U.S. Department of Housing and Urban Development

Office of Inspector General

Semiannual Report

to Congress

April 1, 2004, through September 30, 2004
Profile of Performance

For the Period

April 1, 2004, through September 30, 2004

Audit and Investigation Results Audit Investigation Combined FY2004

Recommendations That Funds Be Put to Better Use $498,144,712 $500,405,366 $2,367,760,848

Management Decisions on Audits with RecommendationsThat Funds Be Put to Better Use

$1,659,629,600 $1,659,629,600 $2,426,213,670

Questioned Costs $87,851,868 $87,851,868 $154,963,692

Management Decisions on Audits with Questioned Costs $80,524,272 $80,524,272 $120,321,080

Indictments/Informations 752 1,442 752

Convictions/Pleas/Pretrial Diversions 420 773 420

Months in Prison 5,804 11,316 5,804Months of Probation 14,144 25,981 14,144Hours of Community Service 11,075 14,521 11,075

Recoveries/Receivables $80,259,952 $380,486,439 $80,196,368

Funds Put to Better Use $125,408,750 $391,414,327 $125,408,750

Collections from Audits $9,595,399 $22,802,076 $9,595,399

Administrative Sanctions 769 1,242 5 764

Personnel Actions 16 55 16

Arrests 1,345 2,482 1,345

Search Warrants 35 74 35Weapons Seized 5 8 5Value of Drugs Seized $3,240 $10,697 $3,240Subpoenas Issued 299 658 282 17

Hotline

Civil Actions 6

$2,260,654

$63,584

6 35
Inspector General’s Message

It is with pride that I present the U.S. Department of

Housing and Urban Development Office of Inspector General

(HUD-OIG) Semiannual Report that outlines our activities for

the past half fiscal year beginning April 1, 2004.

The HUD-OIG is serving the American taxpayer by our

oversight of HUD program administration through our audits of

the Department’s financial statements and through internal

control reviews. Further, we serve the American taxpayer

through our investigations of white-collar crime and program

abuse. Employee misconduct is checked through our vigorous

efforts to investigate and resolve reported offenses. We continue

to assess information security, report on departmental compliance and accountability, and identify management and performance challenges.

During the past 6 months, we have seen the HUD-OIG’s “return on investment” (ROI) far exceed

our own initial goal. During the last half year, OIG audits and investigations returned over 33 times

more than we spent. I am very pleased by our increases, but we are highly motivated and capable of

achieving even greater results in the next reporting period.

Some of our accomplishments are highlighted in this report. We are continuing to address problems plaguing single-family housing. During the 6-month reporting period, audit reports related to the

Single Family Housing program area questioned millions of dollars in costs and made nearly half a

billion dollars in recommendations as to how funds could be put to better use. A key example of this

work is our audit of Wells Fargo Home Mortgage Company, a case that was widely reported in the

press. We found that this large nationwide mortgage company did not follow HUD requirements and

prudent lending practices. Our recommendations resulted in this company, the Department, and the

industry implementing more financially sound procedures.

Similarly, we have had outstanding results investigating single-family mortgage fraud, due in large

part to our collaboration with the Mortgage Bankers Association, the Appraisal Institute, and mortgage

underwriters associations. Our investigations of single-family activities have led our agents into wideranging initiatives on combating white-collar crime. During the past 6-month period, single-family

housing cases have been filed that uncovered property flipping, loan origination fraud, racketeering and

money laundering, identity theft, conspiracy, mail and wire fraud, and outright theft.

Further, the Department’s Rental Housing Integrity Improvement Program has been improved by

the collaboration of the Department with OIG and State and local law enforcement. Jointly we have

been successful in reducing Section 8 rental subsidy fraud. In an effort to identify tenants who have lied

about their family incomes, OIG has signed memoranda of understanding with housing authorities and

State and local law enforcement agencies aimed at sharing income databases. This income verification

effort has yielded enormous success, as demonstrated by this summer’s initiatives focusing on residents

who are not eligible.

Inspector General’s Message iii
Inspector General’s Message iv

OIG auditors continue to monitor the disaster assistance funds provided to the City of New York in

the wake of the 9-11 attacks. Specifically, we have audited the Lower Manhattan Development Corporation (LMDC) and found that it has generally disbursed the Disaster Assistance Funds as directed by the

Congress. We have noted, though, certain processing deficiencies in the Employment Training Assistance Program that need to be resolved to ensure LMDC’s administration of the funds are more efficient.

 The HUD-OIG has also been active in rooting out public corruption. East Cleveland Mayor

Emmanuel Onunwor was indicted on 22 counts of Federal Racketeering Influenced Corrupt Organizations Act (RICO) conspiracy, mail fraud, public corruption, witness tampering, and violations of tax

laws. HUD-OIG, along with the Federal Bureau of Investigation and the Internal Revenue Service

recently executed 13 Federal arrest warrants against a Massachusetts Executive Director, his family,

and associates, who stole from the Springfield Housing Authority. The violations included conspiracy to

commit RICO crimes, conspiracy to commit bribery, bribery, conspiracy to commit theft, extortion,

conspiracy to commit mail fraud, money laundering, and obstruction of justice.

In closing, I want to acknowledge the extraordinary efforts of our auditors, investigators, and

support personnel who form the core of the HUD-OIG. During the last half year, scores of our employees have been selected for awards and commendations by the President, the President’s Council on

Integrity and Efficiency, U.S. Attorneys’ Offices, the Department of Justice, elected officials, and

editorial boards, providing evidence of the superior work they have performed. I again want to thank

them for their dedication and service to the American taxpayers and their commitment to eliminate

waste, fraud, and abuse.

Thank you,

Kenneth M. Donohue

Inspector General
Information About the HUD Office of Inspector

General

Beginning with fiscal year (FY) 2004, the Office of Inspector General (OIG) instituted a return-oninvestment (ROI) computation as one method to measure its contribution to the Department’s mission.

This measure takes the total dollars of recommended Funds To Be Put to Better Use 1 and Questioned

Costs,2 together with Receivables and Recoveries3 from Investigations and Hotline, and divides that total

by OIG’s operatings costs, including salaries, for the period. The resulting ratio represents the potential

amounts that could be realized or better used per dollar of OIG expenditures either during current or

future periods. Many factors affect when and how much is actually returned so OIG uses recommended

amounts in our ROI calculation, rather than management decisions, to better relate results to the work

that was actually done during the period. Much of this period’s ROI results from the annual financial

audit finding regarding the need to deobligate more than $1.43 billion in HUD funds. The majority of

contributing factors to the ROI are the results from reviews of external parties who administer or

benefit from U.S. Department of Housing and Urban Development (HUD)-funded programs. HUD

refers many matters such as these to OIG for audit or investigation, as appropriate.

Our target ROI ratio for FY 2004 was set at 7 to 1. This means that for every dollar Congress

appropriated to OIG, we should uncover $7 that should be returned or put to better use. The budget for

FY 2004 was $100.3 million. The ROI in dollars computed on a 7 to1 ratio would be $700 million. We

are pleased to report that our FY 2004 ROI was 32.8 to 1 – far exceeding a goal of 7 to 1.

October 1, 2003 April 1, 2004

 - March 31, 2004 - September 30, 2004 FY 2004

 Return on Investment 51 to 1 16.2 to 1 32.8 to 1

1

 Funds To Be Put to Better Use is an item required by Congress and is defined in the IG Act as “a recommendation by the Office that

funds could be used more efficiently if management of an establishment took actions to implement and complete the recommendation,

including (1) reductions in outlays; (2) deobligations of funds from programs or operations; (3) withdrawal of interest subsidy costs on

loans or loan guarantees, insurance, or bonds; (4) costs not incurred by implementing recommended improvements related to the

operations of the establishment, a contractor, or grantee; (5) avoidance of unnecessary expenditures noted in preaward reviews of

contractor grant agreements; or (6) any other savings which are specifically identified.”

2

 Questioned Costs are “a cost that is questioned by the Office because of (1) an alleged violation or provision of law, regulation, contract,

grant, or cooperative agreement, or other agreement or document governing the expenditure of funds; (2) a finding that at the time of the

audit, such cost is not supported by adequate documentation; or (3) a finding that the expenditure of funds for the intended purpose is

unnecessary or unreasonable.”

3

 Receivables and Recoveries are based on the total dollar value of (1) criminal cases—the amount of restitution, criminal fines, and/or

special assessments based on a criminal judgment or established through a pretrial diversion agreement; (2) civil cases—the amount of

damages, penalties, and/or forfeitures resulting from judgments issued by any court (Federal, State, local, military, or foreign government) in favor of the U.S. Government or the amount of funds to be repaid to the U.S. Government based on any negotiated settlements

by a prosecuting authority or the amount of any assessments and/or penalties imposed, based on actions brought under the PCFRA, civil

money penalties, or other agency-specific civil litigation authority, or settlement agreements negotiated by the agency while proceeding

under any of these authorities; (3) Voluntary repayments—the amount of funds repaid on a voluntary basis or funds repaid based on an

agency’s administrative processes by a subject of an OIG investigation or the value of official property recovered by an OIG during an

investigation before prosecutive action is taken, any of which result from a case in which an OIG has an active investigative role; and

(4) Administrative Receivables and Recoveries based on Hotline referrals to HUD program staff.

Information About the HUD Office of Inspector General v
OIG Cost of Operations for FY 2004

$100.3 Million

OIG Results FY 2004

$3.29 Billion

Administration & Operations

$7,271,688 = 7%

Personnel Services

$72,147,364 = 72%

Centrally Managed/

Funded Services

$20,927,260 = 21%

Questioned Costs

$154,965,692 = 5%

Funds Put to Better Use

$2,759,175,174 = 83%

Receivables/Recoveries

$380,486,439 = 12%

OIG Charts vi
Audit Reports Issued by Program FY 2004

Monetary Benefits Identified in Millions of Dollars - Office of Audit FY 2004

1,600

1,400

1,200

1,000

800

600

400

200

0

$535.8

$28.6

$175.9 $82.0

$1,459.6

Single

Family

Multifamily PIH CPD Financial

Audit &

Other

24%

Single Family

18%

Multifamily

37%

Public & Indian

Housing

13%

Community

Planning &

Development

8%

Other

Monetary Benefits Identified by Program FY 2004

23%

Single Family

8%

Public & Indian

Housing

1%

Multifamily

4%

Community Planning

& Development

64%

Other

Audit Charts vii
Single Family

PIH

Multifamily

CPD

Other/GNMA

Investigation Recoveries by Program

Single Family

PIH

Multifamily

CPD

Other/GNMA

Investigation Funds Put to Better Use

Single Family

PIH

Multifamily

CPD

Other/GNMA

Investigation Cases Opened by Program

69.54

0 20 40 60 80 Millions

4.44

0.83

4.4

0.96

80.89

0 20 40 60 80 100 Millions

16.96

21.86

4.59

1.08

156

0 100 200 300 400

371

104

38

73

Investigation Charts viii
Acronyms List ix

Acronyms List

ACC Annual Contributions Contract

ARIGA Assistant Inspector General for Audit

ASAC Assistant Special Agent in Charge

ASSMCA Administrator of the Mental Health and Anti-Addiction Service Administration

CDBG Community Development Block Grant

CID Criminal Investigation Division

CPD Community Planning and Development

DCD Department of Community Development

DEC Departmental Enforcement Center

DOC Department of Commerce

DVA Department of Veteran Affairs

EA Executive Assistant

ED Executive Director

EDA Economic Development Agency

EDI Economic Development Initiative

EPA Environmental Protection Agency

FBI Federal Bureau of Investigation

FDIC Federal Deposit Insurance Corporation

FFMIA Federal Financial Management Improvement Act

FHA Federal Housing Administration

FY Fiscal Year

GNMA Government National Mortgage Association (aka Ginnie Mae)

HAP Housing Assistance Payments

HHS Department of Health and Human Services

HOME Home Investment Partnership

HOPE VI Housing Opportunities for People Everywhere

HOPWA Housing Opportunities for Persons with AIDS

HUD U.S. Department of Housing and Urban Development

IG Inspector General

IRS Internal Revenue Service

JFMIB Joint Financial Management Improvement Program

LLC Limited Liability Company
Acronyms List x

MAP Multifamily Accelerated Processing

NAHRO National Association of Housing and Redevelopment Officials

NAIHC National American Indian Housing Council

NOFA Notice of Funding Availability

NPO Nonprofit Organization

OCD Office of Community Development

OGC Office of General Counsel

OIG Office of Inspector General

OMB Office of Management and Budget

OND Officer Next Door

PBA Public Buildings Authority

PHA Public Housing Authority

PHADA Public Housing Authorities Directors Association

PIC Public and Indian Housing Information Center

PIH Office of Public and Indian Housing

REO Real Estate Owned

RESPA Real Estate Settlement and Procedures Act

RICO Racketeering Influenced Corrupt Organizations

RIGA Regional Inspector General for Audit

SA Special Agent

SAC Special Agent in Charge

SBA Small Business Administration

SFA Senior Forensic Auditor

TND Teacher Next Door

UCOWF United Council on Welfare Fraud

UDAG Urban Development Action Grant

WtW Welfare to Work
Table of Contents

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

The HUD Office of Inspector General........................................................................2

Major Issues Facing HUD............................................................................2

Chapter 2 - HUD’s Single Family Housing Programs.........................................................9

Audits.........................................................................................................10

Investigations................................................................................................19

Chapter 3 - HUD’s Public and Indian Housing Programs...................................................41

Audits.........................................................................................................42

Investigations................................................................................................53

Chapter 4 - HUD’s Multifamily Housing Programs...............................................................63

Audits.........................................................................................................64

Investigations..............................................................................................69

Chapter 5 - HUD’s Community Planning and Development Programs........................................71

Audits.........................................................................................................72

Investigations..............................................................................................78

Chapter 6 - Other Significant Audits and Investigations/OIG Hotline........................................87

Audits.........................................................................................................88

Investigations................................................................................................90

OIG Hotline......................................................................................................91

Chapter 7 - Outreach Efforts..........................................................................................93

Chapter 8 - Review of Policy Directives..............................................................................103

Notices of Funding Availability...............................................................................104

Proposed Rules.................................................................................................104

Mortgagee Letter...............................................................................................107

Notices......................................................................................................108

Chapter 9 - Audit Resolution.........................................................................................109

Delayed Actions................................................................................................110

Federal Financial Management Improvement Act of 1996...............................................111

Appendix 1 - Audit Reports Issued...................................................................................113

Appendix 2................................................................................................................119

Table A - Audit Reports Issued Prior to Start Period with No Management Decision

 at 09/30/2004 .....................................................................................120

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

 Action Had Not Been Completed as of 09/30/2004............................................121

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

 at 09/30/2004.......................................................................................131

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

 Use at 09/30/2004.............................................................................132

Table of Contents xi
Reporting Requirements xii

Reporting Requirements

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

the Inspector General Act of 1988, are listed below:

Source/Requirement Pages

Section 4(a)(2)-review of existing and proposed legislation and regulations. 103-108

Section 5(a)(1)-description of significant problems, abuses, and deficiencies 1-92, 109-112

relating to the administration of programs and operations of the Department.

Section 5(a)(2)-description of recommendations for corrective action with 9-92

respect to significant problems, abuses, and deficiencies.

Section 5(a)(3)-identification of each significant recommendation described Appendix 2, Table B

in previous Semiannual Report on which corrective action has not been completed.

Section 5(a)(4)-summary of matters referred to prosecutive authorities and 9-92

the prosecutions and convictions that have resulted.

Section 5(a)(5)-summary of reports made on instances where information or No Instances

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 Appendix 1

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. 9-92

Section 5(a)(8)-statistical tables showing the total number of audit reports and Appendix 2, Table C

the total dollar value of questioned and unsupported costs.

Section 5(a)(9)-statistical tables showing the total number of audit reports Appendix 2, Table D

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 Appendix 2, Table A

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 No Instances

revised management decisions made during the reporting period.

Section 5(a)(12)-information concerning any significant management decision No Instances

with which the Inspector General is in disagreement.

Section 5(a)(13)-the information described under section 05(b) of the Federal 111-112

Financial Management Improvement Act of 1996.
Chapter 1: HUD’s Management and Performance Challenges
Chapter 1: HUD’s Management and Performance Challenges 2

The HUD Office of

Inspector General

The U.S. Department of Housing and

Urban Development (HUD) Inspector

General is one of the original 12 Inspectors General authorized under the Inspector General Act of 1978. Over the years,

we have forged a strong alliance with

HUD personnel in recommending ways to

improve departmental operations and in

prosecuting program abuses. We strive to

make a difference in HUD’s performance

and accountability. We are committed to

our statutory mission of detecting and

preventing fraud, waste, and abuse and

promoting the effectiveness and efficiency

of government operations. While organizationally we are located within the

Department, we operate independently

with separate budgetary authority. This

independence allows for clear and objective reporting to the Secretary and the

Congress. Our activities seek to

 Promote efficiency and effectiveness in programs and operations.

 Detect and deter fraud and abuse.

 Investigate allegations of misconduct by HUD employees.

 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 staff located in 10

regions and numerous field offices.

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 slightly below a half

trillion dollars. Ginnie Mae, through its

mortgage-backed securities program,

gives issuers access to capital markets

through the pooling of federally insured

loans.

While HUD may appear to be a

small agency, with about 9,100 staff

nationwide, numerous partners are relied

upon for the performance and integrity of

a large number of diverse programs.

Among these partners 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 HUDapproved lenders that originate and

service FHA-insured loans and hundreds

of Ginnie Mae mortgage-backed securities issuers that provide mortgage capital.

Achieving HUD’s mission continues

to be an ambitious challenge for its limited

staff, given the agency’s many distinct

programs. HUD’s management problems

have for years kept it on the General

Accounting Office’s (GAO) list of agencies with high-risk programs. HUD’s
Chapter 1: HUD’s Management and Performance Challenges 3

management team, the GAO, and the

Office of Inspector General (OIG) share

the view that improvements in human

capital, acquisitions, and information

systems are essential in removing HUD

from its high-risk designation. More

specifically, HUD must focus these

improvements on rental housing assistance programs and single-family housing

mortgage insurance programs, two areas

where financial and programmatic

exposure is the greatest. That HUD’s

reported management challenges are

included as part of the President’s Management Agenda (PMA) is indicative of

HUD’s important role in the Federal

sector. HUD’s current Administration

places a high priority on correcting those

weaknesses that put HUD on GAO’s highrisk list.

Each year in accordance with the

Reports Consolidation Act of 2000, the

HUD-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

latest assessment on October 19, 2004.

These reported challenges are the continued focus of our audit and investigative

effort. HUD is working to address these

challenges and in some instances, has

made progress in correcting them. The

Deputy Secretary’s Executive Management Meeting focuses on the actions

taken by each Assistant Secretary in

meeting the PMA. The PMA includes

governmentwide as well as 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:

Departmentwide Organizational

Changes. For more than a decade, the

Department has struggled with organizational and management changes in an

effort to streamline its operations. These

changes were necessary as HUD tried to

manage more programs and larger

budgets with fewer staff. The former

HUD Administration tried to realign the

Department along functional lines,

separating outreach from program

administration. Also, it 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.

HUD also experienced a serious “brain

drain” as many experienced senior staff

took buy-outs and left the Agency. While

these organizational changes were well

intended, some worked and others did not.

The disruptions caused by these sweeping

changes further compounded problems in

effectively managing HUD operations.

Among the problems were unclear lines

of authority, new staff with new training

needs, the inability to simply relocate staff

to locations where they would be most

effective, 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. The

current Administration made several

changes to reduce organizational layers.

For example, the Departmental Enforcement Center was placed under the direc-
Chapter 1: HUD’s Management and Performance Challenges 4

tion of the General Counsel to consolidate

legal resources in support of a strong

program enforcement effort. 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. A return to the former

regional and field office structure was

implemented 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.

Earlier this year, we examined the

operations of the Enforcement Center. We

found the intended results of the Center

were not being realized. Most of the

Center’s operating division staff was

assigned exclusively to multifamily

operations. The Department’s one enforcement strategy was not working. Key

vacancies further burdened the Center in

its ability to implement a single enforcement strategy for the Department. We

made several recommendations to improve the effectiveness of Center operations.

The first goal in HUD’s 5-year

Strategic Human Capital Management

Plan, developed in 2003, is to make HUD

a mission-focused agency. Getting the

right number of employees in the right

location with the right skill mix will

improve the quality of HUD programs and

services by addressing management

challenges, reducing program risks, and

improving program performance. The

relationship between office functions and

departmentwide goals is also reinforced

through the plan implementation. HUD’s

plan recognizes that human resources

activities must be aligned with agency

goals to clearly, efficiently, and effectively

support and enable HUD to achieve its

mission.

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 audit as a material weakness in

internal controls since fiscal year (FY)

1991. While progress has been made, a

number of long-standing deficiencies

remain.

Because of the large volume of

financial transactions, HUD relies heavily

on automated information systems. For the

past 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 in improving these

controls has been slow. The weaknesses

noted in our FY 2003 Consolidated

Financial Audit relate to the need to

 Comply with Federal financial

systems requirements, including the

need to enhance FHA’s information

technology systems to more effectively support FHA’s business and

budget processes;

 Strengthen controls over the computing environment; and

 Improve administration of personnel

security operations.

We also noted the need for HUD to

improve the processes for reviewing
Chapter 1: HUD’s Management and Performance Challenges 5

outstanding obligations to ensure that

unneeded amounts are deobligated in a

timely manner. A lack of integration

between accounting systems and the need

for accurate databases has hampered

HUD’s ability to evaluate unexpended

obligations. The audit of FHA’s FY 2003

financial statements continued to report

long-standing weaknesses in FHA’s

financial management systems environment. FHA continues to conduct many

day-to-day business operations with

legacy-based systems, limiting its ability

to integrate its financial processing

environment and to monitor budget

execution. During FY 2003, FHA implemented the Federal Housing Administration Subsidiary Ledger (FHASL) financial system. This system automated many

previously manual processes used to (1)

consolidate the accounting data received

from the various FHA operational legacy

systems and (2) prepare summary entries

for posting to the FHASL. Despite this

improvement, significant weaknesses still

exist.

FHA plans to fully address this

material weakness by performing

reengineering efforts for the Single

Family and Multifamily operational

systems and related business processes

and by building additional automated

interfaces from the operational systems to

the FHASL. These system enhancements

will also allow FHA to better monitor its

budgetary execution process. FHA plans

to fully complete these efforts by fiscal

year 2007.

Adequate and Sufficiently Trained

Staff. For many years, the Department

has struggled at finding a time and

workload measurement system that would

make it easier to determine staff resource needs. Additionally, in the past

decade, there has been a major shift in

job responsibilities in the Department.

HUD has moved many functions once

done by HUD employees to functions now

performed by contractors. Many HUD

staff now find themselves in a contract

oversight function.

HUD’s current Administration has

embraced standards of management

accountability. However, 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.

HUD is working to complete a

comprehensive strategic workforce plan.

The plan will include the following elements:

 Kind of work to be done now and in

the future;

 Knowledge, skills, and ability

needed to perform the work;

 Knowledge, skills, and ability of

existing staff to do their work;

 Training and development needed to

improve the capabilities of existing

staff;

 Strategies for identifying and filling

skills gaps; and

 Proposals for appropriate changes

in staff development across organi-
zations to better support accomplishment of the Department’s

mission in the future.

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 Department is now involved in 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 human

resource management system. The next

step is to apply these principles as decisions are made to hire new staff.

The workforce plan must include the

core business program offices and

address projected retirements in these

offices, consider the advance of e-government and competitive sourcing, and

recommend staffing levels in accordance

with the outcome of the workforce analysis and the REAP/TEAM data. In addition, the workforce plan will include a

further review of any programs and

service delivery issues to eliminate highrisk areas with strategies for more

effective human capital management.

HUD has submitted a Comprehensive Sourcing Plan to the Office of

Management and Budget (OMB) for

approval. A number of actions were

scheduled for completion at the end of FY

2004. Those program areas undergoing

workforce analysis include the Office of

Public and Indian Housing, the Office of

Community Planning and Development,

the Office of Housing/Federal Housing

Administration, and the Office of Fair

Housing and Equal Opportunity. Upon

completion of the workforce analysis,

program managers will assess opportunities to fill identified existing or anticipated

staffing or skill gaps through competitive

sourcing. A Departmental workforce plan

will be developed using the combined input

of four analyses, with the objective of

comparing priority needs across HUD

and making workforce management

decisions that best serve the Department’s

mission.

FHA Single Family Origination and

Real Estate Owned Oversight. Procedures and practices in HUD’s Single

Family Loan Origination Program have

undergone considerable change, particularly in the last 5 years. The changes have

been both programmatic and organizational, including significant changes in

loan underwriting requirements and the

transfer of virtually all aspects of Single

Family production and program monitoring from HUD staff to lenders and

contractors under the oversight of HUD’s

Homeownership Centers.

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.

Chapter 1: HUD’s Management and Performance Challenges 6
The audit of FHA’s FY 2003 financial statements reported a need to place

more emphasis on monitoring lender

underwriting and continuing to improve

single-family early warning and loss

prevention. 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

improve lender monitoring. Timely

identification of lenders with unacceptable

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.

In FY 2004, we have completed 22

lender audits based on a targeting strategy

that identified lenders with poorly performing FHA portfolios. Results from

these audits have noted significant lender

underwriting deficiencies and irregularities involving monetary benefits exceeding

a half billion dollars. Additionally, our

investigative workload in the single-family

area has grown dramatically over the past

5 years. Last fiscal year, more than 400

persons were indicted for single-family

mortgage fraud. Our work in process

indicates we will have a continued growth

in investigative activity this fiscal year.

Public and Assisted Housing Program Administration. HUD provides

housing assistance funds under various

grant and subsidy programs to public

housing authorities (PHA) and multifamily

project owners (both nonprofits and for

profit). These intermediaries, in turn,

provide housing assistance to benefit

primarily low-income households. The

Office of Public and Indian Housing and

the Office of Housing administer a variety

of assisted housing programs.

Material weaknesses in the monitoring of PHAs and assisted multifamily

projects were first reported in our financial audit in 1991 and continue to challenge HUD. Material monitoring weaknesses seriously impact HUD’s ability to

ensure that its intermediaries are correctly calculating housing subsidies. A

2000 HUD study found that 60 percent of

all rent and subsidy calculations performed by administrative intermediaries

contained overpayment or underpayment

errors. The Administration has set a goal

for a 50-percent reduction in the frequency of calculation processing errors

and the amount of subsidy overpayments

by 2005. To achieve this goal, HUD hopes

to reduce errors and improper payments

by 1) simplifying the payment process; 2)

enhancing administrative capacity; 3)

establishing an annual error measurement

process and rental integrity monitoring;

and (4) establishing better controls,

incentives, and sanctions.

Paralleling this effort, our investigative and audit focus are concentrating on

fraudulent practices in the Section 8

program. In those States where HUD has

entered into memorandums of understanding with State wage-based agencies, the

respective State PHAs are conducting

upfront income verifications. Discrepancies found through these matches are now

reported to the OIG for investigation.

Chapter 1: HUD’s Management and Performance Challenges 7
HUD continues to implement its

performance-oriented, risk-based strategy for carrying out its PHA oversight

responsibilities. In FY 2004, HUD

supplemented this strategy, conducting

rental integrity monitoring and utilizing

current performance information to better

direct its field office monitoring efforts.

However, as noted in previous financial

audits, further improvements need to be

made in the field office monitoring of

PHAs in other key areas. For example,

interface problems have prevented PHAs

from entering tenant data. Also, HUD has

not effectively used the Public Housing

Assessment System data to target performance problems or been able to establish

an effective organizational structure and

obtain relevant and reliable data to complete the monitoring process. Finally,

HUD has been slow to implement additional strategies needed to improve quality

control over the rental assistance subsidy

determination.

  

Chapter 1: HUD’s Management and Performance Challenges 8
Chapter 2: HUD’s Single Family Housing Programs
Chapter 2: HUD’s Single Family Housing Programs 10

The Federal Housing Administration’s

(FHA) Single Family programs provide

mortgage insurance to mortgage lenders that,

in turn, provide financing to enable individuals

and families to purchase new or existing homes

or to rehabilitate existing homes.

Audits

During this reporting period, the Office of

Inspector General (OIG) issued 22 reports: 2

internal audits, 18 external audits, and 2

external memoranda, in the Single Family

Housing program area. These reports

disclosed over $26.6 million in questioned costs

and about $435.7 million in recommendations

that funds be put to better use. We reviewed the

use of independent contract loan officers to

originate FHA-insured loans, contracts for

endorsement and postendorsement service,

and 19 lenders.

Use of Independent Contract

Loan Officers to Originate

FHA-Insured Loans

We reviewed eight U.S. Department of

Housing and Urban Development (HUD)-

approved nonsupervised loan correspondents

(mortgagees) located in the Salt Lake City,

UT, and Denver, CO, metropolitan areas.

These mortgagees were selected for review

primarily based on information that they were

using independent contract loan officers to

originate FHA-insured loans. Seven of the eight

mortgagees were using independent contract

loan officers, contrary to HUD requirements.

Furthermore, five of the seven mortgagees

established agreements with the loan officers

that did not comply with HUD requirements.

By using independent contract loan officers or

nonemployees to originate FHA-insured loans,

the mortgagees could not, and in fact did not,

exercise direct control and supervision over

their loan origination officers, as required by

HUD. The lack of direct control and supervision, coupled with quality control deficiencies,

contributed to increased default and claim rates

and, therefore, resulted in a higher risk to the

FHA insurance fund.

We recommended that HUD issue

appropriate guidance and specific instructions

to its Homeownership Centers and to FHAapproved mortgagees, requiring the use of

mortgagee employed loan officers, versus

contractors or nonemployees, to originate

FHA-insured loans. We also recommended that HUD require mortgagees to

report their originating loan officer’s

 Questioned Costs Funds Put to Better Use

Chart 2.1: Single Family Housing

Reports Issued

2

2

18

 Internal Audits External Memoranda External Audits

Chart 2.2: Single Family Housing

Dollars

External Audits

500,000,000

400,000,000

300,000,000

200,000,000

100,000,000

0

The cost figures in the charts above represent the actual monetary benefits for all reports issued during this semiannual

period. The monetary benefits shown in the Profile of Performance represent only those reports with management decisions

reached during this semiannaul period. Because there is a time lag between report issuance and management decisions, the

two totals will not agree.
Chapter 2: HUD’s Single Family Housing Programs 11

income on Internal Revenue Service (IRS)

Form W-2, which would include withholding of Federal income tax, Social Security

tax, and Medicare tax. (Report No. 2004-

PH-0004)

Contracts for Endorsement

and Postendorsement

Services

The OIG reviewed the standard

contracts that the Office of Single Family

Housing used to procure and administer

endorsement processing and

postendorsement quality control services

over FHA-insured mortgage loans. Our

objectives were to determine whether

terms of the contracts provide adequate

controls to ensure efficient and costeffective delivery of these services and to

determine if the pricing of those services

at the four Homeownership Centers was

reasonable.

We reviewed the contracts that the

Office of Single Family Housing used for

endorsement and postendorsement

services over FHA-insured mortgage

loans to determine whether the terms of

the contracts provide adequate controls to

ensure efficient and cost-effective delivery of the services and to determine if the

pricing of the services at the four

Homeownership Centers was reasonable.

We did not identify any significant deficiencies. (Report No. 2004-PH-0004)

Nonsupervised Mortgagees

and Loan Correspondents

The OIG audited Wells Fargo Home

Mortgage, a nonsupervised direct endorsement lender in Des Moines, IA,

approved to originate FHA-insured loans.

Wells Fargo improperly submitted 2,325

loans, with mortgages totaling over $265

million, for insurance endorsement when

the borrowers had delinquent payments

prior to loan submission to HUD. Wells

Fargo did not have adequate controls to

ensure its employees followed HUD’s

requirements regarding late requests for

insurance endorsement. These inappropriately submitted loans significantly

increased the risk to the FHA insurance

fund.

The OIG also found that Wells Fargo

did not adhere to HUD requirements and

prudent lending practices when originating 61 of the 74 defaulted loans examined.

Problems included unsupported assets,

unsupported income, inadequate qualifying ratios, inadequate documentation,

unallowable fees charged to the borrowers, derogatory credit information,

underreported liabilities, potential fraud

indicators, and improper approval when

using an automated underwriting system.

Wells Fargo also submitted 4 of the 74

loans as late requests for insurance

endorsement but did not follow HUD

regulations when submitting the insurance

requests. As a result, HUD lacks assurance that the mortgagors qualified for the

61 FHA-insured loans totaling over $6.6

million.

We recommended that HUD take

appropriate administrative action against

Wells Fargo. This action should, at a

minimum, include requiring indemnification for 2,375 loans, with actual and

potential cost savings currently valued at

over $266 million. (Report No. 2004-KC1003)

The OIG audited A-Pan-American

Mortgage Group, a nonsupervised loan

correspondent in Chicago, IL, approved

to originate FHA mortgage loans under

HUD’s Single Family Direct Endorsement Program. The audit concluded that
Chapter 2: HUD’s Single Family Housing Programs 12

A-Pan-American did not comply with

HUD regulations, procedures, and

instructions in the origination of FHAinsured loans. It allowed unapproved

branches and/or nonemployees to originate loans using A-Pan-American’s FHA

lender identification number. Additionally,

it lacked an adequate quality control plan

or any evidence that it implemented a

quality control plan. A-Pan-American’s

unacceptable loan origination practices

contributed to its high loan default and

claim rate, putting at risk more than $6.8

million in FHA-insured loans.

We recommended that HUD take

appropriate administrative action against

A-Pan-American, including seeking civil

money penalties and withdrawal of its

approval to participate in HUD’s Single

Family Direct Endorsement Program.

Further, HUD should require A-PanAmerican to indemnify HUD against

future losses on 49 active loans, valued at

over $6.5 million, reimburse HUD for

losses incurred of $145,000 on four loans

terminated by claims, and reimburse

HUD for future losses on one loan

terminated by a claim of more than

$128,000 once the property is resold by

HUD. (Report No. 2004-CH-1007)

The OIG completed an audit of

Decatur Mortgage Company, LLC,

Indianapolis, IN, a nonsupervised loan

correspondent approved to originate FHA

mortgage loans under the Single Family

Direct Endorsement Program. The audit

concluded that Decatur did not originate

FHA-insured loans in accordance with

HUD’s requirements and prudent lending

practices. A review of 41 defaulted loans

found that in originating the loans,

Decatur did not exercise due diligence to

(1) verify or support borrowers’ income

level and stability, (2) investigate credit

inquiries and questionable Social Security

numbers shown on credit reports, (3)

establish the borrowers’ ability and

willingness to pay, 4) document the source

of deposits and gift funds, and ensure

appropriate use of the gifts, (5) estimate

borrowers’ expenses and property taxes,

(6) keep interested third parties from

handling key documentation, and (7)

support property appraisals. Additionally,

Decatur did not ensure that quality control

reviews were completed on FHA loans to

include performing quality control reviews

on early default loans, documenting work

done to determine if loans were originated

properly, and identifying origination

deficiencies and corrective actions needed

for its loan originations.

We recommended that HUD seek

appropriate administrative action against

Decatur Mortgage and its sponsoring

lender, including requiring Decatur’s

sponsor to reimburse HUD for actual and

potential losses on 31 foreclosed loans of

over $1 million and indemnifying HUD

against future losses on 28 loans valued at

over $4 million. Additionally, we recommended that HUD obtain review appraisals for 41 properties to determine whether

they were properly valued since some

appraisals were increased as gift amounts

changed. If the appraisals are found to be

deficient, appropriate administrative

action should be taken against the appraisers. (Report No. 2004-CH-1009)

The OIG audited 18 HUD/FHAinsured loans, valued at over $4.1 million,

approved by Cambridge Home Capital,

LLC, a nonsupervised mortgagee, in

Great Neck, NY. The review disclosed

that 11 of the 18 loans had at least one

significant underwriting deficiency. The

underwriting deficiencies included (1)

debt/income ratios that exceeded HUD/

FHA standards, (2) inadequate property

valuation, (3) inadequate asset verifica-
Chapter 2: HUD’s Single Family Housing Programs 13

tion, (4) inadequate income verification,

(5) insufficient gift information, (6)

inadequate debt verification, (7) minimum

downpayment not provided, and (8)

bankruptcy discharge less than 2 years

prior to loan eligibility. In addition,

Cambridge did not document or provide

adequate justification for variations in its

mortgage charge rates and has not

implemented procedures or established

controls to ensure that all loans defaulting

within 6 months of closing undergo a

quality control review.

We recommended that HUD take

appropriate action against Cambridge for

not adhering to HUD’s underwriting

requirements and have Cambridge

reimburse HUD for losses on four of the

loans, totaling over $1.7 million, that have

gone to claim and indemnify HUD/FHA

against future losses on 10 loans, totaling

about $2.3 million. (Report No. 2004-NY1003)

The OIG completed an audit of

Homewide Lending Corporation, a

nonsupervised mortgagee, based in the

City of Industry, CA, and found that

Homewide used false employment and

income documentation to originate FHA

loans. Specifically, 21 of 30 loans reviewed, totaling $3.5 million, contained

false documents and information, including (1) false or altered IRS W-2 forms,

pay stubs, and verification of employment

forms; (2) false downpayment and gift

fund documentation; and (3) false statements of occupancy on the loan applications. Our review also identified other

loan origination deficiencies with the 21

loans, including (1) overstated income, (2)

inaccurate or excessive qualifying ratios,

(3) unsupported downpayment and/or gift

funds, and (4) understated liabilities. In

addition, while Homewide had established

a written quality control plan that met

HUD requirements, it failed to conduct

the required quality control reviews or

ensure that immediate corrective action

was taken on deficiencies identified. As a

result, loans were approved based on false

information and caused unnecessary risk

to the FHA insurance fund.

We recommended that HUD (1)

remove Homewide from participation in

HUD’s Single Family Mortgage Insurance Programs, (2) require Homewide to

indemnify HUD for the $3.5 million in

FHA loans, (3) consider seeking civil

money penalties against Homewide for the

loans originated using false documents,

and (4) take the needed action to ensure

that required quality control reviews are

conducted and that corrective action is

taken for all reported deficiencies.

(Report No. 2004-LA-1003)

The OIG completed an audit of

Hartford Funding, Ltd. (Hartford), a

nonsupervised mortgagee located in

Ronkonkoma, NY. Hartford did not

adhere to prudent lending practices in

approving two of 15 FHA-insured loans.

The loans had underwriting deficiencies,

including (1) the debt-to-income ratio

exceeded FHA standards, (2) inadequate

documentation of downpayment, (3)

inadequate documentation of gifts, (4)

inadequate review of a credit report, and

(5) minimum downpayment not provided.

In addition, Hartford had not implemented

procedures or established controls to

ensure that all loans defaulting within the

first 6 months undergo a quality control

review.

We recommended that HUD review

the two loans with underwriting deficiencies totaling about $450,000 to determine

whether Hartford should indemnify HUD

against any future losses on these loans. In

addition, we recommended that Hartford
Chapter 2: HUD’s Single Family Housing Programs 14

establish procedures to ensure that all

data on defaulted FHA-insured loans are

obtained from loan servicers and that all

loans that default within the first 6 months

are properly reviewed in accordance with

its quality control plan and HUD requirements. (Report No. 2004-NY-1006)

The OIG audited Gershman Investment Corporation, a nonsupervised direct

endorsement lender approved to originate

FHA-insured loans, in Clayton, MO.

Gershman did not adhere to HUD requirements and prudent lending practices

when originating 27 of the 43 loans

examined. Loan files contained unsupported income, unsupported assets,

underreported liabilities, questionable

and/or derogatory credit histories,

inadequate qualifying ratios, and other

inconsistent and/or questionable documentation. The deficiencies occurred

because Gershman did not have an

adequate control environment to ensure

that its employees followed HUD requirements when processing and underwriting

loans. These 27 loans, totaling over $2.4

million, represent an increased risk to the

FHA insurance fund.

Procedures for submitting late

requests for endorsement were also

tested. While overall the procedures were

effective, Gershman improperly submitted five loans for insurance endorsement

when the borrowers had delinquent

payments prior to loan submission. These

five loans, with mortgages totaling more

than $525,000, also represent an increased risk to the FHA insurance fund.

Gershman was deficient in its quality

control review activities. It did not conduct reviews within 90 days of loan closing

and did not review the required number of

loans closed. Without fully implementing

adequate quality control policies and

procedures, Gershman is unable to ensure

the accuracy, validity, and completeness of

its loan origination operations.

We recommended that HUD take

appropriate administrative action against

Gershman Investment Corporation. This

action should, at a minimum, include

indemnification for the 28 actively insured

loans, totaling nearly $2.8 million, and

reimbursement of $71,000 in related

losses already incurred on the three loans

that have gone into claim status. (Report

No. 2004-KC-1004)

The OIG audited Apreva, Inc., a

nonsupervised mortgagee approved by

HUD to originate and approve FHAinsured loans under HUD’s Single Family

Direct Endorsement Program in

Bellevue, WA. Apreva repeatedly ignored

HUD requirements by failing to follow

HUD regulations and other requirements

when underwriting and approving loans,

entering into prohibited agreements with

independent mortgage companies or

individuals to act as branches and/or

employees to originate loans, and not

conducting required quality control

reviews of loan originations.

We recommended that HUD remove

Apreva from participation in FHA’s Single

Family Mortgage Insurance Programs,

impose civil money penalties, and take

appropriate administrative sanctions

against Apreva officials. We also recommended that HUD require Apreva to (1)

repay insurance losses on claims totaling

over $1.36 million and (2) indemnify HUD

against future losses on loans totaling

more than $2.86 million that were identified as having serious underwriting

deficiencies or were originated by ineligible branches or employees and in default

or claim status and on other loans identified during the audit that were otherwise
Chapter 2: HUD’s Single Family Housing Programs 15

not processed and quality controlled as

required. (Report No. 2004-SE-1006)

The OIG completed an audit of First

Funding, Inc., an FHA-approved

nonsupervised loan correspondent in

Largo, MD. We found that First Funding

had not adequately developed and implemented a quality control plan that meets

HUD regulations, its office operations did

not comply with FHA approval requirements, and it failed to exercise due

diligence in its loan origination processes.

Specifically, First Funding did not meet

its 10-percent sample requirement for

quality control reviews for 3 months,

review loans that defaulted within the first

6 months, or review 10 percent of rejected

loans. In addition, First Funding charged

unjustified fees and did not review borrowers’ liabilities or credit characteristics or verify sources of funds. Consequently, mortgage loans of questionable

eligibility were approved for FHA insurance and borrowers may have incurred

unwarranted costs. First Funding could

not support more than $6,000 in fee

overcharges and nearly $372,000 of funds

could have been put to better use.

We recommended that First Funding

take immediate action to implement a

quality control plan that meets all HUD

requirements and correct its ongoing

operational deficiencies. We also recommended that HUD consider taking appropriate administrative action against First

Funding for its continual failure to comply

with HUD requirements. (Report No.

2004-PH-1009)

The OIG audited Cotton State

Mortgage, a nonsupervised loan correspondent in Atlanta, GA. Cotton State

Mortgage did not properly originate

FHA-insured loans in accordance with

HUD requirements and prudent lending

practices. Cotton State Mortgage did not

exercise due diligence in the verification

of borrowers’ liabilities, credit, assets,

and income. We identified loan origination

deficiencies in 4 of the 26 loans we

reviewed. The deficiencies included (1)

inadequate verification of employment,

rent, and gift funds; (2) inadequate

verification of funds used to pay off debts;

and (3) inconsistencies in credit reports

and loan applications. This process, in

addition to not complying with HUD

requirements for reviewing defaulted and

rejected loans, did not include monthly

quality control reviews. As a result,

Cotton State Mortgage was originating

loans for mortgagors who were not

qualified for FHA-insured loans. These

inappropriate loans contributed to high

default rates and increased the risk to the

FHA insurance fund.

We recommended that HUD seek

appropriate administrative action against

Cotton State Mortgage and require it to

indemnify two loans totaling $221,000. In

addition, HUD should require Cotton

State Mortgage to follow proper requirements for obtaining and verifying information used to qualify borrowers for FHA

insurance and implement its management

control process and quality control plan to

ensure that all loan origination functions

comply with HUD requirements. (Report

No. 2004-AT-1005)

The OIG audited the branch office of

Guild Mortgage Company (Guild) doing

business as Residential Mortgage Bankers

in Downey, CA. Guild is a nonsupervised

direct endorsement lender headquartered

in San Diego, CA. The audit disclosed

that Guild allowed the branch to engage in

prohibited lending practices and operate

contrary to HUD requirements. This was

caused by Guild’s lack of oversight,

ineffective controls, and improper deci-
sions. These deficiencies resulted in

excessive defaults and foreclosures,

increased the risk to the FHA insurance

fund, and actual losses of over $811,000.

We recommended that Guild be

referred to the Mortgagee Review Board

and assessed civil money penalties for

failure to comply with the provisions of

the Real Estate Settlement Procedures

Act. We also recommended that Guild

reimburse borrowers or HUD for charging excessive loan origination fees through

unearned loan discount points and premium rate pricing. In addition, Guild

should (1) be required to indemnify HUD

against future losses on 938 loans totaling

about $159.8 million, (2) discontinue all

similar net branch operations immediately, (3) reimburse HUD over $811,000

for actual losses incurred, and (4) establish policies and procedures to ensure

these issues are addressed. (Report No.

2004-LA-1005)

The OIG completed a limited review

of the Phoenix, AZ, branch office of

National City Mortgage Company, a

direct endorsement mortgagee. We

selected this branch office for review

based on the results of a previous OIG

audit that identified the use of false credit

and employment documents by Keystone

Mortgage, a loan correspondent of

National City.

We found that all nine of the loans

reviewed, totaling about $1 million,

contained indicators of false credit and/or

employment documents that were not

appropriately resolved by National City

during the underwriting process. This

occurred because National City failed to

exercise due diligence when underwriting

the loans. Because National City did not

identify and follow up on indicators of

irregularities that were present in the

files, loans were approved based on false

information, causing HUD to assume

unnecessary insurance risks. Two of these

nine loans have resulted in mortgage

insurance claims to HUD totaling over

$140,000, and five additional loans totaling

more than $482,000 remain insured and

represent a continuing insurance risk to

HUD.

We recommended that National City

indemnify HUD nearly $623,000 for any

past or future losses on these nine loans.

(Report No. 2004-LA-1006)

The OIG audited Cornerstone

Mortgage Group, Limited, a

nonsupervised loan correspondent, in

Inverness, IL. Cornerstone did not

perform quality control reviews of its

FHA loans as required. Our audit tests of

43 loans disclosed that Cornerstone did

not conduct timely quality control reviews,

examine all early defaulted loans, or

inform senior management of the findings.

Cornerstone did not exercise due diligence

in packaging loans for underwriting

approval. Tests of 37 loans totaling over

$4.7 million found numerous documentation omissions that Cornerstone did not

correct prior to loan approval. Deficiencies included not verifying income, assets,

or funds to close or clarifying derogatory

credit. Cornerstone relied on the sponsoring underwriters to obtain the proper

documentation and verifications.

We recommended that HUD determine whether Cornerstone’s approval as

an FHA lender should be withdrawn

based on the audit findings. We also

recommended that HUD require Cornerstone and its sponsor to repay HUD for

actual insurance losses on 15 loans of

about $545,000, indemnify HUD on seven

defaulted loans totaling over $916,000,

repay HUD over $132,000 for claims paid

Chapter 2: HUD’s Single Family Housing Programs 16
on one loan, and fully establish and

implement a quality control plan that

meets HUD requirements. (Report No.

2004-CH-1008)

We completed a review of Mortgage

America Bankers, LLC (Mortgage

America), an FHA-approved

nonsupervised loan correspondent whose

main office is located in Kensington,

MD. A review of 22 loans found that

Mortgage America originated 17 loans

totaling nearly $3 million from unauthorized offices by non-Mortgage America

employees, failed to justify loan overages

(discount fees) charged to 13 borrowers

and premium rate mortgages (yield

spread premiums) charged to 14 borrowers, and did not adequately develop and

implement a quality control plan that

meets HUD requirements. As a result,

Mortgage America received nearly

$89,000 in ineligible and unsupported

fees.

We recommended that Mortgage

America take immediate action to

implement a quality control plan that

meets all HUD requirements and correct

its ongoing operational and loan origination deficiencies that do not comply with

HUD loan correspondent approval requirements. We also recommended that

HUD consider taking appropriate administrative action against Mortgage

America for its continual failure to

comply with HUD requirements and

require Mortgage America to indemnify

HUD on 13 loans totaling nearly $2.5

million, to reimburse HUD for actual

losses of over $500,000 on four loans, and

to support or reimburse ineligible and

unsupported fees of nearly $89,000.

(Report No. 2004-PH-1012)

We audited New Freedom Mortgage

Corporation (New Freedom), a

nonsupervised direct endorsement lender

in Salt Lake City, UT. New Freedom did

not comply with the Real Estate Settlement Procedures Act and HUD-related

requirements in the streamline refinancing of FHA-insured loans. New Freedom

collected an inappropriate monthly

mortgage payment from borrowers of

streamline-refinanced loans to help offset

its lender-paid closing costs on its advertised “no closing cost to you” streamlinerefinanced loans. Because borrowers

believed these payments to be the last

mortgage payment on their existing loans

and because New Freedom did not fully

disclose all costs associated with the

streamline-refinanced loans, borrowers

were unable to make informed decisions

concerning their refinanced loans. Our

testing showed that from a sample of 866

loans reviewed, New Freedom collected

nearly $157,000 in inappropriate monthly

mortgage payments on 598 loans.

We recommended that HUD require

New Freedom to reimburse the borrowers

or HUD for the inappropriate monthly

mortgage payments collected on the loans

and to consider referring the matter for

appropriate action. Further, HUD should

review possible violations of the Real

Estate Settlement Procedures Act.

(Report No. 2004-DE-1004)

An OIG audit found that Austin Loan

Corporation, a nonsupervised loan correspondent, in Austin, TX, did not implement its quality control plan in compliance

with HUD regulations. The audit also

disclosed possible conflict of interest

situations and faulty and deficient appraisals. We have referred these issues for

possible further review. We recommended

that HUD take steps to ensure that the

current operation of Premier Mortgage

Funding, Inc., doing business as

Austinloan.com, complies with HUD

Chapter 2: HUD’s Single Family Housing Programs 17
regulations concerning quality control

plans. (Report No. 2004-FW-1802)

American Mortgage Services, Inc.

(American Mortgage), a nonsupervised

loan correspondent, in Millington, TN,

did not always follow prudent lending

practices or demonstrate responsibility

when it originated FHA-insured loans. In

5 of the 15 cases reviewed, American

Mortgage did not exercise due diligence

or fully consider all factors in its review

of borrowers’ liabilities, credit, assets,

and income. HUD paid claims totaling

nearly $171,000 for three of the five loans.

While the borrowers may have met

minimum requirements to qualify for loan

approval, we questioned whether American Mortgage originated the loans with

the same care that it would have exercised

if the loans were entirely dependent on

the properties as security. American

Mortgage admitted it was concerned that

applicants would file suits if their applications were denied and subsequently

approved by another mortgagee. As a

result, American Mortgage originated

loans for borrowers who were marginally

qualified for FHA-insured loans. Questionable loan origination practices resulted in its high loan default rate of 12.88

percent, well above the national average

of 2.99 percent, for the 2-year period

ending December 31, 2002.

We recommended that HUD uphold

American Mortgage’s suspension under

the Credit Watch Program until HUD

performs a quality assurance review to

assess American Mortgage’s ability to

properly originate loans in accordance

with all HUD requirements. (Report No.

2004-AT-1008)

The officer/owners of First Community Mortgage, Inc. (First Community) of

Fort Meyers, FL, effectively circumvented HUD’s suspension of them by

creating two new mortgage companies

and obtaining HUD approval for each to

originate loans. First Community officers

and employees were named as officers

and employees of two new companies

while still working for First Community.

The new entities also used First

Community’s office address.

First Community did not comply with

HUD requirements in the origination of

FHA-insured loans. In 18 of the 19 loans

reviewed, First Community staff did not

obtain complete documentation, made

improper income determinations, and did

not ensure compliance with other HUD

standards. First Community did not

implement the quality control plan it

submitted to HUD, and its quality control

processes did not comply with HUD

regulations. The plan did not address key

elements including (1) documenting

corrective actions taken on quality control

results, (2) reporting significant discrepancies to HUD, (3) timely performance of

quality control reviews, and (4) quality

control reviews of rejected loans. First

Community’s actual quality control

performance was materially deficient.

We recommended that HUD suspend

First Community’s authority, as well as

the authority of the two new mortgage

companies, to originate and underwrite

FHA-insured loans. We also recommended

that HUD debar First Community’s principals from further participation in HUD and

other Federal programs and consider

imposing civil money penalties. (Report No.

2004-AT-1010)

Chapter 2: HUD’s Single Family Housing Programs 18
Investigations

During this reporting period, the

OIG opened 156 investigation cases and

closed 220 cases in the Single Family

Housing program area. Judicial action

taken on these cases during the period

included $69,544,292 in investigative

recoveries, $80,892,259 in funds put to

better use, 174 indictments/informations,

153 convictions/pleas/pretrial diversions,

167 administrative actions, 3 civil actions,

and 206 arrests.

Some of the investigations discussed

in this report were conducted by the OIG,

while others were conducted jointly with

Federal, State, and local law enforcement

agencies. The results of our more significant investigations are described below.

Property Flipping Schemes

In New York, NY, in Federal Court

for the Eastern District of New York,

defendant Frank Boccagna, owner of

several real estate companies, who

flipped properties to three not-for-profits,

was sentenced to 3 years probation and

was ordered to pay $18,629,716 in restitution. The loans involved in these transactions were originated through the HUD

Section 203(k) Rehabilitation Home

Mortgage Insurance Program by Mortgage Lending of America, a defunct

mortgage company that was previously

based on Long Island.

In Washington, DC, in U.S. District

Court for the District of Columbia,

defendant Maritza Mercedes Ellis was

sentenced to 18 months incarceration and

3 years supervised release and was

ordered to pay $284,740 in restitution.

Ellis pled guilty to a two-count criminal

information charging her with conspiracy

to defraud HUD in an illegal property

flipping scheme. From 1995 through 1999,

Ellis, acting as a real estate speculator,

contracted to purchase approximately 44

properties in the District of Columbia at

low prices. At times, Ellis contracted to

purchase the properties in the names of

her companies, Resource Properties

Unlimited and Capitol Developers, Inc.

Ellis used an appraiser who would

fraudulently inflate the value of the

appraisals so Ellis could resell the properties at artificially inflated prices. The

appraisals indicated that the properties

were renovated, when in fact they were in

poor condition. Ellis recruited individuals

to purchase the properties and arranged

for them to submit fraudulent loan applications to the lenders. She assisted the

buyers in completing false gift letters,

secretly provided them with cash

downpayments, and created false verifications of employment and rent. Ellis also

provided the buyers with false IRS W-2

forms and pay stubs and “cleaned up” the

buyers’ credit reports by paying their

debts. In some instances, Ellis provided

the buyers with large sums of money after

settlement. The properties were purchased with approximately $4.3 million in

FHA-insured loans. OIG and Federal

Bureau of Investigation (FBI) Agents

seized a home owned by Ellis and $90,344

in cash proceeds from the sale of a second

home she owned. All of the assets were

derived from her illegal real estate

transactions. HUD sustained approximately $284,740 in losses in this case.

In Atlanta, GA, in Federal Court for

the Northern District of Georgia, a

Federal indictment was unsealed charging

defendants Chalana McFarland, an

attorney and owner of the McFarland Law

Firm in Stone Mountain, GA; Judith

Brown, a paralegal; Lisa Bellamy, a legal

Chapter 2: HUD’s Single Family Housing Programs 19
assistant; Judy Hooper, a real estate

investor; Melvin Quillen, a real estate

investor/straw purchaser recruiter;

Thomas Davis, a real estate investor/

broker; Brandon Wilhite, James

Pettigrew, and Kenneth Collins, appraisers; Omar Turral, a Florida A&M

University student who stole identities to

use on the loans involved in this case;

Melinda Tyner, an investor; and Jewel

Williams and Sidney Williams, real estate

agents, with participating in a $20 million

property flipping scheme involving 130

properties throughout the Metropolitan

Atlanta area. The defendants allegedly

purchased properties by using straw

purchasers. They grossly inflated the

appraisals on the properties and resold

them, splitting the proceeds among

themselves. Part of the scheme also

included placing Section 8 tenants in these

properties, some of which were valued at

more than $200,000. The defendants

made it appear to the Section 8 tenants

that they were entering into lease/purchase contracts for the homes. Although

the defendants collected Section 8 rent

payments, they never made the mortgage

payments, causing the properties to go

into default. The charges against the

defendants include conspiracy, fraud

against HUD, wire fraud, bank fraud,

mail fraud, money laundering, obstruction

of justice, identity theft, and perjury.

In New York, NY, in Federal Court

for the Eastern District of New York,

defendant Samuel Stith, a board member

for Family Preservation Center, a not-forprofit organization, was sentenced to 36

months probation and was ordered to pay

$11,262,701 in restitution. Stith, who

previously pled guilty to making false

statements to Federal Deposit Insurance

Corporation (FDIC)-insured institutions,

aided and assisted the not-for-profit in the

fraudulent purchase of 66 flipped properties that were insured through HUD’s

Section 203(k) program. These 203(k)

loans were originated by Mortgage

Lending of America, a now-defunct

mortgage company. Defendant James

Corbett, the owner of a not-for-profit

called Homes for Families, who also

previously pled guilty to making false

statements to FDIC-insured institutions,

was sentenced to 36 months probation and

was ordered to pay $3,711,330 in restitution. Corbett purchased flipped properties

from investors at inflated prices and in

return received $5,000 in kickbacks per

property. These Section 203(k) program

loans were also originated by Mortgage

Lending of America.

In the same case, defendant Gary

Gluskin, a closing attorney formerly

employed by the law firm of Bank, Tanen

& Bank, was sentenced to 6 months home

detention and 3 years supervised release

and was ordered to pay $1,760,098 in

restitution. While employed at Bank,

Tanen & Bank, Gluskin represented notfor-profits that purchased flipped properties at inflated values from investors. For

their role in this scheme, the not-forprofits received kickbacks ranging from

$5,000 to $10,000 from the investors. All

of the HUD Section 203(k) properties

were originated by Mortgage Lending of

America.

In Weber County, Salt Lake

County, and Davis County, UT, several

individuals were involved in a mortgage

fraud scheme in which they used the

Social Security numbers of third parties to

obtain FHA-insured loans. The properties

were part of a flipping scheme carried out

through limited liability companies (LLC)

that enticed undocumented/unqualified

buyers to purchase homes at inflated

values. The owners of the LLCs often

conducted simultaneous closings on the

Chapter 2: HUD’s Single Family Housing Programs 20
same day, netting large profits on the

properties involved. The subsequent

mortgage defaults were reflected on the

credit reports of the victims, making their

future financial transactions difficult.

In Weber County, UT, in the 2nd

District Court for Weber County, defendant Teodoro Mendez pled guilty to one

count of attempted theft by deception and

one count of forgery and was ordered to

pay $63,958 in restitution. In Salt Lake

City, UT, in the 3rd District Court for Salt

Lake County, defendant Francisco

Dominguez Vazquez pled guilty to one

count of attempted identity fraud and one

count of forgery and was ordered to pay

$91,917 in restitution, while defendants

Vincente Acosta-Santoyo and Jose

Guadalupe Acosta-Santoyo were indicted

on five counts of identity fraud and five

counts of forgery. Also in Salt Lake

County, defendant Jorge Becerril was

indicted for forgery and identity fraud.

In Davis County, UT, in the 2nd

District Court for Davis County, defendants Bernardino Vargas Sanchez, Juan

Perez Olvera, and Maria Vargas were

indicted on six counts of forgery and

identity fraud.

The total loss to HUD is expected to

exceed $1,700,000 for all mortgages

associated with these fraud schemes.

In Washington, DC, in U.S. District

Court for the District of Columbia,

defendant Watson T. Goffney, Jr., an

FHA-approved real estate appraiser, was

sentenced to 30 months incarceration and

3 years supervised release and was

ordered to pay restitution in the amount of

$935,309 to HUD for his role in a conspiracy to defraud HUD through a property flipping scheme involving FHAinsured mortgages. In sentencing Goffney,

the judge said, “without the appraiser’s

false statement, the scheme would have

been unlikely to succeed.” Goffney pled

guilty in April 2002 to one count of

conspiracy for falsely inflating appraisals

on approximately 36 distressed properties

on behalf of his coconspirators, including

convicted speculator Modou Camara, thus

allowing speculators to resell the properties, sometimes on the same day, at a

significant profit. Goffney certified that

the properties were recently renovated or

that complete renovations had taken place,

when in fact many of the properties were

uninhabitable. Goffney’s coconspirators

would locate buyers who were not financially able to qualify for FHA loans and

provide them with fictitious income

records and undisclosed financial assistance in order for them to qualify. The

FHA-insured mortgages would then go

into default and foreclosure, with HUD

incurring the loss.

Twenty of the 36 properties involved

in the scheme were financed with FHAinsured mortgages and have gone into

foreclosure. HUD has acquired and resold

13 of these properties at the cost of the

total loan and lender’s foreclosure expenses, with an actual loss (after resale)

to the Government of approximately

$935,000.

In White Plains, NY, in Federal

Court in the Southern District of New

York, Elliott Levine was sentenced to 15

months in prison and 3 years supervised

release and was ordered to pay restitution

of $499,134.36. Levine was a mortgage

broker who pled guilty to one count of

Title 18, U.S.Code, Section 1344 (mail

fraud) for his involvement in a property

flipping scheme. Levine admitted to

preparing false and fraudulent documents

Chapter 2: HUD’s Single Family Housing Programs 21
to help numerous buyers qualify for home

mortgages, some of which were insured

by FHA.

In Dallas, TX, in Federal Court for

the Northern District of Texas, defendant

R.C. Jordan pled guilty to one count of

bank fraud. In December 2003, Jordan

was indicted on 15 counts of conspiracy,

wire fraud, bank fraud, and money

laundering. Jordan, a mortgage broker

for Tru-Faith Mortgage, conspired with

Darron Banks, Alan Banks, and Mark

Dean in a land flipping scheme involving

FHA and conventional loans. Alan Banks

served as a closing agent for American

Title, also known as Texas Title, while

Darron Banks located properties and

obtained appraisals that inflated the prices

of the properties. Jordan then recruited

strawbuyers and prepared loan packages,

which contained false information, to be

submitted to the lender. After the

strawbuyers purchased the properties at

the inflated prices, they failed to make the

mortgage payments, and the properties

went into foreclosure. The Bankses are

responsible for over $50 million in losses

to various lenders.

In Springfield, MA, defendants

Albert Annarelli, Michael Bergdoll,

Anthony Matos, Pasquale Romeo, Wilfred

Chagasie, Theodore Jarrett, Mark

McCarthy, James Smith, Jonathan

Frederick, and Joseph Sullivan were

indicted and arrested for a fraudulent

property flipping scheme. The arrests

took place following the unsealing of a

Federal indictment, which was returned

on September 2, 2004. The indictment

charges 10 defendants in the propertyflipping scheme with wire fraud and

conspiracy to launder money. The

scheme, which included over 70 properties in the Springfield, MA, area, involved HUD Real Estate Owned (REO)

properties purchased with FHA-insured

mortgages totaling over $5,900,000. The

indictment charges the defendants with 62

counts of mail fraud and one count of

conspiracy to commit money laundering.

The defendants obtained single-family

properties, including several through the

HUD REO program and within weeks,

resold the properties at prices upward to

200 percent over the purchase price from

HUD, using FHA mortgages.

In Kansas City, MO, in Federal

Court for the Western District of Missouri, defendants Brent Barber, Avonda

Nicodemous, Rod Criss, and Chauncey

Calvert were charged in a 61-count

indictment. The counts alleged conspiracy

to commit the transport or transfer in

interstate commerce of money taken by

fraud and money laundering. The defendants were allegedly involved in a singlefamily property flipping scheme in which

64 properties were purchased and sold

with inflated appraisals and false income

information. The loans were processed

through Ameriquest Mortgage, resulting

in over $2.5 million in diverted funds.

Ameriquest has identified 13 additional

loans, valued at about $1 million, as part

of a related civil lawsuit.

In St. Louis, MO, in Federal Court

for the Eastern District of Missouri,

defendants Mardell McGee Smith, Mario

McGee, Maurice McIntosh, Jimmy

Sexton, and Lawanda Knox were indicted

for their part in a conspiracy to defraud

HUD. The indictment alleges the following property flipping schemes: Smith

owned and operated New Alliance Enterprises, a Missouri corporation that bought

properties, had the properties appraised at

inflated values, and sold them at inflated

prices. McIntosh was a licensed real

estate agent with Prudential Patterson

Realty who assisted in the fraud. Many of

Chapter 2: HUD’s Single Family Housing Programs 22
the buyers of the properties obtained

FHA-insured loans. Buyers who had poor

credit ratings were instructed by Smith

and McGee to obtain an employer identification number from the IRS. The

buyers’ loan applications then falsely

listed the identification number as the

Social Security number. In some cases,

Smith and McGee provided downpayment

funds and false employment information,

gift letters, and credit letters to the

buyers. In addition to the conspiracy

charges, each defendant was charged with

false use of a Social Security number.

Losses to HUD in this case are in excess

of $500,000 on loans that have already

foreclosed. There are also substantial

losses on conventional loans.

In Los Angeles, CA, in Federal

Court for the Central District of California, defendant Pedro Rodriguez was

indicted on charges of money laundering.

Rodriguez allegedly caused funds received from wire fraud associated with

the sale of an FHA-insured property to be

transferred into a marker account at a

casino in Las Vegas, NV. This case was

initiated after the OIG, FBI, and IRS

Criminal Investigation Division began

investigating real estate investor Lorenzo

Espinoza and his colleagues, who were

allegedly involved in defrauding HUD

through a property flipping scheme.

Monies allegedly received through this

scheme also led to income tax evasion,

bankruptcy fraud, and money laundering.

In this case, Rodriguez, using proceeds

from a flipped property in which

strawbuyers were used to obtain an FHAinsured loan, transferred $25,000 and

$30,000 on two consecutive dates to a

company that wired these payments to pay

off a marker account at a Las Vegas

hotel.

In Salt Lake City, UT, in the 3rd

District Court for Salt Lake County,

defendants Antonio Urcino, Carolina

Baena-Urcino, Roberto Osorio Tenorio,

Enrique Montanez-Osorio, Leonel

Salgado, and Rolando Galindo-Sanchez

were indicted on nine counts of forgery,

communications fraud, and theft by

deception. These indictments resulted

from an investigation, which alleges that

the defendants used Social Security

numbers of third party individuals to

obtain FHA-insured properties valued at

$529,100. Further, the properties were

part of a flipping scheme carried out

through LLCs that enticed undocumented/

unqualified buyers to purchase homes at

inflated values. The owners of the LLCs

conducted simultaneous closings on the

same day, netting large profits. In many

cases, the buyers stopped making mortgage payments and subsequently defaulted

on the loans, with a loss to HUD totaling

$386,217. The defaults were reflected on

the credit reports of the actual owners of

the Social Security numbers, which made

future financial transactions very difficult.

Loan Origination

In New York, NY, in New York State

Court, Manhattan, NY, after a lengthy

investigation where HUD-OIG focused

investigative efforts on fraud that had

occurred in the origination and issuance of

loans insured through the HUD 203(k)

loan program, Andrew Graynor pled

guilty to false statements relating to Title

18, U.S. Code, Section 1014. Andrew

Graynor, an attorney and one of the main

players in the HUD 203(k) loan fraud

scheme, utilized his Escrow account to

control monies derived from the 203(k)

loan mortgages surrendered in the Eastern District of New York.

Chapter 2: HUD’s Single Family Housing Programs 23
This investigation uncovered a vast

scheme, involving real estate investors,

not-for-profit organizations, attorneys,

appraisers, and loan officers of Mortgage

Lending of America, a privately held

mortgage lending institution in Long

Island, NY, that is now defunct. Utilizing

cooperating defendants, documents seized

from the search warrants, subpoenaed

bank records, and witnesses testimony,

the HUD 203(k) investigation has resulted

in a $1,870,395 seizure of a luxury

vehicle, 42 arrests, 25 guilty pleas, and

court-ordered restitution to HUD in the

amount of $42,279,126 to date.

In Los Angeles, CA, in Federal

Court for the Central District of California, defendant Kelli Davis, a loan officer

at RE Mortgage Group, Inc., was sentenced to serve 6 months confinement and

pay restitution of $2,146,564 and a special

assessment of $600. Davis was previously

convicted of six counts of violation of Title

18, U.S. Code, Section 1343 (wire fraud),

for her involvement in a single-family loan

origination fraud scheme. Davis and other

coconspirators purchased fraudulently

prepared employment, income, and credit

documents and packaged them into

mortgage loan applications for unqualified

mortgagors. Approximately 80 FHAinsured loans were processed, exceeding

$11.4 million worth of funded loans.

In Farmington, UT, in Davis County

District Court Bernardino, Vargas

Sanchez pled guilty to one count of

forgery and one count of attempted

identity fraud, both third degree felonies

in the State of Utah. Sanchez was sentenced immediately following his entering

a guilty plea. These judicial actions were

the result of the defendant being found

guilty of participating in a loan origination

fraud scheme wherein he used a Social

Security number of a third party to obtain

an FHA-insured single-family home.

Sanchez failed to make the required

mortgage payments, resulting in a default

and subsequent foreclosure on the FHAinsured property, costing HUD $21,651 in

losses. As a result of his actions, the

District Judge sentenced Sanchez to 30

days confinement at a local detention

facility.

In Denver, CO, in U.S. District

Court for the District of Colorado,

Patricia Pittman, an employee of the

United States Postal Service, was arrested

and appeared before the Senior District

Judge. Pittman, a homebuyer who was

previously indicted on September 22,

2004, for her participation in a loan

origination fraud scheme involving FHAinsured properties, was charged with

using a false Social Security number and

making false statements on a loan application for an FHA-insured loan. Pittman

paid money to Roderick Wesson, who has

pled guilty for his involvement, to obtain a

false Social Security number, IRS W-2

forms, and pay stubs. Pittman also had

Wesson verify her false income in order

for her to be able to qualify for the FHAinsured loan. The total loans in this case

are valued at $6.7 million. To date, the

loss to HUD is $309,700.

In Los Angeles, CA, pursuant to an

information simultaneously filed by the

United States Attorney’s Office, Central

District of California, real estate agent

Lucero Fernandez pled guilty to one count

of violation of Title 18, U.S. Code, Section

1010 (fraud), against HUD. As part of a

loan origination fraud scheme, Fernandez

caused a mortgage application, which

contained forged and false employment

and income documents, to be completed

on behalf of a nonqualified borrower.

Fernandez directed a coconspirator to

obtain the forged documents used in the

Chapter 2: HUD’s Single Family Housing Programs 24
mortgage application that led to the

origination of the fraudulent FHA-insured

home mortgage loan. Fernandez’ involvement in the scheme resulted in an approximate loss to HUD of approximately

$42,557.

In McMinnville, OR, in Yamhill

County District Court, defendants Carlos

Morales, Eddy Morales, Cristobal

Vilario, Samuel Pleites, Douglas Pleitez,

Guadalupe Pleitez, and Patricia Tellez, a

mortgage broker, three loan officers, and

three real estate agents, respectively,

were indicted on State charges related to

mortgage fraud involving FHA-insured

and conventional mortgages. The 40-count

indictment charged the defendants for

their roles in the origination of approximately 50 fraudulent mortgages worth an

estimated $8 million. The charges include

racketeering, theft in the first degree,

obtaining execution of documents by

deception, fraud and deceit with respect

to mortgage banker or broker business,

aggravated theft, forgery in the first

degree, theft in the second degree, and

issuing a false financial statement. This

fraudulent loan scheme involved the

alleged theft of monies from borrowers in

amounts ranging from $400 to $30,000,

often demanded by the loan officers in the

form of cash payments, prior to the close

of escrow; these payments were not

shown on the settlement statements, thus

allowing the borrowers to be doublecharged. The scheme also involved the

use of fraudulent employment information

used to defraud HUD, banks, and other

lenders. This information consisted of the

documentation of false employers that the

coconspirators located on the Internet for

the borrowers, a majority of whom are

living illegally in the United States. The

borrowers were often employed as laborers at local ranches and vineyards earning

minimum wage. The loan officers specified cellular phones in their offices that

were to be exclusively used to verify

employment. Twenty-two of the loans

involved in the scheme were insured by

FHA.

In Los Angeles, CA, the U.S.

Attorney’s Office in the Central District of

California issued an information charging

defendants Eugenia Mercado, Liza

Mercado, Thanya Mercado, Manuel

Molina, and Nelly Rubiano with two

counts each of wire fraud and aiding and

abetting. Eugenia and Liza Mercado were

licensed real estate agents, Thanya

Mercado was a loan processor, and

Manuel Molina was an unlicensed real

estate agent and a loan officer. Eugenia

Mercado and Nelly Rubiano were also

notary publics. The defendants allegedly

participated in a scheme to defraud HUD.

They were associates of George

Bahamondes, who was arrested and

indicted for originating the funding and

insurance of approximately $7.5 million in

fraudulent FHA-insured home mortgages.

Allegedly, the defendants caused

mortgage applications containing false

employment, income, and credit information to be completed on behalf of unqualified buyers and submitted to FHA. Molina

acted as a real estate agent on sales of

property to unqualified buyers. In some

instances, he and Rubiano acted as

investors themselves. Eugenia Mercado

and Rubiano notarized the necessary

signatures of strawbuyers and fictitious

buyers on loan documents, falsely certifying that they had personally met with

them. The Mercados and other coconspirators caused the funding and insurance

of approximately $3.6 million in fraudulent FHA-insured mortgages on properties

in Los Angeles County. To date, properties

Chapter 2: HUD’s Single Family Housing Programs 25
that have gone into default and been resold

have caused over $1 million in losses to

HUD.

In St. Louis, MO, in Federal Court

for the Eastern District of Missouri, the

following 12 defendants involved in The

Loan Store, Inc., fraud scheme were

charged, sentenced or pled guilty.

Defendant Ronald Gladney was

sentenced to 5 years probation and was

ordered to pay $344,000 in restitution for

mail fraud. Gladney, a real estate investor

and full-time St. Louis firefighter, admitted engaging in a scheme to sell his

residence to two different strawbuyers.

Two loans totaling $788,000 were obtained with false documents through The

Loan Store. Also, the owner of Bankers

Title, who previously pled guilty, assisted

Gladney by disguising the source of the

downpayments to qualify the strawbuyers

for the loans. Indymac Bank suffered

$344,000 in losses due to Gladney’s

scheme.

Defendant Sean Holland was sentenced to 3 years probation and 100 hours

of community service and was fined

$3,000 for conspiracy to commit wire

fraud. Holland, an accountant for The

Loan Store, created false income documents for the owner/officers of The Loan

Store. A Federal search warrant executed

at Holland’s home/office in November

2001 yielded the false documents, which

assisted The Loan Store in obtaining $3.8

million in loans and $1.9 million in

attempted loans. Holland cooperated in

the investigation and received a downward

departure from the sentencing guidelines.

Defendant Orville “Leo” Johnson

was sentenced to 3 years probation and

was ordered to pay $200,000 in restitution

for conspiracy to commit wire fraud.

Johnson, a real estate investor doing

business as Onyx Real Estate and Platinum Investments, illegally flipped properties by using false appraisals and income

documents and disguising the origin of

downpayments. Johnson’s scheme caused

$200,000 in losses.

Defendant Pierre Jacques was

sentenced to 2 years probation and 100

hours of community service for wire

fraud. Jacques, a real estate appraiser/

investor who owned International Appraisal Company, falsely inflated appraisals for the owner and employees of The

Loan Store as well as other investors. The

Loan Store did not charge him points and

closing fees on his investment properties.

Defendant Mark Williams, owner of

Onyx Investments and Platinum Investments, was also sentenced to 8 months

home confinement, 5 years probation, and

200 hours of community service. Williams

previously pled guilty to wire fraud and

admitted manufacturing and providing

false documents in order to qualify an

individual for a home mortgage.

Defendant Demona Payne, a former

loan officer for The Loan Store, Inc., was

sentenced to 3 years probation and was

ordered to pay $75,000 in restitution.

Payne previously pled guilty to one count

of wire fraud and one count of conspiracy.

She conspired with Tandy Hairston, the

owner of The Loan Store, Inc., to broker

loans that included a variety of false

documentation, including appraisals, IRS

W-2 forms, tax returns, bank statements,

and verifications of deposit.

Defendant Arnold Mitchell, a real

estate investor, was sentenced to time

already served (3 months) and 3 years

probation and was ordered to pay $61,879

in restitution to two financial institutions.

Chapter 2: HUD’s Single Family Housing Programs 26
Mitchell previously pled guilty to one

count of conspiracy to commit wire fraud.

He participated in a scheme to illegally

flip properties to unqualified buyers.

Defendant Iris Whitener was sentenced in St. Louis, MO, to 6 months

home confinement and 3 years probation.

Whitener previously pled guilty to conspiracy to commit wire fraud. As an

officer of Nations Investments, a real

estate investment company, Whitener

conspired with Tandy Hairston to purchase distressed properties and sell them

to unqualified and unsophisticated buyers

by obtaining false appraisals and income

documentation. Whitener admitted to

giving cash incentives and downpayments

to individuals to purchase overqualified

properties.

Defendant Billy Miller, a real estate

investor, was sentenced to 5 years probation and 400 hours of community service

and was ordered to pay $345,000 in

restitution. Miller was previously indicted

as part of an 18-count Federal conspiracy

indictment against eight individuals

associated with The Loan Store and

Nations Investments. Miller admitted

being paid to locate a strawbuyer to

purchase property, as well as obtaining

mortgage loans to assist investors in

preventing loss of their properties to

foreclosure. Miller admitted to causing

$345,000 in losses.

Defendant Anthony Orr, a real estate

investor, was sentenced to 5 years probation and was ordered to pay $570,952 in

restitution to 16 financial institutions. Orr

previously pled guilty to one count of

conspiracy to commit wire fraud. He

admitted to conspiring with Hairston to

illegally flip overvalued properties to

unqualified buyers.

Defendant Kelan Pyant was sentenced to 4 months home confinement and

5 years probation and was ordered to pay

$50,000 in restitution. Pyant previously

pled guilty to one count of conspiracy to

commit wire fraud. Pyant admitted that

while working for Nations Investments, a

real estate investment company, he used a

strawbuyer to purchase a property from

HUD. He then transferred the property

into his own name, obtained an inflated

appraisal, and flipped the property at a

substantial profit to an unqualified purchaser. Pyant admitted to conspiring with

Tandy Hairston in obtaining financing with

false documents. Pyant’s fraudulent

activities caused $50,000 in losses.

Defendant Tandy Hairston was

charged in an 18-count indictment as

former president of The Loan Store, Inc.,

as well as several of his employees and

associates, for conspiracy to commit wire

fraud, mail fraud, and money laundering.

Hairston subsequently pled guilty and was

sentenced to 64 months confinement, 36

months probation, and ordered to pay

restitution of $2,424,857.

In Las Vegas, NV, in Federal Court

for the District of Nevada, defendant

Michael Cartron, a former loan officer at

Mortgage Capital Resources and National

City Mortgage, was sentenced to 21

months incarceration and 5 years supervised release and was ordered to pay

$333,375 in restitution. Cartron was

sentenced on count 8 of a second superseding indictment that charged him with

wire fraud in the furtherance of loan

fraud. Cartron helped falsify income and

employment information for borrowers,

including tax returns, pay stubs, IRS W-2

forms, gift letters, and credit documents,

in order to obtain FHA-insured loans. He

did this while he was employed at MortChapter 2: HUD’s Single Family Housing Programs 27
gage Capital Resources. He also provided

borrowers with false documents in order

to obtain conventional loans while he was

employed at National City Mortgage.

 In the same case, defendants Beth

Lanza, Gary Stephens, and Zina Sagona,

all loan officers, were sentenced. Lanza

received 27 months incarceration and 5

years supervised release and was ordered

to pay $333,375 in restitution. Stephens

received 10 months incarceration and 5

years supervised release and was ordered

to pay $148,249 in restitution. Sagona

received 2 years probation and was

ordered to pay $197,594 in restitution.

Lanza had previously pled guilty to count

7 of a second superseding indictment

charging her with wire fraud in the

furtherance of loan fraud. Stephens pled

guilty to count 2, charging him with

making false statements to HUD. Sagona

pled guilty to counts 1 and 14 of the

original indictment, charging her with

conspiracy to commit loan fraud and

making false statements to HUD. The

three defendants originated fraudulent

FHA-insured loans while employed at

Mortgage Capital Resources. Lanza

continued to originate fraudulent conventional loans at National City Mortgage

after leaving Mortgage Capital Resources. The defendants falsified income

and employment information for borrowers including tax returns, pay stubs, IRS

W-2 forms, gift letters, and alternate

credit documents.

Thirty-two fraudulent FHA-insured

loans originated by the defendants have

been identified. Eighteen FHA loans

valued at $1.9 million have gone into

default, while all 18 of the conventional

loans have gone into default.

In Los Angeles, CA, in Federal

Court for the Central District of California, defendant Carla Piza, owner of

Quality Home Investments, was sentenced

to 12 months incarceration and 36 months

supervised release for false statements

and wire fraud. Piza was also ordered to

pay $103,699 in restitution. As part of a

loan origination fraud scheme, Piza

located and recruited unqualified buyers to

purchase residential properties using

FHA-insured mortgages. In furtherance of

the scheme, Piza purchased cashiers’

checks, which were used to provide the

funds for the buyers’ downpayments, and

fraudulent loan documents such as IRS W2 forms, pay stubs, and credit letters. The

fraudulent loan documents were given to

other coconspirators and submitted in loan

packages for FHA insurance. In total, the

scheme caused $425,809 in fraudulent

loans to be funded with a resulting

$250,000 loss to HUD.

In Cleveland, OH, in Federal Court

for the Northern District of Ohio, defendant Otis C. Bevel, Jr., was sentenced to 1

year and 1 day in prison and 5 years

supervised release and was ordered to pay

$121,325 in restitution, $23,500 to Wells

Fargo and $97,825 to Second National

Bank. Bevel pled guilty in June 2004 to one

count of mail fraud and three counts of

bank fraud for executing a scheme to

defraud Second National Bank and other

mortgage lenders through his two residential real estate companies, Capital Realty

Group and Midwest Venture Realty, Inc.

Bevel provided false and fraudulent

financial documents to lenders in support

of loan applications for both conventional

and FHA-insured loans. Several of the

applications were in fictitious names.

False and fictitious Social Security

numbers, pay stubs, and tax forms were

also used, in addition to nominee or

Chapter 2: HUD’s Single Family Housing Programs 28
nonexistent employers, to falsely verify

employment and income for the loan

applicants. In one instance, Bevel caused

a loan application to be provided and the

mortgage loan issued in the name of a

minor child, concealing from the lender

the true identity of the borrower. HUD

insured this particular loan for $111,599.

To date, Bevel has illegally earned

more than $500,000 in proceeds from his

activities. He is currently serving a prison

sentence for previous mortgage fraud,

after pleading guilty to Federal charges in

U.S. District Court in March 2003. Bevel

continued this illegal activity until he

reported to the Bureau of Prisons in

August 2003.

Racketeering/Theft

In Washington, DC, in Federal

Court for the District of Columbia,

defendant Sunday Yemi Adefehinti, a real

estate agent, was sentenced to 74 months

incarceration and 5 years supervised

release and was prohibited from employment in the real estate industry while on

supervised release. Adefehinti’s sentence

was based on a loss amount of $628,900,

the amount of loan proceeds fraudulently

received from commercial banks relating

to five properties. Adefehinti was also

ordered to pay $340,922 in restitution to

the commercial banks he defrauded.

Additionally, a forfeiture order was

entered in the amount of $1,253,338; the

proceeds will go to the Federal Government. The amount of the forfeiture order

represents the total amount of funds that

were obtained from racketeering activity.

In October 2003, Adefehinti was

found guilty of one count of racketeering,

five counts of bank fraud, one count of

money laundering, and one count of

interstate transportation of stolen property.

Adefehinti, along with Tayo John Bode,

Stephen Benson Akinkuowo, and Olushola

Akinleye, were involved in a scheme in

which they flipped properties to

strawbuyers, using conventional mortgages, then rented the properties under

the Section 8 program. They failed to

make any mortgage payments, and the

mortgages subsequently went into default

and foreclosure.

In Las Vegas, NV, following an

investigation involving a stolen check

worth over $30,000 from HUD, defendant

Lyn Robison was arrested by OIG Agents

for theft of government funds. DP Service

Corporation is a HUD contractor responsible for paying real estate taxes on HUD

properties. DP Service Corporation

issued a check payable to the New York

City Department of Finance as payment

for real estate taxes on a HUD property in

New York. The check was diverted to

Robinson Land and Realty and allegedly

deposited by the defendant. Robison

admitted that he deposited the check and

agreed to repay the funds.

Identity Fraud

In Salt Lake City, UT, in 3rd District Court, Davis County, defendant

Anastasia Preciado Rolon was sentenced

to 1 year in jail and 3 years probation and

was ordered to pay $62,328 in restitution

to HUD after pleading guilty to one count

of communications fraud. In a related

case, defendant Teodoro Mendez was

arrested as a result of his indictment for

recording false or forged instruments,

forgery, and identity fraud. These actions

stemmed from a mortgage fraud investigation which disclosed that Rolon and

Mendez used the Social Security number

of a third party in order to qualify for the

Chapter 2: HUD’s Single Family Housing Programs 29
purchase of a single-family home with an

FHA-insured mortgage. The properties

were part of a flipping scheme conducted

through an LLC that enticed undocumented/unqualified buyers to purchase

homes at inflated prices. The owners of

the LLC conducted simultaneous closings

on the same day, netting large profits. The

subsequent default regarding the mortgage would be reflected on the innocent

victim’s credit report, making future

financial transactions very difficult. The

total loss to HUD is expected to exceed

$1.7 million for all cases associated with

the scheme.

In another related case, in Weber

County District Court, defendant Celso

Rodriguez pled guilty to one count of

communications fraud and one count of

forgery. Rodriguez also used the Social

Security number of a third party to obtain

an FHA-insured home loan. The property

was part of the flipping scheme conducted

through an LLC.

In Los Angeles, CA, in U.S. District

Court for the Central District of California, defendant Greg Phillips was sentenced in Los Angeles, CA, to 5 months

in prison and 5 months home detention

and was ordered to pay $442,888 in

restitution. Phillips pled guilty to mail

fraud in April 2002. Phillips and two

other defendants, Ben Harrison Tyler and

Tony Hicks, were involved in a scheme

directed at commercial lending institutions and HUD’s Title I program. The

defendants used the personal information

of others, including Social Security

numbers, dates of birth, and other individual credit information, to fraudulently

obtain conventional mortgage loans and

FHA Title I loans. In addition, they

recruited strawbuyers or directed other

coconspirators to do so, created or

obtained false IRS W-2 forms and pay

stubs in the names of the strawbuyers, and

then notarized documents certifying that

the strawbuyers signed deeds and other

documentation necessary for the transactions. The loan applications and false

documents were submitted to lending

institutions to support inflated income

levels necessary for the loans to fund. The

defendants’ scheme caused $1.5 million in

loans to go into default. Ben Tyler was

previously sentenced to 5 years probation,

8 months home detention, $43,516 in

restitution, and a $10,000 fine, while Tony

Hicks was sentenced to $60,454 in restitution.

In Cleveland, OH, in Federal Court

for the Northern District of Ohio, defendant Willis Ricardo Barker, a real estate

appraiser also known as Leroy Richards,

was indicted on one count of misuse of a

Social Security number. According to the

indictment, Barker on or about July 14,

1997, applied to the Social Security

Administration in Cleveland and obtained

a false Social Security number in the

name of Leroy Richards. He did this

because he had a prior felony conviction

in his own name. Between 1997 and 2000,

Barker allegedly used the false Social

Security number and alias of Richards to

perform at least 60 real estate appraisals

for which he received an average of $300

per transaction. Other allegations of

Social Security number misuse include his

purchase of 10 properties, 2 of which were

FHA-insured, and the collection of over

$80,000 in Section 8 rental income from

the Cuyahoga Metropolitan Housing

Authority under the name of Richards.

Chapter 2: HUD’s Single Family Housing Programs 30
Conspiracy/False Claims/

Mail and Wire Fraud

In Brooklyn, NY, in Federal Court

for the Eastern District of New York,

defendants Donald Fazio and Gary

Konstantin were indicted on 61 counts of

conspiracy, wire fraud, mail fraud,

money laundering, and insurance fraud,

with forfeiture counts seeking monetary

judgments in the amount of $11.6 million.

The defendants were mortgage brokers

and branch managers at Brucha Mortgage Bank, a now-defunct mortgage

company, and allegedly participated in a

massive scheme to defraud HUD’s

Section 203(k) Rehabilitation Home

Mortgage Insurance Program.

In Pittsburgh, PA, in U.S. District

Court for the Western District of Pennsylvania, defendants William McKee and

Terry Boring, the principals of nowdefunct Zintron, Inc., a Pittsburgh-based

home improvement company, pled guilty

to conspiracy, making false statements to

HUD, and mail fraud. Boring also pled

guilty to income tax evasion. The pleas

culminate two and one-half years of

investigative efforts focused on Zintron,

which engaged in predatory lending

practices against elderly and low-income

homeowners. The scheme involved

solicitation by McKee and Boring,

wherein both marketed Zintron’s home

improvement services door-to-door and

through distribution of flyers, falsely

alleging that Zintron was affiliated with

HUD/FHA. Many of the victims were

interested in having home improvements

done but lacked good credit and the

resources to make payments on the loans

Zintron originated. To get the loans

approved, McKee and Boring regularly

falsified the information they supplied to

lenders, including verifications of employment, IRS W-2 forms, pay stubs, and

homeowners’ insurance policies. Many

victims received loans for which they did

not qualify, resulting in numerous defaults/

foreclosures. A total of 41 homeowners

defaulted on fraudulent FHA-insured Title

I loans that Zintron originated, resulting in

claims to HUD totaling more than

$600,000.

Zintron also originated hundreds of

fraudulent conventional home improvement loans, resulting in a significant

number of defaults. As part of their plea

agreements, McKee and Boring acknowledged that their conduct resulted in losses

that exceed $2 million.

In Chicago, IL, defendant Theresa

Holt, a fugitive from Illinois, was arrested

upon her arrival in New York City after

originally surrendering to American

authorities in South Africa. Prior to the

arrest, Chicago agents received a call

from Holt’s daughter reporting her

mother’s whereabouts and asking for a

reward to turn her in. Holt then surrendered to the American Embassy in South

Africa and flew to New York. Holt was

the alleged main conspirator in an alleged

fraud scheme that involved 100 properties

and $5.7 million in loans. Holt, a former

employee of North East Austin, a HUDapproved nonprofit, started her own

business, known as Share Development

Corporation. Share Development acquired

numerous properties, some of which were

obtained through HUD’s Direct Sales

Program and North East Austin, and

resold them. Many of the mortgage loan

applications allegedly contained inflated

employment information, including

information that some buyers worked for

Share Development and Northeast Austin.

In addition, buyers, as well as loan

officers, were allegedly paid between

Chapter 2: HUD’s Single Family Housing Programs 31
Chapter 2: HUD’s Single Family Housing Programs 32

$3,000 and $4,000 outside of closing for

purchasing the properties. Holt is currently in New York awaiting extradition to

Chicago.

In Los Angeles, CA, in Federal

Court for the Central District of California, defendant Julio Baez, also known as

Julio Baezeta, was indicted on one count

of conspiracy and two counts of making

false statements to HUD. Baez, who

worked as a real estate professional,

allegedly caused false documentation to

be submitted to HUD concerning FHAinsured loans. The indictment alleges that

in addition to purchasing fraudulent

income documents from April 8 Realty,

Baez manufactured fraudulent documents.

The total amount of the loans involved in

the fraud was $2,581,911, with a total loss

to HUD of $743,231. Baez, who was

originally identified as a target in the

April 8 Realty investigation, was the

thirtieth person charged in this case.

In Los Angeles, CA, in Federal

Court for the Central District of California, defendant Jade Serrano was sentenced to 5 years probation and was

ordered to pay $868,621 in restitution to

HUD. Serrano previously pled guilty to

two counts of wire fraud. This case was

initiated after OIG received the results of

an internal investigation by North American Mortgage Corporation, in which

North American Mortgage Corporation

discovered and self-reported fraud in its

Montebello, CA, branch office. Upon

further investigation, the defendant, a

loan officer with North American Mortgage Corporation, was found to have

purchased false income- and creditrelated documentation for inclusion in 22

FHA-insured home loans valued at $3.5

million, with a $1.5 million loss to HUD.

In Springfield, MA, in Federal

Court for the District of Massachusetts,

defendant Angel L. Serrano, Jr., a former

self-employed real estate broker, was

sentenced to 27 months confinement and

36 months supervised release and was

ordered to pay $308,457 to HUD. Serrano

was previously convicted of conspiracy,

wire fraud, and making false statements.

He bought 34 properties and sold them on

the same day he purchased them to lowincome, unsophisticated purchasers.

Serrano defrauded the mortgage lenders

by making false representations concerning the purchasers’ downpayments and

income and submitting fraudulent documentation of gifts and credit references.

Many of the mortgages involved in the

scheme were insured by FHA and went

into default, resulting in a loss of $308,457

to the FHA insurance fund.

In Santa Ana, CA, in Federal Court

for the Central District of California,

defendant Steve Moreno was sentenced to

18 months in prison and 3 years supervised release and was ordered to pay

$129,754 in restitution to HUD. Defendant Toni Rogers was sentenced to 5 years

probation and was ordered to pay $9,360

in restitution to HUD. This investigation

began after OIG received allegations that

real estate professionals, including

Moreno and Rogers, were involved in

making false statements to HUD by

assisting unqualified borrowers in obtaining FHA-insured loans. These professionals contacted forgers to prepare false and

fabricated income- and credit-related

documentation for buyers whom they

represented. They would then use the false

documents to prepare fraudulent loan

applications, which were ultimately

submitted to HUD. Thirty individuals have

pled guilty as a result of this investigation.

The estimated loss to HUD is $10 million.
Chapter 2: HUD’s Single Family Housing Programs 33

In Portland, OR, in U.S. District

Court for the District of Oregon, defendant Curtis Lee pled guilty to one count of

making a false statement to HUD with

intent to defraud. Lee’s participation in

the fraud scheme involved FHA-insured

properties. Prior to being indicted in

Colorado, Lee moved to Oregon, resulting in the actual plea agreement being

transferred to the Oregon District Court.

In Denver, CO, in U.S. District

Court for the District of Colorado,

defendant Michelle Palmer, a homebuyer

who used fraudulent documents to qualify

for an FHA-insured loan, was sentenced

to 4 months probation and was ordered to

pay $10,000 in restitution. Palmer was

previously indicted for submitting false

statements in relation to FHA-insured

properties.

Defendant Paulmiko Parker, a

homebuyer who used fraudulent documents to qualify for an FHA-insured loan,

was sentenced to 2 years probation for

making false statements to HUD involving

FHA-insured properties.

Defendants Janice Marshall and

Sallena Nichols, both homebuyers, were

sentenced for using fraudulent documents

to qualify for an FHA-insured loan.

Defendant Marshall was ordered to pay

$915 in restitution and serve 24 months of

probation. Defendant Nichols was ordered to pay $20,988 in restitution and

serve 24 months probation.

Defendant Marshon Williams pled

guilty to a one count of making a false

statement to HUD with intent to defraud.

Williams was indicted in February 2004

for making a false statement regarding an

FHA-insured loan.

Defendant Maria Powell was found

guilty of one count of making false statements. In 1999, Powell purchased a home

in Aurora, CO, using an FHA-insured

loan. She made a number of false statements which enabled her to qualify for the

loan, including false income information,

gift letters, and verifications of rent.

Defendant Lynn Jones pled guilty to

one count of making false statements to

HUD (Title 18, U.S. Code, Section 1012)

with intent to defraud. Jones was previously indicted on February 24, 2004, for

her participation in a loan origination

fraud scheme involving FHA-insured

properties. Jones had been charged with

one count of false statements, one count of

misuse of a Social Security number, and

one count of aiding and abetting.

Defendant Ekan Udom, who used

fraudulent documents to qualify for an

FHA-insured loan, was sentenced to 24

months of probation/supervised release,

$20,000 court-ordered restitution, and a

$25 special assessment fee. Udom was

previously indicted on February 24, 2004,

for his participation in the loan origination

fraud scheme involving FHA-insured

properties and had pled guilty to a violation of Title 18, U.S. Code, Section 1012

(making false statements to HUD).

Defendant Vaughn Thomas, a

homebuyer who used fraudulent documents to qualify for an FHA-insured loan,

was sentenced to 2 years probation and

was ordered to pay $37,977 in restitution.

Thomas made false statements to HUD

with regard to an FHA-insured loan.

These loans valued at $3.8 million, to

date, have resulted in a $188,800 loss to

HUD.
Chapter 2: HUD’s Single Family Housing Programs 34

In Reading, PA, in Federal Court for

the Eastern District of Pennsylvania,

defendant David Herb, a real estate

agent, pled guilty to participating in a

scheme with four others, James

Ballantyne, Philip Garland, Judith

Grimmel, and Richard Myford, to sell

new homes in and around Lancaster, PA,

with FHA-insured mortgages. The

buyers, who were unqualified, were made

eligible through the use of false source of

funds letters and other misrepresentations

of liabilities, credit worthiness, and

income. Herb was included in a previous

34-count indictment of all five defendants;

he is the first to plead guilty. An investigation disclosed that, over a 5-year period,

Herb conspired to sell up to 100 new

homes to unqualified buyers, most of

whom were unsophisticated, first-time

purchasers. The developer provided funds

for the required downpayments, a procedure normally not allowed, and hid this

through the use of false and forged statements from friends, family members,

charitable organizations, etc. Further, in

many cases, the developer required the

purchasers to execute a promissory note

to cover the amount of funds improperly

advanced. This was never disclosed on

official documents or at settlement as

required. To date, about half of the 100

mortgages have gone into foreclosure,

which has resulted in claims of almost $5

million against the FHA insurance fund.

In Newark, NJ, in Federal Court for

the District of New Jersey, defendant

Shena Fraser, a loan officer, pled guilty

to one count of conspiracy to commit mail

fraud and false statements. Fraser

participated in the purchase of residential

homes, which were then sold at falsely

inflated prices to unqualified buyers who

were recruited to purchase the homes.

Fraudulent mortgage applications were

completed, which included false bank

statements, appraisals, employment

verifications, and gift letter information.

As a result of the fraud, loans valued at

$4,100,292 were funded. These loans

have, to date, resulted in a $607,437 loss to

HUD.

In San Juan, PR, in Federal Court

for the District of Puerto Rico, defendant

Javier E. Diaz Santiago pled guilty to a

one-count information charging him with

preparing false and fraudulent FHA loan

applications for third parties. The applications were subsequently submitted to and

approved by different lending institutions

in Puerto Rico. Between 1999 and 2002,

Diaz Santiago, doing business as Capital

Investment, created false employment

records and downpayment information,

inflated borrowers’ income statements,

created false income tax forms, and

generated other necessary documents that

would allow the borrowers to qualify for

the loans. As a result, 13 FHA-insured

loans valued in the amount of $1,184,163

were involved. Diaz Santiago agreed to

pay $69,000 in restitution to HUD. In

October, Diaz Santiago was sentenced to

9 months imprisonment and 1 year

probation, and a $2,000 fine was imposed.

In Denver, CO, in U.S. District

Court for the District of Colorado, defendant and illegal alien Leonor Martinez

pled guilty and was sentenced to 144 days

in prison and 1 year of supervised release.

She was also ordered to pay $35,620 in

restitution. Martinez was arrested in

March 2004 for using fraudulent documents when she purchased a home

insured through HUD’s Section 203(b)

program. The investigation began after

OIG received allegations that several real

estate agents were assisting homebuyers

in securing FHA-insured mortgages using
Chapter 2: HUD’s Single Family Housing Programs 35

fraudulent Social Security numbers and

other counterfeit documents.

In Milwaukee, WI, in Federal Court

for the Eastern District of Wisconsin,

defendant Stacy Orr, a participant in the

Officer Next Door (OND) program, was

sentenced to 4 years probation and 80

hours of community service and was

ordered to pay $27,180 in restitution to the

Department of Veteran Affairs (DVA).

Orr is a former City of Kenosha, WI,

police officer who was indicted in August

2003 for submitting false statements to the

DVA in connection with loan applications

used to obtain guarantees on mortgages

for two properties in Kenosha, including a

property he purchased through HUD’s

OND program. Both mortgages subsequently went into foreclosure. In addition

to causing DVA to pay out $27,180 for the

guarantees, Orr failed to complete his 3-

year OND residency requirement. In

November 2003, Orr pled guilty to the

second count of this two-count indictment,

which related to the OND property.

In Seattle, WA, in U.S. District

Court for the Western District of Washington, defendant Ive Ramirez was

sentenced to 12 months and 1 day in

prison and 5 years supervised release and

was fined $5,000. Ramirez’s codefendant,

her husband Dino Ramirez, received the

same sentence in May 2004. The defendants previously pled guilty to one count

each of wire fraud. The couple owned and

operated an unlicensed mortgage brokerage business under the name Mortgage

200 in the State of Washington. In order to

process their loans through the lender,

Flagstar Bank, the Ramirezes assumed

the identity of Liberty Financial, a licensed mortgage brokerage that was no

longer in business. In addition to using the

false broker identification, the defendants

prepared and submitted loan applications

containing false employment and income

information for borrowers in order to get

the loans approved by Flagstar Bank. In

return, the defendants collected various

fees from the borrowers during the

processing of the loans. They collected

more than $129,000 in fees while processing 11 loans that were closed with Liberty

Financial’s broker identification.

In Lake Success, NY, in Federal

Court for the Eastern District of New

York, defendant Patrick Cardeanas was

sentenced to 6 months time served and 1

year probation. Defendant Nicholas

Graham pled guilty to conspiracy and

making false statements. Both Cardeanas

and Graham were contractors working

with American International Mortgage

Bankers and helped it in ensuring that

questionable homebuyers located in the

New York metropolitan area, including

Nassau and Suffolk Counties, would

qualify for FHA-insured loans. Over 90

percent of these loans contained one or a

variety of altered documents, including

false pay stubs, bank statements, IRS W-2

forms, rent verifications, verifications of

employment and deposit, credit worthiness letters, gift letters, and credit reports. The Section 203(b) loans were

subsequently endorsed by HUD. This

investigation disclosed that 174 properties

valued at $47.1 million were acquired

through false documentation, resulting in a

loss of $4,905,073 in FHA-insured funds.

In Greenbelt, MD, defendants Lynn

Kromminga, a settlement attorney; John

Bryant, a speculator/investor; Valerie

Borders, a loan processor; and Scott

Davis, a loan officer, pled guilty to

conspiracy to defraud. Defendants admitted that, from early 1998 until late 2000,

they conspired among themselves and with
Chapter 2: HUD’s Single Family Housing Programs 36

others to submit false documents to

enable otherwise unqualified borrowers to

obtain FHA-insured and conventional

mortgages. Bryant created false employment and income documents that were

provided to Borders for processing and

underwriting approval. Kromminga

prepared and certified at settlement that

the mortgagors had provided sufficient

personal funds to settle, when in fact they

had not. Kromminga also prepared

fraudulent title policies to facilitate

settlement. Davis purchased three homes

from Bryant, using false documents, and

then allowed Bryant to collect rental

income until the homes went into foreclosure. Their fraudulent actions involved 26

properties valued at $2.5 million with a

loss of $467,441.

A superseding indictment was filed

against defendants Torina Collins, a loan

officer, and Ronald Brvenik, an appraiser,

charging them with conspiring with

defendant Bryant, et al, to sell FHAinsured homes to unqualified buyers at

inflated prices. To date, six defendants

have pled guilty, with four additional

defendants pending adjudication.

Also in this case, defendants Richard

Minor and Brendan Reilly, both loan

officers, pled guilty to assisting in the

preparation of false documents to enable

strawbuyers and others to qualify for

FHA-insured and conventional mortgages.

The strawbuyers and other buyers purchased the properties from defendant

John Bryant, a speculator who has already pled guilty as a result of this

ongoing OIG/FBI investigation. Minor

and Reilly admitted that, from 1999 to

2000, they approved mortgages on behalf

of individuals whom they knew were

qualified only through the use of false

employment information. Further, they

admitted knowing that the sales prices of

the homes had been inflated with false

appraisals. FHA suffered more than

$100,000 in losses as a result of the

defendants’ illegal activities. They are the

seventh and eighth out of 10 defendants to

plead guilty in this case.

In Dallas, TX, defendant Rene

Salinas, a real estate broker, and Green

Homes Realty, his company, were suspended from further procurement and

nonprocurement transactions with the

Executive Branch of the Federal Government, including HUD. The suspension

was the result of the defendant’s previous

guilty plea in Dallas, TX, in Federal

Court for the Northern District of Texas,

to one count of mail fraud. Salinas assisted borrowers by preparing and filing

false IRS W-2 forms, pay stubs, tax

returns, credit letters, employment letters,

loan applications, and other loan documents. He also supplied false Social

Security numbers to borrowers and

collected payments of $200 to $500 from

borrowers for the false loan documents.

Salinas entered into a plea agreement by

admitting to originating three false loans

that resulted in $55,936 in claims.

In Chicago, IL, in Federal Court for

the Northern District of Illinois, defendant

Paul Crutchfield, Executive Director of

Omega Housing, a HUD-approved

nonprofit, pled guilty, as part of an agreement with the U.S. Attorney’s Office, to

one count of conspiracy and agreed to be

liable for $376,190 in repayments to

HUD. Crutchfield and defendants

Saundra Mayfield, an owner/investor, and

Yinka Otabor, Executive Director of

Hope, another HUD-approved nonprofit,

were previously charged in a four-count

indictment relative to HUD’s Direct Sales

Program. Crutchfield was a member of
Chapter 2: HUD’s Single Family Housing Programs 37

the alumni chapter of the Omega Psi Phi

fraternity in Chicago. Omega Housing

was an Illinois nonprofit organization

operated by the alumni chapter of Omega

Psi Phi. Although Crutchfield was aware

of HUD’s program rules prohibiting

nonprofits from selling discounted properties to investors, Crutchfield used his

position at Omega Housing to purchase

between 20 and 25 properties as an

investor for his personal financial benefit

in violation of HUD’s Direct Sales

Program. He fraudulently concealed the

nature of the transactions from HUD and

made materially false misrepresentations

to HUD relating to the purchase, ownership, and disposition of the properties.

Crutchfield admitted keeping several

of the properties for himself as investment

properties. In one instance, he used his

wife’s maiden name to hide his true

ownership of the property. In some

instances, he rented the properties out to

Section 8 tenants. Finally, he used the

properties on subsequent real estate

purchases as evidence of properties he

owned in order to bolster his credit scores

and ability to qualify.

In Philadelphia, PA, in Court of

Common Pleas, Philadelphia County,

defendants Ronald Banks and Denea

Langston were sentenced to 56 months

incarceration, to be followed by 5 years

probation, and ordered to pay restitution

of at least $28,000 to at least five victims

of a scam that they perpetrated using

documents containing the forged signature

of former HUD Secretary Henry

Cisneros. The defendants had been

previously convicted of engaging in a

scheme to solicit money from various

individuals on the pretext that the money

would be used to purchase vacant lots and

abandoned properties in Philadelphia that

would then be developed into low-income

housing using HUD grants. The defendants created false deeds and tax statements, in addition to a false, forged letter

purportedly signed by then HUD Secretary Henry Cisneros, promising HUD

funds to renovate the properties, in support

of the scheme. At least five investors

contributed $135,000, which the defendants used for such things as vacations,

purchase of fine clothing, and the purchase of a Jaguar automobile.

Money Laundering

In Scottsdale, AZ, State Court,

Harold V. Fields was indicted for allegedly recruiting investors, through advertisements in newspapers, to give him

$25,000 to $100,000 to purchase HUD

REO properties. Fields told the investors

that the funds would be held in escrow and

used for downpayments and closing costs

for up to 12 properties. Often because of

financing issues, many of the loans did not

close, and the properties were recycled

back into HUD’s inventory. Many of the

investors began demanding that Fields

return their money after he failed to

provide closing costs for several homes.

Fields was indicted on 24 counts for which

investors lost $1.4 million dollars. Later,

Fields was indicted on additional charges

resulting from the discovery of four

additional victims who lost a total of

$65,750.

In Newark, NJ, U.S. District Court

in New Jersey, defendant Steven Freeman

pled guilty to conspiracy to embezzle

from a welfare benefit fund in violation of

Title 18, U.S. Code, Sections 371 and 664.

Previously a six-count Federal indictment

was unsealed against Stanley Rothman,

Joseph Nardone, Jr., and Peter Hasho.

Rothman was also charged with money
Chapter 2: HUD’s Single Family Housing Programs 38

laundering relating to payments he

received in violation of Title18, U.S.

Code, Section 1956 (money laundering).

Subsequent to the indictment being

unsealed, Rothman, Nardone, Jr., and

Hasho were arrested. Joseph Nardone

Sr., was also previously indicted on

charges of Title 18, U.S. Code, Sections

371 and 664 (conspiracy to embezzle from

a welfare benefit fund). Nardone Sr., was

the former President of the Novelty

Production Workers Union.

Rothman used Steven Freeman as a

strawbuyer to purchase HUD properties

in Florida, which Rothman later resold

for a profit in violation of Title 18, U.S.

Code, Section 371. Some of the

strawbuyers used by Rothman were

members of his family, and others worked

or were associated with the Novelty

Production Workers Union 148 Welfare

Fund. There were 31 properties valued at

$4.1 million involved in the scheme,

totaling losses of $700,000 to HUD.

Conversion of Government

Property

In Grand Rapids, MI, in Federal

Court for the Western District of Michigan, defendants John and Emalee Birnie,

HUD contractors, were each sentenced to

41 months imprisonment and 36 months

probation and were ordered to pay

$286,000 in restitution joint and several.

The Birnies were previously convicted on

10 counts of wire fraud, 10 counts of

conversion of government property, and 1

count of money laundering for their role in

converting 11 properties from HUD’s

property disposition inventory for their

personal use. Emalee Birnie had been a

long-term HUD contractor for the Grand

Rapids Field Office in the capacity of a

real estate asset manager and a closing

agent. She received payments of over $1.5

million from the Department during the

period she held these positions. Defendant

Terry Hansen, former Chief Property

Officer for the HUD Grand Rapids Field

Office, previously pled guilty in this case

and is awaiting sentencing. Two indictments against defendants Jack Brown and

Tim Doctor, who were principals of a

nonprofit, remain outstanding in the case.

False Statements

In Baton Rouge, LA, Middle District of Louisiana, Jimmie Lee Matthews

was indicted on 12 counts including Title

18, U.S. Code, Section 1344 (bank fraud),

Title 18, U.S. Code, Section 1001 (false

statements), and Title 42, U.S. Code,

Section 408(a)(7)(B) (illegal use of a

Social Security number). Matthews

fraudulently obtained a HUD-insured loan

in the amount of $108,850 for a singlefamily residence located at 808 Kenon

Street, Baker, LA, through First Mortgage Services in Baton Rouge, LA.

Through investigative efforts, it was

discovered that Matthews had also obtained several other loans and lines of

credit with car dealerships and credit

unions, also located in the Baton Rouge

area. Matthews was obtaining these

various loans by providing one of several

false or stolen Social Security numbers. It

was further uncovered that, not only did

Matthews provide a stolen Social Security

number on his loan application to HUD,

he also provided false income and employment information. Agents transported

Matthews from the Dixon Correction

Facility, where he was serving time on a

separate State charge, to the custody of

the United States Marshals Service in

Baton Rouge for his initial appearance. On

September 20, 2004, Matthews was

arraigned and entered a plea of not guilty.

Trial on the matter is pending.
  

In Los Angeles, CA, in the Central

District of California Federal Court,

Western Security Group was debarred by

HUD. During the period of debarment,

for a 3-year period beginning on April 2,

2004, Western Security Group is excluded

from procurement and nonprocurement

transactions as either a principal or

participant with HUD and throughout the

Executive Branch of the Federal Government. Greg Phillips, Tony Hicks, and Ben

Tyler owned Western Security Group and

used the company in a fraud scheme

directed at commercial lending institutions and the HUD/FHA Title I program.

The defendants used the personal information of others to fraudulently obtain

single-family mortgage loans and Title I

loans insured by HUD/FHA for estimated

losses of $1.5 million. They obtained

loans through the fraudulent use of the

victims’ Social Security numbers, dates

of birth, and other personal and credit

information. Phillips, Hicks, and Tyler

have all been convicted and sentenced.

In Santa Ana, CA, in Federal court,

defendant Manny Frias pled guilty to 1

count of Title 18, U.S. Code, Section 1343

(wire fraud), 2 counts of Title 18, U.S.

Code, Section 2(b) (aiding and abetting),

and 1 count of Title 18, U.S. Code,

Section 1010 (false statements); defendant

Frank Gonzalez pled guilty to 1 count of

Title 18, U.S. Code, Section 1343 (wire

fraud), and Title 18, U.S. Code, Section

2(b) (aiding and abetting); defendant

Oscar Gonzalez pled guilty to 2 counts

each of Title 18, U.S. Code, Section 1343

(wire fraud), and Title 18, U.S. Code,

Section 1344 (bank fraud), and 4 counts of

Title 18, U.S. Code, Section 2(b) (aiding

and abetting). Manny Frias, Frank

Gonzalez and Oscar Gonzalez were

remaining defendants from the Andy

Ocampo case. They bought fraudulent

documents from Ocampo and caused

them to be submitted into FHA loan files.

Andy Ocampo was sentenced in 2001 to 4

months confinement, $599,860 in restitution, and 36 months supervised release.

Chapter 2: HUD’s Single Family Housing Programs 39

Chapter 3: HUD’s Public and Indian Housing Programs
The U.S. Department of Housing and

Urban Development (HUD) provides

grants and subsidies to approximately

4,200 public housing authorities (PHAs)

nationwide. About 3,200 PHAs manage

public housing units and another 1,000,

with no public housing, manage units

under Section 8 programs. Many PHAs

administer both Public Housing and

Section 8 programs. HUD also provides

assistance directly to PHAs’ resident

organizations to encourage increased

resident management of public housing

developments and to promote the formation and development of resident management entities and resident skills programs. Programs administered by PHAs

are designed to enable low-income

families, the elderly, and persons with

disabilities to obtain and reside in housing

that is safe, decent, sanitary, and in good

repair.

Audits

During this reporting period, the

Office of Inspector General (OIG) issued

23 reports: 2 internal audits, 17 external

audits, and 4 external memoranda, in the

Public and Indian Housing program area.

These reports disclosed nearly $2.7

million in questioned costs and about

$52.3 million in recommendations that

funds be put to better use. During this

reporting period, we reviewed the Public

and Indian Housing Information Center

(PIC); the Welfare to Work Section 8

Voucher program; and public housing

activities, including PHA activities with

related nonprofit entities, Section 8

Housing Choice Voucher program activities, and other public housing activities. In

addition, we are reporting on our work

that resulted in the firing of a PHA

officer.

Public and Indian Housing

Information Center

PIC was designed to facilitate a more

timely and accurate exchange of data

between PHAs and Local HUD offices by

allowing the PHAs to submit information

to HUD over the Internet. The OIG

audited controls over the validity, accuracy, and completeness of data within the

PIC as it relates to (1) the Form HUD50058 module, which collects and stores

data on families that participate in Public

Chapter 3: HUD’s Public and Indian Housing Programs 42

Chart 3.1: Public and Indian Housing

Program Reports Issued

4 2

17

 Internal Audits External Audits External Memoranda

 Questioned Costs Funds Put to Better Use

Chart 3.2: Public and Indian Housing

Program Dollars

Internal

Audits

50,000,000

40,000,000

30,000,000

20,000,000

10,000,000

0 External

Audits

External

Memorandum

The cost figures in the charts above represent the actual monetary benefits for all reports issued during this semiannual

period. The monetary benefits shown in the Profile of Performance represent only those reports with management decisions

reached during this semiannaul period. Because there is a time lag between report issuance and management decisions, the

two totals will not agree.
Housing or Section 8 rental subsidy

programs; (2) the Section 8 Management

Assessment Program (SEMAP), which

measures PHA management performance in 14 key areas of the Section 8

tenant-based assistance programs; and (3)

the building and unit inventory data in

PIC, which provides information on the

more than 1.2 million units managed by

PHAs. We found the following:

 Adequate controls are not in place

over the identification of tenants.

Specifically, tenant names and

Social Security numbers are kept

on a Web server outside HUD’s

secure network, making them

highly vulnerable to hackers for

identity theft, and HUD does not

sufficiently identify tenants who are

not citizens or tenants who are

citizens but do not provide a valid

Social Security number, increasing

opportunities for fraudulently

obtaining housing benefits.

 Certain controls over the accuracy

of data within PIC have been

inadequate. PIC was initially

populated with data that were not

entirely complete and accurate, the

annual reexamination process that

would update and correct inaccurate and incomplete data within the

PIC system is not enforced, controls

over the calculation of total tenant

payments are not functioning, and

PIC’s Building and Unit module

(inventory of public housing units)

contains inaccurate data.

Current efforts to address these

problems are insufficient. As a result,

PIC data alone would not be a reliable

source of information for HUD’s assessment of PHA performance and the

calculation of funding for the Capital

Fund.

We recommended that HUD establish adequate controls over PIC data

quality before attempting to implement

planned enhancements to PIC. (Report

No. 2004-DP-0003)

Welfare to Work Section 8

Voucher Program

The OIG’s audit of the Welfare to

Work (WtW) Section 8 Voucher program

disclosed that because HUD did not

perform a front-end risk assessment of the

WtW program, the program’s design did

not adequately emphasize family selection

and monitoring requirements and established unrealistic timeframes for leasing

units with WtW vouchers. This caused

conflicting priorities for PHAs in issuing

vouchers. As a result, the WtW program

was not properly implemented or monitored, and program requirements were

not met.

In implementing the WtW program,

HUD did not ensure PHAs complied with

statutory and Notice of Funding Availability (NOFA) family eligibility requirements

in establishing criteria for selecting

among eligible WtW families or determine that a WtW voucher was critical for

a family to successfully obtain or retain

employment. As a result, PHAs issued

WtW Section 8 vouchers to families

before verifying their eligibility to participate in the program. We estimate that

about $7 million in WtW funds allocated

to the Seattle Housing Authority for fiscal

year (FY) 2004 will be put to the use

Congress intended once HUD brings its

program into compliance with statutory

and NOFA requirements.

Chapter 3: HUD’s Public and Indian Housing Programs 43
We recommended that HUD require

a front-end risk assessment for any new

Section 8 Voucher programs in accordance with HUD’s Departmental Management Controls Program Handbook and

that HUD ensure that the WtW Section 8

Voucher program is terminated in accordance with departmental requirements.

(Report No. 2004-SE-0001)

Public Housing Authority

Activities with Related

Nonprofit Entities

In our previous semiannual report,

we reported that HUD was often unaware

of the extent to which development activities with related nonprofit organizations

impacted PHA operations and of the

numerous Annual Contributions Contract

(ACC) and other violations associated

with them. In the previous period, we

identified PHAs with indicators of possible unauthorized development activities

from PHA financial statements. We also

reported that we would continue to assess

the impact of ACC and other requirement

violations as they related to PHA activities with related nonprofit entities. During

the current period, we completed reviews

of an additional nine PHAs. Improper

activities were found at eight of the nine

PHAs, resulting in questioned costs of

nearly $13.4 million and funds that could

be put to better use of about $39.7 million.

Details of the eight PHAs where improper activities occurred are discussed

below.

The Puerto Rico Public Housing

Administration (Authority) in San Juan,

PR, improperly withdrew and used over

$1.1 million in operating subsidies for

program activities not related to the administration of its public housing projects. In

addition, the Authority did not provide

support to document the purpose of over

$4.2 million owed to its Low-Income Public

Housing Program by the Puerto Rico Public

Buildings Authority and its public housing

management agents.

We recommended that HUD require

the Authority to reimburse $1.1 million to

the appropriate projects from nonfederal

funds for ineligible expenses and submit

all supporting documentation for and

determine the accuracy of the $4.2 million

owed by the Puerto Rico Public Buildings

Authority and its management agents. Any

amounts determined ineligible must be

reimbursed to the projects from

nonfederal funds. In addition, we recommended that the Authority be required to

implement policies and procedures to

ensure that grant funds are used solely for

authorized purposes. Further, HUD

should work with the Authority to identify

and refer the officials responsible for the

mismanagement of HUD funds to the

Departmental Enforcement Center.

(Report No. 2004-AT-1006)

The Housing Authority of the City of

Asheville, NC, violated its ACC with

HUD by inappropriately advancing funds

and pledging assets for nonfederal development activities. HUD did not approve

these development activities. As of September 30, 2002, the Authority’s management had advanced over $1.8 million of

public housing funds for development

expenses on behalf of the owners of two

developments. The advances reduced

funds available to operate and maintain the

Authority’s conventional public housing

and other HUD programs and resulted in

cash flow problems. Management further

violated the ACC by pledging the

Authority’s full faith and credit for a $1.3

million letter of credit obtained to fund

development activities. In addition, the

Authority pledged a $649,000 certificate

Chapter 3: HUD’s Public and Indian Housing Programs 44
of deposit as collateral for a loan. The

Authority also entered into inappropriate

development and guarantee agreements

that placed assets at further risk. These

agreements were extremely one-sided in

favor of the investors. Lastly, the Authority

did not properly allocate costs attributable

to the nonfederal properties.

We recommended that HUD (1)

require the Authority to collect and

reimburse its public housing program the

remaining $977,000 of the $1.8 million

due from its affiliates or provide support

showing the funds were repaid or were

the result of accounting errors, (2)

determine whether the Authority properly

retained and subsequently pledged the

$649,000 certificate of deposit and

require the Authority to remit any improperly retained funds to the U.S.

Department of the Treasury, and (3)

require the Authority to assure that it will

no longer pledge assets. In addition, HUD

should take administrative sanctions

against the Authority’s Executive Director

and Board of Commissioners. (Report

No. 2004-AT-1007)

The Cookeville, TN, Housing

Authority violated its ACC with HUD by

inappropriately guaranteeing the performance of its related nonprofit corporation, Holladay Homes, Inc. Also in

violation of its ACC, the Authority advanced nearly $393,000 to Judge O.K.

Holladay Homes, L.P., prior to obtaining

approval of its mixed-finance proposal

from HUD Headquarters. Further, the

Authority incurred questionable costs of

$367,000, $43,000 for the L.P.’s operating

costs and $324,000 for development costs, in

excess of HUD-approved expenditures. The

Authority’s Executive Director, who was

also the Executive Director and Secretary/

Treasurer of Holladay Homes, Inc.,

violated conflict of interest restrictions.

We recommended that HUD require

the Authority to furnish evidence of

repayment of ineligible costs, provide

written evidence of HUD approval to fund

cost overruns, provide support for the

source of the $324,000 in excess of the

amounts originally authorized by HUD,

and obtain written HUD approval prior to

any future pledge or encumbrance of

Authority assets. In addition, HUD should

ensure the Board of Commissioners takes

appropriate measures to prevent future

conflicts of interest, require the Board to

establish adequate controls to monitor

Authority interactions with its nonprofit,

and ensure that transactions comply with

the ACC and other HUD requirements.

(Report No. 2004-AT-1004)

The Housing Authority of the City of

Durham, NC, violated its ACC by

inappropriately advancing funds to its

related nonprofit and other entities. As of

September 30, 2003, the Authority had

inappropriately advanced at least $1.99

million from its conventional public

housing general fund. The Authority also

violated its Turnkey III Administrative

Use Agreement when it inappropriately

advanced or failed to require loan repayments totaling at least $2.8 million. In

addition, the Authority inappropriately

guaranteed a $350,000 loan obtained by a

limited liability company (LLC) and

executed a promissory note for a $1.5

million line of credit on behalf of another

LLC. The audit disclosed that the Authority failed to properly allocate operating

costs to other entities. Further, the

Authority has not completed several of its

development efforts, and as a result, we

question its ability to successfully complete its Housing Opportunities for People

Everywhere (HOPE VI) Revitalization

Plan.

Chapter 3: HUD’s Public and Indian Housing Programs 45
We recommended that the Authority

be required to repay over $3.4 million,

obtain release of any currently encumbered assets, establish adequate controls,

and develop and implement an acceptable

cost allocation plan. We also recommended that HUD continue reviewing all

drawdowns of funds until it determines

that the Authority is properly administering its programs. HUD should also issue

a Notice of Substantial Default in accordance with Section 17(C) of the ACC and

take administrative actions against the

former Executive Director, interim

Executive Director, and Board of Commissioners. Further, HUD should perform a comprehensive review of the

Authority’s capacity and ensure the

Authority takes appropriate measures to

address any capacity issues to successfully complete activities in accordance

with the HOPE VI Grant Agreement and

Revitalization Plan. If the review finds

that the Authority does not have the

capacity to complete the activities or

finds the Authority in serious default of

the grant agreement or regulations, HUD

should terminate the grant and recapture

the remaining $27.5 million or current

balance of unused funds. (Report No.

2004-AT-1012)

The Housing Authority of the City of

Lakeland, FL, paid at least $296,000 for

ineligible expenses that were not authorized under its HOPE VI grant. This

included $270,000 for legal fees and

$26,000 for financial consultant fees.

Also, the Authority failed to obtain timely

repayment of $990,000 it advanced to the

lead developer, The Communities Group.

As of December 31, 2003, The Communities Group still owed the Authority more

than $704,000, which is at risk of nonpayment. On January 23, 2004, the Authority

issued a Notice of Default to The Communities Group for failure to adequately

perform. The Authority assumed the role

of lead developer for the remaining

phases. However, the Authority has not

demonstrated the capacity to serve as lead

developer, and as a result, we question

whether the Authority has the capacity to

complete its HOPE VI Revitalization

Plan. Further, the Authority and The

Communities Group are currently involved in legal disputes that could affect

completion of the remaining phases, and

we are concerned as to whether there are

sufficient funds to complete all the

remaining phases and whether they can be

completed in a timely manner. Accordingly, successful completion of the remaining phases of the HOPE VI Revitalization Plan and the remaining $7.6

million of grant funds are at risk.

We recommended requiring the

Authority to repay from nonfederal funds

$296,000 to its HOPE VI grant and

closely monitoring the Authority’s attempts to recover the remaining $704,000

from The Communities Group. If the

Authority fails to aggressively seek

recovery or jeopardizes its legal rights to

recover the funds, it should be required to

repay the funds to its HOPE VI grant

from nonfederal funds. In addition, we

recommended performing a comprehensive review of the Authority’s capacity to

perform its duties under the grant agreement, performing reviews of all drawdowns of HOPE VI funds until HUD

determines the Authority has the capacity

to successfully complete its activities, and

taking appropriate administrative actions

against The Communities Group, its

principals, and any known related entities.

(Report No. 2004-AT-1013)

The West Palm Beach, FL, Housing

Authority improperly encumbered lowincome housing properties as collateral

for a $3 million line of credit. In addition,

Chapter 3: HUD’s Public and Indian Housing Programs 46
the Authority used $150,000 in Capital

Funds to defray expenses associated with

housing development activities without

HUD approval.

We recommended that the Authority

remove the improper encumbrance of the

low-income housing assets, reimburse

$150,000 to its contract projects from its

Section 8 program excess administrative

fees, and establish and implement adequate policies and procedures to ensure

the proper use of capital funds and that

low-income housing assets are not encumbered without HUD approval. (Report

No. 2004-AT-1014)

The City of Northport, AL, violated

its ACC by improperly advancing nearly

$435,000 of public housing funds for a

nonfederal development and inappropriately guaranteeing performance for its tax

credit properties. Subsequent repayments

of $375,000 left nearly $60,000 due to the

Authority. However, HUD should recapture over $78,000 of the $375,000 in

repayments since these funds should have

been in the Capital Account previously

recaptured by HUD because they were

not obligated within a 2-year period.

Additionally, the Authority did not allocate

costs, including salaries and rental space,

attributable to nonprofit activities. As a

result, nearly $435,000 of ineligible

advances reduced funds for the

Authority’s Low-Rent Housing and Capital

Fund programs. Further, the Authority’s

Executive Director signed guaranty

agreements and loan obligations without

HUD approval. The Executive Director

also signed other documents that included

inappropriate guarantees by the Authority

as a guarantor or key principal and

violated the ACC’s conflict of interest

provision by functioning as the Authority’s

Executive Director while also serving as

president of both general partnerships.

We recommended that HUD require

the Authority to (1) obtain repayment of

the $60,000 balance owed from the

$435,000 advanced; (2) recapture $78,000

of the repayment; (3) ensure reasonable

allocations of salaries and other costs,

such as use of office space and equipment,

and reimburse any ineligible costs attributable to any non-HUD entity; and (4)

pursue terminating inequitable guarantees.

(Report No. 2004-AT-1009)

The Opelika, AL, Housing Authority

improperly sold nearly 10 acres of land for

$116,000 and loaned $130,000 to its

affiliated nonprofit, Opelika Housing

Development Corporation, without HUD

approval. The Authority sold the land to

the nonprofit without a current appraisal

of the property. The Executive Director

also signed agreements stating that the

Authority guaranteed third party obligations for a proposed housing development

on the land. Additionally, it improperly

paid at least $56,000 of Opelika Housing

Development Corporation’s costs and over

$91,000 of ineligible housing assistance

payments to the nonprofit.

We recommended that the Authority

be required to obtain an appraisal of the

transferred property and recover any

shortfall in the sale price, amend the

agreements to limit Authority liability, and

recover any ineligible costs. (Report No.

2004-AT-1011)

Section 8 Housing Choice

Voucher Program

An OIG audit of the Housing Authority of the City of Houston, TX, found that

the Authority paid Section 8 Housing

Choice Voucher funds for tenants to live in

larger units than the Authority’s policy

allowed. Testing showed the Authority

Chapter 3: HUD’s Public and Indian Housing Programs 47
overpaid at least $797,000 to improperly

house at least 352 Section 8 tenants

between January 2002 and May 2004.

Statistical testing identified over $172,000

in actual ineligible overpayments and a

minimum of $625,000 in projected

overpayments. In addition, the Authority

could overpay more than $3.2 million over

the next 3.7 years if it does not implement

controls to stop the overpayments.

We recommended that HUD require

the Authority to comply with the unit size

limitations in its administrative plan. We

also recommended that HUD require the

Authority to

 Repay $172,000 in identified Section

8 overpayments;

 Review other identified tenants

potentially living in units larger than

the Authority’s policy allows and

repay any ineligible Section 8

assistance, which we project to be

at least $625,000; and

 Implement controls to avoid future

estimated overpayments of $3.2

million. (Report No. 2004-FW-1010)

The OIG audited the Housing Choice

Voucher program operated by the Housing Authority of Kansas City, MO.

Authority personnel did not consistently

follow HUD rules and regulations in

calculating tenant income and rent or

verifying tenant information. The results

confirmed problems identified in previous

reviews. Further, the Housing Authority

did not follow an established quality

control plan to ensure that it would

identify and correct errors in rents and

subsidies.

We recommended that HUD ensure

the Authority implements an adequate

quality control plan and makes all appropriate corrections to the tenant files,

rents, and subsidies. (Report No. 2004-

KC-1006)

We completed an audit of the Housing

Choice Voucher program operated by the

Housing Authority of Maricopa County

located in Phoenix, AZ. There are

significant problems with the Authority’s

management of its program. The Authority had not established the management or

quality control procedures necessary to

ensure compliance with requirements

relating to rent reasonableness determinations, utility allowance schedules, housing

inspections, and determinations of adjusted incomes and tenant rents; made at

least $87,000 in improper housing assistance payments; incorrectly determined

assistance payment amounts for an

estimated one-third of the 605 case files

processed during the period December 1,

2003, through March 24, 2004; and did

not have a cost allocation plan to equitably

charge the voucher program for its share

of administrative costs that benefited all of

its operations.

We recommended that HUD monitor

the situation and require the Authority to

implement effective quality control and

review procedures and ensure that improper payments are recovered. Further,

since the Authority inappropriately

carried out its administrative responsibilities under the voucher program, we

considered the administrative fees received during FY 2003 unearned and

recommended that HUD require the

Authority to repay administrative fees

totaling over $812,000. (Report No. 2004-

LA-1007)

The OIG audited the Low-Rent

Public Housing and Section 8 Housing

Choice Voucher programs of the Housing

Chapter 3: HUD’s Public and Indian Housing Programs 48
Authority of the City of Greeley and the

Weld County Housing Authority located in

Greeley, CO. The City of Greeley,

through a consortium agreement with

HUD, administers these program activities for both housing authorities.

The City of Greeley needs to improve

the administration of its tenant selection

and continued occupancy activities.

Operating procedures did not ensure that

only eligible tenants were being assisted

under HUD programs or that tenants

were paying or receiving the proper

assistance amounts. Management controls over tenant admissions and continued

occupancy requirements were not sufficient to ensure that the applicable housing

authority properly (1) determined applicant eligibility and rent/assistance payments; (2) implemented the City of

Greeley Income Disregard program; (3)

implemented the City of Greeley low-rent

applicant waiting list procedures; (4)

administered tenant repayment agreements; (5) established/collected security

deposits from City of Greeley Low-Rent

program tenants; and (6) determined the

Weld County monthly Section 8 administrative fees.

We recommended that HUD require

the housing authorities to establish the

necessary management controls over

their operations to ensure that they

function in accordance with HUD requirements. (Report No. 2004-DE-1003)

Public Housing Authority

Activities

An OIG audit of the Seattle, WA,

Housing Authority’s Moving To Work

Demonstration Program found that the

Authority’s program included 17 activities, 8 of which the Authority actually

implemented. The Authority did not carry

out two of the eight activities in full

compliance with program requirements.

For the Simplification of the Process to

Project-Based Section 8 Assistance

activity, our sample of 11 of 60 housing

projects showed the Authority exceeded

the authority granted under the Moving to

Work Demonstration Agreement for

simplifying the process to project-based

Section 8 certificates and vouchers. As a

result, the Authority cannot provide HUD

with assurance that (1) impacts on environmental quality were properly considered, (2) prevailing wages were paid, (3)

relocation and real property acquisition

requirements were met, and (4) assistance was the minimum needed to provide

affordable housing. For the Site-Based

Waiting List activity, the Authority did not

collect required information on tenant and

applicant nationality and language, resulting in racial concentrations as high as 86

percent.

We recommended that HUD make a

determination regarding the issues raised

and if appropriate, require the Authority

to bring the sampled projects into compliance with Moving to Work program

requirements or repay over $1.5 million in

housing assistance payments. HUD should

also review projects that were not in the

audit sample to determine if program

requirements were met, taking appropriate action as needed, and require the

Authority to take necessary measures to

properly implement its affirmative fair

housing marketing activity. (Report No.

2004-SE-1004)

In response to a Congressional

request to review allegations concerning

the Mirasol and Springview HOPE VI

projects, the OIG audited the San Antonio, TX, Housing Authority. We found that

although some construction methods

Chapter 3: HUD’s Public and Indian Housing Programs 49
sounded substandard, in reality they met

San Antonio building codes and were

consistent with acceptable industry

practices in the area. We also found that

the Authority had planned to build on a

former landfill, but after testing the site,

Authority officials decided to change the

plans. The Authority has entered into a

clean-up agreement with the State of

Texas. The Texas Commission on Environmental Quality has investigated the site,

and based on tests to date, the residents of

the project are not threatened as long as

they use City water and do not use ground

water. Our audit did disclose that the

Authority limited competition when

awarding the contract for the Mirasol

development. Further, the Authority (1)

inappropriately incurred over $1.8 million

in HOPE VI fund expenditures to design

part of the Mirasol development on land

that had previously been used as a public

landfill, (2) cannot support over $2 million

in payroll expenses, and (3) overpaid more

than $10,000 in overhead and profit on

change orders.

We recommended that HUD require

the Authority to implement procedures to

ensure compliance with all environmental

requirements for any future grants,

ensure proper contracting procedures are

followed to ensure full and open competition, reimburse the HOPE VI grant

account over $1.8 million for ineligible

payments made with grant funds, and

support all payroll expenses charged to the

HOPE VI grants or reimburse the grants

appropriately. (Report No. 2004-FW1006)

Based on a citizen complaint, the

OIG audited the Minneapolis, MN,

Public Housing Authority’s supplemental

police services. We found that supplemental police services contracts were generally awarded through full and open competition, but contracts were not always

executed or renewed on time. Improvements were needed in the administration

of supplemental police services and

controls over contractor payments. We

also found that the Authority failed to (1)

adequately support over $1.1 million paid

to off-duty police officers, (2) consistently

follow Federal requirements and its

procurement policies in the administration

of supplemental police services contracts,

and (3) consistently implement effective

controls to prevent overpayments of more

than $268,000.

We recommended that HUD assure

that the Authority reimburses its appropriate HUD program for the inappropriate

use of funds and implements controls to

correct the weaknesses cited in the

report. (Report No. 2004-CH-1003)

The OIG conducted a limited review

of the Micro Loan Program that was

sponsored by the Buffalo Municipal

Housing Authority (PHA), in Buffalo,

NY, but administered by the Temple

Community Development Corporation

(Temple). The review disclosed deficiencies pertaining to the PHA’s monitoring

and Temple’s administration of the Micro

Loan Program. Specifically, we found that

the PHA (1) did not adequately monitor

the contract performance of Temple, (2)

paid administration fees to Temple that

were unreasonable, (3) overpaid Temple

for loan-servicing fees, and (4) did not

ensure that Temple had an adequate

system in place to track the status and

repayment of loans. Additionally, Temple

did not meet the performance goals set

forth in the contractual agreements.

Temple was to administer a minimum of

17 loans for residents of the PHA. Originally, $87,000 was to be loaned no later

Chapter 3: HUD’s Public and Indian Housing Programs 50
than October 1, 2001. By the end of the

contract in December 2002, Temple was

only administering and maintaining nine

loans totaling $39,100. Thus, $47,900 of

program funds was not used for its

intended purpose.

We recommended that HUD (1)

make a determination on the appropriate

accounting and usage of the $47,900 in

unexpected grant funds since the grant has

been closed out and (2) determine

whether administrative fees of over

$38,000 were excessive since Temple

failed to meet established performance

goals. If the amount is determined to be

excessive, the PHA should require

Temple to reimburse the excessive

amount to the PHA’s Capital Funds

program from nonfederal funds. In

addition, we recommended that HUD

instruct the PHA to (1) reimburse the

Capital Funds program from nonfederal

funds unearned service fees of over

$13,000 paid to Temple and (2) implement

adequate management controls and

monitoring procedures over Temple to

ensure that adequate records of loan

repayment activities are created and

maintained. (Report No. 2004-NY-1804)

The OIG audited the Housing Authority of the City of Evansville’s Housing

Assistance Payment Savings Refunding

Agreements in Evansville, IN. The audit

generally substantiated the allegations

with regard to the improper use of Federal funds and lack of adherence to

HUD’s requirements for the Agreements.

Specifically, the Authority (1) did not have

adequate controls over HUD funds when it

drew down nearly $797,000 in Housing

Assistance Payment Savings funds that did

not fulfill the Agreements’ requirements,

(2) lacked adequate documentation to

support that more than $768,000 in

Savings funds benefited very low-income

persons and families, and (3) disbursed

over $28,000 for ineligible expenses.

We recommended that HUD ensure

that the Authority reimburses the control

account from nonfederal funds for the

ineligible and unsupported expenses cited

in the report and implements procedures

and controls to ensure that Housing

Assistance Payment Savings funds are

used appropriately. We also recommended

that HUD take appropriate administrative

action against the Authority’s former

Executive Directors who left the Authority

in January 2001 and November 2003,

respectively. (Report No. 2004-CH-1006)

Chapter 3: HUD’s Public and Indian Housing Programs 51

Copyright, 2004. Evansville Courier & Press. Reprinted with permission.
Public Housing

Management/Officials

The OIG previously completed a

review of the procurement activities of the

Housing Authority of the City of Los

Angeles, CA, including ongoing monitoring and management of contracts as they

relate to the Authority’s Resident Management Corporations/Resident Advisory

Councils (RMC). The review was initiated in response to several citizen complaints alleging irregularities with the

Authority’s RMCs and related contracting

activities. Legal complications have

precluded the issuance of a final audit

report describing the results of this

review. However, as part of the review, we

also identified problems related to the

Authority’s management of its legal

affairs, including failure to advise HUD of

significant legal matters. Specifically, it

incurred outside legal service fees and

entered into a $1.8 million litigation

settlement agreement to resolve an

employee lawsuit without required prior

HUD notification and approval. It also

incurred unnecessary and ineligible

attorney fees of over $119,000 on behalf of

a consultant and over $47,000 in unnecessary attorney fees to monitor information

requests and activities of the OIG during

our review.

An executive with the Authority was

fired as a result of our review.

Chapter 3: HUD’s Public and Indian Housing Programs 52

Copyright, 2004. Los Angeles Times. Reprinted with permission.
Investigations

During this reporting period, the

OIG opened 371 investigation cases and

closed 378 cases in the Public and Indian

Housing program area. Judicial action

taken on these cases during the period

included $4,440,517 in investigative

recoveries, $16,963,306 in funds put to

better use, 470 indictments/informations,

189 convictions/pleas/pretrial diversions,

281 administrative actions, 3 civil actions,

and 828 arrests.

Some of the investigations discussed

in this report were conducted by the OIG,

while others were conducted jointly with

Federal, State, and local law enforcement

agencies. The results of our more significant investigations are described below.

PHA Management and

Program Officials/

Employees

In Springfield, MA, OIG, the

Federal Bureau of Investigation (FBI),

and the Internal Revenue Service (IRS)

Criminal Investigation Division (CID)

executed 13 Federal arrest warrants for

Raymond Asselin, Sr., former Executive

Director of the Springfield Housing

Authority; Arthur Sotirion, the

Authority’s former Assistant Executive

Director of Maintenance; and Peter

Davis, John Spano, and Paul Bannick,

three contractors who did business with

the Authority. Additionally, eight Asselin

family members were arrested: Janet

Asselin, Raymond’s wife; their daughter,

Maria Serrazina; their son Raymond Jr.;

their son Christopher, who is a Massachusetts State representative, and his wife

Merylina; their son, James Asselin; and

their son Joseph and his wife Melinda.

These individuals were charged in Springfield, MA, in Federal Court for the

District of Massachusetts, in a 100-count

Federal indictment. The violations include

conspiracy to commit Racketeering

Influenced Corrupt Organizations (RICO)

crimes, RICO (whereby the indictment

identifies the Authority as the criminal

enterprise for the RICO violation),

conspiracy to commit bribery, bribery,

conspiracy to commit theft, extortion,

conspiracy to commit mail fraud, money

laundering, and obstruction of justice. The

investigation revealed over $1.6 million in

alleged kickbacks involving Authority

vendors and employees and their families,

as well as Authority funds and employees

being used to maintain and rehabilitate the

personal residences of Raymond Asselin,

Sr., and members of his family.

In addition, $3,448,600 in cash and

assets are intended to be seized, including

several properties owned by Raymond

Asselin, Sr., and family members. A $1.5

million home located in Chatham, MA,

on Cape Cod is included among the assets

intended to be seized, as well as a boat

valued at $40,000 and a vehicle.

Inspector General Kenneth Donohue

attended the press conference following

the arrests, along with U.S. Attorney

Michael Sullivan, OIG Regional Inspector

General for Audit Barry Savill, OIG

Special Agent in Charge Peter Emerzian,

and representatives from the FBI and the

IRS. The indictment and arrests are the

result of a joint ongoing investigation being

conducted by the OIG, FBI, and IRS-CID.

The HUD Regional Office of Public

Housing and the Office of Counsel worked

closely with the OIG to minimize the loss

to HUD as the fraud schemes were

discovered.

Chapter 3: HUD’s Public and Indian Housing Programs 53
Chapter 3: HUD’s Public and Indian Housing Programs 54

Reprinted with permission of the Boston Herald.

Springfield Racketeering Influenced Corrupt Organizations (RICO) Charges
In Pittsburgh, PA, in U.S. District

Court for the Western District of Pennsylvania, defendant Patty Braun, a former

accountant at the Clarion County Housing

Authority, pled guilty to a one-count

information charging her with theft from

a program receiving Federal funds. Braun

admitted that, over a 10-year period, she

wrote at least 139 fraudulent checks to

herself totaling more than $140,000,

which she covered up by altering the

electronic check register files to indicate

that the checks were made payable to

legitimate Authority vendors. Braun’s

scheme was discovered after the Authority began receiving complaints from

vendors who had not been paid. Even

after an exhaustive review of Authority

records by the OIG, FBI, and Pennsylvania State Police, the actual amount of the

embezzlement may never be completely

known, as the banks with whom the

Authority did business only maintained

records that dated back 10 years, whereas

Braun was employed at the Authority for

more than 15 years.

In Deerfield Beach, FL, in Broward

County Circuit Court, defendant Fumiko

Jackson, a former Section 8 administrator

for the Deerfield Beach Housing Authority, pled guilty to organized fraud and was

sentenced to 2 years house arrest and 13

years probation and was ordered to pay

$162,500 in restitution to the Authority.

Jackson defrauded the Authority of more

than $125,000 in rental subsidies from

June 1993 through February 1999 by

designating her 8-year-old nephew a

“landlord” of four properties, depositing

the rental subsidies in his bank account,

and ultimately transferring the money to

herself.

In Newark, NJ, in Federal Court for

the District of New Jersey, defendant

Miladys Gomez, a former assistant

administrator for the Perth Amboy

Housing Authority, was charged with four

counts of embezzling Federal funds.

Gomez was responsible for the printing

and issuing of housing subsidy checks to

landlords on the behalf of Section 8

recipients. She used her access to the

checks to steal $407,603 in Section 8

funds. Further legal action against Gomez

is pending.

In Beaumont, TX, in Federal Court

for the Eastern District of Texas, defendant Jimmie L. Woodard, former Accountant at the Diboll Housing Authority, was

sentenced to 5 months confinement and 2

years supervised release, fined $10,000,

and ordered to pay $78,000 in restitution

for theft from a program receiving

Federal funds. An OIG investigation found

that Woodard embezzled over $78,000 by

failing to deduct Federal withholding taxes

from her own payroll checks and making

personal loan payments to a credit union

for over 5 years.

In Fort Lauderdale, FL, in Federal

Court for the Southern District of Florida,

defendants Genevie Smith, Constance

Devoe-Drayton, and Chiquita Blue pled

guilty. Genevie Smith was the Section 8

coordinator for the Pompano Beach

Housing Authority. She took bribes for

Section 8 vouchers and received a voucher

for herself under a false name. Smith

further assisted two other defendants in

stealing $16,000 in housing assistance

payment checks by posing as fictitious

tenants. Constance Devoe-Drayton conspired with Smith. Devoe-Drayton operated a beauty salon where she solicited

people to pay between $500 and $1,500 for

the vouchers. Chiquita Blue is charged

with taking $1,000 for a fraudulent Section

8 vouchers. The pleas resulted from a 30-

count indictment, which charged employees of the Pompano Beach Housing

Chapter 3: HUD’s Public and Indian Housing Programs 55
Authority with conspiring to steal funds.

Smith and Devoe-Drayton pled guilty to

one count each of racketeering and

conspiracy. Blue pled guilty to one count

of extortion.

Defendant Valerie Campbell was

sentenced to 8 months incarceration and

36 months supervised release and was

ordered to pay $35,960 in restitution.

Campbell previously pled guilty to one

count of conspiracy after being charged

with stealing funds from the Authority.

Campbell, a Section 8 coordinator at the

Authority, had the Authority to issue

$21,000 in checks to a codefendant, the

father of one of her children, for fictitious

tenants. Other checks were issued to a

family friend for more than $25,000 for

rent subsidies to people who did not live in

Section 8 housing.

In Tahlequah, OK, in State Court

for Cherokee County, OK, defendant

Vickie Crook was indicted for embezzlement. This investigation began after OIG

received allegations that Crook was

involved in a scheme to embezzle funds

from the Stilwell Housing Authority. In

her capacity as Executive Director of the

Authority, Crook allegedly collected cash

rental proceeds from tenants and kept a

portion for herself. The embezzled rental

proceeds totaled nearly $40,000.

In Oklahoma City, OK, in Federal

Court for the Western District of Oklahoma, defendant Gwendolyn Terrapin was

sentenced to 6 months confinement and 5

years probation and was ordered to pay

$24,508 in restitution. This investigation

began after OIG received allegations that

Terrapin was embezzling HUD funds

from the Otoe-Missouria Indian Housing

Authority while she was Executive Director. Terrapin admitted that she used the

Housing Authority’s credit card to make

Chapter 3: HUD’s Public and Indian Housing Programs 56

personal purchases and pay personal bills.

She then authorized the Authority to pay

the personal credit card charges. HUD’s

loss due to the fraud was $23,683.

In Albuquerque, NM, in U.S.

District Court for the District of New

Mexico, defendants Jerry Nieto and

Howard Tenorio were each sentenced to 5

years probation. Nieto was ordered to pay

$7,200 in restitution, while Tenorio was

ordered to pay $10,500. The defendants,

both of whom are former board members

of the Santo Domingo Tribal Housing

Authority, previously pled guilty to one

count of embezzlement and theft from

Indian Tribal Organizations and aiding and

abetting. They were charged in September

2003, along with former Authority Executive Director Joe R. Calabaza and former

board member Lorenzo Coriz, with

embezzling over $200,000 from the

Authority. Calabaza and Coriz are still

awaiting sentencing. Funds were embezzled through the use of an unauthorized

bank account at Century Bank in Santa Fe,

NM, with Authority funds. Several

Certificates of Deposit belonging to the

Authority were used to purchase three

cashiers’ checks totaling $68,872. The

three checks were used as the initial

deposit into the unauthorized bank account. Calabaza transferred additional

funds from other Authority accounts. He

cashed numerous unauthorized checks

from the Authority written out to him.

Investigations Involving

Public Officials

In San Juan, PR, in Federal Court

for the District of Puerto Rico, defendant

Jose A. Acevedo-Martinez was indicted

on three counts of bribery concerning

HUD funds from the Drug Elimination

Grant Program, three counts of extortion
Chapter 3: HUD’s Public and Indian Housing Programs 57

under color of official right, and two

counts of tampering with a witness.

Acevedo was the Administrator for the

Puerto Rican government’s Mental Health

and Anti-Addiction Services Administration from July 1999 through December

2000. Acevedo used his position to

influence contracts with the Puerto Rican

Housing Authority, which were paid with

the Drug Elimination Grant Program

funds. He allegedly committed extortion

by demanding and/or receiving money and

services from contractors who were

seeking to obtain contracts with the

Administration. Acevedo solicited monies

and services in excess of $120,000 from

private contractors.

In Cleveland, OH, in Federal Court

for the Northern District of Ohio, the

U.S. Attorney’s Office unsealed a 22-

count indictment charging defendant

Emmanuel Onunwor, the Mayor of the

City of East Cleveland, with violating

Federal RICO Act conspiracy, mail

fraud, public corruption, witness tampering, and tax laws. Onunwor was arrested

on the same day. The indictment charged

Onunwor with conspiring with others to

conduct the affairs of East Cleveland,

OH, as a racketeering enterprise while

he held various positions in the East

Cleveland government from 1990 to the

present. He is also charged with defrauding the residents and City of East Cleveland and the State of Ohio of their right to

his honest services as a public official,

extorting payoffs from vendors and contractors in violation of the Hobbs Act,

witness tampering, and filing false tax

returns for the years 1998 through 2002.

Specifically, the indictment alleged

that Onunwor solicited and received

numerous bribes, kickbacks, and payoffs

over his career as a City official, often

funneled through “intermediaries” and

concealed from regulators and law

enforcement officials. Specific payoffs

allegedly occurred while Onunwor served

in his current position as Mayor as well as

while he served as President of the City

Council and Director of Community

Development, the City office which

disburses HUD Community Planning and

Development funds. According to the

indictment, Onunwor also filed false

disclosure forms with the Ohio Ethics

Commission to conceal such payments

from regulators and the public, and

conspired to obstruct justice through both

witness tampering and failure to turn over

documents that were subpoenaed by a

Federal grand jury. Additional false

disclosure allegations included Onunwor’s

purported failure to report to the IRS as

well as the Federal Bankruptcy Court that

he had collected housing assistance

payments from the Cuyahoga Metropolitan Housing Authority as a Section 8

landlord.

Identity Theft

In Lancaster, PA, in the Commonwealth of Pennsylvania District Court for

Lancaster County, a criminal complaint

was filed charging defendant Sandra Derr

with one count of theft by deception and

one count of forgery. Allegedly, Derr

fraudulently obtained $39,879 in Section 8

rental assistance from the Lancaster

Housing and Redevelopment Agency from

1992 to 2002. Derr claimed she was

leasing her assisted property from her

half brother, Robert Weatherholtz, when

in fact she owned the property. Derr

allegedly signed Weatherholtz’s name on a

lease agreement, thus enabling her to

collect rental assistance from the Agency

and also forged her half brother’s name

and Social Security number on an IRS

form. This investigation was initiated

following a referral from the District
Attorney’s Office for Lancaster County,

after it received a complaint from the

Agency. The Agency discovered the fraud

after the IRS contacted Weatherholtz

requiring payment of taxes on lease

payments received from the Agency.

In Cleveland, OH, in Federal Court

for the Northern District of Ohio, defendant Pamela Phillips, a Section 8 tenant,

was indicted on nine counts of misuse of a

Social Security number. Phillips allegedly

used another person’s identity to obtain

motor vehicle registrations, vehicles,

titles to vehicles, and drivers’ license

identification cards between 1999 and

2002. At the same time, Phillips resided

in the same unit as her landlord, Aubrey

Benjamin, and failed to disclose his

presence and income to the Cuyahoga

Metropolitan Housing Authority.

Check Fraud Through

Counterfeiting Scheme

In Cleveland, OH, in Federal Court

for the Northern District of Ohio, defendants Donte Wade, Tina Cannon, and

Gregory Carr were sentenced for their

participation in a counterfeit check ring,

which included false and forged checks

from the Cuyahoga Metropolitan Housing

Authority. Wade was sentenced to 21

months incarceration, 36 months supervised release, and $49,600 in restitution.

Cannon was sentenced to 24 months

probation and $3,507 in restitution. Carr

was sentenced to 12 months incarceration, 36 months probation, and $6,955 in

restitution.

The defendants were previously

charged in a 14-person indictment for

their role in a conspiracy to defraud the

Authority, local banks, and merchants as

part of a loosely connected ring formed to

counterfeit payroll and business checks.

The investigation found that Vaden Anderson, who had recently been released from

State prison for attempting to cash a

counterfeit check using a false identity,

sought others whom he used as “recruiters,” who in turn would seek out individuals who were willing to provide their

identification and in some cases their own

bank accounts to deposit counterfeit

checks which Anderson made on a home

computer. Anderson, the recruiters, and

the check “passers” would then split the

proceeds, with Anderson receiving the

lion’s share of the proceeds. Counterfeit

check amounts ranged from as little as

$300 to more than $16,000. Loss estimates exceeded $49,500. The other

remaining defendants, Raysheen Sharp,

Preston Sales, Sharon Smith, Anthony

Norman, Leona McDonald, Keona

McDonald, Tina McDonald, Sharita

Clayton, Sylvia Kind, and Lekita Hall, all

previously pled guilty and are awaiting

sentencing.

Narcotics Conspiracy

In Chicago, IL, Melvin Herbert,

James Stewart, LaSean Ford, Antoine

McDaniels, Deon Holloway, Delarris

Reynolds, Willie Turner, Gregory Hampton, and Juanell Copeland, fugitive felons

wanted on outstanding warrants, were

arrested. These individuals were fugitives

from a May 2004 law enforcement roundup during which 33 members of the Black

Disciples street gang were arrested. The

arrests were the result of a 185-page

Federal criminal complaint wherein 47

members of the Black Disciples street

gang were charged with participating in a

15-year, multimillion dollar narcotics

conspiracy with the intent to possess and

distribute crack cocaine and heroin. This

complaint documents the intense investiChapter 3: HUD’s Public and Indian Housing Programs 58
gative efforts put forth by multiple law

enforcement agencies in an attempt to

dismantle the narcotics distribution

network of the Black Disciples at the

Randolph Towers public housing development and the west side of Chicago. The

complaint describes how Marvel Thompson, a gang leader, purchased a multiunit,

Section 8 subsidized building. This

structure was purportedly purchased by a

strawbuyer within the Black Disciples in

order to launder drug proceeds from the

gang. Following the purchase, the building

is alleged to have been the headquarters of

its apartment building management

company for the administration of dozens

of Section 8 properties. It was at these

locations that law enforcement seized

$300,000 in cash, radio transmitters, gang

paraphernalia, and boxes of records

containing Chicago Housing Authority

housing assistance payments contracts,

leases, and other tenant/rental information.

The Office of Inspector

General’s Enforcement

Actions in Support of the

Rental Housing Integrity

Improvement Program

The Office of Investigation (OI)

supported the Rental Housing Integrity

Improvement Program throughout the

year by initiating many investigations of

tenant voucher fraud in public and assisted living housing units. The OIG

implemented a year-end initiative where

OI regional offices around the country

worked in a cooperative arrangement

with many other Federal, State, and

municipal agencies to target housing

crime, combat voucher fraud, and ferret

out fugitive felons living in public housing.

Listed below are just a few of the many

successful operations.

During September, a joint task force,

also known as Operation HEAT (Housing

Enforcement Action Team), arrested a

total of 141 individuals in New York City,

NY. Operation HEAT consists of HUDOIG Special Agents and Forensic Auditors, Investigators of the New York City

Department of Investigation, and the

United States Marshal’s Regional Fugitive

Task Force. The first part of the operation

consisted of Federal prosecutions of those

involved in fraud of the Section 8 Housing

Subsidy program. The New York City

Department of Housing Preservation and

Development and the New York City

Housing Authority administered the

Section 8 housing subsidy. Concurrently

an ongoing joint effort with the Regional

Fugitive Task Force occurred in which

HUD-OIG Special Agents worked with

the task force to remove dangerous

fugitive felons from New York City’s

housing.

Thirty-seven individuals were

charged by the U.S. Attorney’s Office,

Southern District of New York, and one

remains a fugitive. Of these 37 individuals, 29 were charged in separate Federal

indictments while 8 were charged with

Federal complaints. Those arrested are

alleged to have fraudulently obtained

Federal housing subsidies in the amount of

$786,000. In addition, there were 105

fugitive felons arrested within government-subsidized apartments. All of the

fugitives were arrested within the five

boroughs of New York City except for two

arrested in Yonkers, NY. The combined

efforts of the Task Force will allow

benefits to be distributed to deserving

tenants within the community where the

average time on the waiting list is 11 years.

In Pittsburgh, PA, on September 28,

2004, a 3-month investigation culminated

in the issuance and execution of arrest

Chapter 3: HUD’s Public and Indian Housing Programs 59
warrants for 25 rental assistance and

public housing program participants in

Pittsburgh. The investigation was based

upon a comparative analysis of wages

reported by program participants in both

Section 8 and Public Housing programs

administered by the Allegheny County

Housing Authority versus “Upfront

Income Verification” data supplied by the

Pennsylvania Department of Labor and

Industry, which indicated that specific

Section 8 and Public Housing tenants

failed to report employment and income

to the Authority.

also received requests from other housing

authorities, requesting that similar endeavors be undertaken in their respective

locales. This was an OIG-led investigation, in which the FBI, Authority Police,

and Allegheny County Police also participated.

In early July 2004, IG Kenneth

Donohue traveled to Worcester, MA, to

meet with the Executive Director of the

Worcester Housing Authority, the Worcester Police Chief, and the Worcester

County District Attorney’s Office to get

their commitment to participate in the

National HUD-OIG Section 8 Fraud

Initiative.

HUD-OIG had been working with the

Worcester, MA, Housing Authority for

many years in an effort to assure that

eligible tenants are safe and that they are

reporting all sources of income and all

those residing with them. The Authority

has been proactive in reporting to HUDOIG those tenants who may not be reporting all sources of income and/or not

reporting all individuals living with them.

As a result of IG Donohue’s visit,

HUD-OIG, the Authority, and the Massachusetts Department of Revenue (DOR)

signed a memorandum of understanding to

match State wage data with information

provided by the Authority. HUD-OIG will

provide the State wage data to the Authority for it to match income claimed by

tenants with DOR wage data. This was

necessary because HUD and the DOR

had not signed the Upfront Income Verification Agreement.

In concert with ferreting out tenant

fraud, HUD-OIG has initiated a local

fugitive felon initiative. The names of the

heads of households of Authority Public

Chapter 3: HUD’s Public and Indian Housing Programs 60

Police arrest suspect in Allegheny County, Pittsburgh.

Twenty-four persons, including 21

Section 8 recipients and three Public

Housing residents, who hailed from

various parts of Allegheny County, were

arrested on State charges of felony theft

by deception. One landlord was also

arrested for collecting rent subsidies for a

Section 8 tenant who had died 6 months

prior. This enforcement operation received extensive print and television

media coverage, which resulted in the

Authority receiving numerous phone calls

from other Authority Section 8 and Public

Housing assistance recipients who

voluntarily wanted to confess income they

had previously failed to report. OIG has
Housing and Section 8 tenants were

provided to the Massachusetts State

Police Violent Fugitive Apprehension

Section (MSP - VFAS).

Since IG Donohue’s visit, approximately 70 heads of household have been

determined to have warrants on them.

HUD-OIG, the MSP - VFAS, the

Worcester Police Department, and the

Authority’s Public Safety Department

have conducted enforcement operations on

September 14, 21, and 28 and have

arrested 44 wanted individuals; 27 were

Section 8 voucher tenants, 13 were Public

Housing tenants, 1 was a project-based

Section 8 tenant, and 3 were unauthorized

Public Housing residents. They were

wanted for State charges including assault, identity theft, narcotics violations,

public assistance fraud, and motor vehicle

violations. Lease action is anticipated

against the tenants arrested. Additional

enforcement operations are anticipated.

In Cleveland, OH, on August 31,

2004, the culmination of “Operation

Overworked” resulted in the arrest of 13

Cuyahoga Metropolitan Housing Authority

maintenance workers. Those arrested,

including supervisors Gerald Ford and

Lenard McClain, will face potential

charges of bribery, complicity, theft in

office, tampering with records, forgery,

and misuse of a credit card.

The operation was a 9-month joint

investigative effort between the HUDOIG and the Authority’s Police Department, Internal Affairs Division. The

investigation revealed payroll and overtime fraud; specifically, employees being

paid for working on personal residences

during regular work hours, stealing

Authority materials, and using agency gas

credit cards for personal use. The amount

of loss assigned to the employees was

$20,000. The results of the initiative were

9 convicted tenants, 5 convicted landlords,

13 housing authority employees under

indictment, and $270,000 in restitution

from landlords and tenants.

In Indianapolis, IN, the HUD-OIG

worked in a collaborative effort with

Indianapolis authorities. Specifically, the

initiatives occurred in Marion County, IN,

and were focused on all levels of the

Indianapolis Housing Authority. To this

point, the following results have been

achieved:17 tenants under indictment, 1

Authority employee under indictment, and

3 convicted tenants. Loss to the government due to tenant fraud was $50,000.

One subject, who once worked for

the Iranian government on nuclear programs, is wanted on an accusation that he

fraudulently obtained subsidized housing

from the Indianapolis Housing Authority.

This individual, Hooshang Hajimoshammadi,

64, a resident alien who worked part-time

as an instructor at Ivy Tech State College,

faces charges of welfare fraud and theft. He

claimed to be needy and disabled when he

applied for Federal housing assistance.

However, authorities learned he had the

job at Ivy Tech State College and was

receiving Social Security benefits and,

therefore, was not eligible for the housing

money.

Another subject is suspected of

bilking the Indianapolis Housing Authority

of housing assistance funds by receiving

subsidies in Indianapolis, IN, and Miami,

FL.

In Dallas, TX, in an early morning

raid, 19 individuals were arrested for

providing false statements in connection

with underreporting their income to the

Dallas County Housing Authority. The

Dallas grand jury indicted a total of 32

Chapter 3: HUD’s Public and Indian Housing Programs 61
  

persons. Loss to the government was over

$300,000. The investigation revealed that

some of those arrested had been defrauding the government for more than 2 years.

In Kansas City, MO, the Kansas

City Regional Office of Investigation

conducted a Section 8 Warrant Sweep at

the Cloverleaf Apartments. Cloverleaf is

a project-based Section 8 development

with 180 assisted units. In preparation for

the initiative, law enforcement identified

57 occupants with outstanding warrants

and 121 potential fraud cases.

As a result of the initiative, 29

individuals were arrested, including five

parties charged with fraud and one

individual charged with auto theft. Pursuant to the arrests, crack cocaine, marijuana, and one stolen automobile were

recovered. The 29 individuals accounted

for 72 outstanding State and local arrest

warrants. Concurrent with the arrests, 37

“knock and talks” were initiated in

furtherance of ongoing fraud investigations. Both the Deputy Inspector General

Michael Stephens and Special Agent in

Charge Rebecca Kiser addressed press

issues brought to them by the area newspaper and television stations during the

sweep. Tenant feedback and television

coverage provided positive information

relating to the operation.

Participating law enforcement

agencies included the Kansas City, MO,

Police Department, State of Missouri

Division of Social and Rehabilitative

Services, Grandview, MO, Police Department, Raytown, Missouri Police Department, Missouri State Highway Patrol,

U.S. Department of Agriculture Office of

Inspector General, Jackson County

Sheriff’s Department, Missouri Probation

and Parole, Kansas City Southern Railroad

Police, Jackson County Prosecuting

Attorney’s Office, and the Division of

Family Services. Representatives from the

Blue Springs, MO, Police Department,

Lenexa, Kansas Police Department,

Independence, MO, Police Department,

and the Omaha, NE, Housing Authority

Department of Public Safety participated

as observers in attempts to replicate this

initiative.

Chapter 3: HUD’s Public and Indian Housing Programs 62

Agent Karen Gleich briefing in Kansas City, MO.
Chapter 4: HUD’s Multifamily Housing Programs
Chapter 4: HUD’s Multifamily Housing Programs 64

I

n addition to multifamily housing

developments with the U.S.

Department of Housing and Urban

Development (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

Office of Inspector General (OIG) issued

10 reports in the Multifamily Housing

Program area: six external audits, and

four external memoranda. These reports

disclosed nearly $17.2 million in questioned costs and over $906,000 in recommendations that funds be put to better use.

Over the past 6 months, we audited

owner and management agent operations

at multifamily projects, a lender participating in the Multifamily Accelerated

Processing Program, and a Section 8

contract administrator. The results of our

more significant audits are described

below.

Owner and Management

Agent Operations

The OIG audit of Mays Property

Management, Inc., in Little Rock, AR,

determined that Mays officials disbursed

project-operating funds for items that

violated project regulatory agreements

with HUD. They charged management

agent expenses to projects, paid for

unsupported expenditures, diverted project

funds to Mays and a property owner, and

overcharged expenses to projects. In

addition, Mays split its management fee

with a project owner and transferred

project funds to other projects having

cash-flow problems. As a result, Mays’

officials misspent over $979,000 of

project-operating funds and made unauthorized advances of over $20,000 from

five projects to other projects.

We recommended that HUD require

Mays to (1) repay ineligible payments and

(2) furnish supporting documentation or

Chart 4.1: Multifamily Housing Reports

Issued

4

6

 External Audits External Memoranda

Chart 4.2: Multifamily Housing Dollars

20,000,000

15,000,000

10,000,000

5,000,000

0 External Audits External Memoranda

Questioned Costs Funds Put to Better Use

The cost figures in the charts above represent the actual monetary benefits for all reports issued during this semiannual

period. The monetary benefits shown in the Profile of Performance represent only those reports with management decisions

reached during this semiannaul period. Because there is a time lag between report issuance and management decisions, the

two totals will not agree.
Chapter 4: HUD’s Multifamily Housing Programs 65

repay the funds for unsupported payments.

If Mays does not repay amounts officials

misspent, we recommended that HUD

impose administrative sanctions against

the former principals of Mays. (Report

No. 2004-FW-1009)

The OIG audit of United Properties

Management, Inc., a Multifamily management agent in Little Rock, AR,

determined that United officials disbursed

project funds for items that violated

project regulatory agreements with

HUD. Officials used project funds to pay

United’s supervisory expenses, unsupported accounting costs, and a property

owner’s debt. In addition, an official

made erroneous payments, loaned money

to a site manager, and made unsupported

payments. As a result, United officials

misspent nearly $446,000.

We recommended that HUD require

United’s owners to (1) repay the projects

for ineligible payments and (2) furnish

supporting documents or repay the

projects for unsupported payments. If the

owners do not pay back amounts they

misspent, we recommended that HUD

impose administrative sanctions against

them. (Report No. 2004-FW-1008)

In response to a request from HUD’s

Pittsburgh Field Office, Office of Multifamily Housing, the OIG audited Lambeth

Apartments in Pittsburgh, PA. Episcopal

Residences, Inc. (Owners) owns the

property. We found the Owners did not

manage the property in accordance with

the terms of the regulatory agreement,

housing assistance payments contract, and

other applicable HUD rules and regulations. Specifically, the Owners distributed

property funds without HUD’s approval,

used project funds to pay for unauthorized

structural changes to the property, and

made payments for ineligible and unsupported miscellaneous expenses. Further,

the Owners did not properly manage the

property to maximize rental income or

maintain proper documentation to support

the housing assistance payments it received from HUD. These deficiencies

resulted in the Owners using project funds

to pay for more than $209,000 of ineligible

and nearly $259,000 of unsupported

expenditures. In addition, the Owners

received over $284,000 of unsupported

housing assistance payments from HUD.

We also estimate that the property

lost over $280,000 in potential income due

to the unauthorized changes in how the

property was used and managed. Therefore, Lambeth Apartments may have lost

$748,000 in project funds that could have

been used to pay for reasonable and

necessary operating expenses and needed

repairs. Further, these actions placed

Lambeth Apartments in a nonsurplus cash

position and limited the availability of

affordable units to eligible low-income

households.

We recommended that HUD take

appropriate administrative action against

the Owners of the project and recover

ineligible and unsupported payments of

over $752,000 from Lambeth Apartments.

(Report No. 2004-PH-1010)

An OIG review of HAPI Management, Incorporated, Beverly Hills, CA,

found that HAPI inappropriately used over

$409,000 from three projects it managed,

Ashland Manor, King Towers, and South

Park, between January 1998 and December 2002. The inappropriate expenses

included over $130,000 for disbursements

to HAPI Management and more than

$279,000 for unsupported expenses. The

projects were in a nonsurplus cash

position and/or not in compliance with all

outstanding notices of requirements for
proper maintenance when the funds were

used. As a result, fewer funds were

available for the projects’ normal operations. The projects deteriorated, causing

residents to live in substandard conditions

that were hazardous to their health and

safety.

Additionally, HAPI Management

failed to disclose to HUD that Ashland

Manor and King Towers funds were used

to repay advances to HAPI Management

and an owner distribution. Project officials for Ashland Manor and King Towers

certified in fiscal year (FY) 1999 audited

financial statements that no unauthorized

distributions of project revenue were

made. The repayment of advances to

HAPI and the owner distribution while

the projects were in a nonsurplus cash

position are considered unauthorized

distributions.

We recommended that HUD ensure

that HAPI Management, Incorporated,

and/or Ashland Manor Apartments, King

Towers, and South Park Apartments

Limited Partnerships (1) reimburse a

reserve capital account over $130,000 for

the ineligible payments and (2) document

the $279,000 of unsupported payments or

repay the project if the payments can not

be supported. (Memorandum No. 2004-

CH-1802)

An OIG review of Somerset Point

Nursing Home in Shaker Heights, OH,

disclosed that the Somerset Point Limited

Partnership and/or Associated Motor Inns

inappropriately used more than $329,000

of project funds between December 1998

and October 2003. The inappropriate

expenses included over $160,000 to repay

advances made by SOMSOL, Inc., the

general partner; nearly $94,000 in

excessive management fees paid to

Associated Motor Inns; and more than

$75,000 in legal fees unrelated to the

project’s operations. The project was in a

nonsurplus cash position and/or had

defaulted on its Federal Housing Administration (FHA)-insured mortgage when the

funds were used. As a result, fewer funds

were available to fund the project’s

normal operations and debt service.

We recommended that HUD ensure

that the Somerset Point Limited Partnership and/or Associated Motor Inns

reimburse HUD for the inappropriate

payments cited in this report, and pursue

double damages remedies if the Limited

Partnership and/or Associated Motor Inns

do not reimburse HUD for the inappropriate payments. We also recommended that

HUD pursue administrative sanctions

against the Limited Partnership and/or

Associated Motor Inns and impose civil

money penalties against the Limited

Partnership and/or Associated Motor Inns

for the inappropriate payments made

while the project was in a nonsurplus cash

position and/or in default on its FHAinsured mortgage. (Report No. 2004-CH1803)

An OIG audit of the Mustang Nursing Center in Mustang, OK, owned by

Mustang Nursing Center, Inc., found that

Nursing Center officials violated their

regulatory agreement with HUD by using

project operating funds to pay owners’

debts, repay owner’s loans, make owner’s

car lease payments, and pay for the

architectural design of another living

center. In addition, Nursing Center

officials overpaid and made unsupported

payments to the management agent. As a

result, the Nursing Center misused nearly

$172,000.

Chapter 4: HUD’s Multifamily Housing Programs 66
We recommended that HUD require

repayment of all misused funds and

sanction the owners and management

agent of Mustang Nursing Center, Inc.

(Report No. 2004-FW-1005)

The OIG reviewed Legacy Management and Development Corporation in

Edina, MN, and found it inappropriately

used over $305,000 from six projects

under its management. The inappropriate

payments included over $70,000 in doublebillings, over $34,000 in overcharges,

nearly $3,000 for work claimed while

employees were absent, and almost

$198,000 in charges for nonitemized

maintenance tasks.

We recommended that Legacy

Management reimburse HUD for the

inappropriate payments. If Legacy Management does not reimburse HUD for the

inappropriate payments, HUD should

pursue appropriate civil actions and

administrative sanctions against Legacy

Management. (Report No. 2004-CH1804)

An OIG review of Groton Community Health Care Center, Inc. (Groton)

located in Groton, NY, found that Groton

officials executed a 10-percent promissory

note payable, totaling nearly $327,000,

without prior HUD approval in violation

of the regulatory agreement. While the

costs associated with the principal amount

of the promissory note were incurred for

eligible services, the additional interest of

nearly $64,000 paid on the note represented an ineligible payment.

We recommended that HUD recover

the unallowable interest payments from

Groton. (Report No. 2004-NY-1802)

Multifamily Accelerated

Processing Program

We completed an audit of Continental

Securities, LLC’s, performance under the

Multifamily Accelerated Processing

(MAP) program in Syracuse, NY.

Continental Securities underwriters’

estimates of project occupancy, revenue,

and expenses were essentially accurate in

four of the six loans we reviewed. One

loan had inaccurate estimates (Hudson

Valley Care) and one project had no actual

data for comparison since it did not

achieve operational status (Amber Court

Apartments). However, Continental

Securities did not have adequate management and quality control procedures in

place to ensure that loans processed under

the MAP program complied with departmental requirements. Continental did not

correctly analyze a construction

contractor’s financial capability and

allowed financing in excess of HUD limits.

Consequently, Continental submitted at

least two loans for FHA insurance that

resulted in over $13.2 million in losses to

the Department. By authorizing a MAP

lender to prepare much of the documentation for a loan submission for mortgage

insurance, HUD places confidence in the

lender’s integrity and competence.

However, in the process of performing this

work, Continental Securities placed HUD

at risk.

We recommended that HUD seek

indemnification of the loans for Amber

Court Apartments and Hudson Valley

Care and determine whether the lender

and underwriters should retain the authority to use the MAP process. (Report No.

2004-SE-1005)

Chapter 4: HUD’s Multifamily Housing Programs 67
Multifamily Section 8

Contract Administrator

An audit of the Jersey City, NJ,

Housing Authority’s performance as

contract administrator for the Section 8

program at two HUD-insured projects

found that the Authority did not establish

sufficient controls to carry out its Section

8 contract administrator responsibilities.

The Authority (1) paid ineligible and

erroneous claims of nearly $152,000; (2)

failed to ensure that units met Housing

Quality Standards, resulting in payments

of over $245,000 in housing assistance

payments for units that do not meet

decent, safe, and sanitary housing standards; and (3) did not properly determine

and document tenant eligibility, resulting

in ineligible and unsupported housing

assistance payments of nearly $73,000.

We recommended that HUD require

the Authority to recover ineligible payments and claims, support or recover

unsupported payments, and stop housing

assistance payments associated with units

that do not meet Housing Quality Standards. Further, since the Authority

inadequately performed its contract

administrator responsibilities, we recommended that HUD determine whether the

Authority properly earned the nearly

$228,000 in contractor administrator fees

paid during FY 2002 and 2003 and require

repayment if fees are found to be improper. (Report 2004-NY-1005)

Chapter 4: HUD’s Multifamily Housing Programs 68
Investigations

During this reporting period, the

OIG opened 104 investigations and closed

98 cases in the Multifamily Housing

program area. Judicial action taken on

these cases during the period included

$834,204 in investigative recoveries;

$21,865,748 in funds put to better use; 76

indictments/informations; 45 convictions,

pleas, and pretrial diversions; 121 administrative actions; and 260 arrests.

Some of the investigations discussed

in this Report were conducted by the OIG,

while others were conducted jointly with

Federal, State, and local law enforcement

agencies. The results of our more significant investigations are described below.

Lead-Based Paint Disclosure

Violation

In Minneapolis, MN, in Federal

Court for the District of Minnesota, a

civil agreement was reached between the

U.S. Attorney’s Office and Dominion

Management Services, Inc. Dominion

agreed to pay $1 million to remove leadbased paint from rental units, pay $10,000

in civil penalties to the Federal Government for violating a Federal lead-based

paint disclosure law, and give $70,000 to

the Sustainable Resource Center in

Minneapolis for lead-based paint abatement work. In the same case, Minneapolis landlord Robert Zeman also reached a

settlement with the Government and

agreed to pay $250,000 to test and clean

up all lead-based paint hazards on his

properties and pay a $2,000 civil penalty.

Dominion currently owns 4,500 apartments in Minnesota, South Dakota,

Wisconsin, and Indiana, 3,838 of which

are in Minnesota. Zeman currently owns

Chapter 4: HUD’s Multifamily Housing Programs 69

19 properties containing 22 rental units in

Minneapolis. Specifically, Dominion and

Zeman were cited for not adhering to the

Residential Lead-Based Paint Hazard

Reduction Act of 1992. This Act requires

landlords with housing built before 1978 to

give each tenant a lead hazard pamphlet,

divulge any information about lead-based

paint hazards on their properties, and sign

a warning statement with the tenant.

Equity Skimming

In Fort Worth, TX, in Federal Court

for the Northern District of Texas, defendant Richard Harmon pled guilty to one

count of mail fraud and aiding and abetting. Harmon used HUD-insured draw

funds designated for the construction of

Hillsboro Harmony House, a 46-unit

multifamily assisted living center, to pay

Internal Revenue Service (IRS) employee

back taxes, other business expenses, and

bank loans relating to other projects.

Harmon was the owner of Everspan, Inc.,

the general contractor for Hillsboro

Harmony House, which received

$1,999,425 in construction loan proceeds

for the HUD project. Harmon caused the

fraudulent diversion of $761,000, which

amounted to over one-third of the $2.7

million HUD-insured loan amount.

Everspan, Inc., filed for Chapter 11

bankruptcy (reorganization) in January

2000 and then Chapter 7 bankruptcy

(liquidation) in March 2000, causing its

bonding company to ultimately settle its

remaining unpaid vendor claims.

Conspiracy

In Boston, MA, in U.S. District

Court of Massachusetts, Joseph O’Connor

was indicted by a Federal grand jury on

one count of conspiracy (Title 18, U.S.

Code, Section 371). This indictment is the
result of a HUD-OIG investigation in

which Janet Gaibl and Joseph Cassidy

were indicted by a Federal grand jury in

the District of Massachusetts on November 19, 2003, and charged with one count

of conspiracy (Title 18, U.S. Code,

Section 371); Gaibl was also charged with

two counts of making false statements

(Title 18, U.S. Code, Section 1001).

Gaibl’s cooperation has allowed the court

to issue the current indictment against

O’Connor. The indictment alleges that

between 1988 and mid-2000, Gaibl and

Cassidy, former employees of First Realty

Management, and O’Connor, former

contractor for First Realty, combined to

cause false statements to be submitted to

HUD relating to a rent subsidy program

at Cummins Towers, a HUD-insured

multifamily complex managed by First

Realty. Gaibl, Cassidy, and O’Connor

allegedly identified certain federally

subsidized units at the development for

their own use or the use of friends and

then caused false statements to be made

on related HUD forms and supporting

documents to be fabricated, all for the

purpose of obtaining subsidized units for

individuals who would not otherwise

qualify. By their actions, Gaibl,

O’Connor, and Cassidy caused a loss to

HUD in excess of $140,000 and also

deprived qualified families of use of the

subject units.

Bank and Tenant Fraud

In Lincoln, NE, in U.S. District

Court for the District of Nebraska,

defendants Elizabeth Rivera-Colley and

Phillip Colley were sentenced for their

participation in a bank and tenant fraud

scheme involving $207,000. The Colleys

were representative payees for various

handicapped people. The handicapped

people received payments from various

government programs. The Colleys failed

to declare the income from the other

government programs. Phillip Colley was

sentenced to 12 months confinement, 5

years supervised release, and community

service. Elizabeth Rivera-Colley was

sentenced to 7 months confinement, 5

years supervised release, and community

service. Phillip Colley was also arrested

at the sentencing for violation of another

pretrial release for mortgage fraud.

Theft/Embezzlement

Defendant Neuil Edwards, the former

operations manager for the Roosevelt

Towne Apartments and the Union Sarah

Rehab scattered rental sites, pled guilty in

St. Louis, MO, in Federal Court for the

Eastern District of Missouri, to theft of

government funds. Roosevelt and Union

Sarah are Section 8 project-based rental

properties. Edwards admitted stealing

tenant rent receipts, misappropriating

monies for his day care business, writing

checks for his personal use, and remitting

funds to a fraudulent vendor. In total,

between August 2000 and March 2002,

Edwards misappropriated $135,314 from

the two properties.

  

Chapter 4: HUD’s Multifamily Housing Programs 70
Chapter 5: HUD’s Community Planning and Development Programs
Chapter 5: HUD’s Community Planning and Development Programs 72

The Office of Community

Planning and Development

(CPD) seeks to develop viable

communities by promoting integrated approaches that provide

decent housing, as suitable living

environment, and expanded

economic opportunities for lowand 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

Office of Inspector General (OIG) issued

10 reports in the CPD program area: one

internal audit and nine external audits.

These reports disclosed nearly $17.6

million in questioned costs and over $1.9

million in recommendations that funds be

put to better use.

The OIG audited management

controls over grantee and subgrantee

capacity, the Community Development

Block Grant (CDBG) Disaster Assistance

Funds in the State of New York, Home

Investment Partnership (HOME), CDBG,

Housing Opportunities for Persons with

AIDS, Supportive Housing, and Shelter

Plus Care programs.

Management Controls Over

Grantee and Subgrantee

Capacity

In response to a congressional

inquiry related specifically to management controls over nonprofits, the OIG

audited CPD’s management controls over

the capacity of entities participating in

their programs. Specifically, we looked at

CPD’s management controls over selection and oversight of grantees and

subgrantees. We found that CPD’s management controls are not sufficient to

provide reasonable assurance that only

grantees and subgrantees with capacity

participate in its programs. CPD has

controls to minimize the risk of grantees

and subgrantees lacking capacity. However, unverified assumptions, incomplete

and outdated guidance, and limited onsite

monitoring undermine these controls.

Chart 5.1: Community Planning and

Development Reports Issued

9

1

 Internal Reports External Reports

Chart 5.2: Community Planning and

Development Dollars

20,000,000

15,000,000

10,000,000

5,000,000

0 External Reports

Questioned Costs Funds Put to Better Use

The cost figures in the charts above represent the actual monetary benefits for all reports issued during this semiannual

period. The monetary benefits shown in the Profile of Performance represent only those reports with management decisions

reached during this semiannaul period. Because there is a time lag between report issuance and management decisions, the

two totals will not agree.
Chapter 5: HUD’s Community Planning and Development Programs 73

For competitive grants, CPD incorporates capacity into the Notice of Fund

Availability as both a threshold factor and

a rating factor. However, if the applicant

is new or CPD has not monitored the

applicant onsite, it accepts without

verification that the application accurately

reflects the applicant’s capacity. Further,

for some competitive grants, CPD sets

the threshold factor too low to be effective

and excludes field office staff, who should

be the most familiar with the grantees,

from the selection process. As a result,

CPD cannot be reasonably assured that it

only funds grantees and subgrantees

capable of effectively carrying out its

programs in accordance with applicable

laws and regulations.

CPD bases its monitoring goals and

grantee risk analyses on unverified

assumptions. It has never evaluated the

aggregate risk associated with its programs or made a decision as to what level

of risk is acceptable. Further, CPD has

not tested its grantee risk analysis process

to ensure it accurately identifies the

highest risk grantees. As a result, CPD

lacks assurance that it has the resources

to perform the appropriate level of monitoring. Additionally, CPD cannot demonstrate that it is focusing limited resources

on the highest risk programs and grantees.

We recommended that CPD provide

guidance for grantees to evaluate capacity,

involve field office personnel in decisions

where appropriate, and increase minimum threshold requirements for capacity

for competitive grant programs. Further,

we recommended that CPD document the

basis for establishing monitoring goals,

evaluate risks, test its risk assessment

process, schedule monitoring based on

risks, increase training for field staff

responsible for monitoring, and provide

field offices with appropriate financial

analyst capabilities. (Report No. 2004-

FW-0001)

Disaster Assistance Funds –

State of New York

The OIG performed an audit of the

Lower Manhattan Development

Corporation’s (LMDC) administration of

the CDBG Disaster Assistance Funds,

which were provided to the State of New

York as a result of the September 11,

2001, terrorist attacks on the World Trade

Center in New York City. This review is

the third in a series of reviews that the

OIG plans to conduct of LMDC’s administration of the CDBG Disaster Assistance

Funds. We plan to issue an audit report

every 6 months and include the results of

each review in the Inspector General’s

Semiannual Report to Congress.

The results of our review disclosed

that LMDC generally disbursed the

CDBG Disaster Assistance Funds to

eligible applicants in accordance with

U.S. Department of Housing and Urban

Development (HUD)-approved action

plans and has a financial management

system capable of adequately safeguarding

the funds. Our review did not disclose any

exceptions regarding grant disbursements

under the Disproportionate Loss of

Workforce or the Utility Restoration and

Infrastructure Rebuilding programs.

However, we noted processing

deficiencies in the Employment Training

Assistance Program (ETAP) that need to

be resolved to enhance the efficiency of

LMDC’s administration of the funds and

prevent other related administrative

deficiencies from occurring. Contrary to

the program’s application instructions and

program guidelines, the program adminis-
trator approved and disbursed grant

payments as reimbursement for training

costs to businesses without adequate

supporting documentation. Thus, training

costs totaling over $87,000 are considered

unsupported, pending an eligibility determination by HUD.

We recommended that HUD instruct

LMDC to obtain and maintain all missing

documentation to support the grantee

training costs charged to the ETAP and

pursue reimbursement from those grant

recipients who cannot support their costs.

(Report No. 2004-NY-1004)

Community Development

Block Grant Programs,

Home Investment

Partnership, and Section

108 Loan Program

The OIG completed a review of the

Desire Community Housing Corporation

as part of our audit of the City of New

Orleans’ housing and economic development programs, New Orleans, LA. As a

subrecipient of the City, Desire received

HUD funding through the City’s Division

of Housing and Neighborhood Development. We concluded Desire did not

effectively and efficiently administer its

programs in accordance with the terms of

the grant agreements with the City and

applicable HUD regulations. Desire did

not develop and implement a sound

internal control environment to administer its programs and as a result, did not

provide adequate oversight and management of its HUD-funded projects. Further, Desire mismanaged $1.1 million of

HOME funds on its Bayou Apartments

rehabilitation project and over $2 million

of program income from Liberty Terrace.

In addition, Desire made unsupported

disbursements totaling nearly $92,000 and

violated HUD procurement regulations.

The City should have provided sufficient

monitoring of Desire to detect these

problems sooner and possibly mitigate

Desire’s mismanagement of limited

HOME funds.

We recommended that HUD and the

City ensure that Desire has the necessary

controls before awarding it any additional

grants. Further, Desire should repay the

City the $1.1 million and either support or

repay over $322,000 of unpaid loans from

program income and $92,000 in unsupported disbursements. We also recommended that HUD aid the City in establishing appropriate controls, reprogramming funds, and taking appropriate

administrative actions. (Report No. 2004-

FW-1007)

At the request of HUD’s Detroit

Field Office Director of Community

Planning and Development, the OIG

audited the Home Investment Partnership

Program (HOME) of Pontiac Neighborhood Housing Services, Inc. (Housing

Services), in Pontiac, MI. Housing

Services did not follow HUD requirements and its development agreement with

the City of Pontiac for the Martin Luther

King residential project. Specifically,

Housing Services (1) used over $871,000

in HOME funds and nearly $458,000 in

program income to pay for the construction of nine homes that did not meet the

City’s building code and (2) did not return

$368,000 of program income directly

generated from the use of HOME funds.

We recommended that HUD ensure

the City completes construction and

obtains Certificates of Occupancy on the

nine homes that did not meet code or

return the funds to the HOME program.

(Report No. 2004-CH-1004)

Chapter 5: HUD’s Community Planning and Development Programs 74
In response to a request from HUD’s

Pittsburgh Office of Community Planning

and Development, the OIG reviewed the

CDBG program for the City of

McKeesport, PA. Our review concentrated on the City’s oversight of the Home

Improvement Loan Program by its

subrecipient, the McKeesport Housing

Corporation, from January 2000 through

December 2002. The City did not adequately monitor the performance of the

McKeesport Housing Corporation to

ensure it administered its Home Improvement Loan Program in compliance with

HUD requirements. Specifically, the City

did not review quarterly status reports

submitted by the McKeesport Housing

Corporation to ensure program income

generated through its Home Improvement

Loan Program was used to fund eligible

activities. As a result, the City did not

identify that the McKeesport Housing

Corporation violated Federal procurement regulations and requirements when

it procured consultants for accounting,

legal, computer, financial audit, and loan

underwriting services as well as rehabilitation contractors. We also found that the

subrecipient failed to establish a cost

allocation plan to ensure that indirect

costs were equitably distributed to the

Home Improvement Loan and other

CDBG programs. As a result, the

McKeesport Housing Corporation could

not support over $694,000 in consultant

contract costs, rehabilitation contract

costs, and indirect costs.

We recommended that the City of

McKeesport provide adequate support or

reimburse HUD for any unsupported

expenditures and establish and implement

a comprehensive system to monitor its

subrecipients to ensure they administer

their programs in accordance with HUD

requirements. (Report No. 2004-PA-1007)

OIG and the City Auditor for Kansas

City, MO, audited Kansas City’s Housing

Program and the role of the Housing and

Economic Development Financial Corporation (HEDFC) in that program. Two

previous HUD-OIG/City Auditor joint

reports raised concerns about HEDFC,

the City’s largest subrecipient of Federal

housing funds, and recommended that the

City develop a housing policy including

strategies and goals, develop mechanisms

for gathering information on housing

conditions, and strengthen processes for

selecting and monitoring subrecipients.

The objectives for this audit were to

determine what system the City used to

implement its housing policy, what role

HEDFC played in the system, how well

HEDFC carried out that role, and

whether changes in the system could

improve the City’s performance and its

ability to meet its housing goals.

The City’s system is fragmented and

overly complex, resulting in higher than

necessary administrative costs, lack of

information, poor communication, delays,

and lack of accountability for poor performance. In addition, the City has failed to

adequately define HEDFC’s role in

providing affordable housing, causing it to

concede decisions about the use of public

funds to HEDFC and preventing it from

fulfilling its responsibilities as a recipient

of Federal grant funds. As a result,

HEDFC spent more than authorized by

contract on the Beacon Hill Housing

Development Project and used program

income without authorization. Also,

HEDFC failed to fully repay the Section

108 loan for the Westside Business Park.

We also noted significant deficiencies in

HEDFC’s operations. Since HEDFC is an

integral component of the City’s housing

program, financial and operational

problems result in underperformance for

the program as a whole.

Chapter 5: HUD’s Community Planning and Development Programs 75
Chapter 5: HUD’s Community Planning and Development Programs 76

We recommended that HUD ensure

that the City develops and implements the

procedures necessary for an effective and

efficient housing program and recovers

from HEDFC the $900,000 in Beacon

Hill program income it used without

authorization and the $600,000 balance of

the Westside Business Park Section 108

loan. (Report No. 2004-KC-1005)

Housing Opportunities for

Persons with AIDS,

Supportive Housing, and

Shelter Plus Care Programs

At the request of CPD, the OIG

audited the Safe Haven Outreach Ministry, Inc., in Washington, DC, and found

that Safe Haven could not substantiate

how it used over $1.16 million of the $1.6

million (72 percent) in grant funds it

received from HUD under its Housing

Opportunities for Persons with AIDS,

Supportive Housing, and Shelter Plus

Care programs. The audit also disclosed

that Safe Haven officials spent nearly

$4,000 in HUD funds on ineligible activities such as movie tickets, cigarettes,

Christmas gifts, and bingo games. As a

result, there is no assurance that Safe

Haven used funds to assist the homeless

with housing and supportive services or

addressed the specific housing and other

supportive needs of persons living with

HIV/AIDS and their families as required.

We recommended that HUD initiate

appropriate administrative actions against

current and/or former members of the

Board of Directors, Executive Committee,

and other responsible officials of the Safe

Haven Outreach Ministry. Safe Haven

should also provide HUD with adequate

documentation to support unsupported

expenditures or reimburse HUD from

nonfederal funds and reimburse HUD

nearly $4,000 from nonfederal funds for

ineligible costs. (Report No. 2004-PH1008)

An audit of the U.S. Veterans Initiative, Inc., a Supportive Housing program

grantee based in Inglewood, CA, disclosed that U.S. Veterans (1) did not meet

cash-matching fund requirements for $7.2

million in Supportive Housing program

funds expended, (2) spent over $633,000 in

Supportive Housing program funds for

ineligible and unsupported expenses, and

(3) did not administer its Supportive

Housing program grants in accordance

with requirements.

We made a number of recommendations to address the deficiencies, including

requiring U.S. Veterans Initiative and/or

its continuums Los Angeles Homeless

Services Authority and City of Long

Beach to repay HUD from nonfederal

funds for the Supportive Housing program

grant expenditures that did not have the

required matching funds, unless it can

provide supporting documentation and

reimburse the Supportive Housing program grants and/or repay HUD from

nonfederal funds for the ineligible and

unsupported expenses. (Report No. 2004-

LA-1008)

At the request of HUD’s Richmond

Office, Community Planning and Development Division, the OIG audited Peninsula

AIDS Foundation, Inc., in Newport

News, VA. The Foundation could not

substantiate how it used nearly $340,000

of the $353,000 (96 percent) in grant funds

it received from HUD under a Supportive

Housing program renewal grant and a

Housing Opportunities for Persons with

AIDS grant. It did not retain, nor did it

provide the organizations assigned the

grants, auditable financial records or

related documentation. As a result, there
Chapter 5: HUD’s Community Planning and Development Programs 77

is no assurance that the Foundation used

the funds to assist the homeless with

housing and supportive services or

addressed the specific housing and other

supportive needs of persons living with

HIV/AIDS and their families as required

by the grant agreements.

We recommended that HUD initiate

administrative actions, as appropriate,

against former members of the Board of

Directors and Executive Committee of the

Peninsula AIDS Foundation to preclude

them from participating in any future

Federal awards. We also recommended

that HUD request guidance from the

Office of General Counsel on the possibility of recovering the unsupported costs

from the former members of the Board of

Directors and Executive Committee.

(Report No. 2004-PH-1006)

In response to a request from HUD’s

Chicago Regional Office of Community

Planning and Development, the OIG

audited the Supportive Housing grant

program of Connexions Enterprise, a

nonprofit organization located in Chicago,

IL. Although Connexions met its cashmatching requirements under the program, it lacked adequate management

controls to ensure that program costs

were eligible and adequately supported

and that program participants received

the required services. Connexions (1)

used nearly $31,000 of program funds for

ineligible costs, (2) lacked sufficient

documentation that its use of another

$173,000 benefited the program, (3) did

not receive the in-kind services for its

program participants as set forth in the

HUD-approved grant application, and (4)

did not ensure that its Chief Executive

Officer followed its financial management

policies and procedures.

We recommended that HUD declare

Connexions in default and recapture any

ineligible program funds used. We also

recommended that HUD take administrative action against Connexions’ Board of

Directors and its Chief Executive Officer

for failing to administer the Supportive

Housing program in accordance with

Federal requirements. (Report No. 2004-

CH-1005)
Chapter 5: HUD’s Community Planning and Development Programs 78

Investigations

During this reporting period, the

OIG opened 38 investigation cases and

closed 33 cases in the CPD program

area. Judicial action taken on these cases

during the period included $4,404,416 in

investigative recoveries, $4,598,827 in

funds put to better use, 23 indictments/

informations, 20 convictions, pleas, and

pretrial diversions, 45 administrative

actions, and 20 arrests.

Some of the investigations discussed

in this report were conducted by the OIG,

while others were conducted jointly with

Federal, State, and local law enforcement

agencies. The results of our more significant investigations are described below.

Disaster Assistance Funds –

State of New York

In the OIG’s last three Semiannual

Reports to Congress, we reported on both

our audit and investigative work into the

misuse of HUD funds provided in the

aftermath of the September 11, 2001,

terrorist attacks in New York City. During

this reporting period, we continued to find

instances of fraud and abuse involving

these funds. Our results are as follows:

In New York, NY, in Federal Court

for the Southern District of New York,

defendant David Zimmer, a resident of

Maryland, pled guilty to two counts of

theft of government funds for obtaining

two Business Recovery Grants totaling

$450,000. Zimmer was previously

arrested by the OIG in Bethesda, MD,

and charged with theft of government

funds and wire fraud in connection with a

scheme to defraud HUD and the Empire

State Development Corporation of

$270,000 in Federal grant money. The

World Trade Center Business Recovery

Program was established by the Empire

State Development Corporation after the

September 11, 2001, terrorist attacks to

provide assistance to certain businesses in

Lower Manhattan. The Business Recovery

Grant Program is funded through a $375

million appropriation from HUD.

Zimmer created a fake office lease for his

company DZ Investments in Lower

Manhattan. DZ Investments was actually

located in Bethesda, MD, and reported

gross receipts of $2.7 million for tax year

2000. Zimmer created a false corporate

return for his father’s business. His father

actually was a tenant at the Lower Manhattan address of Zimmer’s business

scheme. Zimmer created a corporate

return which inflated his father’s business

gross receipts to $1.8 million. Further

investigation by the OIG after Zimmer’s

initial arrest revealed that he had obtained

another fraudulent grant totaling

$180,000.

In New York, NY, in Federal Court

for the Southern District of New York,

defendant Alexander D. Koltovskoy, also

known as Alexander Kolt, was sentenced

to 51 months incarceration, 3 years

supervised release, $373,228 in restitution, and an $1,800 special assessment. In

October 2003, Koltovskoy was found guilty

of defrauding numerous private and

government agencies that provided relief

after the September 11, 2001 terrorist

attacks on the World Trade Center.

Koltovskoy and Vincent Pizzi were

principals of Alexander Edwards Global

Search, Inc. Koltovskoy, the president of

the company, applied for grants, stating

that the company was at 2 World Trade

Center, Suite 2112, when in fact, it was

located in Mid-Town Manhattan, out of the

grant zone. HUD was defrauded of

$64,390.
Chapter 5: HUD’s Community Planning and Development Programs 79

In New York, NY, in Federal Court

for the Southern District of New York,

Jobim Rose, who previously pled guilty to

one count of theft of government money

(Title 18, U.S. Code, Section 641), one

count of false statements (Title 18, U.S.

Code, Section 1001), and two counts of

mail fraud (Title 18, U.S. Code, Section

1341) in connection with a scheme to

defraud HUD and Lower Manhattan

Development Corp (LMDC) of Federal

grant money, was sentenced to 48 months

of probation and ordered to pay restitution

of $7,963.79. LMDC was created by the

State and City of New York after the

September 11, 2001, terrorist attacks to

coordinate the rebuilding and revitalization of Lower Manhattan. It received over

$2.7 billion from HUD. Rose devised a

scheme to fraudulently obtain money

from one of the grant programs established by the LMDC, which aimed to

retain and attract residents to Lower

Manhattan. Jobim Rose, a resident of the

Bronx, kept a second residence in the

Mitchell-Llama Apartments within the

eligible zone in Lower Manhattan. After

the September 11, 2001, terrorist attacks,

Rose applied for a grant, stating that he

lived in Lower Manhattan, when in fact,

he had been renting out the apartment to a

tenant since August of 2001. Rose fraudulently stated that he was residing in Lower

Manhattan.

In a second case involving LMDC in

New York, NY, in Federal Court for the

Southern District of New York, defendant

Denise O’Connor was sentenced to 2

months incarceration. O’Connor, an

inmate in Rikers Island, pled guilty in

February 2004 to one count of theft of

government money and one count of mail

fraud in connection with a scheme to

defraud HUD and LMDC of Federal

grant money. O’Connor devised a scheme

to fraudulently obtain money from a grant

program established by LMDC to retain

and attract residents to Lower Manhattan.

O’Connor fraudulently stated that she

resided in Lower Manhattan within the

eligibility area, when in fact, she just

stayed with a relative in Lower Manhattan

for a short period.

In a third case involving LMDC in

New York, NY, in Federal Court for the

Southern District of New York, Michael

Fraraccio pled guilty to one count of mail

fraud in connection with a scheme to

defraud HUD and LMDC of Federal

grant money. Fraraccio devised a scheme

to fraudulently obtain money from a grant

program established by the LMDC to

retain and attract residents to Lower

Manhattan. Fraraccio, a resident of New

Jersey, kept a second apartment in Lower

Manhattan. Fraraccio was renting the unit

out when he applied for and received the

residents grant, stating that he was living

in Lower Manhattan.

In a fourth case involving LMDC in

New York, NY, in Federal Court for the

Southern District of New York, Ivy Horn

pled guilty to one count of mail fraud

(Title 18, U.S. Code, Section 1341) in

connection with a scheme to defraud

HUD and LMDC of Federal grant money.

Horn devised a scheme to fraudulently

obtain money from a grant program

established by LMDC to retain and attract

residents to Lower Manhattan. Horn, a

resident of Florida and Brooklyn, with an

apartment in the elibilility area in Lower

Manhattan, applied for and received a

residents grant. Horn was renting the

apartment to two individuals and fraudulently stated that she was residing in

Lower Manhattan.
Chapter 5: HUD’s Community Planning and Development Programs 80

Investigations Involving

Public Officials

In Mineola, NY, in New York State,

District Court of Nassau County, defendant former Deputy Nassau County

Executive Peter Sylver, who headed

Nassau County’s HUD-funded Economic

Development Agency (EDA), pled guilty

to charges of misconduct, coercion, and

harassment. Sylver misappropriated

HUD and other funds to pay personal

expenses, including lodging, meals, and

entertainment; directed an EDA employee

to participate in political activities; and

physically harassed the employee. During

the course of the investigation, HUD

conducted a review of EDA-administered

programs and directed Nassau County to

repay HUD $1.2 million. Sylver resigned

from office at the onset of the investigation.

In Newark, NJ, in U.S. District

Court for the District of New Jersey,

defendant Joseph Barry pled guilty to theft

or bribery concerning programs receiving

Federal funds. Barry, a real estate

developer, bribed Robert Janiszewski, the

former Hudson County Executive, to help

secure Federal and State grants and loans

for some of Barry’s development projects.

Barry secured $1 million in HUD grants

and loan guarantees under the Economic

Development Initiative, as well as

$6,690,000 in Section 108 loan guarantees

for these projects. Barry was previously

indicted on 16 counts of fraud and swindling, using a fictitious name or address,

and theft or bribery concerning programs

receiving Federal funds. The indictment

detailed $8.8 million in Federal and State

grants that Barry and his enterprise, the

Applied Companies, secured through

bribery. Barry maintained a “payoff

sheet” of bribe amounts, dates, and

notations, indicating to which government

loan or grant the payoffs were connected.

In Houston, TX, in Federal Court

for the Southern District of Texas, defendants Diana Cortez, the former Mayor of

the City of LaGrulla, TX, and Sandra

Lopez, a former bookkeeper for the City,

were indicted on one count each of theft of

government funds. They allegedly used

more than $60,000 in City funds to pay for

the services of a psychic tarot card

reader.

In Little Rock, AR, in U.S. District

Court for the Eastern District of Arkansas, defendant Billy Freeman, a Pine

Bluff City Alderman, pled guilty to one

count of violating the Hobbs Act and

aiding and abetting extortion. In June and

July 2002, the City of Pine Bluff advanced

$71,648 to Freeman’s corporation,

Southeast Arkansas Development Corporation, which was funded by HUD and the

Department of Health and Human Services. The advances were made with the

assumption that a grant from HUD would

be made later, and this grant would be

used to reimburse the City. The HUD

grant was made in December 2002, but

the money was signed over to Freeman’s

corporation. Freeman then wrote a check

from the nonprofit’s bank account, postdated for December 26, and gave it to the

City; the check bounced. In order to

obtain the funds necessary to repay the

City, Freeman sold his City Council vote

on a property zoning issue for $72,000.

In McAllen, TX, in Federal Court

for the Southern District of Texas, defendant Israel Sagredo, former City Administrator for Alton, TX, was found guilty of

extortion and accepting a $10,000 bribe.

Sagredo negotiated and accepted two

separate payments of $5,000 each from an

individual who posed as a potential bidder
Chapter 5: HUD’s Community Planning and Development Programs 81

on a contract to furnish the City of Alton

Recreation Center. The funds designated

to furnish the center were part of a $3

million Section 108 loan, guaranteed by

HUD and administered by Hidalgo

County’s Urban County Program.

Conspiracy

In Concord, NH, in New Hampshire Superior Court in Concord, NH,

defendant Kevin Craffey pled guilty to one

count of unlawful disposal of regulated

asbestos containing material and one

count of unlicensed asbestos abatement.

He was sentenced to 2 months in jail and

150 hours of community service and

ordered to pay a $150,000 voluntary

forfeiture to the New Hampshire Asbestos Management Fund and an $82,000

reimbursement to the State of New

Hampshire for forensic excavation.

Craffey also received an additional 22-

month sentence, deferred for 2 years upon

his release. After 2 years, he must return

to the court and demonstrate that he

complied with the terms of his sentence.

In addition, Jose Fonseca of Duxbury,

MA, pled guilty to unlawful disposal of

regulated asbestos containing material in

Coos County Superior Court. Fonseca

received a 3-month jail sentence in the

Grafton, NH, House of Corrections, 100

hours of community service, a $4,000

fine, plus nine months supervised release.

Fonseca was a business partner of Kevin

Craffey, a developer, who received a $1

million Community Development Block

Grant made to the Town of Whitefield,

NH, to enable Craffey to purchase and

rehabilitate a historic hotel.

In Springfield, MA, in U.S. District

Court, four defendants were charged in a

19-count superseding Federal indictment.

This indictment had previously been

handed down by a Federal grand jury in

January 2004. The indictment included

violations of conspiracy (Title 18, U.S.

Code, Section 371), program fraud (Title

18, U.S. Code, Section 666), wire fraud

(Title 18, U.S. Code, Section 1343),

obstruction of justice (Title 18, U.S. Code,

Section 1503), false statements (Title 18,

U.S. Code, Section 1001), threatening a

witness (Title 18, U.S. Code, Section

1512), and aiding and abetting (Title 18,

U.S. Code, Section 2). The four charged

were associated with the Massachusetts

Career Development Institute, an organization partially funded with HUD CDBG

funds. The Institute provided educational

and job-training programs for incomeeligible individuals in the Springfield, MA,

area. Those charged are the Institute’s

Copyright, 2004. The Boston Globe South. Reprinted with permission.
former Executive Director Gerald

Phillips, former Administrator Giuseppe

Polimeni, former no-show employee

Luisa Cardaropoli, and former Secretary

Jamie Dwyer. The investigation concerned no-show employees. During the

course of the investigation, Phillips

allegedly threatened, intimidated, and

corruptly persuaded a witness to prevent

the testimony of this witness in a Federal

grand jury. This superseding indictment

included additional information required

under the Blakely decision. On September 13, 2004, the four defendants pled not

guilty to the charges in this indictment.

In Cleveland, OH, in Federal Court

for the Northern District of Ohio, defendants Cecelia George, the former Director of the City of East Cleveland Department of Community Development (DCD);

Charles Reed, Sr., her father; Charles

Reed, Jr., her brother; and Willie

George, her son, each pled guilty to one

count of conspiracy. Celia George and her

coconspirators orchestrated a scheme to

funnel HUD CPD funds to her family.

The fraud was carried out through rigging

bids, illegally awarding contracts to

family members through “sham” or

“front” companies, providing false

information to HUD regarding the expenditure of funds, and forging signatures on

checks in order to profit directly from

DCD funds. They also used DCD funds

for office entertainment. The fraudulent

contracts included the emergency door

and lock contract; emergency furnace

contract; emergency roof contract; and

the emergency heating, ventilation, and

air conditioning contract, as well as

HOME funds. Approximately $69,000 in

DCD funds were misappropriated through

one or more of these schemes.

Equity Skimming

In Las Vegas, NV, a Federal grand

jury in the District of Nevada indicted

John Everett, an investor, for conspiracy

(Title 18, U.S. Code, Section 371) to

commit wire fraud (Title 18, U.S. Code,

Section 1341) and money laundering (Title

18, U.S. Code, Section 1956) in the

furtherance of loan fraud. According to

the indictment, Everett purchased homes,

using strawbuyers, from individuals who

were on the verge of foreclosure and set

up nonprofit companies alleging to the

sellers that these companies were purchasing the homes to use as halfway

houses. At closing, Everett withdrew

amounts equal to the equity available in

the homes, identifying these disbursements as costs to convert the homes to

halfway houses. Fraudulent documentation

was prepared and submitted for each

strawbuyer, including false bank account

statements, Internal Revenue Service

(IRS) W-2 forms, gift letters, verifications

of employment, and bills of sale to support

the source of down payments. Everett was

allegedly involved in 18 fraudulent loans

valued at over $6 million through National

City Mortgage Company. All of the loans

have gone into default.

False Statements

In Cedar Rapids, IA, a Federal

grand jury indicted Joyce Ashcraft on one

count of making false statements to HUD.

Ashcraft allegedly submitted false documents to Cedar Rapids Housing Services

to obtain a $24,660 housing rehabilitation

grant. Ashcraft is also being investigated

on allegations of credit card fraud, bank

fraud, identity theft, welfare fraud, and

making false statements to the Social

Security Administration.

Chapter 5: HUD’s Community Planning and Development Programs 82
Embezzlement/Theft

In Springfield, MA, in Federal

Court for the District of Massachusetts,

defendant James Asselin, former Director of the Greater Springfield Entrepreneurial Fund, a nonprofit organization,

was sentenced to 41 months confinement

and 36 months supervised release and

was ordered to pay $723,553 in restitution. Asselin and his coconspirators

illegally collected over $300,000 in travel

and consulting fees on top of their city

salaries. Asselin used Springfield Housing

Authority employees to maintain and

repair his personal properties. Authority

contract bids were rigged and involved

kickbacks to Asselin and related contractors. Numerous schemes were used to

defraud HUD and the Authority. Asselin

previously pled guilty to conspiracy and

other charges relating to the embezzlement and theft of over $700,000 in funds

received from the Small Business Administration and the Department of Commerce. The Greater Springfield Entrepreneurial Fund had also received $697,000

in Urban Development Action Grant

Chapter 5: HUD’s Community Planning and Development Programs 83

Copyright, 2004. The Republican Company. All rights reserved. Used with permission.
(UDAG) funds for its start-up costs. The

investigation found that a large portion of

the UDAG funds had been used to cover

shortages in the books, which had to be

presented to the Small Business Administration and Department of Commerce on

a monthly basis.

 Also in the same case, defendant

Salvatore Anzalotti, former Accountant

with the Greater Springfield Entrepreneurial Fund, was sentenced to 6 months

home confinement and 4 years probation

and was ordered to pay $68,000 in restitution. Anzalotti was previously convicted,

along with codefendant Cornell Lewis, on

charges of conspiracy.

Wire and Mail Fraud and

Money Laundering

In East St. Louis, IL, in Federal

Court for the Southern District of Illinois,

defendant Phillip Cohn was indicted on 20

counts of mail fraud, money laundering,

bank fraud, wire fraud, and environmental crimes. Cohn, a real estate developer,

was charged with mail fraud and money

laundering in connection with a

$1,195,000 sale of real estate to the East

St. Louis school district. Cohn allegedly

created false invoices and falsely endorsed checks in order to obtain portions

of the $1 million placed in escrow for the

environmental cleanup of school property.

Cohn was charged with bank fraud for

allegedly obtaining over $620,000 in loans

using the environmental escrow funds as

collateral. The lending bank was unaware

that the escrow funds had to be used for

environmental cleanup as well as the fact

that Cohn was creating false invoices to

obtain the escrow funds for his personal

use. Cohn was charged with environmental crimes in connection with the illegal

removal of asbestos containing materials

from the Spivey Building, which he

owned. Also in connection with the Spivey

Building, Cohn was charged with wire

fraud for making false statements to the

Greater St. Louis Regional Empowerment

Zone when he applied for $1,260,000 in

HUD CPD funds through the Empowerment Zone program for the development

of the Spivey Building. Cohn’s wife,

Katrina Cohn, was also charged in one of

the bank fraud counts.

In Albany, NY, in Federal Court for

the Northern District of New York,

defendants Charles M. Barber and his

son, Charles H. Barber, were sentenced

to 48 months in prison, while Helen

Barber was sentenced to 33 months in

prison. The sentencings followed the

defendants’ earlier convictions on bankruptcy fraud, wire fraud, money laundering, and misuse of public funds. All three

defendants have entered into criminal

forfeiture agreements, whereby they

agreed to forfeit the following previously

seized assets: a money judgment in the

amount of $850,000, one vehicle and one

motorcycle, and $240,554 from seven bank

accounts and two stock accounts. The

defendants owned AMG Industries and

received $370,000 in CDBG funds for the

construction of a new metal fabricating

facility. The defendants submitted fraudulent and misleading invoices in support of

the CDBG loan and then diverted the

funds for their personal use. The three

were also ordered to collectively pay $1.9

million in restitution and were sentenced

to 5 years supervised probation upon their

release from prison. Additionally, they

were ordered to forfeit 25 percent of their

prison wages.

Chapter 5: HUD’s Community Planning and Development Programs 84
Grand Larceny

In Riverhead, NY, in New York

State Superior Court, defendant Carrie

Wilson, Bishop of New Life Christian

Mission Ministries, Inc., pled guilty to

grand larceny in the third degree and

agreed to pay $300,000 in restitution.

Wilson was involved in the theft of New

York State and Federal program money

earmarked for homeless women and

children. HUD provided the money to

New York State, which then distributed

the money to different charities via the

county welfare systems. Carrie Wilson, a

managerial agent of New Life Christian

Mission Ministries, Inc., a nonprofit

homeless shelter, knowingly submitted a

fraudulent financial statement for the

fiscal year ending 2000. This financial

statement stated that certain costs were

incurred in excess of $500,000, which

were not incurred. Wilson also submitted

to the Suffolk County Comptroller’s office

two lease agreements with fraudulent

information indicating that contracts

existed to pay the lessors of these premises a certain amount of rent for a

specific period of time. This caused New

Life Christian Mission Ministries, Inc., to

receive money it was not entitled to

receive. Also, Wilson wrongfully obtained

and withheld a property from the true

owner. It is anticipated that Wilson will be

making restitution of approximately

$300,000 and will be sentenced next year.

The business, New Life Christian Mission

Ministries, Inc., also pled out on the same

day as Wilson.

  

Chapter 5: HUD’s Community Planning and Development Programs 85

Chapter 6: Other Significant HUD Audits and Investigations/

OIG Hotline
Chapter 6: Other Significant HUD Audits and Investigations/OIG Hotline 88

Audits

During this reporting period, theOffice of Inspector General (OIG)

issued three reports: two internal audits

and one internal memorandum involving

areas of U.S. Department of Housing and

Urban Development (HUD) operations

that do not fall under major HUD programs reported in previous chapters.

The OIG audited the Departmental

Enforcement Center’s (DEC’s) enforcement actions, Office of Federal Housing

Enterprise Oversight, and HUD’s funds

management function. Our more significant audits are discussed below.

Effectiveness of the Departmental

Enforcement Center’s Enforcement

Actions

The OIG conducted an audit to

assess the effectiveness of the DEC’s

enforcement actions. The DEC had

positive impacts in (1) improving the

physical condition of HUD’s multifamily

portfolio, (2) imposing civil money

penalties against multifamily project

owners who fail to submit annual financial

statements in a timely manner, and (3)

implementing debarments against program violators. However, the audit

identified the following conditions that

warrant corrective action by the DEC.

The DEC is not functioning pursuant

to its planned mission as the Department’s

single enforcement authority and has not

implemented consistent enforcement

standards for all HUD programs. The

DEC assigned its operating division staff

almost exclusively to multifamily housing

cases and allowed the Office of Housing to

control certain criteria for referrals to the

DEC and certain enforcement decisions.

The DEC needs to improve its

development and pursuit of administrative

and civil sanctions and referral of potentially criminal violations to the OIG. The

DEC did not pursue equity skimming

violations that may have warranted

enforcement sanctions. Audit tests identified 24 cases with violations under the

equity skimming and double damage

statutes, but the DEC did not document

whether sanctions were considered and

did not pursue enforcement actions beyond

partial or full repayment of the misused

funds. The DEC did not refer these equity

skimming cases to OIG as required by

HUD policy.

Further, the DEC needs to eliminate

certain unwarranted referrals from the

Office of Housing and a premature case

closure policy. These conditions inflated

the DEC’s workload and reported accomplishments and wasted staff resources that

could have been used on other referrals.

Since the merger of the Office of

General Counsel (OGC) and the DEC,

Chart 6.1: Other Reports Issued

2

1

 Internal Audits External Memos

The cost figures in the chart above represent the actual monetary benefits for all reports issued during this semiannual

period. The monetary benefits shown in the Profile of Performance represent only those reports with management decisions

reached during this semiannaul period. Because there is a time lag between report issuance and management decisions, the

two totals will not agree.
Chapter 6: Other Significant HUD Audits and Investigations/OIG Hotline 89

OGC has not filled five key vacant DEC

positions because OGC had exceeded its

overall staff ceiling. DEC also could not

document some reductions in its staff

ceiling that resulted from the merger. The

vacant OGC/DEC positions and reduced

DEC staffing may have increased the

burden on existing staff and hindered

OGC/DEC’s ability to manage and

reduce its backlog of referred cases.

We recommended that OGC/DEC

(1) revise its operations to conform with

its published plans as HUD’s one enforcement authority or obtain written HUD

authorization to revise its mission, (2)

establish uniform enforcement standards

for all HUD offices, (3) revise DEC

procedures to ensure appropriate consideration of sanctions and referrals to OIG

when required by HUD policy, (4) eliminate unwarranted referrals and a premature case closure policy, (5) fill key vacant

positions, and (6) document the DEC staff

ceiling. (Report No. 2004-AT-0002)

The Office of Federal Housing

Enterprise Oversight Exceeds Its

60-Percent Statutory Requirement

But Has Cost Weaknesses in Its

Controls Over Allocating Costs for

That Requirement

The Chairman of the Subcommittee

on Veterans Affairs, Housing and Urban

Development, and Independent Agencies

of the Senate Committee on Appropriations asked that we determine whether the

Office of Federal Housing Enterprise

Oversight (OFHEO) was complying with

a statutory requirement that it use at least

60 percent of its total funds appropriated

for fiscal year (FY) 2004 for the examination, supervision, and capital oversight of

Fannie Mae and Freddie Mac, the

Government Sponsored Enterprises.

We were also asked to determine

whether OFHEO is using its funds to

meet the 60-percent requirement in a

manner consistent with other financial

regulators of financial institutions, such as

the Office of Thrift Supervision and the

Federal Deposit Insurance Corporation.

Further, the request asked us to determine

whether the other regulators are using

substantially more than 60 percent of their

funding for the examination, supervision,

and capital oversight of financial institutions.

The OFHEO is exceeding this

statutory requirement. However, neither

OFHEO nor HUD can be certain whether

OFHEO has significantly exceeded the 60-

percent requirement, as it has reported,

because OFHEO cannot adequately

support its method for allocating employee

expenses or the resulting use of funds

reported in its annual reports and budget

requests.

The OFHEO is allocating its funds

using a method consistent with other

financial regulators, including the Office

of Thrift Supervision, the Federal Deposit

Insurance Corporation, and the Office of

the Comptroller of the Currency. In

addition, OFHEO uses approximately the

same percentage of its funds as these

regulators for the purposes of examination, supervision, and capital oversight.

We recommended that OFHEO

establish and implement controls to

ensure accurate allocation and reporting.

These controls should include a reliable

method of maintaining actual employee

time spent on each strategic objective and

a method of ensuring that actual expenses

are reflected in its reporting of funds

used. (Report No. 2004-KC-0001)
Investigations

During this reporting period, the

OIG opened 73 investigation cases and

closed 40 cases involving areas of HUD

operations that do not fall under specific

program categories. Judicial action taken

on these cases during the period included

$962,939 in investigative recoveries,

$1,088,611 in funds put to better use, 9

indictments/informations, 13 convictions/

pleas/pretrial diversions, 150 administrative actions, and 31 arrests.

Some of the investigations discussed

in this report were conducted by the OIG,

while others were conducted jointly with

Federal, State, and local law enforcement

agencies. The results of our more significant investigations are described below.

In Washington, DC, as a result of an

OIG investigation, the Department

reached settlement agreements with

former Assistant Secretary for Policy

Development and Research Mr. Albert

Trevino and his friend and former contractor Mr. John Gilchrist. Trevino and

Gilchrist conspired to defraud the government of over $14,000 in travel funds. The

U.S. Attorneys’ Office declined criminal

prosecution. Trevino agreed to repay

$14,120 in travel reimbursements, pay a

penalty of $5,000 and be debarred for a

period of two years. Gilchrist agreed to

pay a penalty of $11,000 and be debarred

for a period of three years. HUD sued

both Trevino and Gilchrist under the

Program Fraud and Civil Remedies Act

for the submission of four false travel

vouchers seeking reimbursement of

Gilchrist’s lodging expenses claimed at

the “Dent Place Bed and Breakfast”

which was a fictional entity and in actuality a townhouse rented by Trevino in the

Georgetown section of Washington, DC.

Trevino created the false lodging invoices

using his government computer.

In Richmond, VA, a HUD employee

was removed from Federal service based

on evidence uncovered during an OIG

investigation. The investigation was based

on a request from the employee’s supervisors who had obtained information indicating that the employee was using a government computer to operate a personal

business during the workday. The OIG

determined that the employee had been

using a HUD computer to view and

download pornography, to store material

that ridiculed others on the basis of race,

and for commercial for-profit and fund

raising activities. OIG also documented

the employee’s use of government computers to visit prohibited Internet sites during

a period of time in which the employee’s

computer access had been suspended,

which led to a finding of insubordination.

HUD’s Deciding Official sustained all of

the previously listed charges against the

employee.

Defendant Christopher Jones was

convicted in New Brunswick, NJ, in

Middlesex County Superior Court of

burglary and fraudulent use of a credit

card. Jones was arrested in April 2003 for

breaking into a HUD-OIG vehicle and

stealing a HUD-OIG credit card. He then

made several unauthorized purchases with

the credit card, totaling more than $5,000.

One of the merchants had a videotape of

Jones using the credit card without

authorization. This videotape was used to

identify Jones and his accomplice, Frank

DeMarc. Jones and DeMarc were

indicted in May 2003. DeMarc pled guilty

in February 2004 and was sentenced to 5

years in jail and 1 year probation and was

fined $15,000.

Chapter 6: Other Significant HUD Audits and Investigations/OIG Hotline 90
Chapter 6: Other Significant HUD Audits and Investigations/OIG Hotline 91

OIG Hotline

The HUD-OIG Hotline is operational

5 days a week, Monday through Friday,

from 10:00 a.m. to 4:30 p.m. The Hotline

is staffed by eight full-time OIG employees, who take allegations of waste, fraud,

abuse, or mismanagement in HUD or in

HUD-funded programs from HUD

employees, contractors, and the public

and coordinate reviews with internal audit

and investigative units or with HUD

program offices.

During this reporting period, the

Hotline has received and processed 9,181

complaints — 76 percent received by

telephone, 21 percent by mail, and 3

percent by e-mail. The Hotline also

interviewed two individuals who visited

HUD headquarters to register complaints

about program operations. Every allegation received by the Hotline is logged into

a database and tracked.

Of the complaints received, 1,021

were related to the mission of the OIG

and were addressed as Hotline cases.

Hotline cases are referred to the OIG’s

Offices of Audit and Investigation or to

HUD program offices for action and

response. The following illustration shows

the distribution of Hotline case referrals

by percentage.

The Hotline closed 622 cases this

reporting period. The closed Hotline

cases included 124 substantiated allegations. The substantiated allegations

resulted in 18 administrative sanctions

against HUD employees for personnel

violations or investors for improprieties

involved in the purchase of a home. The

Department also took 106 corrective

actions that resulted in $63,584 in recoveries of losses and $2,260,654 in HUD

funding that could be put to better use.

The recoveries included Section 8

tenants who must reimburse housing

authorities for assistance to which they

Chart 6.2: Hotline Cases Opened by Program

Public & Indian Housing

55% Multifamily Housing

15%

OIG Audit & Investigation

12%

Other HUD Offices

3%

Community Planning

& Development

4%

Single Family

Housing

11%
  

Chapter 6: Other Significant HUD Audits and Investigations/OIG Hotline 92

were not entitled, based on improper

reporting of income or household composition. Some of the funds that could be put

to better use were the result of cases in

which homebuyers falsely claimed they

were owner-occupants when purchasing

homes financed by Federal Housing

Administration loans. The following chart

illustrates the issue breakdown of the

substantiated allegations by percentage.

Chart 6.3: Hotline Dollar Impact from HUD Program Offices

0

707,475

13,331 90,036 50,253

1,553,179

Single Family Multifamily Public Housing

1,600,000

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

Recoveries $63,584 Funds Put to Better Use $2,260,654

Chart 6.4: Substantiated Cases by Type of Complaint

Other

3%

Rental Fraud &

Improprieties

74%

Employee

Misconduct

3%

False

Statements

3%

Owner/Occupant

Violations

6%

Mismanagement

9%
Chapter 7: Outreach Efforts
Chapter 7: Outreach Efforts 94

I

n order to foster cooperative, informative, and mutually beneficial relationships with agencies and organizations

whose intent is to assist in the accomplishment of the Department of Housing

and Urban Development’s (HUD) mission, the Office of Inspector General

(OIG) participates in a number of special

outreach efforts. These 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 our audit and investigative work

and discuss our goals and objectives; we

also provide information about the OIG’s

role and function.

Inspector General (IG) Kenneth

Donohue was the keynote speaker at the

2004 Tri-State Conference of Public

Housing Authorities (PHAs) in Bar

Harbor, ME, which consists of approximately 100 PHA officials from the States

of Maine, New Hampshire, and Vermont.

IG Donohue provided insight into the

goals of the OIG and spoke on the benefits

of cooperation between the OIG and

PHAs. In addition, IG Donohue and New

England Region Special Agent in Charge

(SAC) Peter Emerzian participated in a

round table discussion with the Executive

Directors (ED) from the largest PHAs in

the Tri-State area. IG Donohue discussed

the Federal budget process and the role

OIG will play in helping HUD achieve its

goals. The PHA EDs and IG Donohue

also discussed quantifying the benefits of

OIG/PHA cooperation, and the EDs

offered several suggestions.

During one of the breakout sessions,

Assistant Special Agent in Charge

(ASAC) Maureen Nelting and Assistant

Regional Inspector General for Audit

(ARIGA) Cristine O’Rourke made a

presentation on fraud in public housing as

it relates to tenants, landlords, and PHA

employees. They also discussed the role of

the IG and the responsibilities of both the

OIG Offices of Investigation and Audit.

Special Agents (SA) Edward Redmond

and Brian Gosselin participated in the

presentation and shared “best practices”

about investigating tenant fraud.

IG Donohue, along with U.S. Attorney Michael Sullivan, Federal Bureau of

Investigation (FBI) Special Agent in

Charge (SAC) Kenneth Kaiser, OIG SAC

Emerzian, OIG Regional Inspector

General for Audit (RIGA) Barry Savill,

and OIG ASAC Diane Dechellis, met

with Springfield Mayor Charles Ryan in

Springfield, MA, to discuss the challenges facing the City of Springfield in the

wake of the indictment of employees from

the Community Development Office, the

Economic Development Office, and the

Springfield Housing Authority. IG

Donohue promised OIG’s continued

support to eliminate corruption in HUDfunded programs.

In Worcester, MA, IG Donohue,

RIGA Savill, SAC Emerzian, ASAC

Nelting, and SA Gene Westerlind met

with Worcester Housing Authority ED

Raymond Mariano to discuss strategies to

address tenant fraud in Authority developments. ED Mariano thanked IG Donohue

for the OIG’s support in addressing tenant

fraud, and IG Donohue pledged continual

OIG support through the Authority’s

Section 8 Fraud Initiative.

On the same day, IG Donohue, RIGA

Savill, SAC Emerzian, ASAC Nelting,

and SA Westerlind met with Worcester

District Attorney John Conte and First
Chapter 7: Outreach Efforts 95

Assistant James Regan to discuss prosecutive strategies to address tenant fraud

in Authority developments.

On the same day, IG Donohue, RIGA

Savill, SAC Emerzian, ASAC Nelting,

and SA Westerlind met with Worcester

Police Chief Gerald Vizzo and Lt. Steven

Sargent to discuss investigative strategies

to address tenant fraud and violent crime

caused by illegal tenants in Authority

developments. After the meeting, IG

Donohue was invited to visit the summer

camp sponsored by the Worcester Police

Department Gang Unit for children living

in Worcester public housing developments. IG Donohue addressed approximately 50 children and let them know that

they could create their own destiny by

following their dreams and by staying in

school and away from drugs.

John Dupuy, Executive Assistant

(EA) to the IG, conducted a single-family

fraud awareness training course at the

Federal Housing Administration (FHA)

training event in Denver, CO. This is the

third such event conducted by FHA for

mortgage lenders; about 150 individuals

were in attendance. The fraud awareness

training covered common

single family fraud schemes

and the OIG’s role in investigating these crimes. Also

covered was OIG’s interaction

with the Department in

ensuring that administrative

sanctions are taken against the

offenders.

In Indianapolis, IN, and

Pittsburgh, PA, EA Dupuy

addressed the annual Indiana

Public Housing Authorities

conference with a presentation of a fraud awareness course focused

on current OIG initiatives, including the

Section 8 and Fugitive Felon Initiatives. In

attendance were 300 representatives of

PHAs in the State of Indiana. SAC Barry

McLaughlin also addressed the conference, thus allowing an opportunity to meet

and discuss issues with staff and directors

of all PHAs in his region and offering

assistance in investigating fraud cases.

EA Dupuy also made a presentation

in Pittsburgh to a combined group of

appraisers and mortgage bankers at a

joint Appraisal Institute/Mortgage Banking Association meeting. EA Dupuy spoke

about the ongoing efforts of the OIG to

fight fraud in single-family housing and

emphasized case studies involving appraiser fraud, property flipping, and

bankruptcy fraud to an audience of over 80

attendees. This marks a continuing effort

to highlight the OIG’s emphasis on single

family fraud and outreach to industry

groups, specifically lenders and appraisers. SA Donrich Young from Pittsburgh

also attended. He discussed issues and

offered his assistance in fraud investigations to members of the local mortgage

industry.

Inspector General Kenneth Donohue addresses

the Worcester Housing Authority
Chapter 7: Outreach Efforts 96

EA Dupuy addressed the American

Bankruptcy Institute on the relationship

between bankruptcy fraud and singlefamily fraud in Washington, DC. Participants included creditors’ lawyers, representing lending institutions, who see their

clients impacted by serial filings and

fractionalized interest schemes wherein

bankruptcies cause automatic stays on

foreclosure proceedings. EA Dupuy

addressed these issues along with the

Chief of the Criminal Enforcement Unit,

Executive Office of U.S. Trustees.

In New Orleans, LA, EA Dupuy

made a presentation of OIG activities at

the annual Public Housing Authorities

Directors Association (PHADA) conference. Topics included the OIG’s role in

the Rental Housing Integrity Improvement

Project, focusing on Section 8 subsidy

overpayments. The OIG has been working

with the Department and members of

PHADA in helping to address this area of

concern. EA Dupuy also discussed how

single-family fraud schemes, such as

flipping and equity skimming, can impact

a public housing authority’s Tenant-Based

Housing Choice program. This marks the

second time that the OIG has been invited

to make a presentation at the PHADA

annual conference.

In Orlando, FL, EA Dupuy made a

presentation to the Florida Quality

Council, which is composed of individuals

and businesses involved in single-family

lending in the State of Florida. The

presentation focused on the role of the

OIG in addressing single-family fraud

issues. Areas of concern by the group

included property flipping schemes, loan

origination fraud, and identity theft issues.

EA Dupuy made a presentation of

OIG activities at a training course sponsored by FHA in Philadelphia, PA. This

is the second of four planned FHA training

sessions being held for the mortgage

industry, covering all aspects of FHA

operations. In attendance were 200

representatives from mortgage institutions, many new to doing business with

FHA. EA Dupuy presented an overview of

the role of the OIG, focusing on singlefamily mortgage fraud, and provided

examples of both past investigations and

warning signs of single-family fraud. This

marks a continuing coordination with

FHA and the mortgage industry in learning about mortgage fraud.

In Billings, MT, EA Dupuy and SAC

John McCarty conducted a fraud awareness course for Executive Directors and

Board members of Native American

housing authorities from the HUD Offices

of Native American Programs, Northern

Plains Region. Deputy IG Michael

Stephens began the course by addressing

the audience and highlighting the role of

the IG in fighting waste, fraud, and abuse

in all HUD programs, including Native

American Programs. Deputy IG Stephens

continued his site visit with a meeting with

the Chair of the Crow Tribe and a discussion covering tribal concerns and their

relation to HUD. This fraud awareness

course, the first of its kind, marks a new

relationship with HUD’s Office of Native

American Programs and the National

American Indian Housing Council. Region

8 ASAC Joseph Clarke and Region 8 SA

Theron Hanes were also present and

expanded their contacts with the Native

American housing stakeholders in the

Northern Plains Region.

In Columbia, SC, EA Dupuy taught

at and attended a Criminal Bankruptcy

Fraud course hosted by the Executive

Office of the U.S. Trustee at the Department of Justice’s National Advocacy

Center. Over 60 Assistant U.S. Trustees
Chapter 7: Outreach Efforts 97

and trial attorneys from around the

country were present to learn about

bankruptcy fraud schemes, specifically,

single-family fraud cases investigated by

the OIG. The cases include loan origination and flipping schemes as well as

equity skimming. These schemes often

lend themselves to bankruptcy fraud

schemes such as serial filings and fractionalized interest schemes, which cause

automatic stays on foreclosure proceedings. Trustees have been a source of

referrals for such single-family cases.

The OIG continues to enjoy a close

working relationship with Trustees around

the country. For example, ASAC Geary in

Chicago has often taken the lead in

coordinating with the Office of the U.S.

Trustee.

SAC McCarty and EA Dupuy

presented a fraud awareness seminar at

the annual National American Indian

Housing Council conference in Anaheim,

CA. This marks a new outreach effort to

work in partnership with the Council in

providing fraud awareness and program

integrity seminars to Native American

tribal governments and housing authorities. The seminar focused on the role of

the OIG, fraud issues, what housing

authorities need to do to combat fraud,

and specific case studies. SACs Rebecca

Kiser, Lester Davis, James Beaudette,

and McLaughlin also attended.

In Denver, CO, EA Dupuy, SAC

McCarty, and ASAC Clarke attended the

annual bankruptcy fraud working group,

which is convened and coordinated by the

Main Justice Fraud Section, Criminal

Division. The focus of the group is to

coordinate efforts among Federal law

enforcement agencies, Assistant U.S.

Attorneys, and U.S. Trustees in an effort

to better respond to schemes involving

bankruptcy fraud. The OIG is playing a

significant role in bankruptcy fraud as it

relates to single-family fraud in that

numerous investigations of single-family

loan origination schemes, flipping, and

equity skimming involve subjects who

abuse the bankruptcy code by filing false

bankruptcies, which result in automatic

stays on foreclosures.

In Decatur, IL, RIGA Heath Wolfe

and ASAC Geary made a presentation to

the Illinois Association of Housing Authorities on issues relating to OIG operations, common fraud schemes at housing

authorities, and the process for conducting

audits and investigations. It was a successful event that allowed RIGA Wolfe and

ASAC Geary the opportunity to share

valuable information about the OIG.

SAC McLaughlin and RIGA Wolfe

made a presentation to HUD’s Eastern/

Woodlands Office of Native American

Programs at the Chicago Regional Office

in Chicago, IL. The presentation included

an overview of OIG’s operations/authority,

an explanation of how audits and investigations are conducted, and audit resolution

training in conjunction with HUD Handbook 2000.06, REV-3. The presentation

was well received, and HUD staff extended their appreciation for the information.

Los Angeles Region SAC Beaudette,

ASAC Lori Chan, and SA Eric Huhtala

spoke to the Northern California and

Nevada Executive Directors at their

quarterly meeting in Oakland, CA. They

discussed the $1.1 billion reduction in the

fiscal year (FY) 2005 assisted housing

budget, along with the new Flexible

Voucher Program. The importance of

housing authorities working in tandem

with HUD and the OIG was emphasized,

as diminishing budgets will impact

everyone.
Chapter 7: Outreach Efforts 98

In Baltimore, MD, Mid-Atlantic

Region SAC Robert Brickley participated

with representatives from the FBI and the

U.S. Attorney’s Office in a panel discussion sponsored by the Baltimore Community Law Center, regarding enforcement

efforts in predatory lending cases. Before

an audience of approximately 30 attorneys, community activists, and representatives from the mortgage and real estate

industries, SAC Brickley talked about

common FHA fraud schemes, including

property flipping and inflated appraisals,

and the impact of predatory lending on

local neighborhoods. He emphasized the

partnerships that have been formed with

other Federal agencies to address and

reduce fraudulent activity in and around

Baltimore.

In New Haven, CT, ASAC Dechellis

and ARIGA O’Rourke were the luncheon

speakers for the Connecticut National

Association of Housing and Redevelopment Officials. They presented common

fraud schemes that could be perpetrated

by tenants, landlords, and PHA employees. They also discussed the role of the IG

and the responsibilities of the OIG Offices of Investigation and Audit.

In Waterville, ME, SAC Emerzian,

ASAC Nelting, and ARIGA O’Rourke

spoke at the Residential Initiatives for

Maine. Their presentation, “Protecting

your Agency from Fraud,” discussed how

fraud harms the needy families that HUD

helps. The audience included local

housing authorities, community directors,

commissioners, low-income housing

developers, and independent public

accountants and others doing business

with housing providers.

Amy Durso, OIG Kansas City

Region SA, and SAC Karen Sweet,

Missouri Division of Legal Services,

spoke at eight roll calls at the Kansas City

Police Department, East Patrol Division,

in Kansas City, MO. During the roll

calls, approximately 65 police officers

were trained on how to obtain information

from the respective agencies. They were

also briefed on ways to get problem

tenants evicted and terminated from

receiving welfare benefits through the

State. Each officer was given a laminated

card which contained various ways to

reach each agency.

Midwest Region ARIGA Brent G.

Bowen was invited by HUD’s Chicago

Regional Office of Community Planning

and Development to speak at its HUD

Entitlement Conference in Chicago, IL.

ARIGA Bowen spoke to about 100 representatives from entitlement communities

in the State of Illinois on the mission and

functions of the OIG. He also discussed

the Chicago OIG Office’s focus on

housing rehabilitation and new construction in its audits of entitlement and

nonentitlement communities.

ASAC Geary made a presentation at

the Midwestern Intergovernmental Audit

Forum in Chicago, IL. This group

consists of Federal, State, and county

auditors as well as private accounting

firms. ASAC Geary discussed common

FHA frauds and fraud schemes.

In Chicago, IL, ASACs Geary and

Ray Espinosa made a presentation to

Detectives from the Chicago Police

Department. They discussed HUD/FHA

single-family fraud and various fraud

schemes. Approximately 30 individuals

were in attendance.

Mid-Atlantic Region ASAC Robert

Gale and SA Daniel Harding attended the

Maryland Association of Housing and

Redevelopment Authorities’ annual
Special Agent Robert Jones makes presentation to

the Waco Builders Association.

Chapter 7: Outreach Efforts 99

conference in Ocean City, MD. During a

breakout session attended by over 60

individuals, SA Harding discussed the

mission and investigative jurisdiction of

the OIG, including new initiatives and

joint efforts such as Upfront Income

Verification, the U.S. Marshal’s Fugitive

Felon Program, the National Center for

Missing and Exploited Children, and

potential joint efforts with local law

enforcement offices and district attorneys.

Harding also discussed areas of mutual

concern and potential cooperative efforts

with the various PHA executive directors

and their staffs. As a result of this meeting, several PHA representatives have

requested to meet with the OIG to discuss

particular issues that may ultimately

result in the opening of new casework.

In Harrisburg, PA, at the request of

the Dauphin County District Attorney,

Senior SA Daniel J. Ellis conducted an

outreach seminar at the Dauphin County Department of

Adult Parole and Probation,

attended by representatives of

various Dauphin County law

enforcement agencies. SA Ellis

spoke about the OIG’s Section

8 Fraud and Fugitive Felon

Initiatives and HUD rules and

regulations governing Section 8

tenants and landlords, with

particular emphasis on situations where termination of

assistance would be appropriate. All attendees were provided with pertinent Code of Federal

Regulations and HUD handbook citations,

along with a list detailing the locations of

assisted housing in their jurisdictions and

the names of persons to contact with

questions or concerns at their housing

authorities. Ongoing outreach efforts such

as this in and around Harrisburg, PA,

have resulted in numerous suspected

cases of fraud being forwarded to the OIG

and an increased emphasis on termination

of Section 8 assistance to recipients who

commit fraud or otherwise violate their

lease agreements.

In Waco, TX, Senior Forensic

Auditor (SFA) Loretta Burns and SA

Robert Jones, both from the Southwest

Region, made a presentation on single

family fraud to the Waco Builders Association. SFA Burns and SA Jones discussed fraud awareness training regarding

single-family loan origination fraud,

predatory lending, and common schemes

used in committing FHA loan fraud.

Approximately 50 individuals from the

single-family loan industry were in

attendance, including appraisers, mortgage company employees, and real estate

agents.

SFA Burns spoke to the Texas Land

Title Association at its regional seminar in

South Padre Island, TX. Approximately

240 attorneys and escrow officers in the

title industry doing business in the central

Texas region were in attendance. SFA
Chapter 7: Outreach Efforts 100

Burns’ presentation focused on fraud and

was part of a continuing education track,

“Legalities of Title: Risky Business.” This

seminar marked the completion of a fiveseminar series given to members of the

title industry in Texas.

In Tacoma, WA, SA Marc Montague

was a guest speaker at the 2004 Northwest

Regional Conference for the National

Association of Housing and Redevelopment Officials. SA Montague was part of

a panel that included Harlan Stewart, the

Director of Public Housing for HUD,

Region 10. SA Montague made a presentation on combating Section 8 tenant fraud

and how public housing agencies can

provide quality referrals to the OIG.

In Compton, CA, OIG SAs Michael

Gibson and Ira Long spoke at the

Compton Housing Authority’s Annual

Section 8 Tenant Briefing. SAs Gibson and

Long explained the OIG’s Rental Assistance Compliance Enforcement Initiative

and expressed a desire to work with

Section 8 recipients in detecting and

preventing fraud, waste, and abuse in the

Section 8 program. They also explained

that violations of Section 8 program

regulations, such as unreported income,

drug usage/activity, and allowing unauthorized individuals to reside in a subsidized

unit, could lead to the loss of subsidized

benefits. Residents were assured that the

units that are part of the Rental Assistance

Compliance Enforcement Initiative were

selected based on investigative leads,

including complaints/information received

from community residents, local housing

authorities, and other law enforcement

agencies. SAs Gibson and Long fielded

several questions regarding the initiative

and received positive feedback from

residents. Residents were encouraged to

contact the HUD-OIG Office of Investigation to report any suspected fraud or abuse

related to the Section 8 program. The

Compton Housing Authority extended an

invitation to the HUD-OIG to speak at

future tenant briefings.

OIG SA Kathleen Hatcher made

presentations at the United Council on

Welfare Fraud’s (UCOWF) annual

conference in San Diego, CA. SA

Hatcher explained OIG’s Rental Assistance Compliance Enforcement Initiative

and expressed a desire to develop collaborative partnerships with UCOWF members. She further discussed fraud trends

and schemes encountered by the OIG

during rental assistance investigations.

Conference participants were interested

in rental assistance eligibility requirements and how information can be shared

among different agencies. Participants

were provided a handout with contact

information for each HUD-OIG Region.

UCOWF leaders expressed their interest

in having OIG make presentations at next

year’s conference to be held in Des

Moines, IA.

At the invitation of the Housing

Authority of Billings, SA Hanes gave a

lecture entitled “Fraud Awareness in

Public Housing” at the Annual Regional

Forensic Auditor Loretta Burns addresses Texas Land

Title Association.
Chapter 7: Outreach Efforts 101

Convention of the National Association of

Housing and Redevelopment Officials in

West Yellowstone, MT. The invitation

was the result of a Section 8 Housing

Choice Voucher program investigation the

OIG conducted with the assistance of the

Housing Authority of Billings, which

hosted the conference. This lecture was

presented to approximately 75 members

of various housing authorities that are

members of the local Mountain Plains

Chapter.

SA George Dobrovic was a representative on a panel discussion for the Northern District of Ohio Law Enforcement

Coordinating Committee in Cleveland,

OH. His panel discussed “Trends in

Fraud Prosecutions.” SA Dobrovic

provided insight into the HUD-OIG, the

Section 8 Initiative, and common frauds in

Single Family Housing programs, including property flipping, deed stealing, and

bankruptcy.

In Ocean City, MD, Randy

McGinnis, Director of the Financial

Audits Division, made a presentation to

the Mid-Atlantic Intergovernmental Audit

Forum on “Producing Auditable Financial

Statements More Quickly.” The presentation focused on key factors that enabled

HUD to have its financial statements

completed and audited in a more timely

manner in recent years. Attendees

included representatives from Federal,

State, and local agencies in the MidAtlantic region.

Doris Denmon and Bob Ashworth of

the Hotline staff manned an OIG exhibit

at the annual National Fair Housing

Training Conference and Housing Policy

Summit at the Marriott Wardman Park

Hotel in Washington, DC. The 1,500

participants at the conference included

senior officials from the Office of Fair

Housing and Equal Opportunity and other

HUD program offices, representatives of

State and community agencies that

contracted fair housing investigations, and

advocates from regional and local organizations that promote fair housing compliance and education. The Hotline staff

passed out a newly developed, wallet-sized

OIG Hotline contact information card that

was well received by conference participants. The card includes public assistance

telephone numbers for Public and Indian

Housing, Multifamily Housing, Fair

Housing, and Real Estate Settlement

Procedures Act. The new cards will soon

be made available to OIG personnel.

OIG SA Hatcher participated in the

monthly Orange County Area-Wide

Housing meeting with representatives

from the Anaheim Housing Authority,

Santa Ana Housing Authority, Garden

Grove Housing Authority, and Orange

County Housing Authority in Garden

Grove, CA. SA Hatcher explained HUDOIG’s Rental Assistance Compliance

Enforcement Initiative, which is this

office’s proactive approach to followup on

investigative leads developed regarding

various criminal violations within Rental

Assistance programs. SA Hatcher further

discussed fraud trends and schemes

HUD-OIG encounters in Rental Assistance investigations. The desire to develop

collaborative partnerships with committee

members was stressed. Committee

members were interested in how information can be shared among different

agencies, and the committee leaders

expressed their interest in having HUDOIG members attend future meetings.

  

Chapter 8: Review of Policy Directives
Chapter 8: Review of Policy Directives 104

Reviewing and making recommendations on legislation, regulations, and

policy issues is a critical part of the

Office of Inspector General’s (OIG)

responsibilities under the Inspector

General Act. During this 6-month reporting period, the OIG reviewed 199 policy

notices. This chapter highlights some of

the OIG recommendations on these

notices as well as other policy directives.

Notices of Funding

Availability

Revitalization of Severely

Distressed Public Housing HOPE VI

Revitalization Grants

We did not concur with this draft

Notices of Funding Availability (NOFA)

because the Office of Public and Indian

Housing did not establish controls to

assure Moving to Work agencies used

Housing Opportunities for People Everywhere (HOPE VI) funds for eligible

activities. The housing agencies participating in the Moving to Work demonstration have the authority under the statute to

use funds for any housing-related purpose.

Consequently, the HOPE VI grant award

may not provide the improvement to the

targeted development as anticipated in the

Appropriation Act. The OIG expressed

concern about the statute requirement that

as a selection criteria, the U.S. Department of Housing and Urban Development

(HUD) must require information about

the relationship between the HOPE VI

grant and the agency plan. The draft

NOFA did not establish as a selection

criterion the information about the relationship between the HOPE VI grant and

the agency plan.

The Offices of Public and Indian

Housing and the Inspector General

mutually agreed to change the NOFA.

Public and Indian Housing revised the

draft NOFA and established the controls

needed to mitigate the program risks for

Moving to Work participants inappropriately using the grant award on activities

not authorized in the statute. The draft

NOFA was revised to contain a selection

criterion for resident participation.

Public and Indian Housing has

improved the control structure to obtain a

higher probability that the housing agencies will use the funds to assist the

targeted population. The NOFA has been

issued.

Proposed Rules

FR-4712-01 Disposition of HUDAcquired Single-Family PropertyGood Neighbor Next Door

HUD drafted a proposed rule to

expand the eligibility of the Officer Next

Door and Teacher Next Door programs

(OND/TND) to tribal police officers,

firefighters, and emergency rescue

workers under a “Good Neighbor Next

Door” title. The program gives a first

offer to purchase advantage and typically

a 50-percent price discount to these

potential buyers of HUD single-family

properties that are located in urban

revitalization areas.

We did not concur with the proposed

rule because the program’s basic design

appears to remain vulnerable to abuse and

may never achieve the stated purpose of

reducing neighborhood crime rates and

urban blight. The program abuses were

documented in a previous audit report

(Report No. 2001-AT- 0001), individual
Chapter 8: Review of Policy Directives 105

guilty pleadings, and criminal convictions.

As to achieving the program’s purpose, a

recent HUD study of OND/TND in

Rialto, CA, and Spokane, WA, concluded

that there must be a sufficient concentration of OND/TND properties in the

revitalization zones to effect reduced

crime rates. Many HUD properties sold

early in the program simply were not in

the targeted areas of greatest need and,

therefore, contributed little to the

program’s goals. While program changes

have corrected this problem, HUD has

not demonstrated that a sufficient number

of properties can be made available in the

targeted areas nationwide to effect

measurable neighborhood change. Timely

and sufficient property availability is a

systemic flaw in the program design, not

easily corrected, and, consequently,

expanding eligibility to other special

occupations is not warranted.

The Department was reviewing the

nonconcurrence at the end of the semiannual reporting period.

Electronic Submission of

Applications for Grants and Other

HUD Financial Assistance

HUD issued a new rule to inform

potential applicants for HUD grants or

other Federal financial assistance how to

submit their applications to HUD electronically. The Federal Government now

provides American citizens with one

online location to find and apply for grants

across the Federal Government.

Grants.gov is the single location to find

over 900 grant programs offered by the 26

Federal grant-making agencies. It provides the public with an accurate and

reliable location to search for grant

information. Grants.gov is supposed to

streamline the process of awarding over

$350 billion annually to State and local

governments, academia, not-for-profits

and other organizations.

We did not concur with this new rule

because we found that the system is not

being used to the extent predicted, and the

proposed rule failed to ensure the internal

mechanisms at HUD could accommodate

the Grants.gov data inflow. The Office of

Management and Budget stated that only

327 grants have been processed since the

system went online in March 2004 and

they were aiming to receive 15,000 grant

applications in the first year. We found

that HUD had failed to test or record the

process of system-to-system interfaces to

ensure that data will flow directly into

HUD’s databases. Without the proper

interface, HUD will not be able to use

Grants.gov in an efficient and effective

manner. HUD also did not obtain a risk

assessment from system owners in order

to mitigate control weaknesses. This

program is one of the 24 Federal crossagency E-Government initiatives focused

on improving access to services via the

Internet. The vision for Grants.gov is to

be a simple, unified source to electronically find, apply, and manage grant

opportunities.

HUD’s Office of Departmental

Grants Management and Oversight is in

the process of performing an assessment

of the Grants.gov requirements, and the

proposed rules are being finalized.

Conversion of Developments from

Public Stock: Methodology for

Comparing Costs of Public Housing

and Tenant-Based Assistance

The Office of Public and Indian

Housing circulated a draft regulation on

the Conversion of Developments from
Chapter 8: Review of Policy Directives 106

Public Housing to Tenant-Based Assistance. The statute mandates that when

low-income development units cost more

to operate than comparable units in the

Section 8 Voucher program, the units in

the Low-Income program must be converted to the Section 8 Voucher program.

The draft regulation is establishing the

method for implementing the statute.

We did not concur with this draft

regulation because the Department has

not conducted a risk assessment on the

conversion program. Public Law 108-199

in section 411 states that none of the funds

made available in the Consolidated

Appropriations Act may be used until a

risk assessment is conducted and any

risks identified in the study are appropriately mitigated.

Section 9(g)(3) of the Housing Act of

1937, as amended, states that a housing

agency may not use any of the amounts

allocated from the Capital Fund for the

purpose of constructing any public housing

if such construction would result in a net

increase from the number of units owned

or operated by the housing agency at

October 1, 1999. To assure that housing

agencies are aware of the number of units

in their inventory at October 1, 1999, the

Office of Public and Indian Housing

should publish in the regulation the

number of units each housing agency had

at October 1, 1999.

Further, the Department should

specify in the regulation that as units are

converted from the low-income inventory

due to conversion, the list should be

revised to reduce the number of units the

housing agencies have in their inventory.

The housing agencies should not be able

to replace, through construction, any unit

converted from the Low-Income program

because this circumvents the purpose of

the statute in reducing units that are not

cost effective from the Low-Income

program.

The Office of Public and Indian

Housing decided to delay the release of

the regulation until the risk assessment is

conducted and all outstanding and material

risks are mitigated. It is also considering

our other suggestions.

The draft regulation has not been

revised or published.

Revision to the Public Housing

Operating Program

The Office of Public and Indian

Housing issued a draft interim regulation

on the system for computing the operating

subsidy. We provided comments to assist

in developing the interim regulation.

HUD allowed a housing agency to use

either the first or last day of the month in

determining if a unit satisfies the requirements. HUD, however, cannot specify a

sufficient control feature to avoid a

housing agency from using the option to

justify more units to qualify for assistance.

We recommend that HUD mandate the

first day of the month.

HUD listed documentation needed to

support the existence of the unit including

street address. The projects often do not

have a specific street address. To recognize this reality, the street address should

be mandated but an exception allowed if a

street address is not available. A note

qualifying the mandate should be made,

stating that if a street address is not

available, the next best documentation

should be used to find a unit. We recommend the next best documentation include
Chapter 8: Review of Policy Directives 107

rent roll control number and suffix,

current rate paid by tenant, number of

bedrooms, current occupancy status,

modernization status, and mail box

identifier.

The interim regulation provides for

the payment of subsidy for a maximum

number of vacant units. The OIG recommends that operating subsidies not be paid

for any vacant unit.

The regulation needs to specify a

sanction for not maintaining the utility

billings to document the amount of consumption.

We recommend that any housing

agencies annually collecting rent receipts

from low-income tenants at a rate less

than 20 percent of the fair market rent for

a two-bedroom unit as a whole, experience a 5-percent reduction in their

operating assistance.

The housing agencies should use the

audited year-end financial statements to

prepare the subsidy calculation.

The OIG recommends that in

computing subsidy amounts, housing

agencies should not round up to the

nearest whole dollar. The larger the unit

size of the housing agency, the larger the

adjustment the housing agency has in

rounding up to the whole dollar amount

and the more operating subsidy the

housing agency will obtain. Further, we

recommend that income from other

sources be included in the calculation.

Any housing agency with assets to generate income from other sources has

obtained the resources from previous

grants. The subsidy needs to be reduced

to reflect the gain in income from the use

of assets.

HUD should establish a requirement

that a housing agency will not be funded in

advance but on a reimbursable basis if the

housing agency has not reduced its backlog of maintenance and increased the

rental receipts by 2 percent annually.

We recommend that the Department

mandate that the housing agency not be

able to obtain any assistance for 1 year for

each unit if the unit has not been recertified annually and in a timely manner and

if there are any questions concerning

income being resolved as an alternative to

the Department’s plan to withhold funding.

Mortgagee Letter

Eligibility of Mortgages on

Hawaiian Homelands Insured Under

Section 247

HUD drafted a mortgagee letter to

implement expanded eligibility of native

Hawaiians that apply for Federal Housing

Administration (FHA) single-family

insured mortgages under the Hawaiian

Homelands program (Section 247 of the

National Housing Act). The Hawaiian

Homelands consist of millions of acres set

aside for lease by native Hawaiians

similar to Native American Indian

programs. To be eligible for a FHA

mortgage on homes in the Hawaiian

Homelands, a native Hawaiian would need

to document a specific blood relationship

to the races inhabiting the Hawaiian

Islands before January 1, 1778, and have

proof of at least a one-quarter native

bloodline.

We commented that expanding

borrower eligibility, based on native

bloodline documentation, would appear to
  

Chapter 8: Review of Policy Directives 108

increase the risk of fraud and corruption

in the FHA loan approval process. We

recommended the Department conduct a

risk assessment before issuing the mortgagee letter.

The Department was reviewing our

comments at the end of the semiannual

reporting period.

Notices

Establishment of Amnesty Programs

at Public Housing Agencies

Resulting from Income and Rent

Determinations

The draft Notice PIH 2004 provides

requirements to housing agencies that

plan to offer tenants amnesty as a result

of the Upfront Income Verification

System detecting a difference between the

tenant claim of income and the income

reported by their employers or agencies

providing income assistance. The Department initiated the Upfront Income Verification System to address subsidy errors

resulting from tenants who are

underreporting or not reporting their

income.

We did not concur with this notice

because it inappropriately empowers

housing agencies to decide who will be

prosecuted. Title 28, U.S. Code, paragraph 516, states that the Attorney General of the United States is responsible for

deciding who will be prosecuted for a

Federal offense. In the Tenth Amendment

to the United States Constitution, the

determination on who will be prosecuted

under State law is reserved to State

authorities.

During the past 18 months, the OIG

has investigated numerous cases involving

tenants who falsely reported their incomes. Hundreds of these cases resulted

in successful prosecutions or other

remedial actions. Currently, the OIG has

approximately 700 pending investigations

involving tenants who have defrauded

Office of Public and Indian Housing

assistance programs. The draft notice

threatens to jeopardize current investigations and to undermine the fairness of past

convictions.

The Office of Public and Indian

Housing is reconsidering the decision to

issue the notice.
Chapter 9: Audit Resolution
I

n the audit resolution process, the

Office of Inspector General (OIG) and

the U.S. Department of Housing and

Urban Development (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 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.

We are proud to note that for the

seventh consecutive semiannual period,

there are no outstanding management

decisions on audit recommendations over

six months old to be reported to Congress.

In addition to this chapter on audit resolution, see appendix 2, table A, “Audit

Reports Issued Prior to Start of Period

with No Management Decision at 9/30/

04,” and table B, “Significant Audit

Reports Described in Previous Semiannual Reports Where Final Action Had Not

Been Completed as of 9/30/04.”

Delayed Actions

Audits of HUD’s FY 1991 through

2003 Financial Statements

First issued June 30 1992. HUD has

been preparing consolidated financial

statements under the requirements of the

Chief Financial Officers Act for 13 years

beginning with fiscal year (FY) 1991.

Various internal control weaknesses have

been reported in these audits. In our most

Chapter 9: Audit Resolution 110

recent audit report for FY 2003, we were

able to express an unqualified opinion on

HUD’s principal financial statements. The

results of our FY 2003 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 and (2)

improve oversight and monitoring of

subsidy calculations and intermediaries’

program performance. Corrective action

plans to resolve these issues have continued to change over the last decade.

Audits of FHA’s FY 1991 through

2003 Financial Statements

First issued March 27, 1992. The

Federal Housing Administration (FHA)

has been preparing financial statements

for 13 years under the Chief Financial

Officers Act, beginning with FY 1991.

The audit of FHA’s FY 2003 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 and (2) continue to improve

early warning and loss prevention for

single-family insured mortgages. 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.

FHA’s latest action plan continues to

report progress toward resolving these

remaining long-standing issues, with final

actions targeted over the next 1 to 3 years.
Chapter 9: Audit Resolution 111

Los Angeles Community

Development Bank – Economic

Development Initiative Grant/

Section 108 Loan Guarantee

Program

Issued September 25, 2002. The Los

Angeles Community Development Bank

had not fully complied with HUD regulations and Economic Development Initiative agreements. Seven recommendations

concerning the bank’s assistance to

businesses that had not met a national

objective of creating or retaining jobs for

low-and moderate-income persons

remain unresolved.

In January 2003, the Los Angeles

Office of Community Planning and

Development (CPD) agreed with our

recommendations and agreed to complete

actions by September 30, 2003. In conjunction with the agreed-upon actions, in

May 2003, CPD requested that HUD’s

Office of General Counsel provide a legal

opinion to be used to determine whether

the bank complied with the regulations

and national objectives in the provision of

economic development assistance. The

legal opinion is required because of a

difference between OIG’s and CPD’s

interpretation and application of the

relevant national objective regulations.

The Los Angeles Office of CPD received

a response from the Office of General

Counsel in April 2004; however, it required CPD to obtain additional information from the City of Los Angeles. CPD

subsequently received the additional

information from the City of Los Angeles

in June and August 2004 and is currently

reviewing it. After CPD completes its

review, it will determine what action

should be taken on the audit recommendations and coordinate the results with the

OIG. The Office of CPD plans to provide

OIG with a response and proposed actions

to resolve the report in October 2004.

(Report No. 2002-SF-1003)

Federal Financial

Management

Improvement Act of

1996

The Federal Financial Management

Improvement Act of 1996 (FFMIA)

requires that HUD implement a

remediation plan that will bring financial

systems into compliance with Federal

financial system requirements within 3

years or obtain Office of Management and

Budget 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 its mediation 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 2003, the Department

continued to report that 4 of its 46 financial management systems were not in

substantial compliance with FFMIA. Our

audit of HUD’s FY 2003 financial statements cites additional financial management system weaknesses, which address

how HUD’s financial management

systems remain substantially noncompliant

with Federal financial management

requirements. We also cited weaknesses

regarding HUD/FHA’s limited ability to

integrate its financial processing environment and effectively monitor budget

execution related to certain funds control

processes. With the implementation of the
  

FHA Subsidiary System, the Department

became substantially compliant with the

FFMIA Standard General Ledger provision. Our audit of HUD’s Funds Management Function indicates HUD’s funds

control process is now capable of performing the mandatory Funds Management Function requirements provided by

the Joint Financial Management Improvement Program. The FHA Subsidiary

General Ledger Project is a multiphase

project to be completed by December

2006 and should remediate weaknesses for

HUD to fully integrate its financial

processing environment.

Chapter 9: Audit Resolution 112
Appendix 1
Audit Reports Issued

Internal Reports

7 Audit Reports

Community Planning and Development

2004-FW-0001 Management Controls Over Grantee and Subgrantee Capacity,

06/18/2004.

General Counsel

2004-AT-0002 Effectiveness of the Departmental Enforcement Center,

07/12/2004.

Housing

2004-DE-0002 Use of Independent Contract Loan Officers To Originate FHAInsured Loans, 04/23/2004.

2004-PH-0004 Contracts for Endorsement and Postendorsement Services,

09/20/2004.

Office of Federal Housing Enterprise Oversight

2004-KC-0001 The Office of Federal Housing Enterprise Oversight Exceeds Its

60-Percent Statutory Requirement But Has Cost Weaknesses in

Its Controls over Allocating Costs for that Requirement,

09/30/2004.

Public and Indian Housing

2004-DP-0003 Application Controls over Data Integrity within the Public and

Indian Housing Information Center, 05/07/2004.

2004-SE-0001 Welfare to Work Section 8 Voucher Program, 06/29/2004. Better

Use: $7,000,000

1 Audit-Related Memoranda*

Chief Financial Officer

2004-DP-0801 Funds Management Function Compliance with Joint Financial

Management Improvement Programs, “Core Financial System

Requirements” (JFMIP-SR-02-01, November 2001), 08/25/2004.

Appendix 1 114

* The memorandum format is used to communicate the results of reviews not performed in accordance with

generally accepted government audit standards, to close out assignments with no findings and recommendations, to respond to requests for information, to report on the results of a survey, to report interim results, or

to report the results of civil actions or settlements.
Appendix 1 115

External Reports

50 Audit Reports

Community Planning and Development (9 Reports)

2004-CH-1004 Pontiac Neighborhood Housing Services, Incorporated’s, HOME

Investment Partnership Program, Pontiac, MI, 05/05/2004.

Questioned: $876,439.

2004-CH-1005 Connexions Enterprise, Inc.’s, Supportive Housing Grant Program, Chicago, IL, 06/17/2004. Questioned: $205,371; Unsupported: $174,583; Better Use: $174,134.

2004-FW-1007 City of New Orleans, LA, Desire Community Housing

Corporation, 06/22/2004. Questioned: $5,467,648; Unsupported:

$4,043,973; Better Use: $1,585,097.

2004-KC-1005 The City’s Housing Program and the Role of the Housing and

Economic Development Finance Agency, Kansas City, MO,

08/11/2004. Questioned: $1,500,000.

2004-LA-1008 United States Veterans Initiative, Inc., Inglewood, CA,

09/27/2004. Questioned: $7,253,030; Unsupported: 6,754,332;

Better Use: 164,619.

2004-NY-1004 Lower Manhattan Development Corporation, Community

Development Block Grant Disaster Assistance Funds, New York,

NY, 09/15/204. Questioned: $87,394; Unsupported: $87,394.

2004-PH-1006 Peninsula AIDS Foundation, Inc., Newport News, VA,

05/17/2004. Questioned: $339,661; Unsupported: $339,661.

2004-PH-1007 City of McKeesport, PA, Community Development Block Grant

Program, 05/28/2004. Questioned: $694,573; Unsupported:

$694,573.

2004-PH-1008 Safe Haven Outreach Ministry, Inc., Washington, DC,

06/03/2004. Questioned: $1,164,850; Unsupported: $1,160,873.

Housing (24 Reports)

2004-AT-1005 Cotton State Mortgage, Inc., Nonsupervised Loan

Correspondent, Atlanta, GA, 04/21/2004. Better Use: $221,007.

2004-AT-1008 American Mortgage Services, Inc., Nonsupervised Loan

Correspondent, Millington, TN, 05/03/2004.

2004-AT-1010 First Community Mortgage, Inc., Nonsupervised Loan

Correspondent, Fort Myers, FL, 06/17/2004. Questioned: $700.

2004-CH-1007 A-Pan-American Mortgage Group, Nonsupervised Loan

Correspondent, Chicago, IL, 08/09/2004. Questioned: $273,352;

Unsupported: $128,296; Better Use: $6,643,810.

2004-CH-1008 Cornerstone Mortgage Group, Limited Nonsupervised Loan

Correspondent, Inverness, IL, 09/10/2004. Questioned: $677,183;

Unsupported: $132, 092; Better Use: $4,070,036.

2004-CH-1009 Decatur Mortgage Company, LLC, Nonsupervised Loan

Correspondent, Indianapolis, IN, 09/23/2004. Questioned:

$1,031,786; Unsupported: $356,723; Better Use: $4,070,036.
2004-DE-1004 New Freedom Mortgage Corporation, Single Family Direct

Endorsement Mortgagee, Salt Lake City, UT, 09/29/2004.

Questioned: $156,998.

2004-FW-1005 Mustang Nursing Center, Project No. 117-22003, Section 232

Nursing Home Audit, Mustang, OK, 04/19/2004. Questioned:

$171,554; Unsupported: $1,650.

2004-FW-1008 United Properties Management, Inc., Multifamily Management

Agent, Little Rock, AR, 09/14/2004. Questioned: $445,612;

Unsupported: $181,106.

2004-FW-1009 Mays Property Management, Inc., Multifamily Management

Agent, Little Rock, AR, 09/17/2004. Questioned: $979,333;

Unsupported: $453,480.

2004-KC-1003 Wells Fargo Home Mortgage, Nonsupervised Direct

Endorsement Lender, Des Moines, IA, 07/16/2004. Questioned:

$19,505,405; Better Use: $246,649,035.

2004-KC-1004 Gershman Investment Corporation, Nonsupervised Direct

Endorsement Lender, Clayton, MO, 07/28/2004. Questioned:

$116,402; Unsupported: $71,010; Better Use: $2,765,500.

2004-LA-1003 Homewide Lending Corporation, Nonsupervised Mortgagee,

Los Angeles, CA, 05/19/2004. Questioned: $318,872; Better Use:

$3,163,750.

2004-LA-1004 Sahara Mortgage Company, Nonsupervised Mortgagee, Las

Vegas, NV, 06/17/2004. Questioned: $396,106; Unsupported:

$329,762; Better Use: $1,958,297.

2004-LA-1005 Guild Mortgage Company dba, Residential Mortgage Bankers,

San Diego, CA, 07/09/2004. Questioned: $811,843; Better Use:

$159,865,833.

2004-LA-1006 National City Mortgage Company, LLC, Direct Endorsement

Mortgagee, Phoenix, AZ, 08/10/2004. Questioned: $140,404;

Unsupported: $102,245; Better Use: $482, 410.

2004-NY-1003 Cambridge Home Capital, Nonsupervised Mortgagee, Great

Neck, NY, 07/19/2004. Questioned: $1,746,395; Unsupported:

$1,599,865; Better Use: $2,258,900.

2004-NY-1005 Jersey City, NJ, Housing Authority, Section 8 Contract

Administrator, 09/27/2004. Questioned: $452,383; Unsupported:

$288,180; Better Use: $245,076.

2004-NY-1006 Hartford Funding, Ltd., Nonsupervised Mortgagee,

Ronkonkoma, NY, 09/28/2004. Better Use: $445,150.

2004-PH-1009 First Funding, Inc., Nonsupervised Loan Correspondent, Largo,

MD, 06/29/2004. Questioned: $6,058; Unsupported: $6,058;

Better Use: $371,743.

2004-PH-1010 Lambeth Apartments, Section 236/Section 8, Multifamily

Housing Review, Pittsburgh, PA, 08/04/2004. Questioned:

$752,770; Unsupported: $543,689.

2004-PH-1012 Mortgage America Bankers, LLC, Nonsupervised Loan

Correspondent, Kensington, MD, 09/10/2004. Questioned:

$88,856; Unsupported: $27,718; Better Use: $2,983,501.

Appendix 1 116
Appendix 1 117

2004-SE-1005 Quality Controls and Underwriter Accuracy under Multifamily

Accelerated Processing at Continental Securities, LLC,

Syracuse, NY, 06/21/2004. Questioned: $13,268,851.

2004-SE-1006 Apreva, Inc., Nonsupervised Mortgagee, Bellevue, WA,

08/19/2004. Questioned: $1,366,483; Unsupported: $552,199;

Better Use: $2,867,722.

Public and Indian Housing (17 Reports)

2004-AT-1004 Cookeville, TN, Housing Authority, 04/08/2004. Questioned:

$367,067; Unsupported: $324,295.

2004-AT-1006 Puerto Rico Public Housing Administration, San Juan, PR,

04/22/2004. Questioned: $5,332,004; Unsupported: $4,230,646.

2004-AT-1007 Housing Authority of the City of Asheville, NC, 04/28/2004.

Questioned: $2,499,972; Unsupported: $649,139.

2004-AT-1009 Housing Authority of the City of Northport, AL, 05/20/2004.

Questioned: $434,735; Better Use: $78,334.

2004-AT-1011 Opelika, AL, Housing Authority, Public Housing Programs,

07/23/2004. Questioned: $148,538; Better Use: $99,843.

2004-AT-1012 Housing Authority of the City of Durham, NC, 08/02/2004.

Questioned: $3,454,660; Better Use: $31,244,906.

2004-AT-1013 Housing Authority of the City of Lakeland, FL, 08/19/2004.

Questioned: $1,000,682; Better Use: $7,600,000.

2004-AT-1014 West Palm Beach, FL, Housing Authority, 08/19/2004.

Questioned: $150,000; Better Use: $631,734.

2004-CH-1003 Minneapolis, MN, Public Housing Authority, Supplemental Police

Services, 04/14/2004. Questioned: $1,387,623; Unsupported:

$1,119,274.

2004-CH-1006 Housing Authority of the City of Evansville, IN, Housing

Assistance Payment Savings Refunding Agreements, 06/23/2004.

Questioned: $796,858; Unsupported: $768,517; Better Use:

$61,515.

2004-DE-1003 Housing Authority of the City of Greeley and Weld County,

Housing Authority Tenant Selection and Continued Occupancy

Activities, Greeley, CO, 06/22/2004. Questioned: $10,070;

Unsupported: $10,070.

2004-FW-1006 San Antonio, TX, Housing Authority HOPE VI Program,

04/26/2004. Questioned: $3,895,441; Unsupported: $2,022,977.

2004-FW-1010 Housing Authority of the City of Houston, TX, Housing Choice

Voucher Subsidy Standards, 09/29/2004. Questioned: $797,280;

Unsupported: $625,087; Better Use: $3,232,953.

2004-KC-1006 The Housing Authority of Kansas City, MO, Did Not Consistently

Follow HUD Rules over Its Housing Choice Voucher Program,

09/30/2004.

2004-LA-1007 Housing Authority of Maricopa Country, Phoenix, AZ,

09/22/2004. Questioned: $982,800; Unsupported: $109,361.
2004-PH-1011 Petersburg, VA, Redevelopment and Housing Authority Did Not

Follow Federal Procurement Regulations or Properly Manage

HUD Funds, 09/08/2004. Questioned: $2,826,909; Unsupported:

$1, 943,993; Better Use: $583,357.

2004-SE-1004 Seattle, WA, Housing Authority Moving to Work Demonstration

Program, 05/21/2004. Questioned: $1,516,464; Unsupported:

$1,516,464; Better Use: $1,714, 014.

10 Audit-Related Memoranda*

Housing (6 Memoranda)

2004-CH-1802 HAPI Management Inc., Multifamily Equity Skimming, Beverly

Hills, CA, 05/12/2004. Questioned: $409,388; Unsupported:

$279,021; Better Use: $661,380.

2004-CH-1803 Somerset Point Nursing Home, Multifamily Equity Skimming,

Shaker Heights, OH, 08/09/2004. Questioned: $329,225.

2004-CH-1804 Legacy Management and Development Corporation, Multifamily

Equity Skimming, Edina, MN, 09/16/2004. Questioned:

$305,038.

2004-FW-1802 Austin Loan Corporation, Nonsupervised Loan Correspondent,

Austin, TX, 06/04/2004.

2004-KC-1801 Survey of NovaStar Home Mortgage’s Use of Net Branches,

Kansas City, MO, 09/30/2004.

2004-NY-1802 Groton Community Health Care Center, Inc., FHA Project

Number 013-43055 and 014-10010, Groton, NY, 07/23/2004.

Questioned: $63,512.

Public and Indian Housing (4 Memoranda)

2004-AT-1804 Survey of Miami Dade Housing Agency, Miami Dade County,

FL, 05/04/2004.

2004-AT-1805 Survey of Municipality of Humacao, PR, Section 8 Housing

Choice Voucher Program, 06/29/2004.

2004-NY-1803 Buffalo, NY, Municipal Housing Authority, Hotline Complaint,

09/15/2004.

2004-NY-1804 Buffalo, NY, Municipal Housing Authority, Micro Loan

Program, 09/15/2004. Questioned: $51,519, Unsupported:

$38,334; Better Use: $47,900.

Appendix 1 118

* The memorandum format is used to communicate the results of reviews not performed in accordance

with generally accepted government audit standards, to close out assignments with no findings and

recommendations, to respond to requests for information, to report on the results of a survey, to

report interim results, or to report the results of civil actions or settlements.

  
Appendix 2
Appendix 2 120

Table A

Audit Reports Issued Prior to Start of Period With No

Management Decision at 09/30/2004

* Significant Audit Reports Described in Previous Semiannual Reports

Report Number & Title Reason for Lack of Issue Date/Target

 Management Decision for Management

Decision

Nothing to Report
Table B

Significant Audit Reports Described in Previous Semiannual

Reports Where Final Action Had Not Been Completed

as of 09/30/2004

Report Report Title Issue Decision Final

Number Date Date Action

1997-CH-1010 Major Mortgage Corporation, 09/17/1997 01/06/1998 06/01/2005

Section 203(K) Rehabilitation

Home Mortgage Insurance

Program, Livonia, MI

1999-FO-0003 U.S. Dept. of HUD Fiscal Year 03/29/1999 09/30/1999 Note 1

1998 Financial Statements

1999-DE-0001 Nationwide Review of HUD’s 09/30/1999 03/31/2000 Note 1

Loss Mitigation Program

2000-FO-0002 Federal Housing Administration, 02/29/2000 08/09/2000 12/31/2005

Audit of FY 1999 Financial

Statements

2000-FO-0003 Attempt to Audit the FY 1999 03/01/2000 09/29/2000 Note 2

Financial Statements, U.S.

Dept. of HUD

2000-KC-0002 Housing Subsidy Payments 09/29/2000 02/21/2001 09/30/2005

2001-SF-1802 Audit of HUD Earthquake Loan 02/08/2001 06/14/2001 Note 1

Program (HELP) Funds,

Woodland Hills, CA

2001-FO-0002 Federal Housing Administration, 03/01/2001 07/24/2001 12/21/2006

Audit of Fiscal Year 2000

Financial Statements

2001-FO-0003 Audit of HUD Fiscal Year 2000 03/01/2001 07/18/2001 03/31/2005

Financial Statements

2001-SF-1803 Supportive Housing Program 03/23/2001 07/24/2001 Note 1

Grant, Los Angeles, CA

2001-FO-0004 Review of HUD’s Internal 03/28/2001 07/24/2001 Note 2

Controls over Fiscal Year 1999

Annual Performance Data

2001-SF-1804 Supportive Housing Program 05/09/2001 09/26/2001 Note 1

Grant County of Orange,

Santa Ana, CA

Appendix 2 121
Report Report Title Issue Decision Final

Number Date Date Action

2001-CH-1007 Detroit, MI, Housing 05/16/2001 09/13/2001 06/30/2011

Commission, Hope VI Program

2001-PH-0803 Philadelphia, PA, 06/14/2001 06/14/2001 10/11/2004

Homeownership Center, Single

Family Disposition Activities

2001-AT-0001 Nationwide Audit Results on the 06/29/2001 01/29/2002 Note 2

Officer/Teacher Next Door

Program

2001-FW-1005 Harmony House, Inc., 08/27/2001 12/21/2001 Note 1

Supportive Housing Program,

Harrison, AR

2002-SF-0001 Nonprofit Participation, HUD 11/05/2001 08/30/2002 Note 1

Single Family Program

2002-CH-1801 Housing Authority of the City 01/29/2002 05/18/2002 05/15/2005

of Evansville, IN

2002-FO-0002 Federal Housing Administration, 02/22/2002 05/30/2002 12/31/2006

Audit of FY 2001 and 2000

Financial Statements

2002-NY-0001 Nationwide Audit Asset Control 02/25/2002 06/17/2002 10/15/2004

Area Program, Single Family

Housing

2002-FO-0003 U.S. Department of HUD, Audit 02/27/2002 08/16/2002 Note 2

of Fiscal Years 2001 and 2000

Financial Statements

2002-PH-1001 Williamsport, PA, Community 03/19/2002 08/27/2002 Note 1

Development Block Grant and

Home Investment Partnership

Programs

2002-BO-1001 City of Worcester, MA, CDBG 03/27/2002 08/29/2002 07/01/2005

Program

2002-BO-1003 Newport, RI, Resident 04/30/2002 09/16/2002 01/15/2008

Council, Inc

2002-AT-1002 City of Tupelo, MS, Housing 07/03/2002 10/31/2002 04/30/2010

Authority Housing Programs

Operations

Appendix 2 122
Report Report Title Issue Decision Final

Number Date Date Action

2002-AT-1003 National Scholarship Service and 07/25/2002 10/21/2002 02/28/2005

Veteran’s Opportunity and

Resource Center, Atlanta, GA,

Supportive Housing Program

2002-KC-0002 Nationwide Survey of HUD’s 07/31/2002 11/22/2002 Note 2

Office of Housing Section 232

Nursing Home Program

2002-FW-1002 Houma, LA, Housing Authority, 09/18/2002 01/16/2003 10/29/2004

Low-Rent Housing Program,

Cash & Procurement Controls

2002-AT-1808 Homeless and Housing Coalition 09/20/2002 03/31/2003 Note 2

of Kentucky, Inc., Frankfort, KY,

Outreach and Training Assistance

Grant

2002-NY-1005 The Legal Aid Society, New York, 09/23/2002 03/31/2003 Note 2

NY, Outreach and Training

Assistance Grant and Public

Entity Grant

2002-DE-1005 Crossroads Urban Center, Salt 09/25/2002 03/31/2003 Note 2

Lake City, UT, Outreach and

Training Assistance Grants

2002-SF-1003 Los Angeles, CA, Community 09/25/2002 01/27/2003 Note 2

Development Bank-Economic

Development Initiative Grant/

Section 108 Loan Guarantee

Program

2002-AT-1005 North Carolina Low-Income 09/27/2002 03/31/2003 Note 2

Housing Coalition, Inc., Raleigh,

NC, Outreach and Training

Assistance Grant and Intermediary

Outreach and Training

Assistance Grant

2002-DE-1002 Affordable Housing and 09/30/2002 03/31/2003 Note 2

Homeless Alliance, Honolulu, HI,

Outreach and Training Assistance

Grant and Intermediary Outreach

and Training Assistance Grant

Appendix 2 123
Report Report Title Issue Decision Final

Number Date Date Action

2002-FW-1003 New Mexico Public Interest 09/30/2002 03/31/2003 Note 2

Education Fund, Albuquerque,

NM, Outreach and Training

Assistance Grant and Public

Entity Grant

2002-PH-1002 Virginia Poverty Law Center, 09/30/2002 03/31/2003 Note 2

Richmond, VA, Outreach and

Training Assistance Grant

2002-PH-1003 Delaware Housing Coalition, 09/30/2002 03/31/2003 Note 2

Dover, DE, Outreach and

Training Assistance Grant and

Intermediary Outreach and

Training Assistance Grant

2002-PH-1004 Tenants’ Action Group of 09/30/2002 03/31/2003 Note 2

Philadelphia, PA, Outreach and

Training Assistance Grant

2002-PH-1006 Legal Aid Bureau, Inc., 09/30/2002 03/31/2003 Note 2

Baltimore, MD, Outreach and

Training Assistance Grant

Number FFOT0020MD

2002-PH-1007 Legal Aid Bureau, Inc., 09/30/2002 03/31/2003 Note 2

Baltimore, MD, Outreach and

Training Assistance Grant

Number FFOT98012MD

2002-SF-1004 Low-Income Housing Fund, 09/30/2002 03/31/2003 Note 2

Oakland, CA, Intermediary

Training Assistance Grant

2002-SF-1006 Legal Aid Society of Honolulu, 09/30/2002 03/31/2003 Note 2

HI, Outreach and Training

Assistance Grant

2002-SF-1007 Southern Arizona People’s Law 09/30/2002 03/31/2003 Note 2

Center, Tucson, AZ, Outreach

and Training Assistance Grant

2003-DE-1001 Sicangu Wicoti Awanyakepe 10/08/2002 02/28/2003 07/31/2005

Corp, Rosebud, SD, Indian

Housing Block Grant Program

Appendix 2 124
Report Report Title Issue Decision Final

Number Date Date Action

2003-AT-1801 South Carolina Regional 10/09/2002 02/06/2003 04/30/2005

Housing Authority No. 3,

Barnwell, SC

2003-CH-1003 Tenants United for Housing, 10/29/2002 03/31/2003 Note 2

Inc., Chicago, IL, Outreach

and Training Assistance Grants

2003-SE-1001 Community Alliance of Tenants, 10/31/2002 03/31/2003 Note 2

Portland, OR, Outreach and

Training Assistance Grant

2003-KC-1801 University Forest Nursing Care 11/14/2002 02/24/2003 Note 2

Center, University City, MO

2003-SE-1002 Tenants Union, Seattle, WA, 12/02/2002 03/31/2003 Note 2

Outreach and Training Assistance

Grant and Intermediary Training

Assistance Grant

2003-AT-1001 Northwestern Regional Housing 01/09/2003 06/02/2003 01/09/2005

Authority Public Housing

Programs, Boone, NC

2003-FO-0002 Federal Housing Administration 01/21/2003 05/22/2003 12/31/2006

Audit of Fiscal Year 2002 and

2001 Financial Statements

2003-PH-1002 Philadelphia, PA, Housing 01/27/2003 06/11/2003 04/30/2005

Authority, Contracting and

Purchasing Activity

2003-FO-0004 Audit of HUD’s Financial 01/31/2003 05/22/2003 02/28/2005

Statements Fiscal Years 2002

and 2001

2003-NY-1001 Marion Scott Real Estate, Inc., 02/12/2003 06/13/2003 Note 2

Management Agent, New York,

NY

2003-FW-1001 Housing Authority of the City 02/21/2003 06/20/2003 10/31/2004

of Morgan City, LA, Low-Rent

Program

2003-BO-1002 People To End Homelessness, 03/12/2003 03/31/2003 Note 2

Providence, RI, Outreach and

Training Assistance Grant

Appendix 2 125
Report Report Title Issue Decision Final

Number Date Date Action

Appendix 2 126

2003-KC-0801 Inappropriate Home Ownership 03/18/2003 08/08/2003 Note 2

Center Instructions Denver, CO

2003-KC-1803 Richmond Terrace Retirement 03/24/2003 06/19/2003 10/15/2004

Center, Richmond Heights, MO

2003-NY-1003 Empire State Development 03/25/2003 07/16/2003 02/28/2005

Corporation, New York, NY,

CDBG Disaster Assistance Funds

2003-CH-1014 Coshocton, OH, Metropolitan 03/28/2003 07/28/2003 04/30/2047

Housing Authority, Public

Housing Program

2003-DE-0001 HUD Office of Multifamily 03/31/2003 03/31/2003 Note 2

Housing Assistance

Restructuring’s Oversight of

the Sec 514 Program Activities

2003-CH-1016 City of Cleveland, OH, 04/25/2003 09/11/2003 Note 2

Empowerment Zone Program

2003-FW-1004 Spanish Village Community 04/28/2003 08/18/2003 02/18/2005

Development Corporation,

Houston, TX, Upfront Grant &

HOME Loan

2003-CH-0001 HUD’s Oversight of 05/07/2003 09/11/2003 09/30/2005

Empowerment Zone Program

2003-BO-1003 City Of Bridgeport, CT, Home 05/16/2003 09/16/2003 Note 2

Investment Partnership Program

2003-AT-1004 Historic Westside Village, 06/06/2003 09/26/2003 03/31/2006

Section 108 Loan and Economic

Development Initiative Grant,

Atlanta, GA

2003-CH-1017 Housing Continuum, Inc., 06/13/2003 10/10/2003 Note 2

Homebuyers Assistance

Program, Geneva, IL

2003-KC-0001 Survey of HUD’s Administration 06/24/2003 07/10/2003 12/31/2004

of Section 3 of the HUD Act

of 1968
Report Report Title Issue Decision Final

Number Date Date Action

Appendix 2 127

2003-FW-1806 Colonial Oaks Apartments, 07/03/2003 07/03/2003 10/01/2004

Project No. 114-11132,

Houston, TX

2003-BO-1004 Brockton, MA Housing 07/17/2003 10/16/2003 Note 2

Authority, Portability Features

of the Section 8 Housing Choice

Voucher Program

2003-CH-1018 Chicago, IL, Housing 07/18/2003 01/14/2004 12/31/2005

Authority, Outsourced Property

Management Contracts Review

2003-NY-1802 Safe Space, Inc., Housing 07/24/2003 11/21/2003 Note 2

Opportunities for Persons with

AIDS and Supportive Housing

Program, New York, NY

2003-CH-1019 Fayette County Housing 07/25/2003 11/19/2003 10/24/2004

Authority, Section 8 Housing

Program, Connersville, IN

2003-AT-1006 Puerto Rico Department of 07/30/2003 12/24/2003 12/24/2004

Housing State HOME

Investment Partnership

Program, San Juan, PR

2003-AO-0004 Review of the Department of 08/14/2003 11/03/2003 Note 2

HUD Staffing 9/30 Initiative

2003-NY-1005 Empire State Development 09/30/2003 01/28/2004 03/31/2007

Corporation, New York, NY,

CDBG Disaster Assistance Funds

2004-KC-1001 East Meyer Community 11/24/2003 03/29/2004 11/30/2005

Association, Use of HUD Grant

Funds, Kansas City, MO

2004-FO-0001 Federal Housing 11/25/2003 02/25/2004 Note 2

Administration Audit of Fiscal

Year 2003 and 2002 Financial

Statements

2004-CH-1001 Kankakee, IL, County Housing 11/26/2003 03/24/2004 11/25/2004

Authority, Section 8 Housing

Program
Report Report Title Issue Decision Final

Number Date Date Action

Appendix 2 128

2004-CH-1002 Waukesha County CDBG and 11/26/2003 04/29/2004 06/30/2005

HOME Investment Partnership

Programs, Waukesha, WI

2004-PH-0001 Procedures for Filing Uniform 11/26/2003 04/14/2004 01/19/2005

Commercial Code Continuation

Statements

2004-DP-0001 Fiscal Year 2003 Review of 12/01/2003 05/28/2004 06/30/2005

Information Systems Controls

in Support of the Financial

Statements Audit

2004-BO-1004 Danbury, CT, Housing 12/05/2003 04/05/2004 12/01/2008

Authority, Capital Fund

Program

2004-BO-1005 Springfield, MA, Housing 12/10/2003 04/23/2004 12/31/2004

Authority

2004-DE-0001 Nationwide Review of 12/15/2003 04/13/2004 01/31/2005

Indemnification for Claims on

Single-Family Insured Loans

2004-FO-0003 U.S. Department of HUD 12/19/2003 07/20/2004 09/30/2005

Audit of Fiscal Year 2003

and 2002 Financial Statements

2004-SE-1002 Scheller-Hess-Yoder and 01/09/2004 05/05/2004 05/31/2005

Associates, Nonsupervised

Loan Correspondent, Portland, OR

2004-AT-0001 Public Housing Authority 01/13/2004 05/20/2004 05/13/2005

Development Activities

2004-AT-1001 Housing Authority of 01/15/2004 05/14/2004 12/31/2006

the City of Cuthbert, GA,

Administration of Housing

Development Activities

2004-BO-0006 Portability Features of the 01/15/2004 05/14/2004 10/01/2004

Section 8 Housing Choice

Voucher Program

2004-DE-1001 Last Star Homes, HUD Section 01/16/2004 02/10/2004 02/01/2005

8 Project-Based Multifamily

Housing, Browning, MT
Report Report Title Issue Decision Final

Number Date Date Action

Appendix 2 129

2004-PH-1002 Allegheny County Housing 01/16/2004 05/14/2004 11/15/2004

Authority, Public Housing Drug

Elimination Grant Program,

Pittsburgh, PA

2004-FW-1001 City of Little Rock, AR, 01/26/2004 05/25/2004 05/19/2005

Housing Authority, Procurement

and Asset Control

2004-AO-0001 Award and Administration of 02/06/2004 06/30/2004 07/01/2005

Lead-Based Paint Hazard

Reduction Grants

2004-AT-1002 Jackson State University, 02/18/2004 06/17/2004 11/05/2004

Historically Black Colleges and

Universities Grant, Jackson, MS

2004-BO-1006 Nuestra Casa: Project 02/18/2004 05/24/2004 12/31/2004

Management Operations,

Boston, MA

2004-PH-1003 The Congress of National 02/19/2004 06/18/2004 12/03/2004

Black Churches, Inc., Housing

Counseling Program,

Washington, DC

2004-DP-0002 Application Control Review of 02/25/2004 07/14/2004 03/31/2006

the Tenant Rental Assistance

Certification System

2004-FW-1002 Jester Trails Apartment, 02/26/2004 05/18/2004 12/31/2004

Multifamily Project,

Houston, TX

2004-AT-1802 Saraland Manor Apartments, 03/05/2004 03/05/2004 10/15/2004

Gulfport, MS

2004-KC-1002 Timberlake Care Center, Use 03/10/2004 07/08/2004 10/15/2004

of Project Funds, Kansas

City, MO

2004-DE-1002 Treehouse Mortgage, LLC, 03/11/2004 07/07/2004 10/31/2005

Nonsupervised Loan

Correspondent, Denver, CO
Report Report Title Issue Decision Final

Number Date Date Action

Appendix 2 130

2004-FW-1003 City of New Orleans, LA, 03/15/2004 09/07/2004 11/30/2004

Section 108 Loan Program,

Jazzland Theme Park

2004-PH-0003 HUD’s Oversight of the 03/17/2004 08/16/2004 Note 2

Philadelphia, PA, Housing

Authority’s Moving to Work

Program

2004-LA-1001 Keystone Mortgage and 03/24/2004 06/25/2004 09/15/2005

Investment Company, Nonsupervised Loan Correspondent,

Phoenix, AZ

2004-NY-1001 Empire State Development 03/25/2004 06/30/2004 05/31/2005

Corporation, CDBG Disaster

Assistance Funds,

New York, NY

2004-PH-1004 Carbondale Nursing Home, 03/25/2004 07/23/2004 07/22/2005

Section 232 Project

Operations, Carbondale, PA

2004-PH-1005 Petersburg, VA, Redevelopment 03/25/2004 06/01/2004 10/31/2004

and Housing Authority,

Nonfederal Entities

2004-FW-1004 Housing Authority of the City 03/26/2004 07/23/2004 10/15/2009

of Corpus Christi, TX,

Financial Management of

HUD Programs

2004-SE-1003 Uptown Towers Apartments, 03/26/2004 06/10/2004 05/01/2005

Portland, OR

AUDITS EXCLUDED: NOTES:

23 audits under repayment plans 1 Management did not meet the

24 audits under formal judicial review, target date. Target date is over 1

investigation, or legislative solution year old.

 2 Management did not meet the

 target date. Target date is under 1

 year old.

 3 No Management decision
Table C

Inspector General Issued Report with Questioned and

Unsupported Costs at 09/30/2204

(Thousands)

Reports Number of Questioned Unsupported

Audit Reports Costs Costs

Appendix 2 131

Unsupported Costs

A1 For which no management 26 56,908 44,845

decision had been made by the

commencement of the reporting

period

A2 For which litigation, legislation, 6 14,046 4,883

or investigation was pending at

the commencement of the

reporting period

A3 For which additional costs were - 796 448

added to reports in beginning

inventory

A4 For which costs were added to 0 0 0

noncost reports

B1 Which were issued during the 51 87,056 31,667

reporting period

B2 Which were reopened during the 0 0 0

reporting period

 Subtotals (A + B) 83 158,806 81,843

C For which a management 451 80,525 60,541

decision was made during the

reporting period

(1) Dollar value of disallowed costs

Due HUD 182 17,414 12,122

Due Program Participants 30 57,087 43,540

(2) Dollar value of costs not 163 6,024 4,879

disallowed

D For which management decision 10 15,915 5,066

had been made not to determine

costs until completion of litigation,

legislation, or investigation 

E For which no management 28 62,366 16,236

decision had been made by <74>4 <60,333>4

 <14,102>4

the end of the reporting period 

1 19 audit reports also contain recommendations with funds to be put to better use.

2 6 audit reports also contain recommendations with funds due program participants.

3 13 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.
Table D

Inspector General Issued Report with Recommendations That

Funds Be Put to Better Use at 09/30/2004

(Thousands)

Reports Number of Dollar Value

 Audit Reports

A1 For which no management decision had been 16 1,637,056

made by the commencement of the reporting

period

A2 For which litigation, legislation, or investigation 2 6,302

was pending at the commencement of the

reporting period

A3 For which additional costs were added to reports - 4,504

in beginning inventory

A4 For which costs were added to noncost reports 1 2,854

B1 Which were issued during the reporting period 31 490,788

B2 Which were reopened during the reporting period 0 0

 Subtotals (A + B) 50 2,141,503

C For which a management decision was made 271

 1,659,630

during the reporting period

(1) Dollar value of recommendations that were

 agreed to by management

 Due HUD 10 1,528,444

 Due Program Participants 16 123,724

(2) Dollar value of recommendations that were 32 7,461

not agreed to by management

D For which management decision had been made 4 13,120

not to determine costs until completion of

litigation, legislation, or investigation

E For which no management decision had been 19 468,753

made by the end of the reporting period <30>3 <468,753>3

1 19 audit reports also contain recommendations with questioned cost.

2

 2 audit reports also contains recommendations with funds agreed to by management.

3

 The figures in brackets represent data at the recommendation level as compared to the report

level. See Explanations of Tables C and D.

Appendix 2 132
Appendix 2 133

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 recognize 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.

  

HUD OIG Operations Telephone Listing 135

HUD OIG Operations Telephone Listing

Office of Audit

Headquarters Office of Audit, Washington, DC 202-708-0364

Region I, Boston, MA 617-994-8380

Hartford, CT 860-240-4800

Region II, New York, NY 212-264-4174

Albany, NY 518-464-4200

Buffalo, NY 716-551-5755

Newark, NJ 973-622-7900

Region III, Philadelphia, PA 215-656-3401

Baltimore, MD 410-962-2520

Pittsburgh, PA 412-644-6372

Richmond, VA 804-771-2100

Region IV, Atlanta, GA 404-331-3369

Birmingham, AL 205-731-2630

Miami, FL 305-536-5387

Greensboro, NC 336-547-4001

Jacksonville, FL 904-232-1226

Knoxville, TN 865-545-4369

San Juan, PR 787-765-5202

Region V, Chicago, IL 312-353-6236

Columbus, OH 614-469-5737

Detroit, MI 313-226-6190

Region VI, Fort Worth, TX 817-978-9309

Houston, TX 713-718-3199

New Orleans, LA 504-589-7267

Oklahoma City, OK 405-609-8606

San Antonio, TX 210-475-6895

Region VII, Kansas City, KS 913-551-5870

St. Louis, MO 314-539-6339

Denver, CO 303-672-5452

Region IX, Los Angeles, CA 213-894-8016

Phoenix, AZ 602-379-7250

San Francisco, CA 415-489-6400

Region X, Seattle, WA 206-220-5360
Office of Investigation

Headquarters Office of Investigation, Washington, DC 202-708-0390

Region I, Boston, MA 617-994-8450

Manchester, NH 603-666-7988

Meriden, CT 203-639-2810

Region II, New York, NY 212-264-8062

Buffalo, NY 716-551-5755

Newark, NJ 973-622-7900

Region III, Philadelphia, PA 215-656-3410

Baltimore, MD 410-962-4502

Pittsburgh, PA 412-644-6598

Richmond, VA 804-771-2100

Region IV, Atlanta, GA 404-331-3359

Miami, FL 305-536-3087

Greensboro, NC 336-547-4000

Jacksonville, FL 904-232-1226

Memphis, TN 901-544-0644

Nashville, TN 615-736-7000

San Juan, PR 787-766-5868

Tampa, FL 813-228-2026

Region V, Chicago, IL 312-353-4196

Cleveland, OH 216-522-4421

Columbus, OH 614-469-6677

Detroit, MI 313-226-6280

Indianapolis, IN 317-226-5427

Minneapolis-St. Paul, MN 612-370-3106

Region VI, Arlington, TX 817-652-6980

Houston, TX 713-718-3197

Little Rock, AR 501-324-5409

New Orleans, LA 504-589-6847

Oklahoma City, OK 405-609-8601

San Antonio, TX 210-475-6894

Region VII, Kansas City, KS 913-551-5866

St. Louis, MO 314-539-6559

Denver, CO 303-672-5350

Billings, MT 406-247-4080

Salt Lake City, UT 801-524-6090

HUD OIG Operations Telephone Listing 136
Region IX, Los Angeles, CA 213-894-0219

San Francisco, CA 415-489-6683

Phoenix, AZ 602-379-7255

Sacramento, CA 916-498-5220

Las Vegas, NV 702-366-2144

Seattle, WA 206-220-5380

  

HUD OIG Operations Telephone Listing 137

Report fraud, waste, and mismanagement

 in HUD programs and operations by:

Calling the OIG Hotline: 1-800-347-3735

Faxing the OIG Hotline: 202-708-4829

Sending written information to:

Department of Housing and Urban Development

Inspector General Hotline (GFI)

451 7th Street, SW

Washington, DC 20410

Emailing the OIG Hotline: hotline@hudoig.gov

Internet:

http://www.hud.gov/complaints/fraud_waste.cfm

All information is confidential

and you may remain anonymous.
Semiannual Report to Congress

as of September 30, 2004

www.hud.gov/offices/oig

No. 52 HUD-2004-10-OIG