyers,

Serrano prepared numerous false gift letters, income statements, lease documents, and credit

documents and submitted them to the mortgage

lender. In order to continue the scheme, a closing

attorney conducted the real estate closing for both

sides of the flip and failed to notify the mortgage

lender, as required by FHA on a double escrow.
Chapter 2 — HUD’s Single Family Housing Programs 24

Defendant Barbara Kessinger, also known as

Sheila Murphy, was indicted by a Federal Grand

Jury in the Northern District of Illinois, Chicago,

on one count of mail fraud and six counts of bankruptcy fraud. The indictment charges Kessinger

with fraudulently obtaining financing to obtain one

FHA insured property and two properties that were

owned by the Department of Veterans Affairs. The

indictment alleges that Kessinger acquired the

properties by submitting falsified borrower information that included a false Social Security number, a

false name, and fabricated income and employment

documentation. As part of the fraud, Kessinger

failed to make the required payments on the mortgage loans. In addition, she purposely filed six false

Chapter 13 bankruptcy petitions from 1997-1999 in

order to halt foreclosure proceedings. Following the

dismissal of the bankruptcies, all three properties

went into foreclosure. The loss to HUD was

$74,149, while the loss to the Department of

Veterans Affairs was $36,524.

Defendants William E. Fallon and Julie A.

Fallon, doing business as Homeowner Services of

Arizona, Phoenix, AZ, and Michael D. Henschel,

doing business as Proserve, Van Nuys, CA, were

indicted by a Federal Grand Jury in U.S. District

Court, District of Arizona, on five counts of wire

fraud. An investigation focused on a scheme in

which homeowners, whose mortgages were in

default and who were facing foreclosure, were

contacted by the Fallons and told that Homeowner

Services could delay the foreclosure. The Fallons

collected rent and fees from homeowners, while

Henschel filed fraudulent bankruptcies in California

to delay the foreclosure process. Henschel originated the same scheme in California and the Fallons

moved to Arizona to continue the fraud. Over 1,000

property owners in California signed deeds and paid

fees to Proserve; this included about 120 properties

with FHA insured mortgages and 40 properties with

mortgages guaranteed by the Department of Veterans Affairs. In addition, Henschel caused over 200

fraudulent bankruptcies to be filed in California by

using fictitious names and Social Security numbers.

The Fallons secured deeds from 39 homeowners in

Arizona, 18 of whom had FHA insured mortgages.

They then collected about $51,000 in fees/rents

from the homeowners during the period they

operated Homeowner Services in Arizona. Losses

to the government as a result of this scheme total

approximately $390,000.

In U.S. District Court, Central District of

California, defendant Kelli Davis, a loan officer at

RE Mortgage Group, Inc., in Downey, CA, was

indicted on six counts of wire fraud for her involvement in a single family loan origination fraud

scheme. Davis, along with other real estate professionals, fraudulently purchased employment,

income, and credit documents from a known forger.

The forger was convicted in Federal Court in

August 2002. Davis then packaged the fraudulent

documentation into more than 80 mortgage loan

applications for unqualified borrowers. The fraudulent applications were eventually submitted to HUD.

Davis was arrested at her place of business, Pro 1

Mortgage, as a result of an arrest warrant that was

issued in U.S. District Court for the Central District of California. The value of the fraudulently

funded loans exceeded $11.4 million. The resulting

loss to HUD exceeded $5.2 million.

Defendant Waldo Andia, a property speculator

in Rockville, MD, was arrested at his residence

after previously being indicted in Federal Court for

the Districr of Maryland on false statement charges.

Andia allegedly flipped approximately 40 single

family properties. He typically sold the homes to

first-time homebuyers, who purchased the homes

using both FHA insured and conventional mortgage

loans. Andia created false employment documents

for homebuyers, including W-2’s, pay stubs, and

verifications of employment, to help them qualify

for the mortgage loans. The potential loss attributable to the fraudulent documents is $250,000.

Defendant Brian G. Hoch, sales representative

for Barwood Estates Development in Dover, PA,

was debarred from participation in procurement and

non-procurement transactions with HUD or the

Federal Government for four years. Developer Gary

L. Sweitzer and his company, Gary L. Sweitzer

Enterprises, Inc., were also debarred from participation in procurement and non-procurement transactions with HUD or the Federal Government for ten

years. These debarments are based on information

that Hoch and Sweitzer participated in a scheme
Chapter 2 — HUD’s Single Family Housing Programs 25

whereby they and other conspirators used fraudulent gift letters and sweat equity to provide mortgagors with most or all of the funding required to

purchase FHA insured homes, including funds for

the down payments and to pay off debts to ensure

that they qualified for the mortgages. Hoch helped

to originate, and Sweitzer sold up to 110 homes

with, FHA insured mortgages in Barwood Estates.

Currently, 19 of these loans have gone into foreclosure, totaling over $1.8 million in potential claims

to the FHA insurance fund. Both Hoch and Sweitzer

have signed agreements to plead guilty to conspiracy to commit HUD fraud in U.S. District Court

for the Middle District of Pennsylvania.

A five-count False Claims Act civil complaint

was filed in the Southern District of Texas by the

Houston U.S. Attorney’s Office against Charles

Anthony, a deputy with the Harris County Sheriff’s

Department. An investigation disclosed that Anthony violated the Officer Next Door Program

regulations by failing to live in a home which he

purchased at a discounted price. Under the False

Claims Act, the government is entitled to recover

three times the amount of actual damages plus civil

penalties and other fees.

In U.S. District Court, Central District of

California, defendant Maritza Portillo, a real estate

agent at Century 21 Bright Horizons in West

Covina, CA, pled guilty to one count of conspiracy

to commit fraud against HUD. Portillo, along with

Walter Brent Williams and Heidi Lynn Jackson,

employees at Golden Feather Realty, devised a

scheme to enter “straw” high bids to win the

electronic bid process for HUD real estate owned

(REO) properties. Golden Feather was the HUD

contractor for the marketing, maintenance, and sale

of HUD REO properties in California. After all the

bids for properties had been entered, some employees at Golden Feather altered the bid sheets to show

that certain bids had won the bid process and the

properties were sold for amounts far below market

value. The fraud resulted in a loss to HUD of approximately $516,560, with a $51,000 loss attributed to Portillo. Portillo was sentenced to three

years probation and was ordered to pay a one-third

portion of $29,500 in restitution to HUD.

Defendants Williams and Jackson were sentenced in U.S. District Court for the Central District of California for their roles in the scheme.

Williams was sentenced to 15 months incarceration

and three years probation, and ordered to pay

$465,560 in restitution to HUD. Jackson was sentenced to four months in a halfway house, four

months home detention, and five years probation,

and ordered to pay $340,605 in restitution to HUD.

This investigation was initiated based on a referral

from the HUD Home Ownership Center.

Defendant Ismael Rodriguez, an Essex County,

NJ Sheriff’s Officer, pled guilty in U.S. District

Court, District of New Jersey, to knowingly and

willfully making a materially false, fictitious, and

fraudulent statement and representation relating to

the purchase of a residence under HUD’s Officer

Next Door Program. Under this program,

Rodriguez purchased a property at a 50 percent

discount and certified falsely that he would reside in

the residence for a three-year period. In fact,

Rodriguez owned two other residences.

Defendant Kerry Townsend, a Harris County,

TX Sheriff’s Deputy, agreed in Federal Court,

Southern District of Texas, to a financial settlement

with the government and provided the Houston,

TX U.S. Attorney’s Office with two cashiers’

checks totaling $40,500 to avoid a federal lawsuit

under the False Claims Act. An investigation

disclosed that Townsend failed to abide by HUD’s

requirement that he live in a home, purchased

through the Officer Next Door Program, for three

years as his primary residence. Instead, he resided

at another property and never occupied the house

he purchased from HUD at a discounted price.

OIG Offices of Audit and

Investigation — Joint Efforts

The joint effort, in which both HUD OIG Investigators and Auditors bring to a case their respective

areas of expertise, is an effective means to completing an investigation, and is often the only way to

put together the necessary pieces of an investigative

case.
Defendant Albert R. Coccia, Jr., former general

manager/owner of Arco Redevelopment Company, a

Title I contractor/dealer in Philadelphia, PA, was

sentenced in Federal District Court, Eastern District

of Pennsylvania, on multiple federal violations.

Coccia was sentenced for his role in defrauding the

HUD Title I Program and interstate drug trafficking

activities after his Title I company went out of

business. He received a prison term of 27 months

and three years supervised release, and was ordered

to pay a $900 special assessment fee. Coccia was

also ordered to forfeit $5,157 and pay $14,421 in

restitution to HUD. The latter represents one of the

Title I claims the government paid as a result of his

criminal activities. The sentencing stems from a

superseding 41-count Federal Grand Jury indictment

returned against Coccia in April 2002 that charged

him with wire fraud, false statements to HUD, and

money laundering. In May 2002, the Court accepted Coccia’s guilty plea to various counts of the

indictment.

A Federal Grand Jury in the Western District of

Tennessee found defendant Melvin Rice, Jr., guilty

on two counts of making false statements. Rice, a

Memphis, TN Police Officer, purchased a home

through HUD’s Officer Next Door Program, agreeing to live in the property for three years after

purchase. Rice rented the property and falsified

certifications as to his residency. When the renters

refused to lie for Rice, he had them evicted. Rice

was sentenced to two years probation, six months

home confinement, 50 hours of community service,

fined $1,000, and ordered to pay $9,600 in restitution and a $200 special assessment fee.

Defendant Julio Hidalgo, Sr., a real estate

broker who did business as Julio and Associates,

entered a plea of guilty in U.S. District Court,

District of Arizona, Phoenix, to a one-count

information charging him with submitting false

statements to HUD. In addition, Julio Hidalgo, Jr., a

real estate agent, also entered a plea of guilty to one

count of submitting false statements to HUD.

Hidalgo, Sr., and Hidalgo, Jr., were previously

indicted on one count of conspiracy, 12 counts of

submitting false statements to HUD, and five counts

of mail fraud. An investigation disclosed that the

Hidalgos produced numerous W-2’s, pay stubs,

letters of credit, and verification of employment

forms for the purchase of homes with FHA insured

mortgages. In addition, they stole thousands of

dollars from homebuyers by claiming additional

funds were needed for closing. In one instance,

Hidalgo, Jr., received $20,130 from one homebuyer

when the actual closing costs were only $3,672.

About 72 loans originated by the Hidalgos have

been identified as fraudulent, with FHA insured

mortgages totaling approximately $6.12 million and

losses on 10 of these properties totaling about

$148,000.

Chapter 2 — HUD’s Single Family Housing Programs 26
Chapter 3 — HUD’s Public and Indian Housing Programs 27

Chapter 3 — HUD’s Public and Indian Housing Programs

Audits

HUD provides grants and subsidies to approximately 4,200 housing authorities (HAs) nationwide. About

3,200 HAs manage public housing units and another 1,000 HAs, with no public housing, manage units under

Section 8 Programs. (Many HAs administer both Public Housing and Section 8 Programs.) HUD also provides

assistance directly to HAs’ resident organizations to encourage increased resident management of public housing

developments and to promote the formation and development of resident management entities and resident

skills. Programs administered by HAs are designed to enable 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 conducted reviews of the Puerto Rico Public Housing Administration’s

procurement of management agents, the Philadelphia, PA Housing Authority’s contracting and procurement

activities, the Public Housing Programs of the Northwestern Regional Housing Authority in Boone, NC, and

the Coshocton, OH Metropolitan Housing Authority, as well as the general operations of other HAs.

We completed a review of the Puerto Rico Public Housing Administration’s (PRPHA) management agent

contracts. We began the review in response to the criminal indictment of the general manager of one of the

management agents involving excess charges to the Public Housing Program. Our assessment showed that the

former PRPHA administrator failed to ensure that contracts awarded in 1999 were procured in a manner that

provided full and open competition consistent with appropriate standards, and were reasonable and beneficial to

the PRPHA. The PRPHA disregarded procurement requirements; executed financially burdensome management

contracts; paid excessive non-project salaries; and paid excessive overhead and profit. We estimate these fiveyear contracts to have been awarded at $35 million more than was necessary.

We recommended that HUD work with the PRPHA to remedy the deficiencies in the contracts, or require the

PRPHA to pursue all available options provided by the agents’ service contracts to ensure that the best interests of

the PRPHA and HUD are being served, and possibly save $10.8 million in costs not incurred. We also recommended that HUD require the PRPHA to deduct about $2 million from one of the management agent’s invoices

correct the costs improperly included in the proposal and contract award. In addition, HUD should consider

appropriate administrative action against the former PRPHA administrator and others for gross mismanagement

of the procurement process. (Report No. 2003-AT-1002)

Total Number of Public Housing Authorities 

Administering Public Housing

 and Section 8 Programs

Section 8

24%

Both 

Programs

38%

Public 

Housing

38%
An audit of the Philadelphia, PA Housing

Authority’s contracting and purchasing activities

found that, for the most part, the Authority was

soliciting, awarding, and administering construction

contracts in accordance with federal procurement

requirements. We did find, however, that the Authority did not always comply with federal purchasing requirements or its own procurement policy in

awarding service contracts. We identified at least

one major deficiency in 12 of the 37 service contracts reviewed ($2.3 million of $37 million reviewed). Specifically, contracting officials did not:

(1) always advertise solicitations adequately; (2)

develop required cost estimates; (3) issue written

amendments to all bidders when changes were

made after the due date for proposals; and (4)

adequately evaluate options as part of the total

contract award.

We also found that the Authority frequently split

purchases from vendors to avoid obtaining the

products and services through the competitive

award process. A review of small purchases for 28

vendors that received $20.1 million during the audit

period showed that the Authority frequently split

purchases for 15 of the 28 vendors. Since the

Authority did not adequately plan its contracting

needs, it divided purchases to justify using small

purchase procedures ($10,000 limit on purchases)

to obtain the commodities it needed to keep operations running smoothly.

During the audit, the Authority took a number

of actions that should improve its vendor payment

process. We recommended that the Authority: (1)

reimburse nearly $400,000 of ineligible costs from

non-federal funds; (2) provide documentation to

support vendor payments totaling nearly $330,000

or reimburse that amount from non-federal funds;

and (3) develop an annual procurement plan.

(Report No. 2003-PH-1002)

In Boone, NC, our audit of the Northwestern

Regional Housing Authority (Authority) was conducted in response to a citizen’s complaint. We

found the Authority repeatedly violated regulatory

requirements and its public housing and Section 8

contracts. Management pledged Authority assets as

collateral for unauthorized bank loans, misused over

$580,000 of Section 8 and public housing funds for

private development activities, and guaranteed

repayment of private development loans. The

Authority incurred unnecessary and ineligible travel

and other costs. It paid lavishly for meals, hotels,

and tips, made frequent out-of-region trips, and

paid travel expenses for family members of management and the board. Also, it spent over $100,000

for miscellaneous items, half of which were for

entertaining and pampering its board members and

employees, their spouses, and guests at board

meetings, a beach retreat, and a Christmas party. It

also purchased theater tickets, jewelry, bath products, libations, and other personal gifts.

The Authority did not maintain its public

housing units and grounds in good repair, did not

maintain accurate accounting records, and did not

follow Section 8 fund requisition requirements,

resulting in excess withdrawals. Management did

not properly segregate tenant escrow funds, adequately pursue collection of tenant rents, or follow

its own policies on nepotism.

Due to the nature and extent of the violations,

we recommended that HUD declare the Authority in

substantial default, recover $4.3 million of ineligible costs, and take appropriate administrative and

other needed actions. (Report No. 2003-AT-1001)

As part of a comprehensive review of the

Coshocton, OH Metropolitan Housing Authority,

we conducted five audits of five different programs

based on a request from HUD’s Columbus Field

Office Coordinator of the Public Housing Program

Center. The five programs audited included the

Public Housing Program, Section 8 Housing

Program, Comprehensive Improvement Assistance

Program, Public Housing Resident Council’s

Tenant Opportunities Program and Public Housing

Drug Elimination Program. All five audits found

that management controls over the programs were

weak. resulting in questionable costs of about

$670,000.

 Under the Public Housing Program, weak

controls over monetary assets, cash and inventory resulted in the Authority’s using over

$76,000 for ineligible expenses and being

unable to support expenditures of about

$166,000. Areas which lacked adequate proce

Chapter 3 — HUD’s Public and Indian Housing Programs 28
dures and controls included personnel,

Public Housing Program physical

condition standards, cash receipts and

disbursements, equipment, procurement, and financial and administrative

processes.

 Under the Section 8 Program, Section

8 units contained health and safety

violations (521 violations in 33 of the

34 units inspected) and the Authority

could not document how utility

allowances or rent reasonableness

were determined.

 Under the Comprehensive Improvement Assistance Program (for FYs

1997, 1998, and 1999) the Authority

did not: (1) ensure that about

$290,000 was used according to HUD

regulations; (2) ensure that over

$36,000 was used in accordance with

its board approved operating budget; (3) procure goods and services in accordance with

HUD regulations; and (4) perform contractor

employee wage surveys for its program.

 Under the Resident Council’s Tenant Opportunities Program (FY 1998), the Authority: (1)

requested about $42,000 from HUD without

supporting documentation to show that funds

were for reasonable and necessary program

expenses; and (2) drew down about $5,000 in

excess of actual program expenses.

 Finally, under the Public Housing Drug Elimination Program (FY 1998), the Authority: (1)

drew down about $15,000 in excess of actual

program expenses; (2) used about $6,000 to pay

two resident security guards who had criminal

histories, had no previous experience providing

security services and did not receive any security services training; and (3) failed to monitor

and evaluate the program’s activities to ensure

that they achieved their intended objectives.

In all the audit reports, we recommended that

HUD’s Acting Director of the Troubled Agency

Recovery Center, Cleveland Field Office, assure

that the Authority implements procedures and

controls to correct the weaknesses cited in the

reports. We also recommended that the

Acting Director: (1) take administrative

actions against the Authority’s former

executive director, current director, and its

board of commissioners for failing to

administer the Authority according to

federal, state, and its own requirements; (2)

take appropriate action against the Authority for its default on its Annual Contributions Contract; (3) conduct an election to

determine whether the public housing

residents want a transfer of management to

another entity, as permitted by the Housing Act of 1937; and (4) determine the

feasibility of combining the Authority with

another public housing authority, as

permitted by the Housing Act of 1937.

(Report Nos. 2003-CH-1010, 2003-CH1011, 2003-CH-1012, 2003-CH-1013, and

2003-CH-1014)

As a result of a citizen’s complaint, we audited

the Housing Authority of Champaign County, IL.

The complainant’s specific allegations were that the

Housing Authority: (1) inappropriately used monies

from its Comprehensive Improvement Assistance

Program, Public Housing Drug Elimination Grant,

and Resident Opportunities for Self Sufficiency

Grant Programs; and (2) did not maintain its units

in a decent, safe, and sanitary condition. We found

that the Housing Authority charged its HUD funded

grants (Public Housing, Drug Elimination, and

Comprehensive Improvement Assistance) over

$27,000 in ineligible and unsupported expenses.

The ineligible expenses totaling about $24,000

consisted of stipends paid to the Authority’s residents who were not eligible to receive them because

they were not officers of the Authority’s Resident

Council.

We recommended that HUD’s Director of Public

Housing Hub, Chicago Field Office, assure that the

Housing Authority reimburses its Public Housing

Program for the inappropriate use of grant funds.

(Report No. 2003-CH-1001)

We audited the Housing Authority of the City of

Morgan City, LA’s Low-Rent Program. The audit

concluded that the Authority did not follow either

procurement requirements or policies regarding the

Split entry door trim.

Missing cover plate caused

exposed wires of electrical outlet.

Chapter 3 — HUD’s Public and Indian Housing Programs 29
use of its credit cards and the performance of travel.

Specifically, the Authority: (1) inappropriately

procured over $900,000 in contracts; (2) paid about

$22,000 in ineligible and unsupported procurement

expenditures; (3) paid nearly $4,000 in ineligible

and unsupported travel expenditures; (4) paid about

$33,000 to an Authority contractor in violation of

conflict-of-interest requirements; and (5) did not

monitor its budget. Further, the Authority did not

have procedures that adequately

addressed outside employment

and businesses. As a result of

poor management, lax oversight, and a failure to follow

requirements, the Authority

discouraged procurement

competition and mismanaged

HUD funds.

We recommended that the

Authority either support or

repay the unsupported expenditures discussed in the audit, and

repay all ineligible amounts.

Further, we recommended the

Authority follow regulations and

procedures to ensure it properly

expends funds and that HUD

take administrative actions

against the parties involved in

the conflict of interest. Generally, the Authority agreed to

implement our recommendations. The Authority and its

board have been reorganized

and its former executive director

has been terminated. (Report

No. 2003-FW-1001)

An audit of the Fairfield,

AL Housing Authority found

that the Authority: (1) improperly provided conventional and Section 8 assistance

to individuals; (2) had continuing problems in

procuring goods and services; (3) did not maintain

an adequate system of controls over its general

accounting and disbursements; and (4) did not have

adequate controls to ensure that travel expenses

were necessary, reasonable, adequately supported,

and recorded, resulting in questionable costs totaling over $560,000.

We recommended that HUD require the Authority to: (1) recover about $70,000 in overpaid Section 8 assistance payments; (2) justify or reimburse

nearly $440,000 in unreasonable and unsupported

disbursements from non-federal funds; (3) seek

repayment of a $50,000 receivable owed by a

nonprofit corporation; and (4) reimburse over $400

of ineligible travel expenditures

and justify or reimburse nearly

$4,000 charged as travel or

sundry expenditures. We also

recommended that that Authority be required to implement

basic controls to ensure its

activities are in accordance with

applicable HUD requirements.

(Report No. 2003-AT-1003)

At the request of the HUD

Atlanta Office Director of

Public Housing, the OIG audited

the South Carolina Regional

Housing Authority No. 3 and

the associated nonprofit, Southeastern Housing Foundation,

Barnwell, SC. We found that

the Authority’s executive director (ED) and director of management (DM) took advantage of

inadequate oversight by the

Authority’s board and the

Foundation’s board to financially benefit themselves, their

families, and friends at the

expense of both entities. The ED

and DM violated the Annual

Contributions Contract with

HUD by executing an illegal

agreement between the Authority and the Foundation that provided financial and

administrative support to the Foundation, including

the use of Authority funds to finance the

Foundation’s operation. The Foundation owed the

Authority over $200,000 for operating costs as of

January 31, 2002. Furthermore, the ED and DM

collected over $950,000 in development and other

fees on Founda

Chapter 3 — HUD’s Public and Indian Housing Programs 30
tion property purchases. As a result, the financial

positions of the Authority and Foundation were

materially weakened.

We recommended HUD monitor board of commissioners’ actions to ensure adequate oversight of

the Authority, and require the Authority to recover

over $1.1 million including, amounts owed the

Authority by the Foundation, amounts improperly

collected by the ED and DM, and other improper

payments. We also recommended the Authority

improve procedures for documenting certain expenditures, ensure proper acquisition procedures are

followed, and sever ties with the Foundation or

develop a plan to absorb the Foundation and its

known liabilities. (Report No. 2003-AT-1801)

We performed an audit of the Delta, CO

Housing Authority to determine whether complainants’ allegations about the Authority’s operations

were valid and to determine whether Authority

funds were used in accordance with applicable HUD

policies and procedures. Specifically, we reviewed

procurement activities, selection of applicants from

the waiting lists, Section 8 voucher payments for

tenants previously residing in Authority owned units

after moving out, allocation of costs to the

Authority’s housing programs and activities, and

maintenance activities. We found that the Authority

had deviated from its own policies and procedures

in some areas and was not conforming to HUD

requirements in carrying out its HUD funded housing programs. As a result, HUD funds were used to

pay ineligible expenses totaling over $100,000;

procurement policies were circumvented to provide

contracts to favored contractors; admission policies

were ignored to facilitate favoritism on the public

housing waiting lists; excess Section 8 voucher

payments and administration fees were collected for

Authority owned housing units; and unrecorded

tenant fees and deposits were used for unallowable

activities. (Report No. 2003-DE-1002)

An OIG audit of the Key West, FL Housing

Authority’s (KWHA’s) procurement activities found

that management did not ensure that procurement

activities complied with HUD or local procurement

policies and procedures. Our review found that: (1)

cost estimates and cost/price analyses were not

conducted; (2) the contract register was inaccurate;

(3) records lacked sufficient documentation of

procurement histories; and (4) contracts were

awarded when conflict-of-interest relationships

existed. These deficiencies occurred because there

was no clear responsibility for the management,

oversight, and review of procurement activities.

The KWHA also needs to improve the administration of its Section 8 Program. Specifically,

KWHA: (1) did not recognize conflict-of-interest

situations; (2) did not establish reasonable contract

rents and incorrectly calculated housing assistance

payments to landlords; and (3) did not conduct

proper housing quality standards inspections. These

weaknesses occurred because the KWHA staff lacked

knowledge of HUD requirements and had not established adequate controls to administer the program.

The KWHA agreed with our findings and indicated they have taken or will take a number of

corrective actions to address the findings. (Report

No. 2003-AT-1802)

An OIG review of the Fort Pierce, FL Housing

Authority (FPHA) disclosed that the Authority’s

system of accounting and management controls was

weak. FPHA lacked controls to assure that it adhered to HUD and its own policies and procedures

concerning cash disbursements, credit card and

travel expenditures, procurement activities, purchases, and equipment inventory. As a result, HUD

and the FPHA lacked assurance that its assets were

properly safeguarded against waste, loss, and

misuse. The FPHA also failed to adhere to HUD

requirements designed to prevent conflicts of

interest, assure the reasonableness of Section 8

rents, obtain third party verification of program

participants’ income, and calculate rents correctly.

In addition, the FPHA used Section 8 reserve funds

without approval from the board of commissioners,

as required by FPHA procedures. These weaknesses

occurred because the FPHA had not established

adequate or effective controls to administer its

Section 8 Program.

Among other things, we recommended that HUD

require the FPHA to document the eligibility of

expenditures cited in the audit or reimburse the

Section 8 Program from non-federal funds, termi

Chapter 3 — HUD’s Public and Indian Housing Programs 31
nate or transfer existing contracts with Section 8

landlords having conflicts of interest, and implement controls to ensure that costs are properly

supported. (Report No. 2003-AT-1803)

Investigations

In McAllen, TX, defendants Ovidio Ramirez,

former Section 8 director at the Housing Authority

of the City of La Joya, and Jose Trevino, former

executive director, were sentenced in U.S. District

Court, Southern District of Texas. The defendants

previously pled guilty to conspiracy to embezzle

and steal public funds. They conspired to embezzle

$194,814 of Section 8 Pprogram funds by engaging

in a scheme of duplicating Section 8 participant

landlord checks, forging landlords’ signatures,

cashing and depositing the duplicate checks in

various financial institutions, and using the proceeds for their personal benefit. Ramirez was

sentenced to four months imprisonment, two

months home confinement with electronic monitoring, and three years supervised release. Trevino was

sentenced to 15 months imprisonment and three

years supervised release. Both defendants were also

ordered to pay half each of the $194,814 loss and

assessed a special $100 fee.

Defendant Maria Suarez, the former director of

Section 8 Programs for the Newburgh, NY Housing Authority, was ordered to surrender to the

Bureau of Prisons on January 3, 2003, to begin

serving a six-month sentence. Suarez was also

ordered in U.S. District Court, Southern District of

New York, to serve three years probation, 10

months of which will be served as home confinement with an electronic monitoring device, and to

pay $170,000 in restitution. She was previously

arrested and pled guilty to one count of theft from

programs receiving government funds.

The same court also ordered defendant Derrick

Riullano, a Section 8 landlord, to surrender to the

Federal Bureau of Prisons within 45 days to begin

serving a 12-month term of incarceration. Riullano

was also ordered to serve three years supervised

release and to pay $171,000 in restitution. Riullano

was previously arrested and pled guilty to one count

of theft or bribery concerning programs receiving

federal funds. Riullano and Suarez participated in

an embezzlement scheme involving the creation of

fictitious Section 8 tenants at the Newburgh Housing Authority. The scheme resulted in a loss to HUD

of approximately $220,000.

The following actions are the result of an

investigation at the Parkhill Apartments in Staten

Island, NY. The investigation developed into a

multi-faceted Section 8 lower-income rental assistance case involving a dozen or so individuals who

were suspected of providing false statements to a

management company during the annual recertification process. The investigation disclosed that a

number of lower-income rental assistance recipients

were in fact homeowners who lived in other parts of

the country and traveled back to Staten Island once

a year to assist in the recertification process. All the

defendants appeared before the U.S. District Court,

Eastern District of New York.

Defendant Joseph Adams, a former tenant of

Parkhill, was sentenced to five months incarceration

and two years supervised probation, and was

ordered to pay $89,851 in restitution. In August

2002, Adams pled guilty to conspiracy to defraud

the Federal Government.

Defendant Bamidele T. Lawal pled guilty to one

count of submitting false statements involving HUD

and FHA transactions and one count of mail fraud.

Defendant Presley A. Hanson pled guilty to one

count of conspiracy to commit offense against or to

defraud the United States. The fraud committed by

these two subjects resulted in an estimated overpayment of Section 8 subsidies in the amount of

$133,674. The investigation also disclosed that the

defendants owned real property and were unlawfully subletting the subsidized units to third parties.

Defendant Stephen Freeman, a resident at

Parkhill, was sentenced on charges of conspiracy to

commit fraud against the government. Freeman was

sentenced to 36 months supervised probation and

was ordered to pay restitution of $44,604 and a

$100 special assessment fee. Freeman also received

Section 8 benefits as a resident of Parkhill Apartments while registered as another individual.

Chapter 3 — HUD’s Public and Indian Housing Programs 32
Defendant Edwin Erhabor pled guilty to mail

fraud. Erhabor was actually a homeowner and did

not live in the Parkhill Apartments; he provided

false statements to the management company during

the recertification process, including failing to

disclose that he worked for the New York City

Transit Authority.

Defendant Odiokosa Ofili, a resident at

Parkhill, pled guilty to submitting false statements

to HUD. The investigation found that Ofili was

actually a homeowner and lived outside of Parkhill.

Ofili also failed to disclose that he worked for the

New York City Human Resources Administration.

Defendant Ndubuishi A. Ukoha, a resident at

Parkhill, pled guilty to mail fraud. In addition to

providing false statements to the management

company, the investigation disclosed that Ukoha

was subleasing his Section 8 apartment.

Defendant Bobby Ross was sentenced in Federal

Court, Eastern District of Missouri, St. Louis,

MO, to serve three months probation and ordered

to pay $86,058 in restitution. Ross previously pled

guilty to a two-count indictment charging him with

Social Security fraud and false statements. He

admitted illegally obtaining Social Security benefits

by using two different Social Security numbers and

falsifying Social Security applications. Ross obtained Social Security disability while at the same

time working for General Motors, resulting in an

$86,058 loss to the government. The illegal acts

were discovered after Ross applied for Section 8

housing assistance.

In Cleveland, OH, defendant Samuel Dabney

was sentenced in Federal Court in the Northern

District of Ohio after pleading guilty to theft of

government funds and making false statements.

Dabney was sentenced to five months in a halfway

house, five months of electric monitoring, and three

years probation, and was ordered to pay $80,708 in

restitution to the Social Security Administration

(SSA) and $35,994 in restitution to HUD. Dabney

was indicted in September 2002 for defrauding SSA

and HUD’s Section 8 Program. He failed to report

the death of his mother, Aggie M. Lee, in order to

continue receiving both SSA and HUD benefits.

Dabney received and negotiated these benefits

beginning in August 1987, the month after her

death, through February 2002.

Defendant Sandra Napua Clarke, the former

vice president and community representative of the

Waimanalo Housing Resident Association (WHRA)

in Honolulu, HI, was sentenced in U.S. District

Court in Honolulu. She received 15 months in

prison and three years supervised probation, and

was ordered to pay $25,800 in restitution and a

$300 special assessment fee. Clarke embezzled

funds from a Tenant Opportunity Program grant.

HUD awarded the funds to WHRA in 1995 to promote and encourage tenant opportunities in public

housing, such as training and technical assistance.

Clarke was previously found guilty on one count

each of theft from a government program and

conspiracy.

In San Diego County, CA Superior Court,

defendant Patricia Wylie was sentenced to five years

of summary probation and ordered to pay $25,693

in restitution. In the event that Wylie violates

probation, she will be sentenced to 365 days of

custody. Previously, Wylie pled guilty to three

counts of a seven-count felony complaint that was

filed by the County of San Diego District Attorney’s

Office. The complaint alleged that Wylie made false

statements and unlawfully obtained $25,693 in

Section 8 subsidies. Wylie pled guilty to grand theft

of real property from the County of San Diego,

grand theft of money and personal property of the

County of San Diego, and forgery of checks. This

sentencing was the result of an investigation that

revealed that Wylie was receiving funds from Child

Development Associates, Inc., an agency funded by

the State of California, and making false statements

regarding this income on a Section 8 application.

Carmen Luna, also known as Carmen Colon, a

former public housing resident in Lawrence, MA,

was sentenced in U.S. District Court, District of

Massachusetts, to 36 months probation, the first six

months of which will be served as home confinement, and ordered to pay restitution totaling

$55,760 — $24,988 to HUD and $30,772 to SSA.

Luna has already repaid $19,000 of the amount she

owes to SSA. She was also ordered to pay a $300

special assessment fee. The sentence follows Luna’s

Chapter 3 — HUD’s Public and Indian Housing Programs 33
July 2002 guilty plea to two counts of theft of

government funds and one count of false statements.

In Eugene, OR, defendant Larry Dale Johnson

was sentenced to serve 33 months incarceration,

pay HUD $21,820 in restitution, and forfeit 58

firearms following his guilty plea in Federal Court,

District of Oregon, to fraudulently obtaining HUD

funded rental assistance. This sentence resulted

from an investigation which disclosed that Johnson

was financing a substantially large marijuana grow

operation from fraudulently obtained HUD rental

assistance. The investigation led to a 12-count

indictment of Johnson for mail fraud, theft of

government monies, and false statements. As part of

his plea agreement, Johnson admitted to having

concealed the ownership of his residence by claiming to be a renter so he could obtain HUD rental

assistance totaling $21,820 between April 1998 and

March 2001. When arrested, Johnson was in

possession of 50 firearms that he utilized to protect

his illegal narcotics business.

The OIG was notified by the HUD Office of

General Counsel that Ralph P. Mayes, a Section 8

landlord residing in Point Pleasant, WV, was

issued a “Final Notice of Debarment” from participation in procurement and non-procurement transactions with HUD and throughout the Executive

Branch of the Federal Government for three years.

The debarment follows a December 17, 2002

“Notice of Proposed Debarment” and a November

7, 2002 “Notice of Immediate Suspension.” These

notices were issued based on Mayes’ November 4,

2002 sentencing to 60 months probation and restitution to HUD totaling $20,100. Mayes pled guilty in

U.S. District Court, Southern District of West

Virginia, on August 19, 2002, to one count of mail

fraud for his role in a fraud scheme wherein he

cohabitated with Denise S. Villeneuve, a tenant,

and received Section 8 rental subsidies from the

Point Pleasant Housing Authority from September

1996 to December 2001.

In a related case, defendant Robert Wamsley

lived with Eula Clonch and received Section 8

rental subsidies from the Point Pleasant Housing

Authority. Subsidies were paid from September

1996 to December 2001. Clonch moved out of

Wamsley’s home after Section 8 subsidy payments

were terminated due to evidence of their co-habitation. When Wamsley saw Clonch in town, he

abducted her and took her back to his residence,

where he held her hostage and physically assaulted

her, according to West Virginia State Police reports.

Defendant Terrence Lee Witherspoon, former

executive director of the Eutaw, AL Housing

Authority, was sentenced in U.S. District Court,

Northern District of Alabama, to five months in

prison and 36 months supervised release, and

ordered to pay $31,688 in restitution to the Housing

Authority. Witherspoon confessed to stealing

$31,688 in rental payments from the Authority

while he was the executive director. He used most

of the funds for gambling at a local racetrack.

In Cleveland, OH, defendant Carol Wall, a

mortgagor, was sentenced in Federal Court, Northern District of Ohio, to four months home confinement and three years probation, and was ordered to

pay $27,876 in restitution to the Cuyahoga Metropolitan Housing Authority (CMHA). In 1999, Wall,

using the identity of Cassandra Ramsey, obtained a

mortgage loan for a property in Warrensville

Heights, OH. The loan was brokered by Bevel,

Bevel & Associates, and was obtained using false

and fraudulent documentation regarding Wall’s

identity and income. Wall, under her own identity,

then applied for Section 8 subsidies as a “tenant” of

the property, knowing that she was not qualified or

entitled to receive such subsidies. Between July

1999 and July 2002, she received $27,876 in

Section 8 housing assistance payments by falsely

claiming to be a tenant of the property she actually

purchased and owned.

In the same case, defendant Nichelle Gould, a

mortgagor, was sentenced in the same court to three

years probation for using her child’s Social Security

number to secure two loans, one of which was FHA

insured. Documents recovered during the December

2002 execution of a search warrant at the FHA

insured residence disclosed a Section 8 landlord/

tenant scheme between Gould and her boyfriend,

Marc Morris. Morris presented himself as the

owner of Gould’s property. Morris was arrested

based on multiple felonies out of Cuyahoga County

and is currently awaiting sentencing on these local

charges.

Chapter 3 — HUD’s Public and Indian Housing Programs 34
Wall and Gould were charged along with 40

other individuals in a 100-count single family fraud

indictment wherein five of the subjects had a

specific HUD nexus. Specifically, three Section 8

landlords, one FHA mortgagor, and one Section 8

tenant (Carol Wall, Charmane Lowe, Cherese

McDowell, Darryl Stevenson, and Jeffrey Davis),

who simultaneously received Section 8 assistance

on behalf of their own residences, were charged

with conspiracy, mail fraud, bank fraud, money

laundering, misuse of Social Security numbers,

wire fraud and false statements in connection with

their false loan applications for single family houses

in the Cleveland Metropolitan area. Fraudulent

statements by these individuals include name, Social

Security number, employment, and down payment

information.

In the same case, a federal search warrant was

executed at a residence which was alleged to have

ties to a counterfeiting check scheme. Harrison

Clark, Bettina Mabrey, and Latosha Oliver were

arrested. Seized during the search were a computer,

a printer, check quality printing paper, and several

counterfeit checks, including several CMHA checks.

During the execution of the search warrant, as

Agents and Officers made entry into the residence,

the printer was in the process of printing out several

CMHA payroll checks and Section 8 checks.

During the investigation, information was

developed about Clark’s using his home computer

to print counterfeit checks. Clark conspired to

generate fraudulent CMHA and other company

payroll checks. Specifically, CMHA payroll checks,

CMHA Section 8 landlord checks, and CMHA Section

8 utility checks were being counterfeited. These

checks were then distributed to other individuals

involved in the scheme so they could cash the

checks at local check cashing stores and small

grocery/convenience stores. This counterfeit check

“ring” was cashing approximately $9,000 a day in

bad checks. It is estimated that the loss to the CMHA

and HUD could exceed $250,000.

In a related case, defendant Fernando Newcomb

was sentenced in District Court, Northern District

of Ohio, Akron, after pleading guilty to a onecount information charging him as a felon in

possession of a firearm. Newcomb was sentenced to

16 months incarceration and two years supervised

probation. Fines were waived, but Newcomb was

ordered to pay a $100 special assessment. Weapons,

including a 9 mm handgun and an AK-47, were

found at Newcomb’s residence during the execution

of a search warrant for counterfeit public housing

authority payroll checks. Newcomb had two prior

state felony convictions for drug offenses. He was

remanded to the custody of the U.S. Marshals

Service pending his answering a felony indictment

handed down in October 2002 by the Cuyahoga

County Common Pleas Grand Jury in Cleveland for

domestic violence with a prior offense.

In State Court, defendant Anthony Jenkins, the

former Section 8 manager of the Arkadelphia, AR

Housing Authority, pled guilty to one count of

felony theft of property and one count of felony

forgery. On the same day, Jenkins was sentenced in

Ninth Circuit Court East to seven years probation

and 200 hours of community service, fined $2,500,

and ordered to pay $18,730 in restitution to the

Authority plus court costs. An investigation revealed that from October 2000 to April 2002,

Jenkins stole over $22,000 from the Authority. As

Section 8 manager, he had access to the Section 8

computer program and could establish vendors to

whom Section 8 checks were written. Jenkins

established fictitious vendors and had checks

written to these vendor names. He received and

subsequently deposited these checks in his personal

bank accounts. To conceal the theft, Jenkins coded

the checks in the accounting system using the

identities and Social Security numbers of unsuspecting Authority landlords, tenants, and other individuals.

Defendant Julio Perez III, former manager of

information systems at the Housing Authority of

Corpus Christi, TX (HACC), pled guilty in Federal

Court, Western District of Texas, to one count of

theft or bribery concerning programs receiving

federal funds. Perez has already paid $25,000 in

restitution. An investigation found that Perez

embezzled $133,645 in HACC money, committed

wired fraud, laundered funds through his wife’s

financial institution via a commercial bribery

scheme to obtain money from HACC, and influenced

the HACC board of directors to award him with a

computer upgrade contract. Pursuant to the bribery

Chapter 3 — HUD’s Public and Indian Housing Programs 35
scheme, Perez was treated by Pantex Computers,

Inc., as an independent “consultant” and received

kickbacks in exchange for his influence.

In Harrisburg, PA, defendants Emily Ayala

and Emilio Cortez, husband and wife, were each

sentenced in Federal Court, Middle District of

Pennsylvania, to 48 months supervised release and

ordered to pay $12,980 in restitution. Ayala and

Cortez previously pled guilty to one count of false

statements and aiding and abetting. An investigation

disclosed that the defendants failed to report Ayala’s

earned income on annual recertification forms.

From April 1997 to April 2000, Ayala received

approximately $12,900 in rental subsidies by falsely

claiming she was estranged from her husband and

that she had no source of income. The investigation

also found that Ayala was living with her husband

during this time period and that he earned approximately $30,000 as a local factory worker. Ayala

worked “under the table” and received over

$18,000 working in a bar. As a result of their

fraudulent scheme, Ayala and Cortez were able to

save enough money to purchase the single family

home located next door to their Section 8 residence.

Defendant Mark Blakemore, a Section 8 landlord and a Department of Labor employee, pled

guilty in the Circuit Court of Cook County, IL, to

a misdemeanor charge of theft and was sentenced

on the same day to 12 months probation, and

$6,358 in restitution to HUD. As part of the plea, he

agreed to cooperate with the prosecution of former

Section 8 tenant Kimberly Vaughn. Blakemore has

already made restitution to the Department. An

investigation disclosed that Blakemore was renting

Vaughn’s Section 8 unit to a market rate tenant for

one year while continuing to collect housing assistance payments for the same unit. He then kicked

back half the market rate rent to Vaughn, while

keeping the remainder for himself. The investigation also disclosed that Blakemore collected Section

8 benefits on behalf of the unit while it was vacant

for five months. Vaughn is scheduled for trial at a

later date.

Defendant Diane Galloway was sentenced in

Christian County, MO District Court to five years

supervised probation and 50 hours of community

service, and ordered to pay $6,012 in restitution to

HUD. In November 2002, Galloway pled guilty to

one count of theft by deceit for failing to disclose

financial assets owned by a tenant receiving subsidized housing. Galloway was the manager at

Branson Manor Apartments where she accepted at

least $167,443 from Richard Hayes, an elderly

tenant residing at Branson Manor.

In Chicago, IL, former Section 8 landlord

Bryan Witt was convicted in State Court in Cook

County, Northern District of Illinois, on one count

of attempted state benefits fraud. On the same day,

Witt was sentenced to 24 months of court supervision and ordered to pay $6,000 in restitution to

Irene Greenwalt. From October 1997 through

November 1999, Witt required Greenwalt to pay

him additional funds, under the threat of eviction,

in excess of the payment required by the housing

assistance payment contract agreed to by Witt and

the Housing Authority of Cook County. Greenwalt

paid Witt an additional $400 per month. An aggravating factor in the prosecution of Witt was the fact

that Greenwalt was an elderly woman on a fixed

income caring for her handicapped daughter and

two juvenile grandchildren.

In Houston, TX, defendant Deaueishia T. Page

was sentenced in the 209th Texas State District Court

to three years probation and 120 hours of community service, and was ordered to pay $912 in restitution. Page pled guilty earlier this year to two

separate indictments on the state felony charge of

forgery-commercial instrument related to her

cashing two fraudulent checks and for attempting to

cash a third. The checks were from the Housing

Authority of the City of Houston’s Section 8 contractor, Houston Housing Assistance Partnership.

Page admitted to cashing the checks and advised

that she would have continued had she not been

arrested.

Defendant Monica Ross, a Section 8 specialist

employed by the St. Louis, MO Housing Authority,

and her associate, defendant Evelyn Williams, were

sentenced in Federal District Court, Eastern District

of Missouri, on bribery charges. Ross was sentenced to three years probation, while Williams was

sentenced to 20 months in prison. Both defendants

pled guilty in July 2002 to one felony count of

Chapter 3 — HUD’s Public and Indian Housing Programs 36
conspiracy to solicit and accept bribes by a public

official. Ross’ duties included entering preliminary

registration forms for the Section 8 Program into a

computer system, maintaining the Section 8 waiting

list, and assisting applicants in obtaining Section 8

vouchers once they were chosen from the waiting

list. Williams was an acquaintance of Ross and was

aware of Ross’ responsibilities at the Housing

Authority. Ross admitted that she accepted bribes

from Section 8 applicants to backdate preliminary

registrations for the Section 8 Program, which

placed them higher on the waiting list. Between

March 2000 and October 2001, Williams located

15-20 individuals who wanted Section 8 rental

subsidies and solicited and obtained between $250

and $350 from each individual as payment for

getting them on the waiting list at the St. Louis

Housing Authority. Williams paid Ross approximately half of the funds she collected as payment.

Defendant Verel T. Westover was found guilty

following a five-day jury trial in the District of

Kansas, Topeka, on four counts of making false

statements to the United States and one count of

embezzling money from the United States. According to testimony, from May 1998 through July

2001, Westover was involved in a scheme to obtain

rental subsidies from HUD and food stamps from

the Department of Agriculture by submitting false

statements claiming that he was not employed.

Westover received approximately $12,920 in rental

subsidies and approximately $1,022 in food stamps

when he was actually employed as a truck driver. In

addition, Westover provided a false statement in

May 1998 for purposes of determining his eligibility to participate in the Public Housing Program.

He stated that he had only one prior felony offense

when he had at least three priors. Westover obtained

a total of nearly $30,000 in assistance benefits.

In Canton, OH, in Stark County District

Court, defendant Berniece Jackson pled guilty to

state charges of engaging in a pattern of corrupt

activity and nine counts of complicity to forgery for

her part in a counterfeit check scheme involving

computer generated checks drawn on the account of

the Stark Metropolitan Housing Authority. Coconspirator Elijah Baldwin pled guilty to three

counts of theft and four counts of forgery. Coconspirator Evette Brown was convicted on one

count of theft and four counts of forgery. A fourth

co-conspirator, Latasha Stokes, previously pled

guilty to two counts of forgery.

This case involved multiple search warrants and

the tracing of counterfeit checks which were used

for cash or to purchase computers for subsequent

counterfeiting and false identifications. Losses

exceed $45,000.

In White Plains, NY, following an investigation, defendant Brian Panich, executive director of

the Liberty Housing Authority, pled guilty in

District Court, Southern District of New York, to a

one-count information charging him with theft or

bribery concerning programs receiving federal

funds. Panich admitted taking personal loans from

the Authority’s Section 8 account from 1997 to

2001, during which time he served as executive

director.

In Reno, NV, defendant Shannon Thompson

pled guilty in Federal Court, District of Nevada, to

one count of embezzlement from a tribal organization. Thompson is a former employee of the TeMoak Indian Housing Authority. From July 2001 to

November 2001, he embezzled approximately

$30,000 of Authority funds for his own use.

Defendant Ed Zamborski, the Yonkers, NY

Municipal Housing Authority’s former maintenance

supervisor, pled guilty in U.S. District Court,

Southern District of New York, to theft of government funds. Zamborski admitted inflating the prices

of contracted jobs paid to his co-defendant Norman

Scotland, a contractor, who previously pled guilty.

In return for controlling the bids and the bidding

process, Scotland did construction work on two

properties owned by Zamborski as well as on a

property owned by Zamborski’s son.

Defendant Tracey Michelle Roach, former

Section 8 coordinator of the City of York, SC

Housing Authority, was indicted in Federal Court,

District of South Carolina, on one count of embezzlement of public money, property, or records.

Roach admitted embezzling over $95,000 of Housing Authority funds over a six-month period. She

Chapter 3 — HUD’s Public and Indian Housing Programs 37
embezzled the funds by writing duplicate housing

assistance payment checks to Section 8 landlords.

Defendant Charmaine Mabry, a former Section

8 eligibility clerk with the Philadelphia, PA Housing Authority, was indicted in U.S. District Court,

Eastern District of Pennsylvania, on charges of

extortion under color of official right (Hobbs Act),

conspiracy to commit an offense against the United

States, and theft concerning a program receiving

federal funds. In her position at the Authority,

Mabry had access to the Authority’s computer

database on the Section 8 waiting list. She was

charged with accepting payoffs in exchange for

manipulating the database to make it appear that

certain individuals, who paid a fee to Mabry, had

been selected from a lottery. Some of these individuals had never even applied to be put on the

waiting list, while others had not been selected but

were on the list. As a result of this scheme, Section

8 vouchers in excess of $74,000 were fraudulently

paid on behalf of individuals who paid Mabry and

were not eligible for Section 8 assistance. In addition, Mabry paid referral fees for those who referred other individuals.

Defendant Maxine Gordon, a federal fugitive,

was apprehended after spending the past 17 months

on the run. Gordon fled the Pittsburgh, PA area

after confessing that she fraudulently received

benefits from HUD and the Social Security Administration. Subsequent to the confession, a Federal

Grand Jury in the Western District of Pennsylvania

returned an eight-count indictment against her in

October 2001, charging her with using fictitious

identities to obtain both HUD Section 8 and Social

Security benefits. Gordon was arrested after intelligence was received that indicated she had returned

to the Pittsburgh area to seek treatment for a medical condition. Gordon attempted to use one of her

13 known aliases, as well as the Social Security

numbers she had fraudulently acquired, to apply for

medical benefits. Her application for these benefits

alerted OIG Agents she had returned to Pittsburgh

from South Florida. HUD paid Gordon, under a

fictitious identity, nearly $38,000 in Section 8

subsidies between 1994 and 2001, and the Social

Security Administration paid her more than

$87,000 under two fictitious identities she used

during the same period.

Gordon made her initial appearance in U.S.

District Court and also had a detention hearing,

during which she was released from custody due to

her medical condition, but was required to wear an

electronic monitoring bracelet to ensure she does

not flee again. In addition to the federal charges

pending against her in this matter, the State of

Pennsylvania also has an outstanding arrest warrant

for Gordon associated with her alleged fraudulent

receipt of welfare benefits.

In Texas State Court, Navarro County, defendant George Douglas Linicomn, former executive

director of the Corsicana, TX Housing Authority

(CHA), was indicted on one count of theft by a

public servant ($1,500 or more but less than

$20,000). The indictment was the result of an

investigation which disclosed that Linicomn used

refrigerators, water heaters, thermostats, and

building supplies owned by the CHA in a multi-unit

complex located in Corsicana which he owned.

Linicomn admitted his wrongdoing to the HUD

Deputy Director of Public Housing in Fort Worth,

as well as the CHA board of directors, after the

investigation revealed that he had CHA property in

his possession.

Defendant Ramon Mesa, Section 8 recipient,

was arrested and arraigned in Federal Court,

Southern District of Florida, on charges of money

laundering, theft of government funds, and false

benefits. Arrest, search and seizure warrants were

also issued by the Southern District of New York

and the Southern District of Florida. In addition,

simultaneous search and seizure warrants were

executed at Mesa’s home in Miami, FL, and his

Section 8 subsidized apartment in South Bronx,

NY. The search of the apartment in the Bronx

yielded about four kilos of cocaine, $100,000 in

cash, and several firearms. Four luxury vehicles, 12

fur coats, and Mesa’s bank account were seized.

The search of Mesa’s Florida home netted two

firearms, eight luxury vehicles, and one yacht; two

additional bank accounts were also seized, along

with an additional $20,000 in cash.

An investigation disclosed that Mesa engaged in

the sale and distribution of narcotics, laundered

money, created several false identities, collected

Social Security benefits based on those false identi

Chapter 3 — HUD’s Public and Indian Housing Programs 38
ties, and committed Section 8 fraud. Mesa, who is

confined to a wheelchair, utilized information

provided from Social Security as proof of income in

order to receive Section 8 benefits while living at

the Maria Lopez Houses in the Bronx. The investigation of Mesa’s assets revealed that he bought a

home worth $500,000 and approximately 12 luxury

vehicles, all while maintaining a bank account

containing $125,000. The home in Florida, as well

as eight of the luxury vehicles, were purchased with

cash.

Additionally, Defendant Vivien L. Carter was

arrested and arraigned in Federal Court, Southern

District of New York, for theft of public money.

Carter is accused of underreporting her income to

the New York City Housing Authority (NYCHA) in

order to receive Section 8 rental assistance. In an

interview at the NYCHA Inspector General’s Office,

Carter admitted that she had underreported her

income. The amount of rental subsidy that she

obtained based on her fraudulent application totaled

$5,974 dollars.

Defendant Robert Swinton was arrested in the

Southern District of New York and charged with

extortion. While serving as the deputy director of

NYCHA’S Department of Facility Planning, Swinton

attempted to obtain $17,000 in cash from a Harlem

shopkeeper whose store was located in Rangel

Houses, a HUD subsidized multifamily residence.

In Augusta, ME, a criminal complaint was

filed in Southern Kennebunk Maine District Court

against defendant Christi Baker. Baker was charged

with one count of theft by deception. She allegedly

committed Section 8 tenant fraud between July

1999 and July 2002. Baker’s husband, Norman

Baker, allegedly lived with her at her Section 8

residence during this time period. However, Baker

never claimed her husband as a resident of the

household during the annual Section 8 recertifications. As a result, the Augusta Housing Authority

overpaid $13,956 in Section 8 subsidies.

OIG Offices of Audit and

Investigation — Joint Efforts

Defendant Edwin Rafael Cornier-Ortiz, a

management agent and President of Erco Enterprise, Inc., was sentenced in Federal Court for the

District of Puerto Rico to 39 months imprisonment

and 36 months supervised release, ordered to pay

$136,000 in restitution, and fined $15,000.

Cornier-Ortiz was previously found guilty after an

eight-day trial in Federal Court. The jury convicted

him on seven of the eight counts contained in an

indictment that was returned by a Federal Grand

Jury in May 2001. The charges included conspiracy,

bribery, money laundering, extortion, and embezzlement. Cornier-Ortiz paid Juan IrizarryValentin, a HUD employee in the San Juan Office,

over $195,000 through Irizarry-Valentin’s bother,

Samuel Valentin-Toro, who was employed at Erco.

Cornier-Ortiz also received kickbacks from vendors

doing business with Erco for the awarding of

contracts for rehabilitation repairs at public housing

projects that Erco managed through a $28.6 million

contract that Erco had with the Puerto Rico Public

Housing Authority (PRPHA). Juan Irizarry-Valentin

and his brother, Samuel Valentin-Toro, have already

pled guilty to charges of extortion, conspiracy, and

theft. Valentin-Toro was sentenced to three years

probation, while Irizarry-Valentin was sentenced to

21 months in prison and three years supervised

released. In addition, plea agreements for two

vendors and a former PRPHA contract employee

have been prepared.

An investigation and audit resulted in the

recovery of over $191,000 from the Scranton, PA

Housing Authority (SHA). In December 2001, OIG

and the Department of Justice uncovered evidence

that Authority officials were misallocating HUD

public housing monies. Officials were paying

Authority managers and employees from HUD

public housing funds for tasks unrelated to the

management of HUD funded public housing developments and/or programs. This scheme continued

for approximately five years. This recent monetary

recovery is now part of an official False Claims Act

investigation being conducted by OIG and the

Department of Justice.

Chapter 3 — HUD’s Public and Indian Housing Programs 39
The U.S. Attorney’s Office, Middle District of Pennsylvania, issued a formal civil False Claims Act demand

letter to the Authority. The demand letter notified the SHA that its misappropriation of HUD funds exposed the

SHA to over $642,507 in civil False Claims Act penalties and fines. The demand letter offered the SHA settlement in this matter if the SHA pays $642,507 in fines and penalties. The Department of Justice is awaiting SHA’s

response to the offer.

March 11, 2003, Scranton, PA

In Tulsa, OK, defendant Roberta Jean Ahdunko was arrested for one count of embezzlement from an

Indian Tribal Organization and five counts of mail fraud. She was previously indicted by a Federal Grand Jury

in the Northern District of Oklahoma. Ahdunko was employed as the finance manager for the Pawnee Nation

Housing Authority, which receives all of its funding from HUD through the Native American Housing Assistance and Self-Determination Act Indian Housing Block Grant Program. While she worked at the Authority,

Ahdunko traveled to a weekend vacation rendezvous, went on shopping sprees, purchased a plane ticket for a

relative, and paid her personal telephone/utility bills with Authority funds. The total loss attributed to

Ahdunko’s criminal activity was $4,582. Ahdunko was also involved in another $22,500 of unallowable expenses.

Defendant James Coleter , former executive director of the Fayette County, IN Housing Authority, was

indicted in Fayette County Court on four counts of unauthorized use or failure to deposit public funds and one

count of theft. Coleter allegedly failed to deposit reimbursement expenses in the Authority’s account while

using an Authority credit card to pay for a vacation to Florida, a television satellite dish at his personal residence, and other unauthorized expenses.

Defendant Theresa Coughlin, a former employee of the Housing Authority of Lycoming County, PA, was

charged by the Lycoming County District Attorney’s Office, Pennsylvania District Court, with 208 counts of

theft related charges for lowering the rents of some tenants without permission and not depositing cash rent

payments from others. The charges include theft by failure to make required disposition of funds, tampering

Chapter 3 — HUD’s Public and Indian Housing Programs 40
with public records, and receiving stolen property.

The OIG is assisting the District Attorney’s Office,

which conducted the initial investigation, in furthering their investigation and pursing prosecution of

the employee. The Housing Authority suffered a

loss of approximately $28,000 in this case.

Fugitive Felon Initiative

The Office of Investigation has established a

Fugitive Felon Initiative to identify HUD housing

assistance recipients who are criminal fugitives

from justice. This initiative includes automated

comparisons of fugitive felon files of law enforcement agencies and HUD files of tenants who have

received housing assistance from HUD. Once the

fugitives are identified, information on these individuals is provided to the appropriate law enforcement agencies to facilitate their apprehension.

Additionally, fugitive information will be subsequently provided to appropriate authorities to

facilitate the suspension of housing assistance or

terminate tenancy. Currently, we have a Memorandum of Understanding with the United States

Marshals Service, and are entering into agreements

with other law enforcement agencies.

We will report on our progress as this initiative

continues.

Chapter 3 — HUD’s Public and Indian Housing Programs 41
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Chapter 3 — HUD’s Public and Indian Housing Programs 42
Chapter 4 — HUD’s Multifamily Housing Programs 43

Chapter 4 — HUD’s 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.

Audits

During this reporting period, the OIG issued its

consolidated report on assistance funded by Section

514 of the Multifamily Assisted Housing and

Reform Affordability Act of 1997. The OIG also

reviewed owner and management agent operations,

a residential care facility, and a retirement center.

Assistance Funded by the Multifamily

Assisted Housing Reform and

Affordability Act of 1997

We completed an audit of the management and

oversight of Section 514 Program activities by

HUD’s Office of Multifamily Housing Assistance

Restructuring (OMHAR). The Multifamily Assisted

Housing Reform and Affordability Act of 1997

(MAHRA) established OMHAR within HUD. OMHAR’s

responsibility included the creation of the Mark-toMarket Program for HUD assisted projects with

above-market or below-market rents and projectbased Section 8 contracts expiring in October 1998

or later. Congress recognized, in Section 514 of

MAHRA, that the Mark-to-Market Program would

affect project tenants, neighborhood residents, the

local government, and other parties. Accordingly,

Section 514 of MAHRA authorized the HUD Secretary to provide up to $40 million ($10 million

annually) for resident participation from 1998

through 2001. As of August 2002, HUD had

awarded $30.3 million, of the $40 million authorized, to 40 grantees. Also as of August 2002, HUD

had obligated $25.2 million and disbursed $13.9

million (about 55 percent) of the obligated funds.

Our audit evaluated what management controls

OMHAR had implemented to manage and oversee the

Section 514 Program. We concluded that OMHAR’s

management did not establish appropriate management controls to oversee and manage the program,

as required by Office of Management and Budget

(OMB) Circular A-123 and HUD’s policy.

We also completed external audits of 40 Section

514 Program participants (grantees) that received

funding under Section 514 of MAHRA. Section 1303

of the 2002 Defense Appropriation Act (Public Law

107-117) required the HUD OIG to audit all Section

514 funded activities over the last four years.

Consistent with the Congressional directive, we

audited all grantees and reviewed their use of

Section 514 funds for eligibility (per the legislation

and the grantee’s agreement with HUD) and/or the

allowability (per OMB Circular A-122) of costs, with

particular emphasis on identifying ineligible lobbying activities.

As a result of our audits, we identified that 32

of the 40 grantees did not comply with the requirements of their grant agreements and/or the

allowability of the grant cost requirements of OMB

Circular A-122. In our grantee audit reports, we

identified about $600,000 of ineligible costs and

over $1.6 million of unsupported costs. In addition,

nine grantees used a portion of their Section 514

funds for lobbying activities directed at Congress,

contrary to the explicit prohibition in Section 514.

Also, four grantees used a portion of their Section

514 funds for lobbying activities at the state and

local level. Section 514 did not include an explicit

prohibition on lobbying at the state or local level,

but these costs are unallowable under OMB Circular

A-122 guidance. These conditions occurred because

OMHAR’s management emphasized the creation of

the Mark-to-Market Program and strong relations

with the affected tenants, as opposed to the management and oversight of the Section 514 Program. In

addition, OMHAR staff generally lacked the knowledge and skills needed to manage and oversee a

grant program.

The Assistant Secretary for Housing did not

dispute the information and conclusions in the

audit. In addition, the Assistant Secretary provided
management decisions for the recommendations

contained in this report and for the 221 recommendations in the 40 external Section 514 audits. OIG

agreed with the management decisions proposed by

the Assistant Secretary. (Report No. 2003-DE-0001)

Audit Report No. 2003-DE-0001 summarized

the results of all external audits completed both

during this semiannual reporting period and during

the prior period. The following audits were issued

during this period:

 2003-AO-1001, National Center of Tenants

Ownership, Washington, DC

 2003-AO-1002, National Housing Trust, Washington, DC

 2003-BO-1002, People to End Homelessness,

Providence, RI

 2003-CH-1003, Tenants United for Housing,

Inc., Chicago, IL

 2003-CH-1004, Indiana Coalition on Housing

and Homeless Issues, Indianapolis, IN

 2003-DE-1003, Corporation for National

Service, Washington, DC

 2003-SE-1001, Community Alliance of Tenants,

Portland, OR

 2003-SE-1002, Tenants Union, Seattle, WA

Owners and Management Agents

Based on concerns raised by the St. Louis

Multifamily Program Center, we completed a

review of the University Forest Nursing Care

Center in University City, MO. We identified

significant violations of University Forest’s Regulatory Agreement involving unauthorized payments

and unnecessary expenses. The corporation, president, chairman of the board, members of the board,

and the management agent were responsible for

using approximately $2.4 million of project funds

for unauthorized compensation and unnecessary

operating expenses. These improper expenditures

increased the risk to HUD’s mortgage insurance

fund and depleted funds needed to provide services

and care to residents. During the review, we actively coordinated our efforts with HUD’s Offices of

Housing and General Counsel to resolve the violations. While our review was in progress and HUD

was pursuing corrective actions, the owner sold the

project.

University Forest Nursing Care Center in University City, MO.

We recommended that the St. Louis Program

Center ensure that the project’s mortgage insurance

is terminated as a result of the sale and that the

Office of General Counsel (Departmental Enforcement Center) take appropriate administrative actions

against University Forest’s president and chairman

of the board, members of the board, and the management agent for their noncompliance with HUD’s

requirements and the Regulatory Agreement.

(Report No. 2003-KC-1801)

We completed a review of Wood Hollow Place

Apartments in Texas City, TX, to determine

whether expenditures and disbursements complied

with the terms and conditions of the Regulatory

Agreement and other HUD requirements. Because

the project experienced cash flow problems, the

management agent did not follow the Regulatory

Agreement and other HUD regulations. As a result,

the management agent: (1) improperly paid advances, loans, and other fees totaling over

$223,000; and (2) paid nearly $28,000 in ineligible

and $7,500 in unsupported expenses. In addition,

the management agent improperly used tenant

security deposits to fund project operations. These

improper payments weakened the project’s financial

condition and put the project at risk of default.

We recommended that HUD require the management agent and/or the partnership to repay the

project for improper and ineligible distributions and

Chapter 4 — HUD’s Multifamily Housing Programs 43
to support or repay the unsupported expenses. In

addition, we recommended that HUD require the

management agent to fully fund the tenant security

deposit account and submit disbursement reports to

HUD. Finally, HUD should closely review the

monthly disbursement reports and take administrative action if violations of the Regulatory Agreement continue. (Report No. 2003-FW-1801)

A review of HUD’s oversight of Wood Hollow

Place Apartments, Texas City, TX, found that in

three instances, the Houston Multifamily Office did

not adequately monitor the project. In these cases,

Multifamily staff did not perform sufficient work to

ensure that the owner complied with the Regulatory

Agreement or HUD requirements. As a result, the

owner made over $258,000 in improper distributions and failed to submit required reports. In

addition, Multifamily staff did not properly maintain project files. The former project manager could

not locate two monthly accounting reports he had

received, nor did he maintain a control log to track

and monitor the receipt of such reports.

We recommended that HUD staff receive direction, including training if necessary, on how to

properly perform their monitoring tasks. The

Director of the Houston Multifamily Office agreed

with the recommendations and immediately implemented them. (Report No. 2003-FW-0801)

We audited Marion Scott Real Estate, Inc., a

New York, NY management agent for 10 HUD

insured and subsidized projects in New York and

New Jersey. We concluded that the agent did not

always comply with HUD regulations and requirements pertaining to the use of project funds, nor did

it always comply with its management certification

when purchasing from or contracting with its

identity of interest companies. Specifically, we

found that the agent: (1) used approximately

$186,000 in project funds to pay for ineligible,

unsupported, and unnecessary/unreasonable expenses; (2) deprived the projects of $77,000 by

collecting unauthorized and excessive management

fees and improperly charging front-line expenses to

projects; (3) allowed its identity of interest company

employees to occupy rent free apartment units in the

projects, resulting in lost revenue of $55,000; (4)

paid its identity of interest companies amounts that

included questionable cost mark-ups of a

subcontractor’s invoice amounts, resulting in

$193,000 of unreasonable and unsupported charges;

(5) entered into a questionable arrangement for

legal services, resulting in over $257,000 in questionable expenses; and (6) used project funds to pay

$134,000 of expenses that were incurred under the

Drug Elimination Grant Program, thus depriving

that project of those funds.

We recommended that the Director of the HUD

New York Multifamily Hub require the agent/

owners to reimburse the projects $180,000 for

expenditures considered to be ineligible, and submit

supporting documentation for $722,000 in expenses

considered to be questionable and/or unsupported

so that HUD can determine their eligibility. In

addition, we made recommendations to improve the

agent’s internal controls and encourage compliance

with HUD requirements. (Report No. 2003-NY1001)

Residential Care Facility/Retirement

Center

We audited the Farmington Health Care Center

(FHCC) in Farmington, CT, to assess the project’s

performance relating to appropriate use of project

funds, maintenance of the property in satisfactory

physical condition, and general management practices. The audit concluded that FHCC’s operator/

lessee inappropriately executed a capital lease

purchase agreement with a leasing company for

over $340,000 in major moveable equipment and

other non-critical repairs without HUD consent.

Consequently, the loan was overinsured, and HUD

has lost security in the equipment and repairs. In

addition, installation of an emergency generator, as

required under the escrow agreement between the

mortgagor/lessor and HUD, remains uncompleted.

We attributed the cause of these conditions to the

operator/lessee’s insufficient knowledge of HUD

program regulations and the lack of mortgagor/

lessor oversight of project operations.

We recommended freezing an appropriate

amount of repair escrow and/or reserve for replacement funds to protect HUD’s security interest in the

facility in the event of a default on the lease. If

reserve for replacement funds are frozen, consider

Chapter 4 — HUD’s Multifamily Housing Programs 45
ation could be given to requiring an increase in the monthly deposits to the account to ensure that sufficient

funds are available in the event that emergency repairs are required, without detracting from the “frozen” funds.

Upon pay-off of the lease and execution of the purchase option, we recommended that the operator/lessee assign

the title of equipment and repairs to the mortgagor/lessor, using an approved mechanism, to ensure that title

remains with the real estate. (Report No. 2003-BO-1001)

In response to concerns raised by the HUD St. Louis Multifamily Program Center, we reviewed the Richmond Terrace Retirement Center in Richmond Heights, MO, to determine if bond funds and project funds

were properly handled. We concluded that the mortgagee provided key certifications at initial closing that

contained incorrect cost amounts, causing mortgage proceeds to be drawn down and used for unsupported

expenses. These acts exposed HUD’s mortgage insurance fund to unnecessary risk because the owner did not

have adequate funds at initial closing. We also identified residual bond funds that were improperly being held by

the bond trustee. During our review, we coordinated with HUD’s Office of Housing and the Office of General

Counsel to exercise HUD’s legal claim to the residual bond funds. As a result, HUD collected residual bond

funds totaling over $50,000 from the bond trustee.

We recommended that the St. Louis Multifamily Program Center take appropriate legal and administrative

actions in coordination with the Regional Counsel/Office of Program Enforcement. (Report No. 2003-KC1803)

Investigations

Defendants Nancy G. Wilkinson, West Virginia Management LLC project manager, Mary Ann Middleton,

Westview Manor property manager, and Darlene Starkey, a contractor, were sentenced in U.S. District Court,

Southern District of West Virginia, for their involvement in a fraud scheme that resulted in the embezzlement of

over $800,000 from four HUD subsidized and insured multifamily/elderly housing communities. Wilkinson,

who was held accountable for her leadership role in the embezzlement scheme, was charged with one count of

embezzlement from an organization receiving federal funds and aiding and abetting. She was sentenced to 24

months incarceration and 36 months probation, and ordered to pay $250,000 in restitution. Wilkinson will be

held jointly and severely liable for the restitution amounts ordered in Middleton and Starkey’s sentencing. She

has also been notified of her immediate suspension from participation in procurement and non-procurement

transactions with HUD and throughout the Executive Branch of the Federal Government.

Defendant Middleton was also charged with one count of embezzlement from an organization receiving

federal funds and aiding and abetting, and was sentenced to 12 months and one day incarceration and 36

months probation, and ordered to pay $250,000 in restitution. Middleton will be held jointly and severely liable

for Wilkinson’s restitution amount. Starkey was charged with one count of mail fraud for her involvement in a

Medicaid billing fraud scheme unrelated to the HUD fraud. Starkey was also charged with one count of embezzlement from an organization receiving federal funds and aiding and abetting. She was sentenced to 12

months and one day incarceration and 36 months probation for each count, to be served concurrently. Starkey

was also ordered to pay $175,000 in restitution, and will be held jointly and severely liable for Wilkinson’s

restitution amount.

Chapter 4 — HUD’s Multifamily Housing Programs 46
Wilkinson conspired with

Middleton and contractor

Darlene Starkey, doing

business as Starkey Enterprises, from approximately

October 1996 to March 2002

to divert funds from four HUD

assisted developments located

in Huntington, Lewisburg,

Elkins, and Beverly, WV.

The three defendants prepared

invoices for fictitious contractors or created/altered invoices of legitimate companies and forged the endorsements on the back of each

check. Wilkinson would issue

a check to Starkey or a

fictitious vendor in the case of

Middleton. Upon receipt of

the checks, Middleton and

Starkey would deposit them in

personal bank accounts and

then return one-half of the

funds to Wilkinson.

Defendant Robert

Vaughan pled guilty in Federal Court, Eastern District of

Michigan, to one count of

multifamily equity skimming.

Vaughan, who was the agent

and manager of Flint Heights

Terrace, a HUD insured

multifamily project in Flint,

MI, admitted skimming more

than $350,000 from the development for his personal use instead of meeting reasonable expenses of the project.

Vaughan withdrew these funds when the project was in a non-surplus cash position and later when it was in

default. He used some of the funds to pay cell phone bills and expenses of his private law practice.

Defendant Rodney Crump, an assistant property manager at Blue Ridge Commons (BRC) Apartments, a

HUD insured, Section 8 multifamily project in Charlottesville, VA, was arrested at his residence. Crump was

indicted June 2002 in Federal Court, Western District of Virginia, for embezzling funds from BRC. He and

Nancy Besemer, former BRC property manager, conspired to embezzle $24,112 from BRC. They solicited cash

payments and blank money orders from several residents to pay the residents’ monthly rents and security

deposits. Instead of depositing these funds in a BRC bank account, Crump and Besemer kept the funds for their

personal use. An additional arrest warrant was filed in Portsmouth, VA, for Crump related to his habitual

offender status. Besemer was previously convicted of embezzlement in this case. She is currently wanted for

probation violation.

Chapter 4 — HUD’s Multifamily Housing Programs 47
Defendant Michael Cantor pled guilty in Federal Court, Eastern District of New York, to one

count of conspiracy for his involvement in a scheme

to defraud both HUD and the IRS. Cantor was the

owner and president of Cantor Real Estate, a real

estate management company in Brooklyn, NY.

Cantor Real Estate managed numerous properties in

New York that received subsidies and loan guarantees from HUD. Between January 1992 and April

1999, Cantor conspired with others to receive at

least $13,000 in cash kickbacks from vendors for

approving work to be done at buildings that he

managed.

Defendant Beverly Beltran, a former office

manager, pled guilty in Maryland State Court,

Hagerstown, MD, to two counts of forgery and

felony theft. Beltran was sentenced to 90 days

incarceration to be followed by three years probation, and was ordered to pay $11,431 in restitution.

An investigation disclosed that while Beltran

worked at Edgewood Hill Apartments, a HUD

subsidized multifamily complex, she wrote numerous checks to herself and forged the owner’s name

on each check in order to cash the checks.

A Cook County, IL Grand Jury indicted

defendant Renard Mayfield on two felony counts of

forgery and theft by deception for his role in a

scheme to defraud the Park Shore East Co-Op

Section 8 Program. Specifically, Mayfield allegedly

falsified his employment from 1996 to 2000 by

reporting “odd jobs,” totaling $600 per year, while

in fact he earned more than $100,000 per year as an

accountant. In addition, Mayfield qualified for and

purchased a $300,000 property with a $200,000

mortgage while he was participating in the Section

8 Program. The approximate loss to HUD is

$37,300.

A Grand Jury in Cook County, Chicago, IL,

indicted defendant Lawrence Prentice on two counts

of forgery and one count of theft. Prentice had been

receiving Section 8 housing assistance since 1995 at

one property under the name of Eunice Prentice,

when Eunice moved to Minnesota. Lawrence had

his girlfriend, Doris Wilson, forge Eunice’s name

on the recertification documents and had her

impersonate Eunice during recertification interviews, thus making it appear that she was an active

Section 8 tenant. Wilson was not indicted but gave

testimony before the Grand Jury during the investigation. The loss to HUD is approximately $50,000.

OIG Offices of Audit and

Investigation — Joint Efforts

Defendant Douglas S. Wasserman, the former

owner of Mott Haven, an FHA insured and HUD

subsidized housing development in the Bronx, NY,

was ordered to pay $894,000 in restitution to HUD.

Wasserman was previously sentenced in Federal

Court, Southern District of New York, to 60

months incarceration after his convictions for

multifamily equity skimming and tax evasion. Due

to family health issues, Wasserman was allowed to

defer incarceration until May 2003.

Defendants Joseph W. Ham, a general contractor, and Murray Howell, an employee of Ham

Contracting, Inc., both of whom previously pled

guilty in Federal Court, Western District of Louisiana, to conspiracy to commit mail and wire fraud,

provided the U.S. Attorney’s Office with 539 oneonce gold coins (Krugerrands), which at the time

were valued at approximately $188,000. The

defendants’ pleas were made in conjunction with

the Low-Income Housing Tax Credit Program and

forfeiture of illegal proceeds. The gold coins

provided to the government were deemed to be

proceeds from a money laundering scheme which

resulted in Ham and Howell previously agreeing to

forfeit interest in gold coins and assets seized; the

coins were also proceeds identified during an

investigation. The investigation found that Ham, as

a general contractor for Calhoun Property Management in Mansfield, LA, was responsible for the

rehabilitation of 37 multifamily properties in Texas

and Louisiana. Howell was an officer in Ham

Construction, Inc. Ham, in coordination with

others, created and caused to be created numerous

false invoices and certificates of actual cost related

to the rehabilitation of a multifamily project. Ham

and Howell also caused the false documents to be

delivered by Federal Express, which resulted in

Chapter 4 — HUD’s Multifamily Housing Programs 48
funds being wired to a partnership entity in Louisiana.

Illegal proceeds (gold coins) turned over to U.S. Attorney’s Office,

Western District of Louisiana.

The defendants also agreed to forfeit to the

United States immediately and voluntarily all right

and title to, and interest in, all assets in a brokerage

account maintained by Legg Mason Wood Walker,

Inc., in the name of Ham Contracting, Inc. They

additionally agreed to forfeit any interest they may

have in 1,599 Gold Eagle coins, which at the time

were valued at $567,447, previously seized during

the service of a search warrant. Ham provided the

government with an additional 725 one-ounce gold

coins (Krugerrands) on February 28, 2003, for a

total of $441,136 in Krugerrands. Finally, the

defendants had converted $1.32 million worth of

gold coins to money market certificates. These

certificates were either seized or forfeited.

A final judgment of forfeiture was also issued in

the Western District of Louisiana in the matter of

the United States vs. Thomas L. Frye. The judgment orders that all interest in a particular Legg,

Mason, Wood, Walker, Inc., account, as well as

1,599 Gold Eagle Coins that were located inside a

safe deposit box at the Louisiana Coin Exchange, is

hereby forfeited to the United States of America.

Also in this case, defendant Maurice Riemer

Calhoun, Jr., of Calhoun Property Management,

pled guilty in Federal Court, Western District of

Louisiana, to a two-count bill of information charging him with one count of wire fraud and one count

of conspiracy to commit equity skimming. T.F.

Management, Inc., acting through Maurice

Calhoun, also pled guilty to a one-count bill of

information which charged the corporation with

wire fraud. Maurice Calhoun and the government

agreed that the maximum fine of $500,000 fine is

appropriate for Maurice Calhoun, and the maximum fine of $500,000 is appropriate for T.F.

Management. Sentencing is scheduled for July 31,

2003.

Chapter 4 — HUD’s Multifamily Housing Programs 49
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Chapter 4 — HUD’s Multifamily Housing Programs 50
Chapter 5 — HUD’s Community Planning and Development Programs 51

Chapter 5 — HUD’s Community Planning and

Development Programs

The Office of Community Planning and Development (CPD) seeks to develop viable communities

by promoting integrated approaches that provide

decent housing, a suitable living environment, and

expanded economic opportunities for low- and

moderate-income persons. The primary means

toward this end is the development of partnerships

among all levels of government and the private

sector.

Audits

During this reporting period, the OIG audited

Community Development Block Grant (CDBG)

Disaster Assistance Funds in the State of New York,

the Empowerment Zone, Housing Preservation,

HOME, and CDBG Programs, and a Special Purpose

Grant.

Disaster Assistance Funds – State of

New York

We are performing an ongoing audit of the

operations of the Empire State Development Corporation (ESDC) and the Lower Manhattan Development Corporation pertaining to their administration

of CDBG Disaster Assistance Funds provided to the

State of New York as a result of the terrorist

attacks on the World Trade Center in New York

City. This is the first of a series of reviews that the

OIG plans to conduct during our ongoing audit of

the CDBG Disaster Assistance Funds. Presently, we

plan to issue an audit report every six months and

include the results of each review in the Inspector

General’s Semiannual Report to Congress, to

comply with Congress’ request that HUD OIG

periodically audit and semiannually report on the

expenditures of CDBG Disaster Assistance Funds.

During the initial audit period, virtually all

activities were carried out by ESDC; the objectives

of the completed review were to determine whether

the ESDC: (1) disbursed CDBG funds to eligible

applicants in accordance with the HUD Approved

Action Plan; (2) disbursed CDBG disaster funds to

applicants in a timely manner; and (3) has a financial management system that adequately safeguards

the funds. The review disclosed that ESDC generally

met these requirements. However, processing

deficiencies and discrepancies in ESDC’s grant

programs need to be addressed and resolved to

enhance the efficiency of its administration of the

funds. Also, administrative and accounting controls

need to be strengthened to prevent duplicate payments and other related administrative deficiencies

from occurring.

Regarding ESDC’s primary program, the Business Recovery Grant (BRG) Program, we used a

dollar unit sampling plan to statistically select a

sample of 439 grants, valued at over $46 million,

out of a universe of 10,456 grants, with a value of

about $277 million. Using the sample results, we

estimated that the universe contains: (1) overpayments to grant recipients of over $1.1 million, and

underpayments of more than $77,000, for a net

World Trade Center site, New York, NY.
Chapter 5 — HUD’s Community Planning and Development Programs 52

overpayment of over $1 million; and (2) $7.76 million of disbursements to grant recipients whose federal tax

information, per their applications, did not agree with tax information we received from the Internal Revenue

Service (IRS).

We recommended that HUD instruct ESDC on the appropriate corrective actions that should be taken regarding the over and underpayments of grant amounts, and the discrepancies between tax information on recipients’

applications and tax information provided by the IRS. In addition, we made other recommendations that should

enhance ESDC’s program efficiency and strengthen its administrative and accounting controls. (Report No.

2003-NY-1003)

Empowerment Zone Program

As part of our review of the use of Empowerment Zone funds, which was initiated as a result of a Congressional request, we conducted five audits during this reporting period. The results are as follows.

We audited the joint Empowerment Zone Program of the Cities of Norfolk and Portsmouth, VA. The City

of Norfolk was the lead entity responsible for administering the program. The audit showed that the City generally maintained adequate oversight over the majority of its Empowerment Zone funds but needed to strengthen

its administration of the program to ensure that all funds are used efficiently and effectively. A review of 18

funded Empowerment Zone activities showed that the City did not maintain adequate control over about 7.25

percent of the $8.9 million of disbursements reviewed and did not always accurately report the accomplishments

of the program to HUD.

The City obtained nearly $294,000 from HUD for activities without approved implementation plans and paid

over $100,000 for items or services that were either unallowable or unsupported. The City also did not properly

allocate costs totaling nearly $250,000 among activities benefiting from the funding. Lastly, the City needs to

improve the accuracy of information it reports to HUD by developing and maintaining a formal reporting policy

and a centralized database system.

We recommended that the City submit separate implementation plans for each activity to HUD for review

and approval. We also recommended that the City reimburse the program over $100,000 for material and

services that were unsupported or not allowed under federal cost guidelines. Lastly, we recommended specific

controls to help the City more effectively allocate its indirect costs and improve its reporting process. (Report

No. 2003-PH-1001)

The City of Cincinnati, OH, needs to improve its oversight of Empowerment Zone funds and accurately

report its program accomplishments to HUD. Specifically, the City inappropriately used over $15,000 and

lacked documentation to show that another $311,000 benefited the City’s Empowerment Zone Program or were

matched with in-kind services. The City also used over $594,000 to fund three projects that have not provided

benefits to Empowerment Zone residents, or benefited only 37 percent of Zone residents as of October 2002.

The three projects were completed between August 2001 and November 2002.

We recommended that the City of Cincinnati reimburse its Empowerment Zone Program for the inappropriate use of Zone funds and implement controls to correct the weaknesses cited in the report. (Report No. 2003-

CH-1009)
Used with permission from

The Cincinnati Enquirer/

Gregory Korte,

February 4, 2003.

The Cities of Huntington, WV, and Ironton,

OH, need to improve their oversight of Empowerment Zone funds. The audit found that the Cities

did not accurately report the accomplishments of

the program to HUD. Specifically, the Cities did not

use $160,000 in accordance with their Strategic

Plan and the September 8, 1999 Agreement for the

Marting Hotel Renovation project. Also, the Cities

inaccurately reported their accomplishments to

HUD, and funded five projects that have not provided benefits to Empowerment Zone residents, or

benefited only 27 percent of Zone residents as of

October 2002. Four of the five projects are scheduled for completion between June 2004 and June

2005, and the remaining project was completed in

June 2001.

We recommended that the Cities of Huntington

and Ironton reimburse the Empowerment Zone

Program for the inappropriate use of Zone funds

and implement controls to correct the weaknesses

cited in this report. (Report No. 2003-CH-1006)

The City of Minneapolis, MN, inaccurately

reported the accomplishments of its Empowerment

Zone projects to HUD and inappropriately used

nearly $10,000 to pay expenses not related to its

Near North Planning and Development project. The

City also funded seven projects that have not provided benefits to Empowerment Zone residents, or

benefited only three to 38 percent of Zone residents

as of June 2002. Five of the seven projects are

scheduled for completion between December 2003

and December 2011, and the remaining two projects

were completed between December 2001 and July

2002.

We recommended that the City of Minneapolis

reimburse its Near North Planning and Development project from Empowerment Zone administration funds for the inappropriate use of Zone funds

and implement controls to correct the weaknesses

cited in this report. (Report No. 2003-CH-1007)

The City of St. Louis, MO, did not accurately

report all planned and actual outputs or funding

commitments in its June 30, 2002 Empowerment

Zone Performance Review. For one of four projects

we evaluated, the Performance Review contained

information that overstated the projected number of

area residents to be served and understated the

actual number of area residents served. For two of

the four projects, total funding commitments were

understated. This occurred because the City projected all residents of the Empowerment Zone

census tract as being served by a construction

project, whereas only the occupants of the units

should have been projected. Also, the City overlooked reporting actual figures when it prepared its

report. HUD requires accurate information to be

able to accurately review and assess the progress of

the City’s Empowerment Zone activities.

Chapter 5 — HUD’s Community Planning and Development Programs 53
The Sun Press, February 20, 2003, Cleveland Heights, OH.

We recommended that HUD’s Columbus Field

Office Director of Community Planning and Development assure the City reimburses its HPP for the

inappropriate use of HUD funds and implements

controls to correct the weaknesses cited in the

report. (Report No. 2003-CH-1008)

We completed a review of the HUD Indian

Housing Block Grant Program administered by the

Sicangu Wicoti Awanyakape Corporation, also

known as the Rosebud Housing Authority, in

Rosebud, SD. The review disclosed that management controls were not satisfactory. We found

deficient controls over tenant occupancy and related

activities. Specifically, the Authority has not:

consistently enforced its drug elimination policy;

consistently enforced its sublease policy; implemented its delinquency policy; or properly documented the eligibility of its various housing program recipients. In implementing its supplemental

housing programs (Used Mobile Home, PreManufactured Modular Housing Units, and Private

Homeowner Rehabilitation/Loan Programs), the

Corporation did not establish adequate administrative procedures to ensure HUD requirements were

met. For example, the Authority used Indian Hous

We recommended that the City of St. Louis

establish and implement management controls to

ensure accurate reporting. (Report No. 2003-KC1003)

Housing Preservation, HOME, and

CDBG Programs

In response to a HUD Hotline complaint, the OIG

audited the Housing Preservation Program (HPP) of

the City of Cleveland Heights, OH. The complainant alleged that the City misused funds for its HPP.

HUD’s CDBG and HOME Programs funded the City’s

HPP. We found that the City did not follow HUD’s,

Cuyahoga County’s, and/or its own requirements

regarding the use of HUD funds. Specifically, the

City: (1) inappropriately used nearly $9,000 of

HOME funds to pay for rehabilitation work that was

improperly performed or not provided; (2) did not

include over $26,000 in housing rehabilitation work

in specifications for 15 houses to ensure they met

the City’s code and/or HUD’s standards; (3) did not

maintain an effective system of controls over its

contracting process; (4) used over $158,000 in

HOME funds to assist 10 households that were

delinquent on their City income taxes; (5) provided

over $111,000 in HOME funds to assist seven households when the City lacked documentation to show

the households were current on their City income

taxes; (6) spent over $151,000 in HOME funds to

assist 10 households that lacked sufficient equity in

their homes to secure the assistance; (7) awarded

over $8,000 in HOME funds for one household

without determining whether it had the ability to

repay the assistance; (8) used over $13,000 for two

households without a promissory note to secure the

assistance; (9) provided over $51,000 to 17 households although the assistance was not included in

the promissory notes and/or the mortgage liens with

the homeowner; and (10) awarded nearly $140,000

to nine households without documentation to show

that the assisted houses were protected by property

hazard insurance or lacked enough insurance to

cover the assisted property.

Chapter 5 — HUD’s Community Planning and Development Programs 54
ing Block Grant monies to acquire used mobile

homes for selected individuals who would reimburse the Authority for the Authority’s costs. Most

of the homes were purchased sight unseen, and

were in poor condition.

Mobile home purchased with Indian Housing Block Grant funds. Home

was not inspectedprior to purchase.

In addition, the Corporation did not follow its

own procurement and maintenance policies in

implementing the supplemental housing programs.

There was an inadequate contract administration

system in place to ensure contractors performed

according to the terms of their contracts. In addition, and controls over the inventory of materials

and supplies were inadequate.

Materials and supplies haphazardly stored are exposed to the elements and

vandalism.

The Corporation was not maintaining adequate

perpetual inventory records in support of its construction and renovation projects, resulting in

improper payment of penalties and fees totaling

over $100,000. Finally, the Corporation had not

implemented sufficient management controls over

its travel and related expenses to ensure that its

adopted travel policy was followed.

The audit recommended that the Authority

establish the necessary management controls over

its operations and financial systems to ensure it

functions in accordance with HUD requirements and

within the Corporation’s policies. (Report No.

2003-DE-1001)

Special Purpose Grant

Based on a request from the HUD Cleveland,

OH Multifamily Housing Program Center, we

completed an audit of the Jewish Community

Federation of Cleveland’s Special Purpose Grant to

determine whether the Federation used its grant

funds in an efficient and effective manner and in

compliance with its grant agreement. It was found

that the Federation did not administer its Special

Purpose Grant in full compliance with federal

requirements and its fiscal standards policy. Specifically, the Federation did not obtain computer

consulting services for the grant through open and

free competition; failed to execute a written contract

for its computer consulting services received in

December 1998 through January 2000 and August

2000 through September 2001; and lacked adequate

documentation to support an additional $45,000 in

computer consulting services paid to its consultant.

As a result, HUD lacks assurance that grant funds

were used efficiently and effectively, and the

Federation’s procurement of computer consulting

services was not subject to open and free competition.

We recommended that the Jewish Community

Federation of Cleveland provide documentation to

support the use of Special Purpose Grant funds and

implement procedures and controls over the grant.

(Report No. 2003-CH-1005)

Investigations

Defendants Alexander Koltovskoy, also known

as Alexander Kolt, and Vincent Pizzi were indicted

by the U.S. Attorney’s Office, Southern District of

New York, and charged with conspiracy to commit

offense or to defraud the United States, fraud by

wire, frauds and swindles, and false statements.

The defendants were arrested two days after the

indictment.

Chapter 5 — HUD’s Community Planning and Development Programs 55
On February 13, 2002, HUD awarded to the

State of New York $700 million in CDBG Program

assistance for properties and businesses damaged

during, and economic revitalization related to, the

September 11, 2001 terrorist attacks on the World

Trade Center (WTC). As part of the $700 million

awarded, Empire State Development Corporation

(ESDC) of New York was hired by the Governor of

New York State to process the WTC Business Recovery Grant Program (BRG). Using funds provided by

HUD, this grant provides immediate financial

assistance to small and medium sized businesses

located on or south of 14th Street. The amount of

the grant depends on which one of four different

zones in which the business is located.

Defendant Koltovskoy, president of Alexander

Edwards Global Search, Inc., applied for the WTC

BRG on March 29, 2002, and indicated on his grant

application that his business address on September

11, 2001, was “2 World Trade Center, Suite 2112,

New York, NY.” A grant was issued to Alexander

Edwards on May 14, 2002, in the amount of

$25,756. On August 28, 2002, ESDC changed the

program requirements of the BRG and all applicants

became eligible for supplemental BRG based on

increased zone percentages. As a result, Alexander

Edwards Global Search, Inc., received an additional

$38,634 in grant funds on November 8, 2002.

The $64,390 grant received by Koltovskoy was

part of a scheme in which Koltovskoy, along with

Pizzi, his employee, applied to other federal, state,

local, and private relief agencies and received

benefits totaling almost $350,000. Pizzi was not

involved with the ESDC BRG grant, but was involved

with other grants.

Defendant Michele Nesbitt, former secretary

for Rehabco Development, a consultant company

for the Union County, NJ Office of Community

Development, was sentenced in District Court for

the District of New Jersey on two counts of mail

fraud. Between March 2000 and May 2001, Nesbitt

embezzled Section 8 funds from Union County. She

was sentenced to 27 months in prison on each

count, to run concurrently, and three years probation, and ordered to pay $212,000 in restitution,

$209,000 of which is to be paid to HUD.

Defendant Bryan Fuhr was arrested and charged

in Federal Court, Southern District of New York,

with theft of government money and mail fraud in

connection with a scheme to defraud HUD and the

Lower Manhattan, NY Development Corporation

(LMDC) out of federal grant funds. These funds

were made available after the September 11, 2001

terrorist attacks to assist in the revitalization of

Lower Manhattan. LMDC, which received over $2.7

billion from HUD to fund the grant program, was

created by the State and City of New York to

coordinate the rebuilding of the area. Fuhr allegedly

devised a scheme to fraudulently obtain money

from the grant program.

An information was filed in Federal Court,

Southern District of Iowa, in the case of the United

States of America vs. defendant Kathleen Ann

Moretz. Moretz was charged with three counts of

theft or bribery concerning programs receiving

federal funds. Moretz, the former executive director

of Neighborhood Housing Services (NHS), Des

Moines, IA, allegedly used her position in order to

steal money from NHS, a nonprofit organization

receiving HUD community planning and development funds. In a plea agreement between the United

States and Moretz signed on December 30, 2002,

Moretz agreed to waive indictment and pled guilty

to the information. Part of the plea agreement was

to pay full restitution in the amount of $450,000.

Defendant Rosa M. Cameron, also known as

Rosa Cameron-Rollins, former alderwoman for the

City of Milwaukee, WI, was sentenced in U.S.

District Court, Eastern District of Wisconsin,

following her November 2002 guilty plea to two

counts of misapplication of funds. Cameron was

sentenced to eight months incarceration, four

months community confinement/home detention,

and three years supervised release. She was also

barred from holding any position of fiduciary

responsibility without notification of her probation

officer and employer, ordered to participate in the

Inmate Financial Responsibility Program, and

ordered to pay $28,964 in restitution to the City of

Milwaukee. The restitution amount was based on

money illegally transferred from the Williamsburg

Heights Community Block Club Association, a HUD

funded nonprofit, to the election campaign bank

Chapter 5 — HUD’s Community Planning and Development Programs 56
account of “Friends of Rosa Cameron-Rollins.” Money from this account was used to elect Cameron as alderwoman for the City of Milwaukee. As part of her October 2002 plea agreement, Cameron was required to

resign as Milwaukee alderwoman within 24 hours. She sat on the Milwaukee Common Council’s Community

Development Committee, which oversees the City’s administration of HUD CDBG funds. Charges remain outstanding against two of Cameron’s daughters, LaZonda Moore and LaRosa Roberta Cameron, both of whom

served as executive director of Williamsburg Heights after their mother’s election.

Following his September 24, 2002 indictment by a Federal Grand Jury, Central District of California,

Tony Chisum, Jr., an employee of the American Philanthropy Association (APA), was arrested without incident

at his residence in Los Angeles, CA. APA, a nonprofit organization, owned and operated several homeless

shelters located in Los Angeles County. Chisum and co-conspirator Terry Lee Rhodes devised a billing scheme

that involved the creation and submission of fraudulent documents in order to receive government funding.

They submitted documents including fraudulent “Cold and Winter Shelter Program” attendance logs that falsely

claimed that certain persons had received food and shelter free of charge from APA. Between 1994 and 1998,

APA illegally received approximately $550,000 in federal funds through its participation in the Cold and Winter

Shelter Program, a program funded by HUD through the City and County of Los Angeles. The Los Angeles

Homeless Services Authority administered the program. The HUD loss was approximately $350,000.

Defendants James Asselin, former co-administrator of the Greater Springfield, MA Entrepreneurial Fund

(GSEF), James Krzystofik, also a former co-administrator of GSEF, Cornell Lewis, former GSEF board member,

and Salvatore Anzalotti, Jr., a certified public accountant and professor of accounting at American International

College who also served as the GSEF accountant, were indicted by a Federal Grand Jury in the District of

Massachusetts. GSEF loaned and/or granted federal funds to assist business entities in the Springfield area.

GSEF received funding from HUD’s Office of Community Planning and Development, the Department of Commerce, and the Small Business Administration.

March 25, 2003

The Boston Globe, March 25, 2003

Chapter 5 — HUD’s Community Planning and Development Programs 57
Defendant Asselin was charged with one count

of conspiracy, one count of false statements, 20

counts of federal program fraud, and 20 counts of

money laundering. Asselin is the son of Ray

Asselin, executive director of the Springfield

Housing Authority. Krzystofik was charged with

one count of conspiracy, three counts of Small

Business Administration fraud, seven counts of false

statements, 20 counts of federal program fraud, and

32 counts of money laundering. Lewis was charged

with one count of conspiracy and two counts federal

program fraud. Anzalotti, Jr., was charged with one

count of conspiracy and three counts of false statements. Allegedly, Asselin and Krzystofik set up two

consulting firms to receive unauthorized GSEF

funds. In addition, along with Lewis, they allegedly

took unauthorized personal trips that were paid for

with GSEF funds. The indictment also alleges that

there were numerous conflicts of interest resulting

from self-dealing. GSEF rented space in a building

owned by Anzalotti; a business entity associated

with Anzalotti received a GSEF loan. GSEF rented

space in a building owned by Asselin, Krzystofik,

Lewis, and a GSEF borrower. Anzalotti did not

report any of this activity in the annual GSEF audits.

The four defendants were recently arrested.

Former Beaumont, TX Mayor David W.

Moore was found guilty in Federal Court, Eastern

District of Texas, on 13 counts of conspiracy,

bribery, mail fraud, and money laundering. As a

result of the same trial, former Beaumont City

Councilman John K. Davis was found guilty on 11

counts of conspiracy, bribery, mail fraud, and

money laundering. An investigation disclosed that

San Antonio, TX businessman Terry Samuel

provided the defendants with cash payments,

checks, and other things of value in return for their

assistance and influence in Samuel’s business

transactions with the City of Beaumont. This

included Samuel’s participation in several programs

which received HUD funding.

Defendant Betty Jane Anderson, former property manager of the Detroit Lakes, MN Economic

Development Authority (EDA), was indicted in

Minnesota State Court on seven counts of theft by

swindle. Anderson allegedly devised a scheme to

create fictitious vendors, landlords, tenants, work

orders, and invoices to obtain over $55,410 in EDA

funds. She either took the funds in cash or deposited them in six different bank accounts which she

opened in nearby cities. A review of the bank

records show that Anderson used these funds for

her own personal benefit.

Home improvement contractor Thomas E.

Keehn, Jr., doing business as Certified, Inc., pled

guilty in Federal Court, District of Columbia, to

mail fraud. Keehn used the mails in furtherance of a

fraudulent scheme to obtain HUD funds from the

D.C. Department of Housing and Community

Development. He prepared false, inflated bids on

behalf of fictitious contractors on at least 15 home

improvement contracts for which he was competing

in order to ensure that his bid was accepted. Keehn

obtained contracts totaling at least $220,000 under

false pretenses.

Defendant Francis Nicholas Armah-Afful, a

Montgomery County, MD Housing Opportunities

Commission (HOC) subsidy recipient, was arrested

subsequent to a controlled delivery and surveillance

operation which resulted in the execution of two

state arrest warrants and four simultaneous state

search warrants. Armah-Afful manufactured counterfeit checks from a computer in his HOC apartment, which was funded by HUD, purchased laptop

computers from a distributor in Illinois, and had the

computers sent to his apartment. The computers

were then either sold on the street or pawned.

During the investigation, it was discovered that

Armah-Afful created fraudulent checks under the

corporate names of “HUD Enterprises, Inc.,” “HUD

Accounts Payable, Inc.,” and “HUD Corporation.”

Armah-Afful was deported in 2000 and at the time

of the investigation was considered an illegal entry.

The alias used by Armah-Afful, Divine Selasi

Ziorklui, had an active INS arrest warrant on file.

During the execution of the search warrant at

Armah-Afful’s apartment, evidence was located

which linked him to two local strong-arm robberies.

The fraud in this scheme has thus far totaled over

$70,000 and is expected to double subsequent to

findings from the search warrants. Two other

individuals, Eric Nensah and Trevonne McLean,

were arrested during this operation.

Chapter 5 — HUD’s Community Planning and Development Programs 58
OIG Offices of Audit and

Investigation — Joint Efforts

Defendant Bradley D. Jones, former controller

for Utica, NY Community Action, Inc., pled guilty

in Federal Court, Northern District of New York, to

a one-count felony information for theft of property

from an organization receiving federal assistance.

Utica Community Action, Inc., is a federally

funded, nonprofit agency providing anti-poverty

programs to the Utica area. A Congressional

inquiry led to an investigation of Utica Community

Action’s financial activities; the investigation found

25 suspicious checks totaling $63,616 payable to

Brad Jones. Jones admitted that, while employed as

controller, he issued agency checks payable to

himself, cashed the checks, and used the cash for

his personal benefit.

Defendants Phuong Vu and Hang Hua entered

into a civil settlement at the U.S. Attorney’s Office

in Houston, TX, in connection with a False Claims

Act investigation. The investigation disclosed that

Vu misrepresented his income in order to receive

mortgage down payment assistance from a

subrecipient of the City of Houston under the HUD

HOME Program. Vu failed to disclose he was cohabiting with a girlfriend, Hang Hua, who was employed as a mortgage underwriter. Vu also reported

a fictitious employer because he was unemployed

and receiving worker’s compensation benefits. In

lieu of a civil complaint being filed, Vu and Hua

made full payment of damages totaling $9,500 per

the settlement agreement.

Defendants Gerald A. Phillips, executive

director, Massachusetts Career Development

Institute (MCDI), Giuseppe Polimeni, former director of MCDI, Jamie Dwyer, former MCDI employee

who handled the payroll, and Luisa Cardaropoli,

alleged MCDI no-show employee, were indicted by a

Federal Grand Jury in the District of Massachusetts.

MCDI provided educational and job training programs for income eligible individuals in the Springfield area. MCDI received funds from many

sources, including the HUD CDBG Program and the

Department of Education. Phillips was charged with

one count of conspiracy, six counts of aiding and

abetting, four counts of wire fraud, three counts of

federal program fraud, and one count of threatening

a witness. Phillips served as a civilian commissioner for the Springfield Police Department until

his March 2002 arrest. Polimeni was charged with

one count of conspiracy, nine counts of aiding and

abetting, four counts of wire fraud, three counts of

federal program fraud, and three counts of obstruction of justice. Dwyer was charged with one count

of conspiracy, nine counts of aiding and abetting,

four counts of wire fraud, three counts of federal

program fraud, and two counts of obstruction of

justice. Cardaropoli was charged with one count of

conspiracy, three counts of aiding and abetting, two

counts of wire fraud, one count of federal program

fraud, and one count of obstruction of justice.

Allegedly, Phillips, Polimeni, and Dwyer conspired

to disburse unauthorized MCDI funds to Cardaropoli

and other no-show employees of MCDI. The indictment also alleges that there were numerous fraudulent wire transactions in regard to health insurance

and employment benefits illegally awarded to the

alleged no-show employees. During the course of

this investigation Phillips threatened, intimidated,

and persuaded a witness in order to prevent the

witness from testifying in a Federal Grand Jury

proceeding. The four defendants were arrested

shortly after their indictment.

OIG Special Agent in Charge Peter Emerzian, on right,

attending press conference held by U.S. Attorney Michael J.

Sullivan, District of Massachusetts, announcing Grand Jury

indictments and arrests of Gerald A. Phillips, Giuseppe

Polimeni, Jamie Dwyer, and Luisa Cardaropoli.

Chapter 5 — HUD’s Community Planning and Development Programs 59
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Chapter 5 — HUD’s Community Planning and Development Programs 60
Chapter 6 — Other Significant Audits and Investigations

Audits

During this reporting period, the OIG audited

HUD’s Principal Financial Statements and issued

reports prepared by a contractor that audited FHA’s

Financial Statements as well as Ginnie Mae’s

Financial Statements. We also audited HUD’s

Information Security Program, Controls Over

Social Security Numbers, and Resource Management System. In addition, we performed two

reviews of Ginnie Mae’s Internal Controls.

Financial Statement Audits

OIG issued its report presenting the results of

our audit of HUD’s principal financial statements

for the years ended September 30, 2002 and 2001.

Assessments of HUD’s internal controls and compliance with laws and regulations are also provided in

the audit report. In our opinion, the principal

financial statements present fairly, in all material

respects, the financial position of HUD as of September 30, 2002 and 2001 and its net costs, changes

in net position, budgetary resources, and reconciliation of net costs to budgetary obligations for the

fiscal years then ended, in conformity with accounting principles generally accepted in the United

States.

Our audit disclosed material weaknesses in

internal controls in FY 2002 related to the need to:

(1) comply with federal financial management

system requirements, including the need to enhance

Federal Housing Administration (FHA) information

technology systems to more effectively support

FHA’s business processes; (2) improve oversight and

monitoring of subsidy calculations and intermediaries’ program performance; and (3) improve FHA’s

controls over budget execution and funds control.

Reportable conditions in internal controls in FY

2002 related to the need to: (1) improve quality

control over performance measures data; (2) improve controls over project-based subsidy payments;

(3) strengthen controls over HUD’s computing

environment; (4) improve personnel security practices for access to the Department’s systems; (5)

improve funds controls over public housing operating funds; (6) improve processes for reviewing

obligation balances; (7) more effectively manage

controls over the FHA systems’ portfolio; (8) place

more emphasis on monitoring lender underwriting

and improving early warning and loss prevention for

FHA single family insured mortgages; (9) sufficiently monitor FHA’s single family property inventory; and (10) improve FHA’s controls over the

credit subsidy adjustment process. As part of the

reportable condition that HUD needs to improve

processes for reviewing obligation balances, our

review showed that over $1.1 billion in excess funds

could be deobligated. Most of these control weaknesses were reported in prior efforts to audit HUD’s

financial statements and represent long-standing

problems.

The audit also includes the following instance of

noncompliance with applicable laws and regulations: HUD did not substantially comply with the

Federal Financial Management Improvement Act.

In this regard HUD’s financial management systems

did not substantially comply with Federal Financial

Management Systems Requirements; applicable

accounting standards; and the U.S. Standard

General Ledger at the transaction level. The report

provides an assessment of HUD’s action to address

the weaknesses and makes various recommendations for corrective action. (Report No. 2003-FO0004)

The OIG issued a report on the results of KPMG

LLP’s audit of the Federal Housing

Administration’s (FHA) financial statements for

the years ended September 30, 2002 and 2001. In

KPMG’s opinion, the financial statements present

fairly, in all material respects, FHA’s financial

position as of September 30, 2002 and 2001, and its

net costs, changes in net position, budgetary resources, and reconciliation of net costs to budgetary

obligations, for the years then ended, in conformity

with accounting principles generally accepted in the

United States.

While KPMG issued an unqualified audit opinion

on FHA’s financial statements, their report identifies

two material weaknesses: (1) HUD/FHA’s automated

Chapter 6 — Other Significant Audits and Investigations 61
Chapter 6 — Other Significant Audits and Investigations 62

data processing (ADP) system environment must be

enhanced to more effectively support FHA’s business processes; and (2) controls over budget execution and funds control must be improved. The

report also identifies four reportable conditions on

internal control: (1) HUD/FHA can more effectively

manage controls over the FHA ADP systems portfolio; (2) FHA must place more emphasis on monitoring lender underwriting and continue to improve

early warning and loss prevention for single family

insured mortgages; (3) FHA must sufficiently

monitor its single family property inventory; and

(4) FHA must improve the controls over the credit

subsidy adjustment process.

The report provides an assessment of actions

taken by FHA to mitigate these weaknesses and

conditions, and makes recommendations for corrective actions. Report No. (2003-FO-0002)

OIG issued its report presenting the results of

KPMG LLP’s audit of the Government National

Mortgage Association’s (Ginnie Mae) financial

statements for the years ended September 30, 2002

and 2001. In KPMG’s opinion, the financial statements present fairly, in all material respects, the

financial position of Ginnie Mae as of September

30, 2002 and 2001 and the results of its operations

and its cash flows for the years then ended, in

conformity with accounting principles generally

accepted in the United States.

In addition to KPMG’s unqualified opinion on

Ginnie Mae’s financial statements, the audit results

indicate that there were no material weaknesses in

Ginnie Mae’s internal controls and no reportable

instances of noncompliance with laws and regulations. KPMG noted other matters involving internal

control and its operations that are not material to

the financial statements and are being reported

separately to Ginnie Mae management. (Report No.

2003-FO-0003)

HUD’s Information Security

Program

We completed an audit of HUD’s information

security program and practices as required by the

FY 2001 Defense Authorization Act (P.L. 106-398),

Title X, subtitle G, “Government Information

Security Reform.” The Act requires that the OIG

perform an annual independent evaluation of the

Department’s information system (IS) security

program leading to a conclusion regarding its

overall effectiveness. While we observed improvement in some aspects of HUD’s IS security program,

weaknesses persist. Delays in the implementation of

corrective actions and tasks designed to strengthen

the IS security program continue to put critical data

and resources at risk. Although the Office of the

Chief Information Officer (OCIO) expanded its selfassessment program in FY 2002, we found that the

results reported are unreliable in the absence of a

review process to ensure correct performance of the

assessments. We also found that despite the effort

given to prepare HUD’s Critical Infrastructure

Protection Plan, the OCIO has made little progress

in implementing tasks outlined in the plan to

strengthen HUD’s IS security program in the areas of

risk management, emergency management and

interagency coordination, recruitment, education,

and awareness. We attribute these delays to funding

limitations, poor planning and coordination, and

administrative processes preventing the timely

establishment of contractual agreements.

We made recommendations to strengthen the

OCIO’s role in monitoring the Department’s IS

security program by overseeing the immediate

correction of long-standing security weaknesses and

implementing procedures to improve the reliability

of results obtained during its annual self-assessment

program. In addition, we recommended that the

OCIO ensure adequate resources are requested and

allocated to facilitate full implementation of its

Entity-wide Security Program Plan as outlined in

the Department’s Critical Infrastructure Protection

Plan. The OCIO’s Corrective Action Plan dated

December 18, 2002, indicates concurrence with all

of the report recommendations and scheduled

completion of all corrective actions by November

2003. (Report No. 2003-DP-0801)

HUD’s Controls Over Social

Security Numbers

The Chairman of the House Ways and Means

Subcommittee on Social Security asked the

President’s Council on Integrity and Efficiency
(PCIE) to evaluate federal agencies’ control over

third party access to, and disclosure and use of,

Social Security numbers (SSNs). To accomplish this,

the HUD OIG and other participating OIGs were

requested to select one program area and determine

whether their agency: (1) made legal and informed

disclosures of SSNs; (2) had appropriate controls

over contractors’ access to and use of SSNs; (3) had

appropriate controls over other nongovernmental

and noncontractor entities’ access to and use of

SSNs; and (4) had adequate controls over access to

individuals’ SSNs maintained in databases.

Our audit showed that Office of Housing and

Office of the Chief Information Officer (OCIO) staff

had adequate controls over access to individuals’

SSNs maintained in databases containing sensitive

information. However, neither Housing nor OCIO

staff complied with procedures established to

control contractors’ access to records containing

personal information. Specifically, OCIO did not

ensure the required background investigation was

completed for all contract employees. We also

determined that Housing and OCIO staff did not

ensure that contract employees completed information security training or maintained up-to-date lists

identifying contract employees having access to

these systems. These deficiencies, along with

appropriate recommendations for corrective action,

were reported in HUD OIG’s Audit of HUD’s Financial Statements, FYs 2001 and 2000, dated February

27, 2002. Accordingly, no further recommendations

were made as part of this audit. (Report No. 2003-

AO-0801)

Components of HUD’s Resource

Management System

We completed a review of the Department’s

progress in implementing the Resource Estimation

and Allocation Process (REAP) and the Total Estimation and Allocation Mechanism (TEAM) components of its Resource Management System. The

Chief Financial Officer’s (CFO) Office of Budget is

responsible for coordination and implementation of

the system. Our primary objective was to assess the

Department’s progress in implementing REAP and

TEAM subsequent to the OIG’s September 2000

REAP review. Generally, we found the Department

has made significant progress in developing and

implementing the key components of its Resource

Management System since September 2000. The

Department completed the REAP studies in January

2002, began implementing the time reporting

component of TEAM in the third quarter of FY 2002,

used REAP/TEAM data to improve the budget process

for FYs 2003 and 2004 and staffing plan decisions

for 2003, and anticipates using the allocation

module of TEAM to allocate FTEs for the

Department’s FY 2004 appropriation. The Department now needs to develop a comprehensive strategic workforce plan that includes elements as to how

the data from the REAP studies and TEAM system

will be used to plan and allocate its human resources among its various operating components.

(Report No. 2003-PH-0801)

Ginnie Mae’s Internal Controls

Our audit of Ginnie Mae’s internal controls

identified several control weaknesses in its operations, including: (1) not requiring issuers to accurately report FHA case numbers and use those

numbers as its primary management control; (2)

inadequate controls to ensure reliability of automated data; (3) inadequate procedures for matching

data in Ginnie Mae’s systems to FHA’s systems; and

(4) unreasonable time allowed for issuers to provide

the Mortgage Insurance Certificate (MIC) to the

document custodian. Because Ginnie Mae officials

did not recognize the need to implement the controls, the Ginnie Mae database contained incomplete and inaccurate loan information and Ginnie

Mae’s risk of fraud was increased. These weaknesses allowed one issuer to place over $21 million

of uninsured and fraudulent loans into Ginnie Mae

pools.

In response to our audit inquiries and through

its own assessments of controls, Ginnie Mae implemented several new procedures designed to

strengthen and improve operations. It began electronically confirming that all case numbers are

valid. It improved the loan level edits to identify

syntax and format errors so that loans that are not

in the proper format cannot be placed in pools. It

began follow-up with issuers to improve the reliability of information on existing portfolios, and continued to improve its tracking of timely MIC recogni

Chapter 6 — Other Significant Audits and Investigations 63
tion. Ginnie Mae agreed with our recommendation

to match all FHA loans in its database with FHA’s

database to ensure data is accurately reported and

loans are insured, and expects to complete its first

reconciliation by December 2003. (Report No.

2003-AT-0001)

At the request of Ginnie Mae, we conducted a

limited review of the general controls over the

information systems operated and maintained for

Ginnie Mae by Affiliated Computer Services –

Governmental Services, Inc. (ACS). Our review

found that security over certain server and application access controls can be improved. We also

found that required semiannual testing of the

disaster recovery process for one (the webserver) of

the three major ACS contracted services was not

being performed. We made five recommendations

to Ginnie Mae to improve internal controls in these

areas. (Report No. 2003-DP-0802)

Investigations

Defendant Robert Barrera, owner of Financial

Research Services (FRS), Miami, FL, was sentenced in Federal Court in the Southern District of

Florida to 27 months imprisonment and two years

supervised release, and ordered to pay over $4.46

million in restitution to HUD and Ginnie Mae.

Defendant Enos Ying, controller of FRS, was

convicted by a Federal Trial Jury in the Southern

District of Florida on two counts of conspiracy to

make false statements to HUD/Ginnie Mae, one

count of mail fraud, and 27 counts of submitting

false statements to HUD/Ginnie Mae. Barrera and

Ying were able to place 15 fictitious mortgages

totaling $1.29 million in several Ginnie Mae pools,

resulting in a loss to Ginnie Mae. In addition, the

defendants kept the loan pay-off proceeds on 39

mortgages amounting to over $3.17 million and

continued to make the monthly mortgage payments

so that Ginnie Mae would not discover the fraudulent scheme. The total loss to Ginnie Mae was over

$4.46 million and the loss to the Federal Deposit

Insurance Corporation lender that provided the

warehouse line of credit was over $2 million. The

investigation involved 15 bank accounts and over

$200 million in financial transactions.

Defendant Regina F. Solomon, an operations

specialist with the HUD Detroit, MI Office, pled

guilty in Federal Court, Eastern District of Michigan, to a one-count bill of information for theft of

government property for her unauthorized personal

use of a government vehicle. Within a negotiated

plea agreement, Solomon agreed to pay $2,863 in

restitution to one of the complainants in this case

regarding a loan she used to repay past due amounts

on a government credit card. Further, the plea

agreement called for Solomon to immediately cease

her employment with the Federal Government,

which became effective on March 27, 2003.

Solomon had been the HUD field office director and

senior community builder for the State of Michigan

prior to her assignment as an operations specialist.

Sentencing is scheduled for June 24, 2003.

Chapter 6 — Other Significant Audits and Investigations 64
Chapter 7 — Outreach Efforts

In order to foster cooperative, informative, and mutually beneficial relationships with various agencies and

organizations whose intent is to assist in the accomplishment of HUD’s mission, the OIG participates in a number

of special outreach efforts. These outreach efforts, as described below, are in addition to our regular coordination with federal, state, and local law enforcement agencies, other OIGs, and various Congressional Committees

and Subcommittees. During these outreach efforts, we not only present the results of OIG audit and investigative

work and discuss our goals and objectives, but we also provide information about the OIG’s role and function.

The HUD Secretary continues to maintain the highest level of interest in the fight against fraud and abuse,

and the OIG has found that by establishing working relationships with these agencies and organizations, we can

more readily and successfully reach our common goal of providing decent, safe, and sanitary housing for those

in need. The following are some of our outreach efforts carried out during this six-month reporting period.

 Inspector General Donohue addressed the American Association of Residential Mortgage Regulators in

Annapolis, MD, at its first Mortgage Fraud Committee Task Force Symposium.

 Inspector General Donohue addressed the National Conference of the National Association of Housing

and Redevelopment Officials in Seattle, WA.

 Inspector General Donohue addressed the graduates of both the Federal Law Enforcement Training

Center in Glynco, GA, and the Inspector General Auditor Training Institute in Arlington, VA.

 As part of an ongoing partnership with Norfolk, VA State University, the OIG Headquarters Audits Division

Director hosted two accounting students on a three-day job shadowing experience at HUD Headquarters.

Participants in Job Shadowing Program: from l to r, Donna M. Hawkins, Assistant Director, Headquarters

Audits Division; Saundra G. Elion, Director, Headquarters Audits Division; Tamara Artybridge, Norfolk State

University accounting student; Kenneth M. Donohue, HUD Inspector General; James Riley, Jr., Norfolk State

University accounting student; Seanna McGee, OIG Auditor; and Sharon Brown, OIG Auditor.

Chapter 7 — Outreach Efforts 65
 Inspector General Donohue addressed the School of Criminal Justice at the University of Alabama in

Tuscaloosa, AL.

 At the Mortgage Bankers Association in San Francisco, CA, John E. Dupuy, Special Agent in Charge

(SAC), Criminal Investigation Division (CID), and Stephen L. Bell, Assistant Special Agent in Charge

(ASAC), CID, made a presentation on mortgage fraud at CampusMBA’s Advanced Fraud Seminar.

Participants in Job Shadowing Program: from l to r, Tamara Artybridge, Norfolk State University

accounting student; Frank L. Davis, Director of HUD’s Office of Departmental Operations and

Coordination; James Riley, Jr., Norfolk State University accounting student; and Saundra G. Elion,

Director, Headquarters Audits Division.

John E. Dupuy, SAC, CID, and Stephen L. Bell, ASAC, CID, make presentation on mortgage fraud to

Mortgage Bankers Association in San Francisco, CA.

Chapter 7 — Outreach Efforts 66
 The OIG Office of Investigation held a liaison

meeting in Washington, DC, with enforcement

staff from the Environmental Protection Agency

(EPA), Criminal Investigation Division staff

from EPA, program staff from HUD, and Department of Justice staff to discuss ways to focus on

lead-based paint cases.

 The OIG Office of Audit made an extended

presentation on the audit process to all HUD

Principal Staff during a meeting of the HUD

Executive Management Committee in Washington, DC.

 Inspector General Donohue spoke to over 600

Departmental managers from across the country

at the National Management Training Symposium meeting in Washington, DC.

 OIG Special Agents in Charge attended the FBI

sponsored OIG Liaison Conference in New

Orleans, LA.

 OIG Special Agent Joel Parisi, Mid-Atlantic

Region, made a presentation in Grantville, PA,

to the officers and members of the Pennsylvania Septic Management Association on the

merits of avoiding fraud and misrepresentation

in the course of conducting business.

 OIG staff met with the U.S. Attorney (USA) for

the Great Plains Region, Chief Criminal

Assistant USA, Chief Civil Assistant USA, and

the Affirmative Civil Enforcement Coordinator for the District of Kansas, and presented

potential proactive approaches to problems in

Single Family and Multifamily Housing Programs.

 D. Michael Beard, OIG Regional Inspector

General for Audit from the Southwest Region,

made a presentation on the OIG’s policy on civil

referrals to Assistant U.S. Attorneys at the

Joint Conference of the Southwest/Western

Intergovernmental Audit Forum in Reno, NV.

 Acting OIG Assistant Special Agent in Charge

Monica Haltmeyer, Mid-Atlantic Region, spoke

at the Fidelity National Title Insurance Company of New York Fall Seminar on single

family loan origination fraud.

 The OIG, in coordination with the HUD Offices

of Housing and Public and Indian Housing,

is embarking on a nationwide proactive effort to

establish policies and procedures to prevent

overpayments of Section 8 housing assistance,

including up-front income verification, state-bystate memoranda of understanding to obtain

state wage income information, and legislative

proposals to obtain information and for simplifying rent calculations.

 OIG Audit and Investigation staff briefed HUD

employees on how the OIG works, providing a

look at the inner workings of our operations.

Chapter 7 — Outreach Efforts 67
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Chapter 7 — Outreach Efforts 68
Chapter 8 — Legislation, Regulations and Other Directives 69

Chapter 8 — Regulations, Handbooks and Other Directives

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 six-month reporting period, the OIG

reviewed 148 regulations, funding notices, and

other HUD directives and proposals. This Chapter

highlights some of the resultant OIG recommendations.

Regulations

Public Housing Capital Fund

Program

This proposed rule governs public housing

agencies’ (PHA) use of HUD provided funds for

either the development of new housing or the

modernization of existing housing, as well as

management improvement activities. The HUD

Appropriations Act provided $3 billion in FY 2001

and about $2.5 billion in FY 2002. The Appropriations Act contained a provision requiring that HUD

not distribute any of the funds until a risk assessment was completed and mitigation controls initiated to eliminate any identified risks. HUD has

already distributed over $5 billion in capital funds

during the last two years without meeting the

requirements of this provision.

We did not concur with the proposed rule

because HUD has not yet completed the required

risk assessment, established controls for limiting

new construction to the replacement of units in the

PHA inventory, or prescribed a methodology for the

disposition of unappropriated funds designated for

emergencies.

The Office of Public Housing is considering

OIG’s comments. The Department procured a

consultant to conduct a risk assessment and this

study is underway. The draft regulation had not

been published as of the close of this semiannual

reporting period.

Notices Of Funding Availability

(NOFA)

Fiscal Year 2003 SuperNOFA –

General Section

The General Section of the SuperNOFA provides

the general requirements, procedures, and principles that apply to all of HUD’s Discretionary Grant

Programs. The FY 2003 SuperNOFA, in its entirety,

will provide funding for 43 Discretionary Grant

Programs. The Program Section of the SuperNOFA

is reviewed on a program-by-program basis.

We nonconcurred with the General Section of

the SuperNOFA because we did not agree that the

OIG should be performing the pre-award survey

reviews. Section V of the General Section required

the OIG, in consultation with the Office of Grants

Management and Oversight, to arrange for preaward surveys of the applicant’s financial management system. In cases where the recommended

applicant has no prior federal support, the program

area has reason to question whether the applicant’s

financial management system meets federal financial management standards, or whether the applicant is considered a high risk based on past performance of financial management findings. Further,

HUD will not make an award to any applicant who

does not have a financial management system that

meets federal standards. We recommended that the

OIG be dropped from the General Section of the

SuperNOFA and that the Office of Departmental

Grants Management and Oversight make alternative

arrangements for the performance of the system

reviews. The Office of Administration’s Office of

Departmental Grants Management and Oversight

revised the language in the General Section of the

SuperNOFA to indicate that their office would make

alternative arrangements for the performance of the

system reviews.

The SuperNOFA had not been published as of

the close of this semiannual reporting period.
Fiscal Year 2003 SuperNOFA – Rural

Housing and Economic Development

This SuperNOFA would build capacity for the

Rural Housing and Economic Development (RHED)

Program. The program would provide assistance at

the state and local levels for rural housing and

economic development. The funds made available

under this program will be awarded competitively,

through a selection process conducted by HUD in

consultation with the Department of Agriculture

(USDA).

We did not concur with this SuperNOFA because

it anticipated awarding $25 million in assistance in

excess of the authorized budget, contrary to Section

421 of Public Law 107-73, issued on November 26,

2001. The HUD Appropriations Act required that no

part of any appropriation for HUD should be available for any activity in excess of the amount set

forth in the budget estimates submitted to Congress.

The language in the budget states that the 2003

budget proposes no new funding for this program.

Therefore, we were unable to concur with the

NOFA. Further, the NOFA stated that the selection

process was to be done in consultation with USDA.

However, neither the Public Law nor the budget

document discusses the role of USDA in this program.

The Department revised the language of the

proposed SuperNOFA to state that the SuperNOFA

was contingent upon Congressional approval of the

proposed amount and dropped the requirement for

USDA oversight. We lifted our nonconcurrence

based on these revisions.

The SuperNOFA had not been published as of

the close of this semiannual reporting period.

HOPE VI Demolition Grants

This NOFA will announce the availability of $40

million for PHAs from the HOPE VI Demolition

Grants appropriation. Demolition Grants provide

funding to PHAs for the demolition of severely

distressed public housing and for relocation and

other supportive services to residents of these units.

We did not concur with this proposed NOFA

because it anticipated awarding $40 million in

assistance in excess of the authorized budget,

contrary to Section 421 of Public Law 107-73,

issued November 26, 2001. The Appropriations Act

required that no part of any appropriation for HUD

should be available for any activity in excess of the

amount set forth in the budget estimates submitted

to Congress. HUD did not provide any funding for

the demolition activity in its budget to Congress.

The Office of Public and Indian Housing (PIH)

intends to distribute $40 million in appropriations

for the demolition of severely distressed housing

and for the relocation and support services to

families in the units scheduled for demolition.

These PIH actions are contrary to budget controls

established in the Appropriations Act. Historically,

PIH has complied with this Appropriations Act

requirement and adjusted the Family Unification

Program NOFA when the NOFA exceeded the amount

provided in the budget to Congress. PIH has effectively reduced the amount of funds available for

revitalization of severely distressed units by diverting $40 million to the elimination of the public

housing stock.

The NOFA had not been published as of the

close of this semiannual reporting period.

Notice

Capital Fund – Replacement Housing

Factor Instructions

This proposed Notice provided instructions to

public housing agencies to request funding for

replacement housing. The Department planned to

fund the public housing agencies’ request for

replacement housing through the capital fund

formula. The Department authorized public housing

agencies to obtain replacement funding for five

years, or 10 years if they will be leveraging substantial funding from other sources.

We commented on the proposed plan because

the Department did not establish management

controls to detect the development of replacement

housing in excess of the maximum number of units

allowed for the public housing agency. The Department did not place a limit on the number of units a

public housing agency could develop with the

Chapter 8 — Legislation, Regulations and Other Directives 70
replacement housing funds. The Housing Act of

1937, as amended in Section 9(g), did limit the

number of units being developed to the number of

units in the public housing inventory at October 1,

1999. A public housing agency developing units in

excess of the maximum allowed cannot obtain

subsidies for the excess units.

PIH has revised the Notice and established a

management control for detecting units in excess of

the maximum allowed. This Notice had not been

issued as of the close of this semiannual reporting

period.

Handbooks

Multifamily Accelerated Processing

(MAP) Guide – Quality Assurance

Enforcement Actions

This Handbook change adds a Chapter 15 that

provides the Department with enforcement actions

against lenders and participants in the Multifamily

Accelerated Processing (MAP) Program. The enforcement procedures allow for an informal conference between the sanctioning board and the lender

or participant.

We did not concur with this change because it

did not require HUD to document any discussions as

a part of the procedural record. We determined that

board members would be using the discussions

from the informal conference when considering

sanctions. Without these discussions as part of the

written record, final determinations may appear to

be unsupported. Conversely, if their discussions are

not taken into consideration, we did not see the

relevance of having the participant attend the informal conference. In response, HUD revised the

Handbook Chapter to now allow for written arguments and additional documents or evidence to be

entered into the written record if submitted within

five days of the informal conference. This appears

to be an opportunity to adequately support the

written record; it also supports a reason to hold the

conference.

The Handbook change was not finalized as of

the close of this semiannual reporting period.

Administrative Control of Funds

Policies and Procedures

This proposed Handbook updates, strengthens,

and consolidates five of HUD’s previous Handbooks

relating to the administration of funds. The purpose

of this Handbook is to prescribe requirements for:

(1) distributing HUD’s budget authority through an

apportionment/allotment process that affixes personal responsibility and accountability for specific

budgetary resources; (2) establishing and maintaining internal controls that provide reasonable assurance that HUD’s obligations and expenditures are

within the budget authority limits established by the

Congress for specific budgetary resources; and (3)

reviewing, reporting, and acting on possible and

confirmed violations of the Anti Deficiency Act.

We initially did not concur with the new policies and procedures because the Handbook lacked:

(1) a clear statement to HUD staff to avoid obligating funds prior to the signing of grant agreements;

(2) an audit trail of the Office of General Counsel’s

conclusions and opinions provided to allotment

holders; (3) complete instructions for year-end

closing processes and rules for carrying over funds

for the next fiscal year; (4) a clear definition of the

term “carryover” to ensure this process is completed in accordance with the Office of Management and Budget reapportionment process; (5) a

requirement for the Office of General Counsel’s

involvement in handling possible Anti Deficiency

Act violations; and (6) provision for the Office of

General Counsel’s involvement in the team make-up

for performing reviews of violations of the Anti

Deficiency Act.

The Department concurred with our recommendations to strengthen the Handbook by establishing

policies and procedures for maintaining internal

controls of funds and processes. Our recommendations were added to the Handbook, which was

issued on December 19, 2002.

Chapter 8 — Legislation, Regulations and Other Directives 71
HUD Standard Forms

Revised FHA Multifamily and Health

Care Closing Documents

The closing documents for multifamily rental

projects and health care facilities have not been

updated since the 1960’s. Therefore, the Department conducted a thorough review and comparison

to modern day instruments to offer the requisite

protection to all parties to the transaction, consistent

with modern real estate and mortgage lending laws

and procedures. The Department now has one

regulatory agreement for rental housing projects

(Sections 202 and 811 will have a separate agreement, to be revised at a later date), and another

regulatory agreement for health care facilities.

Major changes have been made to the regulatory

agreements, including adding current policies and

administrative procedures and incorporating the

Mortgagor’s Certificate into the agreement. Most

notably, the regulatory agreement of health care

facilities makes lessees responsible for the same

level of financial reporting, posting all personal

property as security for the mortgage, and agreeing

that the certificate of need and license cannot be

transferred from the project. These changes were

made, in part, based on management decisions

made in response to a prior OIG audit.

We did not concur with the health care facilities

regulatory agreement because it falls short where

program areas cross over between rental and health

care. For example, board and care facilities have

rental issues as well as health care issues. The

health care facilities regulatory agreement does not

cover rental issues and vice versa.

We also nonconcurred with the terminology on

the Mortgagee’s Certificate (Form HUD-92434)

with regard to reserve for replacement deposits.

Section 232 mortgages are underwritten with a twopart reserve for replacement deposit due each

month. A stated portion of this deposit is to be used

for major moveable equipment, while the balance is

for long-term physical plant needs. Owners have

been using the entire reserve for replacement

balance on major moveable equipment without

regard to reserving funds for future major repairs.

HUD is currently evaluating our comments. The

revised closing documents had not been finalized as

of the close of this semiannual reporting period.

Chapter 8 — Legislation, Regulations and Other Directives 72
Chapter 9 — Audit Resolution

In the audit resolution process, the OIG and HUD

management come to an agreement as to the needed

actions and timeframes for resolving audit recommendations. Through this process, we hope to

achieve measurable improvements in HUD programs

and operations. The overall responsibility for

assuring that the agreed upon changes are implemented rests with HUD managers. This Chapter

describes some of the more significant pending

issues where resolution action has been delayed. It

also contains a status report on HUD’s implementation of the Federal Financial Management Improvement Act of 1996. In addition to this Chapter on

audit resolution, see Appendix 2, Table A, “Audit

Reports Issued Prior to Start of Period With No

Management Decision at 3/31/03,” and Table B,

“Significant Audit Reports Described in Previous

Semiannual Reports Where Final Action Had Not

Been Completed as of 3/31/03.”

Delayed Actions

Audits of HUD’s FY 1991 through

2002 Financial Statements

First issued June 30, 1992. HUD has been

preparing financial statements under the requirements of the Chief Financial Officers Act for 12

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 2002, we were able to express an

unqualified opinion on HUD’s principal financial

statements. The results of our FY 2002 report on

internal controls were consistent with results reported in Semiannual Reports from prior years.

While there has been progress, material weaknesses

continue with respect to the need to: (1) complete

improvements to financial systems; (2) improve

oversight and monitoring of subsidy calculations

and intermediaries’ program performance; and (3)

improve FHA’s controls over budget executions and

funds control. Corrective action plans to resolve

these issues have continued to change over the last

decade.

Audits of FHA’s FY 1991 through

2002 Financial Statements

First issued March 27, 1992. FHA has been

preparing financial statements for 12 years under

the Chief Financial Officers Act, beginning with FY

1991. The audit of FHA’s FY 2002 financial statements discussed problems similar to those that have

been reported since the audit of FHA’s FY 1991

financial statements. The audit continues to recognize that FHA needs to: (1) improve its information

technology (primarily accounting and financial

management systems) to more effectively support

FHA’s business processes; (2) sufficiently monitor

its single family property inventory; and (3) continue to improve early warning and loss prevention

for single family insured mortgages. This third

reported condition was expanded in FY 2002 to

include the need to place more emphasis on monitoring lender underwriting. A weakness reported

since the FY 1992 financial statement audit relates

to the need for FHA to enhance the design and

operation of information systems’ general and

application level security controls. A weakness first

reported in the FY 1998 financial statement audit

relates to the need to improve controls over budget

execution and funds control. A number of previously reported problems have been satisfactorily

resolved over the years. FHA’s latest action plan

continues to report progress toward resolving these

remaining long-standing issues, with final actions

targeted over the next one to three years. The FY

2003 financial statement audit will assess FHA’s

accomplishments in correcting these conditions.

Empowerment Zone Program, Cities

of Chicago, Philadelphia, and

Atlanta

Issued September 28, 1998, September 30,

1998, and October 15, 1998. Audits of the Cities of

Chicago, IL, Philadelphia, PA, and Atlanta, GA,

found that the Cities used empowerment zone funds

inappropriately. The questioned amounts totaled

over $2 million for the three Cities. The unique

Chapter 9 — Audit Resolution 73
nature of the Empowerment Zone Program, authorized by the Omnibus Budget Reconciliation Act of

1993, provided HUD the authority to oversee the

program, but provided funding through tax credits

and Social Services Block Grant funds from the

Department of Health and Human Services (HHS).

HHS has responsibility for resolving questions

concerning the permissible use of zone funds.

In 1999, HUD management agreed with our

findings and promised to have the Cities repay, by

June 2000, program funds spent inappropriately.

HUD, however, did not take corrective actions

timely. In February 2000, HUD’s Community

Planning and Development (CPD) Comptroller

started taking corrective actions and planned to have

the outstanding recommendations closed by July

2001. In July 2001, the CPD Comptroller requested

that HHS decide whether the Cities’ use of zone

funds to provide services to non-zone residents was

an eligible use of funds. If HHS decides that the

Cities used zone funds improperly, HUD plans to

execute a repayment agreement with the Cities

requiring repayment within two to three years. At

present, HHS has not responded to the

Comptroller’s request.

On September 10, 2002, the Deputy Assistant

Secretary for Operations, CPD, sent a letter to HHS’

Director of Community Services outlining the

outstanding issues relating to OIG Empowerment

Zone audit reports. CPD requested HHS’ decision on

the eligibility of the questioned costs for which the

OIG recommended repayment. The letter also

included HUD’s suggestions for resolving the

outstanding issues. At present, HHS has not responded to HUD’s letter. Therefore, on March 20,

2003, HUD’s Assistant Secretary for CPD sent a

letter to HHS’ Assistant Secretary for Children and

Families requesting an immediate response to HUD’s

September 2002 letter. HUD has no control over

HHS’ actions, but will continue to pursue these

issues until they are resolved. (Report Nos. 1998-

CH-1005, 1998-CH-1006, and 1999-CH-1002)

City of Lynwood, CA, Community

Development Block Grant Program

Issued August 19, 1999. The City of Lynwood

could not demonstrate its compliance with Community Development Block Grant (CDBG) requirements

for activities administered by subgrantees. The

subgrantees operated a community-based program

which provided business training and incubator

space for the benefit of low- and moderate-income

residents. The training component included businesses outside of the grantee’s City limits. However,

the City could not provide documentation to support the number of jobs for low- and moderateincome persons created or retained, or document

future benefits accruing to its residents. We recommended that HUD require the grantee to submit

documentation of job creation and retention activities or return any unsupported amounts to its letter

of credit, from non-federal funds. In December

1999, the Los Angeles Office of CPD agreed with

our recommendations and agreed to complete

actions by October 31, 2000.

In November 2000, the Los Angeles Office of

CPD requested revised management decisions,

because the City’s program benefited low- and

moderate-income persons. Therefore, it would not

be necessary for the City to repay the program. We

disagreed with the Los Angeles Office of CPD and

referred the matter to the Acting General Deputy

Assistant Secretary for CPD for decision in February

2001. In July 2001, the CPD Comptroller agreed

with OIG’s position and the Los Angeles Office of

CPD advised the City to reimburse about $732,000

to its line of credit. A demand for repayment was

sent to the City in February 2002. During the last

year, CPD and the Office of General Counsel

requested additional information from the City. The

City did not provide any new information. In

February 2003, the Acting General Deputy Assistant Secretary for CPD referred this matter to HUD’s

Departmental Enforcement Center for appropriate

enforcement action. (Report No. 1999-SF-1003)

Nationwide Audit of the Officer/

Teacher Next Door Programs

Issued June 29, 2001. A nationwide audit of

HUD’s Officer Next Door and Teacher Next Door

(OND/TND) Property Disposition Programs found

that HUD had not established adequate management

controls over the programs. The audit found that:

(1) 23 of 108 homebuyers in our sample, who

Chapter 9 — Audit Resolution 74
received program discounts of nearly $735,000,

abused the OND Program by not fulfilling three-year

occupancy requirements; (2) achievement of the

OND and TND Programs’ goals and objectives were

not assessed; and (3) homes were sold outside of

revitalization areas and were therefore improperly

discounted by about $1.2 million.

Management agreed to improve controls and

guidance over the programs in January 2002.

Actions to be taken included establishing a monitoring plan to detect and deter program abuse and

ensure occupancy requirements are met, redefining

the occupancy starting date, assessing whether

program achievements justify the high cost of

discounted property sales, and establishing minimum standards for designating revitalization areas.

All actions were to be completed by December

2002; however, completion of action has been

delayed. Actions to improve monitoring of the

program have been delayed because HUD has

decided to implement an automated system to

monitor the program instead of issuing written

procedures. We have yet to see the details of these

plans. Accordingly, it is unknown whether the

revised action will satisfy the recommendations

contained in our report. In March 2003, the OIG

formally requested the Office of Housing to provide

the details of their revised management decisions to

revise the actions that they are taking to address the

reported recommendations. HUD’s plan to complete

an assessment of whether program goals and

objectives are being met has been delayed until

December 31, 2003, because of scheduling conflicts

and other priorities. The remaining recommendations required issuing guidance to improve procedures for designating revitalization areas and better

defining the starting date for the required three-year

occupancy period. HUD now plans to issue the

guidance by April 2003 and December 2003,

respectively, but did not inform OIG why this delay

occurred. (Report No. 2001-AT-0001)

Federal Financial Management

Improvement Act of 1996

(FFMIA)

FFMIA requires that HUD implement a

remediation plan that will bring financial systems

into compliance with federal financial system

requirements within three years or obtain Office of

Management and Budget (OMB) concurrence if

more time is needed. FFMIA requires us to report,

in our Semiannual Reports to the Congress, instances and reasons when an agency has not met the

intermediate target dates established in the

remediation plan required by FFMIA. In April 1998,

HUD determined that 38 of its systems were not in

substantial compliance with FFMIA. At the end of

FY 2002, the Department continued to report that

17 systems were not in substantial compliance with

FFMIA. Our audit of HUD’s FY 2002 financial

statements cites additional financial management

system weaknesses, which we reported as reasons

for the Department’s FFMIA noncompliance. These

include noncompliance with: (1) federal financial

management systems requirements; (2) federal

accounting standards; and (3) the standard general

ledger at the transaction level. HUD has made

progress by implementing a new FHA automated

general ledger in October 2002. The FHA Subsidiary General Ledger Project has been designed to

bring HUD into substantial compliance with FFMIA

and is to be completed by December 2006.

Chapter 9 — Audit Resolution 75
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Chapter 9 — Audit Resolution 76
Appendices
APPENDIX 1 - AUDIT REPORTS ISSUED

Internal Reports

Audit Reports

FOR THE PERIOD

OCTOBER 1, 2002 THROUGH MARCH 31, 2003

2003-DE-0001

2003-FO-0002

2003-AO-0001

2003-AT-0001

2003-FO-0001

2003-FO-0003

2003-FO-0004

2003-BO-0802

2003-KC-0801

2003-BO-0801

2003-FW-0801

2003-SE-0801

Housing

Miscellaneous

Single Family

Multifamily

HUD Office of Multifamily Housing Assistance Restructuring’s (OMHAR) Oversight of the Section 514 Program

Activities, 03/31/03.

Federal Housing Administration, Audit of Fiscal Years 2002 and 2001 Financial Statements, 1/21/03.

Financial Activities of the Commission on Affordable Housing and Health Facility Needs for Seniors in the

21st Century, 10/11/02.

Ginnie Mae, Review of Internal Controls, Washington, DC, 3/05/03.

HUD’s Energy Management and Conservation Program, 12/9/02.

Ginnie Mae’s Financial Statements for Fiscal Years 2002 and 2001, 1/31/03.

HUD’s Financial Statements for Fiscal Years 2002 and 2001, 1/31/03. Funds Put To Better Use: $1,100,000,000.

Audit Memoranda

New England Region’s Officer Next Door and Teacher Next Door Property Disposition Programs, 2/12/03.

Inappropriate Home Ownership Center Instructions, Denver, CO, 3/18/03. Funds Put to Better Use: $1,807,534.

Office of Housing’s Use of the Financial Assessment Subsystem, 12/20/02.

HUD Houston Multifamily’s Oversight of Wood Hollow Place Apartments, Texas City, TX, 1/31/03.

Housing Authority of the City of Bremerton, WA, Performance as Contract Administrator for HUD’s Section 8 ProjectBased Assistance Program for the State of Washington, 3/11/03.

These reports are available on the HUD OIG website at www.hud.gov/offices/oig/reports/auditreports.cfm 1
APPENDIX 1

Internal Reports - continued

Audit Memoranda - continued

External Reports

Audit Reports

2003-AO-0801

2003-AO-0802

2003-DP-0801

2003-DP–0802

2003-FW-0802

2003-PH-0801

2003-DE-1004

2003-KC-1001

2003-KC-1004

2003-KC-1005

2003-NY-1002

2003-AO-1001

2003-AO-1002

2003-BO-1001

Single Family

Miscellaneous

Controls over Third Party Access to, and Disclosure and Use of Social Security Numbers, 12/13/02.

HUD’s Implementation of the Federal Activities Inventory Reform Act, 12/20/02.

Annual Evaluation of HUD’s Information Security Program, 10/30/02.

General Information Technology Controls at Affiliated Computer Services – Governmental Services, Inc. (ACS),

12/3/02.

HUD’s Houston, TX Office of Administration, Time and Attendance, 2/5/03.

HUD’s Progress in Implementing the Resource Estimation and Allocation Process (REAP) and Total Estimation and

Allocation Mechanism (TEAM) Components of Its Human Resource Management System, 12/3/02.

Pryme Investment and Mortgage Brokers, Inc., Murray, UT, Non-Supervised Loan Correspondent, 3/27/03.

Cendant Mortgage Corporation, Mt. Laurel, NJ, Non-Supervised Direct Endorsement Lender, 10/2/02.

Funds Put To Better Use: $101,216,328.

First Horizon Home Loans, Irving, TX, Non-Supervised Direct Endorsement Lender, 1/17/03.

Funds Put To Better Use: $46,371,676.

Choice Enterprises, Inc., Denver, CO, 3/10/03. Funds Put To Better Use: $6,567,024.

Chapel Mortgage Corporation, Rancocas, NJ, Non-Supervised Mortgagee, 3/11/03.

Funds Put To Better Use: $2,937,120.

Multifamily

National Center of Tenants Ownership, Washington, DC, Intermediary Technical Assistance Grants, 12/3/02. Questioned

Costs: $88,946; Unsupported Costs: $7,953.

National Housing Trust, Washington, DC, Outreach and Training Assistance Grants, 12/9/02.

Questioned Costs: $36,711.

Farmington Health Care Center, Farmington, CT, 3/7/03. Questioned Costs: $341,682.

These reports are available on the HUD OIG website at www.hud.gov/offices/oig/reports/auditreports.cfm 2
External Reports - continued

APPENDIX 1

Multifamily Audit Reports - continued

2003-BO-1002

2003-CH-1003

2003-CH-1004

2003-CH-1005

2003-DE-1003

2003-KC-1002

2003-NY-1001

2003-SE-1001

2003-SE-1002

People to End Homelessness, Providence, RI, Outreach and Training Assistance Grants, 3/31/03.

Questioned Costs: $16,499; Unsupported Costs: $4,041.

Tenants United for Housing, Inc., Chicago, IL, Outreach and Training Assistance Grants, 10/29/02.

Questioned Costs: $6,900.

Indiana Coalition on Housing and Homeless Issues, Indianapolis, IN, Outreach and Training Assistance Grant, 10/31/02.

Questioned Costs: $35,783; Unsupported Costs: $14,113.

Jewish Community Federation of Cleveland, OH, Special Purpose Grant, 11/15/02. Questioned Costs: $44,720;

Unsupported Costs: $44,720.

Audit of the June 1998 Memorandum of Understanding Between HUD’s Office of Multifamily Housing and the

Corporation for National Service, Washington, DC, 10/28/02. Questioned Costs: $57,916.

Housing Comes First, St. Louis, MO, Outreach and Training Assistance Grant, 12/17/02.

Questioned Costs: $336,108; Unsupported Costs: $336,108; Funds Put To Better Use: $363,579.

Marion Scott Real Estate, Inc., Management Agent, New York, NY, 2/12/03. Questioned Costs: $902,425;

Unsupported Costs: $721,998.

Community Alliance of Tenants, Portland, OR, Outreach and Training Assistance Grant and Intermediary Technical

Assistance Grant, 10/31/02. Questioned Costs: $52,244; Unsupported Costs: $45,751.

Tenants Union, Seattle, WA, Outreach and Training Assistance Grant and Intermediary Technical Assistance Grant,

12/2/02. Questioned Costs: $164,198; Unsupported Costs: $96,430.

PIH

2003-AT-1001

2003-AT-1002

2003-AT-1003

2003-CH-1001

2003-CH-1010

2003-CH-1011

Northwestern Regional Housing Authority, Boone, NC, Public Housing Programs, 1/9/03.

Questioned Costs: $4,372,282.

Procurement of Management Agents, Puerto Rico Public Housing Administration, San Juan, PR, 3/21/03.

Questioned Costs: $2,007,019; Funds Put to Better Use: $10,824,363.

Fairfield, AL Housing Authority, Housing Programs, 3/24/03. Questioned Costs: $560,251;

Unsupported Costs: $12,865.

Housing Authority of Champaign County, Champaign, IL, 10/24/02. Questioned Costs: $27,360;

Unsupported Costs: $3,761.

Coshocton, OH Metropolitan Housing Authority, Section 8 Housing Program, 3/21/03.

Questioned Costs: $32,341.

Coshocton, OH Metropolitan Housing Authority, Comprehensive Improvement Assistance Program, 3/24/03.

Questioned Costs: $323,632.

These reports are available on the HUD OIG website at www.hud.gov/offices/oig/reports/auditreports.cfm 3
APPENDIX 1

External Reports - continued

PIH Audit Reports - continued

2003-CH-1012

2003-CH-1013

2003-CH-1014

2003-DE-1001

2003-DE-1002

2003-FW-1001

2003-FW-1002

2003-PH-1002

Coshocton, OH Metropolitan Housing Authority, Tenant Opportunities Program, 3/25/03.

Questioned Costs: $46,623; Unsupported Costs: $41,827.

Coshocton, OH Metropolitan Housing Authority, Public Housing Drug Elimination Program, 3/26/03.

Questioned Costs: $21,044.

Coshocton, OH Metropolitan Housing Authority, Public Housing Program, 3/28/03.

Questioned Costs: $242,138; Unsupported Costs: $165,972.

Sicangu Wicoti Awanyakape Corporation, Rosebud, SD, HUD Indian Housing Block Grant Program, 10/8/02.

Questioned Costs: $144,410.

Delta, CO Housing Authority, Low-Rent Housing and Section 8 Housing Assistance Payments, 10/7/02.

Questioned Costs: $101,233.

Housing Authority of Morgan City, LA, Low-Rent Program, 2/21/03, Questioned Costs: $58,510;

Unsupported Costs: $23,035.

Caddo Nation of Oklahoma, Binger, OK, Indian Housing Block Grant, 3/7/03. Questioned Costs: $4,795;

Unsupported Costs: $3,795.

Philadelphia, PA Housing Authority, Contracting and Purchasing Activity, 1/27/03.

 Questioned Costs: $716,970; Unsupported Costs: $250,892.

CPD

2003-CH-1002

2003-CH-1006

2003-CH-1007

2003-CH-1008

2003-CH-1009

2003-FW-1003

2003-KC-1003

2003-NY-1003

New Covenant Housing Corporation, Inc., Milwaukee, WI, CDBG and HOME Programs, 10/29/02.

Questioned Costs: $18,700.

Cities of Huntington, WV and Ironton, OH, Empowerment Zones Program, 12/31/02. Questioned Costs: $160,000.

City of Minneapolis, MN, Empowerment Zone Program, 1/3/03. Questioned Costs: $9,705.

City of Cleveland Heights, OH, Housing Preservation Program, 1/23/03. Questioned Costs: $504,717;

Unsupported Costs: $119,793.

City of Cincinnati, OH, Empowerment Zone Program, 1/28/03. Questioned Costs: $326,710;

Unsupported Costs: $311,346.

City of Dallas, TX, Mortgage Assistance Program, HOME Investment Partnerships, 3/17/03.

Questioned Costs: $67,889; Unsupported Costs: $34,890.

St. Louis, MO/East St. Louis, IL, Empowerment Zones, 12/26/02.

Empire State Development Corporation, New York, NY, CDBG Disaster Assistance Funds, 3/25/03.

Questioned Costs: $354,691.

These reports are available on the HUD OIG website at www.hud.gov/offices/oig/reports/auditreports.cfm 4
APPENDIX 1

External Reports - continued

CPD

Audit Memoranda

2003-PH-1001 Joint Empowerment Zone Program of the Cities of Norfolk and Portsmouth, VA, 12/20/02.

Questioned Costs: $332,154; Unsupported Costs: $74,041.

Multifamily

2003-FW-1801

2003-FW-1803

2003-KC-1801

2003-KC-1803

2003-PH-1801

Wood Hollow Place Apartments, Texas City, TX, 11/18/02. Questioned Costs: $266,057;

Unsupported Costs: $7,500.

Coffman Investment Company, Inc., Little Rock, AR, Multifamily Management Agent, 1/10/03.

University Forest Nursing Care Center, University City, MO, 11/14/02. Funds Put To Better Use: $4,784,000.

Richmond Terrace Retirement Center, Richmond Heights, MO, 3/24/03. Funds Put to Better Use: $50,063.

Royal Arms Apartments, Front Royal, VA, Management Improvement Operating Funds, 03/27/03.

PIH

2003-AT-1801

2003-AT-1802

2003-AT-1803

2003-DE-1801

2003-KC-1802

South Carolina Regional Housing Authority No. 3, Barnwell, SC, 10/9/02. Questioned Costs: $1,362,268;

Unsupported Costs: $1,118,925.

Housing Authority of the City of Key West, FL, 1/16/03.

Fort Pierce, FL Housing Authority, 1/31/03. Questioned Costs: $10,664; Unsupported Costs: $10,664.

Housing Authority of the City and County of Denver, CO, Section 8 Housing Choice Voucher Program, 2/11/03.

Housing Authority of Independence, MO, Section 8 Review, 12/26/02.

CPD

2003-FW-1802

2003-SE-1801

Sale of Hargest College, City of Houston, TX, Community Development Block Grant (CDBG) Program, 1/9/03.

Community Resource Center, Bremerton, WA, HOME Program and CDBG Funds, 1/31/03.

Audit Reports - continued

These reports are available on the HUD OIG website at www.hud.gov/offices/oig/reports/auditreports.cfm 5
APPENDIX 2

TABLE A

AUDIT REPORTS ISSUED PRIOR TO START OF PERIOD WITH

NO MANAGEMENT DECISION AT 03/31/03

REPORT NUMBER & TITLE REASON FOR LACK OF MANAGEMENT DECISION

ISSUE DATE/

TARGET FOR

MANAGEMENT

 DECISION

Nothing to report.
APPENDIX 2

TABLE B

SIGNIFICANT AUDIT REPORTS DESCRIBED IN PREVIOUS SEMIANNUAL REPORTS

WHERE FINAL ACTION HAD NOT BEEN COMPLETED AS OF 03/31/03

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

1995CH1009

1997FW1003

1997CH1010

1998AT1001

1998CH1005

1998CH1006

1999NY1004

1999FO0003

1999PH0801

1999SF1003

1999CH1803

1999NY1007

1999DE0001

2000DP0002

2000NY1002

Alliance Mortgage Corporation, Single Family Mortgage Insurance Program, Villa Park, IL

Medlock Southwest Management Corporation, Multifamily Management Agent, Lubbock, TX

Major Mortgage Corporation, Section 203(k) Rehabilitation Home Mortgage Ins. Program,

 Livonia, MI

Housing Authority of the City of Alma, GA

City of Atlanta, GA Empowerment Zone Program

City of Philadelphia, PA Empowerment Zone Program

Homestead Financial Services, Inc., Non-supervised Mortgagee, Syracuse, NY

U.S. Department of HUD Fiscal Year 1998 Financial Statements

Chester, PA Housing Authority Receivership

City of Lynwood, CA, CDBG and HOME Programs

Fairfield County, Community Housing Improvement Program, Lancaster, OH

Alliance Mortgage Banking Corporation, Non-supervised Mortgagee, Rochester, NY

Nationwide Review of HUD’s Loss Mitigation Program

Initial Development Efforts of the Departmental Grants Management System

Target V Phase I Development Associates, Multifamily Housing Program, Bronx, NY

08/08/95

08/26/97

09/17/97

01/20/98

09/28/98

09/30/98

02/17/99

03/29/99

06/01/99

08/19/99

09/15/99

09/27/99

09/30/99

11/04/99

12/08/99

11/30/95

01/16/98

01/06/98

05/04/98

09/20/99

09/20/99

06/25/99

09/30/99

12/02/99

12/16/99

01/13/00

02/16/00

03/31/00

09/19/01

05/08/00

Note 1

Note 1

Note 1

09/30/03

Note 1

Note 1

Note 1

Note 2

7/31/03

Note 1

Note 1

Note 1

06/30/03

10/31/04

Note 1

1
2

APPENDIX 2, TABLE B

Report

Number Report Title IssueDate

Decision

Date

Final

Action

2000FO0002

2000FO0003

2000AT1003

2000AT1005

2000SF0001

2000CH1002

2000SF1001

2000CH1003

2000NY1005

2000AT0001

2000DP0804

2000KC0002

2000SE0003

2001AT1001

2001CH1001

2001NY1001

2001SF1802

Federal Housing Administration, Audit of Fiscal Year 1999 Financial Statements

Attempt to Audit the Fiscal Year 1999 HUD Financial Statements

Puerto Rico Public Housing Administration, Procurement Management

Benson, NC Housing Authority, Public Housing Programs

Single Family Production

Cuyahoga Metropolitan Housing Authority, Title V Account, Cleveland, OH

San Francisco, CA Housing Authority, Low-Income and Section 8 Programs

State of Ohio, Community Housing Improvement Program, Columbus, OH

Poughkeepsie, NY Housing Authority, Low-Rent Housing Program

Single Family Property Disposition Program

Department’s September 2000 Purchase of COTS Financial Management System

Housing Subsidy Payments

Nationwide Audit, Use of and Disposition of Residual Receipts

Housing Authority of the City of Miami Beach, FL

City of Ironton, OH Community Development Block Grant Program

Bay Towers, Far Rockaway, NY, Multifamily Mortgage Operations

HUD Earthquake Loan Program Funds, Woodland Hills, CA

02/29/00

03/01/00

03/06/00

03/27/00

03/30/00

03/31/00

03/31/00

06/15/00

09/25/00

09/28/00

09/29/00

09/29/00

09/29/00

10/20/00

11/16/00

12/07/00

02/08/01

08/09/00

09/29/00

09/28/01

09/13/00

01/19/01

09/29/00

09/01/00

10/18/00

02/13/01

02/20/01

03/30/01

02/21/01

08/15/01

02/13/01

03/21/01

04/20/01

06/14/01

12/31/05

09/30/03

10/31/07

8/21/03

Note 2

Note 2

Note 1

Note 1

Note 1

Note 2

Note 1

09/30/05

12/30/03

Note 1

Note 1

Note 2

Note 2
3

APPENDIX 2, TABLE B

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

2001DP0801

2001FO0002

2001FO0003

2001CH1005

2001SF1803

2001FO0004

2001PH1003

2001AT1005

2001NY1002

2001PH1005

2001SF1804

2001FW0001

2001CH1007

2001PH0803

2001AT0001

2001FW1005

2001AO0003

Review of the Department’s Internet Privacy Status

FHA Audit of Fiscal Year 2000 Financial Statements

Audit of HUD’s Fiscal Year 2000 Financial Statements

London, OH Metropolitan Housing Authority, Safeguarding of Monetary Assets and Inventory

Supportive Housing Program Grant, Los Angeles, CA

HUD’s Internal Controls over Fiscal Year 1999 Annual Performance Data

Housing Authority of Baltimore City, MD, Section 8 Certificate and Voucher Programs

San Juan, PR Public Housing Administration HOPE VI, Comprehensive Grant, and Economic

Development & Support Services Programs

Belmax Management Corporation (Management Agent), Brooklyn, NY

Housing Authority of the City of Pittsburgh, PA

Supportive Housing Program Grant, County of Orange, Santa Ana, CA

New Orleans, LA Housing Authority

Detroit, MI Housing Commission, HOPE VI Program

Philadelphia, PA Home Ownership Center, Single Family Disposition Activities

Nationwide Audit on the Officer/Teacher Next Door Programs

Harmony House, Inc., Harrison, AR, Supportive Housing Program

Drug Elimination Funds Used for Creative Wellness Program

02/21/01

03/01/01

03/01/01

03/22/01

03/23/01

03/28/01

03/28/01

03/30/01

04/17/01

05/03/01

05/09/01

05/11/01

05/15/01

06/14/01

06/29/01

08/27/01

08/29/01

04/23/01

07/24/01

07/18/01

07/18/01

07/24/01

07/24/01

09/10/01

09/28/01

07/13/01

02/06/02

09/26/01

11/02/01

09/13/01

06/14/01

01/29/02

12/21/01

01/22/02

Note 1

12/21/06

09/30/03

03/17/04

Note 2

01/31/04

Note 2

Note 2

Note 2

06/06/03

Note 2

10/15/03

03/06/06

Note 2

12/31/03

Note 2

06/30/03
APPENDIX 2, TABLE B

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

2001FW1809

2001DE1003

2001DP0003

2001KC1005

2002SF0001

2002NY1801

2002CH1801

2002FO0002

2002NY0001

2002FO0003

2002DE0001

2002PH1001

2002AT1807

2002NY1001

2002DE0801

2002CH1001

Jefferson Parish, LA Housing Authority, Limited Procurement Review

Foster and Associates, Whitefish, MT, Review of Management Activities for Projects Clark

Fork Manor and Whitefish Manor

Real Estate Management System

First Community Resources, Inc., St. Louis, MO, Section 203(b) Home Mortgage Insurance

Program

Nonprofit Participation, HUD Single Family Program

City of Utica, NY, CDBG, HOME and Section 8 Existing Housing Programs

City of Evansville, IN Housing Authority

Federal Housing Administration, Audit of Fiscal Years 2000 and 2001 Financial Statements

Nationwide Audit-Asset Control Area Program, Single Family Housing

Audit of HUD’s Fiscal Years 2000 and 2001 Financial Statements

Nationwide Review of HUD’s Loss Mitigation Program (Follow-up)

City of Williamsport, PA, CDBG and HOME Investment Partnership Programs

Jardines de Valencia Housing Cooperative, Rio Piedras, PR

City of Ithaca, NY, Community Planning and Development Programs

Review of Alleged Violations of the Anti-Deficiency Act and the HUD Reform Act by the Office

of Multifamily Housing Assistance Restructuring

Ypsilanti, MI Housing Commission, Safeguarding Monetary Assets and Inventory

09/25/01

09/28/01

09/28/01

09/28/01

11/05/01

12/03/01

01/29/02

02/22/02

02/25/02

02/27/02

02/28/02

03/19/02

03/20/02

03/21/02

03/22/02

03/26/02

11/07/01

01/16/02

01/30/02

01/17/02

08/30/02

03/27/02

05/18/02

05/30/02

06/17/02

08/16/02

06/28/02

09/04/02

07/15/02

07/23/02

09/30/02

07/24/02

Note 2

09/30/03

Note 2

03/16/04

06/07/03

04/03/03

05/15/05

12/31/06

06/17/03

01/30/04

06/30/03

Note 2

07/10/03

07/23/03

Note 2

12/31/03

4
APPENDIX 2, TABLE B

Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

2002PH1803

2002BO1001

2002CH1002

2002NY1002

2002BO1003

2002DP0801

2002NY1802

2002PH0001

2002AT1001

2002PH0002

2002AT1002

2002AO0001

2002AT1003

2002KC0002

2002SF0801

2002SF1804

Philadelphia, PA Housing Authority, Limited Personnel Review

City of Worcester, MA, Community Development Block Grant Program

Alton, IL Housing Authority, Low-Income and Public Housing Drug Elimination Programs

Hudson County Division of Community Development, Jersey City, NJ, CPD Programs

Newport, RI Resident Council, Incorporated

HUD’s Multi-Year Information Technology Plan

CDBG Disaster Assistance Funds Administered by Empire State Development Corp.,

New York, NY

HUD’s Utilization of the Public Housing Assessment System

Magnolia Lane Apartments, Project Management Operations, Conway, SC

Single Family Sales to Owner-Occupant Purchasers

City of Tupelo, MS Housing Authority, Housing Programs Operations

Grants Management Center’s Operations

National Scholarship Service and Veteran’s Opportunity and Resource Center, Atlanta, GA,

Supportive Housing Program Grant

HUD’s Office of Housing Section 232 Nursing Home Program (Nationwide Survey)

HOME Investment Partnerships Program

HOME Investment Partnerships Program, City of Stockton, CA and San Joaquin County,

CA

03/26/02

03/27/02

03/29/02

04/15/02

04/30/02

05/01/02

05/22/02

05/23/02

06/05/02

06/10/02

07/03/02

07/12/02

07/25/02

07/31/02

07/31/02

07/31/02

07/25/02

08/29/02

08/02/02

08/09/02

09/16/02

10/31/02

08/08/02

09/20/02

09/24/02

09/30/02

10/31/02

11/18/02

10/21/02

11/22/02

12/06/02

12/06/02

04/30/03

07/01/05

12/31/03

04/30/03

01/15/08

06/30/03

05/01/03

04/30/03

08/29/03

Note 2

04/30/10

10/31/03

02/28/04

06/30/04

04/30/03

04/30/03

5
Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

APPENDIX 2, TABLE B

2002DE1004

2002SF1002

2002FW1002

2002KC1003

2002AT1808

2002NY1004

2002NY1005

2002DE1005

2002SE0001

2002SF1003

2002AT1004

2002SF1005

2002AT1005

2002DP0002

2002AT1006

Housing Advocacy Coalition, Colorado Springs, CO, Outreach and Training Assistance Grant

Oakland, CA Housing Authority, Rehabilitation of the 49th Street Housing Development

Houma, LA Housing Authority, Low-Rent Housing Program, Cash & Procurement Controls

Iowa Coalition for Housing and the Homeless, Des Moines, IA, Outreach and Technical Assistance Grant

Homeless and Housing Coalition of Kentucky, Inc., Frankfort, KY, Outreach and Technical

Assistance Grants

Ironbound Community Corporation, Newark, NJ, Outreach and Technical Assistance Grant

and Public Entity Grant

Legal Aid Society, New York, NY, Outreach and Technical Assistance Grants and Public Entity

Grant

Crossroads Urban Center, Salt Lake City, UT, Outreach and Training Assistance Grants

Follow-up on Down Payment Assistance Programs Operated by Private Nonprofit Entities

Los Angeles, CA Community Development Bank, Economic Development Initiative Grant

Ashley Crossings Apartment Homes, Largo, FL

Housing Rights Committee of San Francisco Tides Center, San Francisco, CA, Outreach and

Training Assistance Grants

North Carolina Low-Income Housing Coalition, Inc., Raleigh, NC, Outreach and Technical

Assistance Grant and Intermediary Technical Assistance Grants

Review of Departmental IT Security Plans

Ridgeview Manor Apartments, Hopkins, SC

08/26/02

09/17/02

09/18/02

09/19/02

09/20/02

09/23/02

09/23/02

09/25/02

09/25/02

09/25/02

09/26/02

09/26/02

09/27/02

09/27/02

09/30/02

03/31/03

02/06/02

01/16/03

03/31/03

03/31/03

03/31/03

03/31/03

03/31/03

09/25/02

01/27/03

09/26/02

03/31/03

03/31/03

09/27/02

11/19/02

12/31/03

05/23/03

11/30/03

12/31/03

12/31/03

12/31/03

12/31/03

12/31/03

06/30/03

09/30/03

10/31/03

12/31/03

12/31/03

09/30/03

11/01/03

6
Report

Number Report Title

Issue

Date

Decision

Date

Final

Action

APPENDIX 2, TABLE B

AUDITS EXCLUDED:

19 audits under repayment plans

14 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.

2002BO1004

2002BO1005

2002DE1002

2002FW1003

2002PH1002

2002PH1003

2002PH1004

2002PH1005

2002PH1006

2002PH1007

2002SF1004

2002SF1006

2002SF1007

Anti-Displacement Project, Springfield, MA, Outreach and Training Assistance Grant

Chelsea, MA Housing Authority

Affordable Housing and Homeless Alliance, Honolulu, HI, Outreach and Training Assistance

Grant and Intermediary Outreach and Technical Assistance Grants

New Mexico Public Interest Education Fund, Albuquerque, MN, Outreach and Training

Assistance Grants and Public Entity Grant

Virginia Poverty Law Center, Richmond, VA, Outreach and Training Assistance Grant

Delaware Housing Coalition, Dover, DE, Outreach and Training Assistance Grant and Intermediary Technical Assistance Grants

Tenants’ Action Group of Philadelphia, PA, Outreach and Training Assistance Grant

Philadelphia Regional Alliance of HUD Tenants, Philadelphia, PA, Outreach and Training

Assistance Grant and Intermediary Outreach and Technical Assistance Grant

Legal Aid Bureau, Inc., Baltimore, MD, Outreach and Training Assistance Grant

Legal Aid Bureau, Inc., Baltimore, MD, Outreach and Training Assistance Grant

Low-Income Housing Fund, Oakland, CA, Intermediary Technical Assistance Grants

Legal Aid Society of Honolulu, HI, Outreach and Training Assistance Grant

Southern Arizona People’s Law Center, Tucson, AZ, Outreach and Training Assistance Grant

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

09/30/02

03/31/03

12/17/02

03/31/03

03/31/03

03/31/03

03/31/03

03/31/03

03/31/03

03/31/03

03/31/03

03/31/03

03/31/03

03/31/03

12/31/03

12/01/03

12/31/03

12/31/03

12/31/03

12/31/03

12/31/03

12/31/03

12/31/03

12/31/03

12/31/03

12/31/03

12/31/03

7
APPENDIX 2

TABLE C

INSPECTOR GENERAL ISSUED REPORTS WITH

QUESTIONED AND UNSUPPORTED COSTS AT 03/31/03

(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 

30 $8,847 $6,545 

A2 For which litigation, legislation or investigation was pending at the commencement of the 

reporting period 

7 $28,956 $14,415 

A3 For which additional costs were added to reports in beginning inventory - $13 $5 

A4 For which costs were added to non-cost reports - $0 $0 

B1 Which were issued during the reporting period 37 $14,156 $3,451 

B2 Which were reopened during the reporting period 0 $0 $0 

Subtotals (A+B) 74 $51,972 $24,416 

C For which a management decision was made during the reporting period 481 $11,741 $7,376 

(1) Dollar value of disallowed costs: 

• Due HUD 

• Due Program Participants 

332

17 

$2,854 

$7,924 

$1,696 

$4,948 

(2) Dollar value of costs not disallowed 23 $963 $732 

D For which management decision had been made not to determine costs until completion of 

litigation, legislation, or investigation 

7 $29,178 $15,354 

E For which no management decision had been made by the end of the reporting period 19 

<63>4

$11,053 

<$11,053>4

$1,686 

<$1,686>4

 

1

 5 audit reports also contain recommendations with funds to be put to better use. 

2

 2 audit reports also contain recommendations with funds due program participants. 

3

 2 audit reports also contain 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 03/31/03

(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 3 $12,370 

A2 For which litigation, legislation or investigation was pending at the commencement of the reporting 

period 

4 $521,757 

A3 For which additional costs were added to reports in beginning inventory - $0 

A4 For which costs were added to non-cost reports - $0 

B1 Which were issued during the reporting period 10 $1,274,922 

Subtotals (A+B) 17 $1,809,049 

C For which a management decision was made during the reporting period 71 $119,280 

(1) Dollar value of recommendations that were agreed to by management: 

• Due HUD 

• Due Program Participants 

4 

2 

$98,674 

$6,866 

(2) Dollar value of recommendations that were not agreed to by management 22 $13,740 

D For which management decision had been made not to determine costs until completion of litigation, 

legislation, or investigation 

3 $521,211 

E For which no management decision had been made by the end of the reporting period 

7 

<17>3

$1,168,558 

<$1,168,558>3

 

1

 5 audit reports also contain recommendations with questioned costs. 

2

 1 audit report also contains recommendations with funds agreed to by management. 

3

 The figures in brackets represent data at the recommendation level as compare to the report level. See Explanations of Tables C and D. 
EXPLANATIONS OF TABLES C AND D

The Inspector General Act Amendments of 1988 require Inspectors General and agency heads to report cost data on management decisions and

final actions on audit reports. The current method of reporting at the “report” level rather than at the individual audit “recommendation” level results

in misleading reporting of cost data. Under the Act, an audit “report” does not have a management decision or final action until all questioned cost

items or other recommendations have a management decision or final action. Under these circumstances, the use of the “report” based rather than the

“recommendation” based method of reporting distorts the actual agency efforts to resolve and complete action on audit recommendations. For example, certain cost items or recommendations could have a management decision and repayment (final action) in a short period of time. Other cost

items or nonmonetary recommendation issues in the same audit report may be more complex, requiring a longer period of time for management’s

decision or final action. Although management may have taken timely action on all but one of many recommendations in an audit report, the current

“all or nothing” reporting format does not take recognition of their efforts.

The closing inventory for items with no management decision on Tables C and D (Line E) reflects figures at the report level as well as the

recommendation level.

APPENDIX 2
APPENDIX 3

PROFILE OF PERFORMANCE

for the period

October 1, 2002 through March 31, 2003

Audit and Investigation Results Audit Investigation Combined 

Recommendations That Funds Be Put to Better Use $1,274,921,687 $1,274,921,687 

Management Decisions on Audits with Recommendations That Funds Be Put to 

Better Use $119,280,372 $119,280,372 

Questioned Costs $14,169,087 $14,169,087 

Management Decisions on Audits with Questioned Costs $11,741,242 $11,741,242 

Indictments/Informations 260 260 

Convictions/Pleas/Pre-Trial Diversions 186 186 

Months in Prison 3,284 3,284 

Months of Probation 5,462 5,462 

Hours of Community Service 1,385 1,385 

Investigative Recoveries $65,214,234 $65,214,234 

Collections from Audits $7,283,1591 $7,283,1591

Administrative Sanctions 4 242 246 

Arrests 252 252 

Search Warrants 24 24 

Weapons Seized 9 9 

Value of Drugs Seized $10,020 $10,020 

Subpoenas Issued 4 245 249 

 

1

 Amount reduced by $181,589 since it is included in Investigative Recoveries due to a civil settlement negotiated by HUD, resulting from a joint audit and 

investigation effort.