Audit Report District Inspector General for Audit Rocky Mountain District First Preston Management Inc. Denver, Colorado Management and Marketing Contract for Denver Area 3 00-DE-222-1003 September 21, 2000 U.S. Department of Housing and Urban Development District Inspector General for Audit 633 17th Street 14th Floor Denver, CO 80202-3607 Audit Report District Inspector General for Audit Rocky Mountain District Report: 00-DE-222-1003 Issued: September 21, 2000 TO: Ronald C. Bailey, Director, Denver Homeownership Center, 8AHH FROM: Robert C. Gwin, District Inspector General for Audit, 8AGA SUBJECT: Management and Marketing Contract for Denver Area 3 First Preston Management Inc. Denver, Colorado We have concluded a review of the Department of Housing and Urban Development’s (HUD’s) Management and Marketing Contract with First Preston Management, Inc., as it pertains to HUD properties in Denver Area 3, which consists of the states of Missouri, Kansas, Arkansas, Louisiana and Oklahoma. This program contracts out the full responsibility for the management and marketing of properties owned by, or in the custody of, HUD. The primary objective of the review was to determine whether First Preston Management, Inc., managed HUD single family properties in compliance with HUD policies, procedures, and regulations, and within the terms and conditions of the Management and Marketing Contract. This included assessing whether First Preston’s: (a) operations are effective, efficient, and economical and (b) management controls are adequate to effectively identify and address operational deficiencies and noncompliance with requirements. First Preston has been performing within the Management and Marketing contract for a little over a year, and while improvements were noted in their overall compliance with the contract over the last year, we identified where First Preston needs to improve its: • procedures for the protection and preservation of HUD properties within Area 3, and • timeliness for the completion of the processing steps for acquired HUD owned properties. Within 60 days please furnish to this office, for each recommendation in this report, a status report on: (1) the corrective action taken; (2) the proposed corrective action and the date to be completed; or (3) why action is considered unnecessary. Also, please furnish us copies of any correspondence or directives issued because of the audit. We appreciate the courtesies and assistance extended by the personnel of the Denver Single Family Homeownership Center, especially those of the Real Estate Owned branch, and to the management and staff 00-DE-222-1003 of First Preston Management Inc., during this audit. Should you have any questions, please call Ernest Kite, Assistant District Inspector General for Audit, at (303) 672-5452. ii 00-DE-222-1003 Executive Summary In March 1999, HUD’s Federal Housing Administration (FHA) awarded 7 companies a total of 16 Management and Marketing (M&M) contracts to manage its single family property inventory. Although FHA outsourced its property management activities to contractors, its program mission did not change. With regard to HUD owned properties, FHA’s program mission is to reduce its single family property inventory in a manner that: “(1) expands homeownership, (2) strengthens neighborhoods and communities, and (3) ensures a maximum return to the mortgage insurance fund.” We performed an audit of First Preston Management, Inc., HUD’s Denver Area 3 M&M Contractor, to determine whether the contractor was managing HUD owned single family properties in compliance with HUD’s policies, and in accordance with the terms and conditions of the M&M Contract. Our audit work included interviews with HUD and First Preston officials, inspections of properties managed by the contractor, analysis of HUD’s Single Family Acquired Assets Management System (SAMS) data, and examination of records, reports, correspondence and other documents. This report presents the results of our assessment of the M&M contractor’s property management operations, and its ability to manage and market single family properties in a manner that enables FHA to accomplish its mission. Since the inception of the M&M contract in March 1999, First Preston has successfully reduced both the single family property inventory level and the number of properties in inventory for over 6 months. These accomplishments were achieved through significantly increased property sales. First Preston has also improved its fixed fee and pass through costs vouchering procedures and its property sales closing operation, including the accounting for HUD’s sales proceeds. However, the average sales price per property and the amount of revenue recovered as a percent of the appraised value have continued to decrease over the past 12 month period ending May 31, 2000. Also, over the same period, the number of property sales to owner occupants have decreased while sales to investors have steadily increased. The audit identified two areas where First Preston’s property management operations need improvement. First, HUD properties were not always being secured or maintained in a presentable condition and health and safety hazards were not always reported and repaired within 24 hours of discovery. Secondly, First Preston was not always marketing HUD properties in a timely manner. Specifically, property processing requirements were not accomplished within the time frames prescribed in the M&M contract. First Preston needs to initiate corrective action in these areas to ensure compliance with the Management and Marketing Contract, and to ensure the effective management and marketing of HUD properties, from acquisition through sales, in a manner that enables FHA to accomplish its program mission. iii 00-DE-222-1003 As stipulated in the Management and Marketing Contract, First Preston is Management and to provide management and marketing services to successfully manage Marketing Contractor’s single family (1-4 units) properties owned by, or in the custody of, the requirements Department of Housing and Urban Development; to successfully market those single family properties; and to successfully oversee the sales closing activity, including proper accounting for HUD’s sales proceeds. Per the Management and Marketing Contract, Exhibit 3, the disposition approach selected for each property must consider the objective of reducing the inventory in a manner that ensures maximum net return to the FHA mortgage insurance funds, while complying with HUD Secretarial initiatives, preserving and maintaining residential areas and communities, and applicable environmental, legal and policy requirements. Both the inventory level and the amount of time the inventory is being The inventory level and held have been reduced. In May 1998, the inventory of HUD owned the amount of time the properties within the Denver Area 3 jurisdiction was 1,861. Denver Area inventory is held have 3 consists of the states of Kansas, Missouri, Arkansas, Louisiana and both decreased Oklahoma. From the time First Preston was awarded the M&M Contract in March 1999 to November 1999 the inventory of HUD owned single family properties increased to 2,366. By May 2000, First Preston had reduced the number of single family properties in the inventory to 1,844. These changes are reflected in the following graph. Inventory 2,500 2,000 Properties 1,500 1,000 500 0 May-98 Sept Sept Jan-99 Jan-00 May May Nov Nov July July Mar Mar Month In addition, the number of properties in the inventory held for six months or more has decreased from 333 is May 1998 to 324 in May 1999, and then to 319 in May 2000. The number of properties in the inventory held for 1 year or more has decreased from 144 in May 1998 to 93 in May 1999, with a slight increase to 96 in May 2000. Single family property sales have increased by 23% since May 1998. Property sales have Since the inception of the M&M contract in March 1999, there generally increased iv 00-DE-222-1003 has been a steady increase in the number of monthly property sales. In May 1999, due to the newness of the Contract, First Preston only sold 10 properties; however, in May 2000, First Preston sold 404 properties. The changes in property sales by month, since May 1998, are shown in the following chart. Monthly Property Sales 600 Properties 500 400 300 200 100 0 May- May May Nov Nov Mar Mar Sept Sept Jan- Jan- July July 99 00 98 Month A review of the procedures for the submission of fixed fee, direct Review of fixed fee, disbursement, and pass through cost vouchers was performed at First direct disbursement, and pass through cost Preston’s headquarters in Addison, Texas. Overall, the contractor vouchers followed proper invoicing procedures as outlined in the Management and Marketing Contract, Section G(IV). First Preston has management controls in place to ensure: • proper segregation of duties; • vouchers, with original invoices, are submitted to HUD for reimbursement only after the expense has been paid by First Preston (except for direct disbursement invoices); and • all vouchers and invoices are reviewed by management prior to submission to HUD. Although the number of single family property sales has increased, the The average property average sales price per property has decreased. During the 12 month sales price has decreased period ending May 31, 2000, while appraised values remained about the same, the average sales price per property has continued to decrease. For example, in May 2000, the average sales price was $5,121 less than the average established value. The actual sales price, as compared to the “As Is” appraised value, has declined from 96% of appraised value in June 1999 to 88% of appraised value in May 2000. Although sales have increased, because of the significant decreases in Decreased revenues on selling prices, HUD has realized decreased average revenues per sale of HUD owned property. During the 12 month period ending May 2000, First Preston properties sold 4,435 properties for an approximate total of $177,314,965. If First Preston had sold these properties for their “As Is” appraised value, instead of the reduced sales amount, the FHA insurance fund would have received an additional $17 million. v 00-DE-222-1003 Even though single family property sales have increased, property sales to Property sales to owner owner occupants are decreasing. In May 1998, 59% of the property occupants have sales were to owner occupants, while in May 2000, only 45% of the decreased, while property property sales were to owner occupants. Inversely, property sales to sales to investors have investors have increased. In May 2000, 52% of the single family increased property sales were to investors while in May 1998, only 37% of property sales were to investors. The difference in these percentages, so that total sales equals 100%, is accounted for by the sale of properties to non-profit entities. The following chart shows that during the period from May 1998 to May 2000 the sales to owner/occupants have decreased while the sales to investors have increased. Sales to Owner/Occupants and Investors 400 Properties 300 Investors 200 Owner/Occupants 100 0 May - 98 May - 00 Month Two areas of property The audit identified two areas where First Preston’s property management operations management operations need improvement: need improvement 1. Property conditions and the oversight of subcontractors. HUD properties were not always being secured adequately or maintained in a presentable condition at all times by First Preston. Also, health and safety hazards were not always reported and repaired within 24 hours of discovery, as required. Additionally, damage to HUD properties caused by acts of vandalism are not always being repaired by the contractor. 2. Timely accomplishment of the case processing steps. First Preston was not always marketing HUD properties in a timely manner. Specifically, the property processing steps were not being accomplished as prescribed in the Management and Marketing Contract. The key processing steps involved not inspecting properties with 24 hours of assignment to HUD, delays in obtaining property appraisals for acquired properties, and deviations from contract provisions in marketing the properties. Failure to inspect the properties within 24 hours of assignment weakens the contractors ability to ensure that the mortgagee preserves and protects HUD’s assets until the property is transferred. Failure to obtain appraisals in a timely manner can cause HUD to incur unwarranted vi 00-DE-222-1003 holding costs and could possibly result in the receipt of appraisals that are not accurate. Failure to market HUD properties in accordance with the contract may result in delayed property listings, thus properties may remain in inventory longer, which increases the holding costs and reduces the net return to HUD. The results of our review were discussed with officials of First Preston Auditee’s Comments during the course of the audit and at an exit conference held on July 28, 2000. In response to our draft report, First Preston provided us with their written comments, dated August 31, 2000. A complete copy of their response is shown in Appendix A. First Preston provided detailed information comparing their performance of preserving and disposing of HUD acquired properties under their contract with HUD to HUD’s performance of preserving and disposing of acquired properties prior to HUD’s contract with First Preston. Their comments also explain that the conditions under which First Preston must administer the preservation and sale of HUD acquired properties are different from the conditions that HUD followed prior to the contract with First Preston. They point out that HUD had different management and marketing tools that are not available to First Preston. Even with these differences, First Preston concludes that their performance has been at least equal to or better than HUD’s performance. We have acknowledged in the audit report that First Preston, since taking over the management and marketing of HUD owned properties in March 1999, has made improvements in several key areas. These key areas consist of: • Reducing overall inventory levels, • Reducing the number of properties held in inventory over six months, and • Increasing the sales of HUD owned properties in their inventory. First Preston basically concurred with the our findings and related recommendations. In fact, First Preston points out that based upon our review, they have taken positive steps to improve their operations and management of HUD acquired properties. Several of the improvements being made include: • Implementation of an atmosphere of zero tolerance concerning the responsibilities of their personnel when it comes to property conditions and completion of processing steps for acquired HUD owned properties; • Further training of inspectors and their Property Management Center personnel to better document and report property conditions to ensure timely preservation and protection of properties; vii 00-DE-222-1003 • Establishing penalties in contracts with their real estate asset managers for non-compliance; and • Implementing improvements in their monitoring, tracking, and follow-up procedures. Implementation of these positive steps should improve First Preston’s compliance under their management and marketing contract with HUD. viii 00-DE-222-1003 Table of Contents Management Memorandum..............................................................................i Executive Summary.........................................................................................iii Table of Contents ............................................................................................ ix Abbreviations ................................................................................................... x Introduction......................................................................................................1 Findings and Recommendations 1. Improvement Needed in Property Conditions and in the Oversight of Subcontractors.. ................................................................3 2. Improvement Needed in First Preston’s Timely Accomplishment of the Case Processing Steps................................................................15 Management Controls....................................................................................21 Follow Up On Prior Audits ............................................................................23 Other Matter Needing Action ........................................................................25 Appendices A. Auditee Comments................................................................................27 B. Distribution...........................................................................................41 ix 00-DE-222-1003 Abbreviations: CFR Code of Federal Regulations FHA Federal Housing Administration GAO General Accounting Office HOC Home Ownership Center HUD Department of Housing and Urban Development M&M Management and Marketing REAM Real Estate Asset Manager REO Real Estate Owned SAMS Single Family Acquired Asset Management System x 00-DE-222-1003 Introduction FHA’s Single Family Mortgage Insurance Program insures home mortgage loans to help low and moderate income families become homeowners. However, in such cases where the mortgagor can not maintain their mortgage, the Secretary must develop a program that governs the disposition of one-to-four family properties acquired by the Federal Housing Administration, through foreclosure of an insured or Secretary-held mortgage loan under the National Housing Act, or acquired by HUD under Section 312 of the Housing Act of 1964. The National Housing Act (Act) of 1934 states that the Secretary shall have power to deal with, complete, rent, renovate, modernize, insure or sell for cash or credit, in his discretion, any properties conveyed to him in exchange for debentures and certificates of claim. The Secretary shall, by regulation, carry out a program of sales of such properties. Section 204(g) of the Act governs the management and disposition of single family properties acquired by the FHA. Title 24, Code of Federal Regulations (CFR), part 291, Disposition of HUD-Acquired Single Family Property, implements this statutory authority and states that the purpose of the property disposition program is to dispose of properties in a manner that expands home ownership opportunities, strengthens neighborhoods and communities, and ensures a maximum return to the mortgage insurance fund. HUD Handbook 4310.5, Rev-2, dated May 17, 1994, Property Disposition Handbook - One to Four Family Properties, supplements the regulations. FHA’s Office of Insured Single Family Housing, Asset Management Division, is responsible for developing property disposition policies and procedures governing the management and sale of properties. Notice H 99-4 (HUD), dated March 29, 1999, Revisions to Single Family Property Disposition, states that the Department has entered into contracts effective March 29, 1999 for the management and marketing of single family properties which are owned by or in the custody of HUD. FHA awarded 7 companies a total of 16 M&M contracts to manage and market its properties nationwide. First Preston Management, Inc., was awarded the contract for Denver Area 3, which consists of the states of Missouri, Kansas, Arkansas, Louisiana, and Oklahoma. The contract is for 5 years and has an estimated value of $50 million dollars. First Preston’s main office is located in Addison, Texas. First Preston is responsible for the ongoing management, marketing, sales, and closing of acquired properties under their jurisdiction. First Preston’s responsibilities include safeguarding and preserving inventoried properties; providing day-to-day property management functions; and ensuring the properties are maintained in a clean, safe, and presentable condition until the properties are sold or otherwise disposed of. First Preston often uses the services of subcontractors, including Real Estate Asset Managers (REAMs), to assist in its property management functions. However, First Preston remains responsible for ensuring contract requirements are met. Our overall audit objectives were to determine if: (1) the contractor Audit Objectives and managed single family properties in compliance with HUD policies, Methodology procedures, and regulations and in accordance with the terms and conditions of the management and marketing contract; (2) the contractor 1 00-DE-222-1003 had effective controls to ensure FHA’s assets are adequately protected; and (3) contractor operations resulted in FHA accomplishing its mission and performance goals. Our audit approach was to evaluate the management controls in place over the key areas of operations of First Preston and to ensure their compliance with the provisions of the Management and Marketing Contract. To accomplish our objectives we: (1) reviewed the law and regulations governing the management and marketing contract (2) interviewed various HUD officials from the Denver Single Family Homeownership Center; (3) interviewed First Preston officials from both their Denver Office and their Headquarters Office in Addison, TX; (4) performed on-site reviews of active, closed, and held off market cases; (5) analyzed SAMS data; (6) performed comparisons between property inspections, HUD-1s, and appraisals; (7) reviewed a sample of fixed price fee, direct disbursement, and pass through cost vouchers; (8) reviewed contracts between First Preston and their subcontractors; (9) reviewed First Preston’s controls over their subcontractor’s performance; and (10) performed on-site inspections of properties managed by the contractor. These procedures were performed to specifically review the following areas: property files, site inspections, vouchers, subcontracting, and the bidding and purchase processes. To achieve our audit objectives, we relied, in part, on data maintained by HUD data systems used HUD in the Single Family Acquired Assets Management System (SAMS) which is the only data base available relating to the management and marketing contract. We did not perform a detailed analysis of the reliability of HUD’s SAMS data. Our audit period generally covered the activities from contract inception Scope on March 29, 1999, through May 31, 2000. We expanded our scope to other periods as necessary to accomplish the audit objectives. Our audit was performed from April through June 2000. We conducted the audit in accordance with Generally Accepted Generally Accepted Government Auditing Standards. However, we did not test the general Government Auditing and application controls over HUD’s Single Family Acquired Assets Standards Management System. We relied on HUD’s assertions that the information systems provides the only source of reliable data relating to single family property management. 2 00-DE-222-1003 Finding 1 Improvement Needed in Property Conditions and in the Oversight of Subcontractors. First Preston’s property management process did not ensure that HUD owned properties were protected, preserved, and maintained in accordance with the provisions of the Management and Marketing Contract. Specifically, our physical inspection of 26 properties, located in Kansas City, Kansas, Kansas City, Missouri, and New Orleans, Louisiana, revealed that health and safety violations were not being reported and corrected within the prescribed 24 hours; properties were not being protected properly from unauthorized entry; damages caused by vandalism were not being repaired; and the properties were not being maintained in a presentable condition at all times. Real Estate Asset Managers (REAMs) are not reporting to First Preston in a timely manner the true condition of HUD owned properties. In addition, REAMs did not insure that health, safety, and vandalism deficiencies were repaired as prescribed in the contract. These deficiencies are impacting on HUD’s goal of obtaining the maximum return to the insurance fund on the sale of HUD owned properties and the sale of these properties to low and moderate income owner occupants. While sales of HUD owned properties are on the increase and inventory levels are decreasing, sales revenues, based on the percent of appraised value, are on the decline. The cause of these deficiencies appears to be lack of training of the REAMs and the need for more oversight of subcontractors by First Preston Management, Inc. First Preston Management, Inc., entered into a M&M contract with First Preston is HUD to eliminate, in a timely fashion, any hazardous conditions to HUD responsible for the owned properties; to preserve and protect properties; to maintain preservation and properties in a presentable condition at all times; and to enable timely protection of HUD marketing and sales. The M&M contracts holds First Preston liable for owned properties damages to HUD property due to acts of vandalism, neglect, negligence of employees, and subcontractors, failure to secure property, or other misconduct by the Contractor. Additionally, property inspections are to be performed 24 hours after property acquisition and then on a routine basis. The property is to be secured immediately upon acquisition to prevent vandalism. Damages due to vandalism must be repaired by the contractor; also, conditions that present health or safety hazards are to be repaired by First Preston within 24 hours of discovery. First Preston has subcontracted with a REAM, Clayton Williams, to Weaknesses were found perform routine property inspections in New Orleans, Louisiana. The in the preservation and REAM for the Kansas City, Kansas and Kansas City, Missouri regions protection of properties are employees of First Preston. During a review of a select number of properties, significant deficiencies were noted in the areas of preserving and protecting HUD properties. First Preston and the REAMs have not 3 00-DE-222-1003 always secured the properties adequately or maintained properties in a presentable condition at all times. Also, health and safety hazards have not always been reported and repaired within 24 hours of discovery. First Preston’s Quality Assurance and Quality Control Plan requires the First Preston’s Quality REAMs to perform bi-monthly property inspections and to notify First Assurance and Quality Preston immediately of any damage or vandalism to the property. They Control Plan are also required to write up detailed and clear repair specifications and request bids from qualified contractors to perform repairs when authorized by First Preston. They are required to remove or repair safety and health hazards and to order termite and other pest inspection when requested. Also, it is stated in the Plan that First Preston’s Oversight Inspectors will perform a random basis file review with a subsequent property inspection. Additionally, repairs are audited by First Preston’s Regional staff during their Field Office Reviews, to verify that they were necessary, cost effective, timely, and professional. The Field Office Reviews include auditing property files and viewing the physical property. The OIG Appraiser’s on-site property inspections, of a random selection OIG Appraiser identifies of 26 properties, identified several deficiencies with the quality of the deficiencies property inspections being performed by the REAMs. (Note: The denominator used to determine the percent of the various categories often varies. This is because, of the 26 properties selected for review, the OIG Appraiser did not inspect the interior in 4 of the properties, because the property conditions were determined to be unsafe. Also, 4 of the properties were newly acquired and only had the REAM’s Initial Property Inspection. Properties in which some of the categories were not inspected by the OIG Appraiser were deducted from the denominator.) The OIG rated 21 of the 26 properties, 80.77%, as being in poor condition, while the REAMs only showed 4, 15.38%, of the properties as being in poor condition. Specifically the OIG Appraiser identified the following conditions: • 45.83% of the properties inspected had unsecured windows and/or doors and/or garages; • 40.91% of the properties had evidence of vandalism; • 40.00% of the properties did not have proper HUD signs posted; • 59.09% of the properties had evidence of deficient roofs; • 68.18% of the properties had evidence of roof leaks; • 38.10% of the properties had evidence of structural damage; • 60.87% of the properties had evidence of defective exterior paint; • 59.09% of the properties required emergency maintenance; and • 42.31% of the properties had exterior hazardous conditions. 4 00-DE-222-1003 The OIG Appraiser also identified several properties that had the following safety deficiencies: electrical hazards; rotting out, unstable, or settlement of stairs and landings; fire damage; termite damage; openings in the properties’ structure; tripping hazards; and missing light fixtures, switches, or outlets. Case 291-188502, 2120 NW 58 th St., Kansas City, MO. Major electrical hazard. Plus missing switch cover plate. Of the 26 properties that were selected for review, the OIG Appraiser REAMs do not report identified 9 of them as having been vandalized. Of these 9 properties, property vandalism two were identified by the REAMs, during their initial inspections, and two were identified during subsequent inspections, as having been vandalized. Several of the case files also contained work orders and invoices for boarding up the broken windows and doors after the vandalism but no evidence of repairs to other parts of the house due to vandalism were noted. 5 00-DE-222-1003 The OIG Appraiser identified doors that were not properly secured; Doors and windows were incorrect locks that were used; doors and windows that were found not always properly broken; door frames that were found to be severely damaged; unlocked secured windows; hazardous car ports; toilets missing; toilet openings not capped allowing sewer gases to leak in; and broken glass inside and outside of the properties. Case 181-980000, 2615 N. 11 th St., Kansas City, KS 66104. Hazardous trash and debris litters the yard. Property case 221-274304, 2720 Onzaga St., New Orleans, LA. Window on the right is missing. Allows entry into the unit. Property is not properly secured and can be vandalized. 6 00-DE-222-1003 Property case 221-274304, 2720 Onzaga St., New Orleans, LA. Unit has been vandalized by breaking down rear exterior door. The property is exposed to further vandalism and as evidenced by the growth of vegetation on the inside of the property, the door has been broken for an unknown period of time. Property case 221-274304, 2720 Onzaga St., New Orleans, LA. Unit has been vandalized by breaking down rear exterior door. The property is exposed to further vandalism and, as evidenced by the growth of vegetation, the door has been broken for an unknown period of time. 7 00-DE-222-1003 Property case 221-232238, 1638 Clouet St., New Orleans, LA. Front exterior door is missing. Thin sheet of plywood has been substituted. This is not stable or secure. Property is not secured and can be vandalized. Property case 221-232238, 1638 Clouet St., New Orleans, LA. Toilet has been removed. Sewer gas is allowed to enter unit. The hole in the floor is open to the ground below. 8 00-DE-222-1003 Property case 221-232238, 1638 Clouet St., New Orleans, LA. Bathtub has been removed. The hole in the floor is open to the ground below. For those single family properties that had not been sold, First Preston’s First Preston’s Oversight Oversight Inspector performed follow-up inspections of the properties Inspector noted the same identified by the OIG as having deficiencies. There were a total of 8 property conditions properties that were still in HUD’s inventory. The Oversight Inspector identified, in these follow-up inspections, most of the same deficiencies that the OIG Appraiser had noted. The Oversight Inspector also noted additional deficiencies, such as a kitchen gas valve that was found open and some temporary kitchen wiring was detected. Due to the quality of the REAM property inspection reports, the random REAMs are not doing file reviews performed by the contractor’s oversight inspector are adequate property generally not effective. Pertinent information regarding property inspections conditions are being omitted by the REAMs. This does not allow the oversight inspector to obtain a clear and accurate understanding of the properties’ actual condition. It is apparent from the OIG Appraiser’s inspection of properties in Kansas City, Kansas, and Kansas City, Missouri, and New Orleans, Louisiana, and subsequent follow-up inspections performed by First Preston’s Oversight Inspectors, that the REAMs are not performing adequate inspections of HUD properties and/or identifying, correcting, and reporting to First Preston any and all safety and/or structural problems with the properties, and/or acts of vandalism. Fifteen of the 26 properties inspected by the OIG Appraiser have been Sales prices are declining sold, as of June 30, 2000. The net total to HUD from the sale of these properties was $565,034. The average bid price to HUD, on these properties, was about 90.10% of the appraised value. This means that 9 00-DE-222-1003 HUD had a potentially loss of revenue, based on the appraised value, on these properties, of $56,963. Of the 15 properties that were sold: 6 properties, 40.00%, were sold Most properties sold after within 1 to 45 days of initial listing; 6 properties, 40.00%, were sold within initial 45 day listing period 46 to 90 days of initial listing; 1 property, 6.66%, was sold within 91 to 135 days of initial listing; and 2 properties, 13.33%, were sold in 180+ days from initial listing. Twelve of the 15 sold properties, 80.00%, were considered in poor physical condition by the OIG. Property case 221-276295, 6945 Downman Rd., New Orleans, LA. Hazardous metal carport roof and termite damaged wood with sharp nails. Requires removal ASAP. The metal roof and/or the damaged wood can fall and cause serious injury. Property case 221-209295,5505 Bundy, #182, New Orleans, LA. One of several dilapidated and hazardous carport covers in the complex. The cover can fall and cause serious injury. 10 00-DE-222-1003 Case 181-980000, 2615 N. 11 th St., Kansas City, KS. Staircase and landing to second floor is rotted away. Property case 221-149347, 6400 Lafaye St., New Orleans, LA. Rear steps of the kitchen exterior door has settled excessively. Very hazardous. Proper steps with a 8” riser and a handrail is required. 11 00-DE-222-1003 Property case 221-149347, 6400 LaFaye St., New Orleans, LA. Front steps have settled an excessive amount creating a top riser over 8”. Very serious tripping hazard. Property case 221-149347, 6400 LaFaye St., New Orleans, LA. Damaged roof fascia at the right front. Also the gutters are damaged. The opening allows excellerated deterioration of the roof and the ceilings. 12 00-DE-222-1003 An analysis was performed using the profit and loss data for the 12 Sale prices during the 12 month period ending in May 2000 for the properties acquired by First months period ending in Preston in the Denver Area 3. This analysis disclosed that while May 2000 have declined appraised values have remained about the same, actual sale prices have steadily declined. The actual sale prices have declined from an average of 96%, of appraised value, in June 1999 to an average of 88%, of appraised value, in May 2000. Although total sales have increased, in part because of the significant decreases in selling prices, revenue losses continued to increase. One of the stated goals of FHA is to ensure a maximum return to the mortgage insurance fund. These statistics for Denver Area 3 are shown in the following table: Difference of Total Difference Average Percent of Sales Price Between Average Month/ Appraised Average Appraised and Sales Sales Price and Year Value Sale Price Value Appraised Volume Appraised Value Value Jun-99 $42,025 $40,464 96% ($1,561) 192 ($299,712) Jul-99 $47,231 $44,083 93% ($3,148) 244 ($768,112) Aug-99 $45,155 $43,490 96% ($1,665) 359 ($597,735) Sep-99 $43,228 $41,977 97% ($1,251) 311 ($389,061) Oct-99 $45,758 $43,843 96% ($1,915) 357 ($683,655) Nov-99 $45,395 $43,339 95% ($2,056) 300 ($616,800) Dec-99 $43,235 $40,103 93% ($3,132) 484 ($1,515,888) Jan-00 $41,150 $36,975 90% ($4,175) 412 ($1,720,100) Feb-00 $44,043 $38,906 88% ($5,137) 431 ($2,214,047) Mar-00 $44,314 $37,063 84% ($7,251) 509 ($3,690,759) Apr-00 $42,685 $36,962 87% ($5,723) 432 ($2,472,336) May-00 $42,803 $37,682 88% ($5,121) 404 ($2,068,884) $43,919 $40,407 92% ($3,511) 4435 ($17,037,089) If First Preston had sold the HUD owned properties in the Denver Area 3, during the 12 month period June 1999 to May 2000, for their appraised value, instead of the reduced selling prices, the FHA fund would have been replenished approximately $17,000,000 dollars more. First Preston has basically concurred with our finding and related Auditee’s Comments recommendations on property condition and has initiated positive steps to alleviate the root causes of the problem. Several of the improvements include: • Implementing an atmosphere of zero tolerance when it comes to property conditions; • Additional training of inspectors and Property Management Center personnel; and • Establishing penalties in future contracts with their REAMs. A complete copy of First Preston’s response to the audit can be found in Appendix A. 13 00-DE-222-1003 Recommendations We recommend that First Preston: 1.A Provide additional training for all REAMs, both subcontractors and First Preston employees, on the proper procedures for performing and documenting property inspections, and the proper procedures for the protection and preservation of HUD properties. 1.B Establish and implement a more detailed oversight review of HUD owned properties to ensure that property inspections and repairs are timely and accurately performed. Contracts for subcontractors should be written to included fines and penalties that can be imposed on the REAMs, if omissions or misleading statements are found on any of their inspection reports. 14 00-DE-222-1003 Finding 2 Improvement Needed in First Preston’s Timely Accomplishment of the Case Processing Steps First Preston Management, Inc., does not have sufficient management controls in place to ensure that the case processing steps, as outlined in the Management and Marketing Contract, are met in a timely manner. Through reviews of 27 active case files, we found that First Preston did not process their properties timely in 21 of the 27 active cases, or 77.77%. Specifically, we found active case processing delays within the initial inspections, appraisals, receipt and review of form HUD-27011 Parts B, C, and D, and the case disposition program approval process. Case processing delays occurred because First Preston’s management controls and the oversight of its subcontractors and staff personnel were not adequate to ensure the timely completion of all required processing steps. These delays in active case processing can result in HUD owned properties not being listed as soon as possible; a possible deterioration of the properties; decreased revenues to the FHA insurance fund; and the possibility of inappropriate charges being passed on to HUD by mortgagees. First Preston needs to insure that their management controls and oversight procedures contained within the Management and Marketing Contract’s Quality Control and Quality Assurance Plan can detect and correct any deviations from the contract by their subcontractors and First Preston’s own staff. Contracts with subcontractors should include sanctions for personnel for poor performance. The Management & Marketing Contract, C-OPC-21337, Section C-2 V, Management and outlines specific tasks that are applicable to each assigned property. The Marketing Contract contract emphasizes that First Preston’s actions shall be timely so as to requirements eliminate any hazardous conditions, to preserve and protect properties, to maintain properties in a presentable condition at all times, and to enable timely marketing and sales. Part B of Section C-2 V specifically requires the contractor to perform an initial inspection within 24 hours of assignment, for newly acquired properties, using form HUD 9516A, Initial Inspection Report. Part B also requires the contractor to obtain an appraisal for each property’s current value from a licensed, industry- recognized source. First Preston is to obtain an appraisal of the property no later than ten business days after assignment. Exhibit 12 of the contract states that the Mortgagee is to send Parts, B, C, and D of form HUD-27011 to the contractor within forty-five (45) days of the date the deed is filed for record, or within fifteen (15) days of title approval, whichever is later. Parts B and C are to be compared to 15 00-DE-222-1003 the Initial Inspection Report, form HUD-9516A and the Appraisal Report. Line item 305 of Part D is to be reviewed to determine whether taxes charged were actually paid and whether the Mortgagee charged HUD for tax penalties. In addition to the Management and Marketing Contract, HUD Handbook 4310.5 Rev-2, Property Disposition Handbook, dated 5/94, details specific requirements that are applicable to each assigned property. HUD Handbook 4310.5 Rev-2, Chapter 6, paragraph 6-17, requires the contractor to review and approve the written property disposition program within 3 days of receiving the property appraisal. We randomly selected and reviewed 27 active case files. Ten of the 27 Review of active case active case files were selected from the Kansas City, Missouri and files identified processing Kansas City, Kansas areas. Seventeen of the 27 active case files were deficiencies selected from the New Orleans, Louisiana area. These cases were in various phases or steps of the disposition process. We focused our review on the following functions within the disposition process: acquisition, title approval, initial inspection, appraisal, disposition program approval, sales contract acceptance and review, and sales closing. Based on our review, we found that First Preston did not always process their properties timely. Specifically, we found active case processing delays within the initial inspection, appraisal, case disposition program approval, and receipt and review of Parts B, C, and D of form HUD- 27011. Four of the 27 active cases selected for review, did not require initial inspections, appraisals, or case disposition program approvals due to events such as adverse occupants, fire damage, etc.; therefore, only 23 of the active case files were reviewed for initial inspections, appraisals, and case disposition program approvals. Based on our review, we determined that in 15 of 23 cases, 65.22%, First Late initial property Preston did not perform the initial inspection within 24 hours of inspections and appraisals assignment. The number of days late ranged from 1 to 14 days. For 5 of 23 cases, 21.74%, First Preston did not receive a property appraisal within 10 business days of assignment. The number of days late ranged from 1 to 16 days. Failure to accomplish timely inspections on HUD owned properties can result in property conditions deteriorating. Deteriorating conditions are caused by acts of vandalism and/or natural acts such as rain and wind. Therefore, it is vital that First Preston accomplish the initial inspections and document the exact condition of the property within 24 hours of assignment. In addition, the initial inspection and appraisal report are to be used at a later time to confirm that any property protection and/or preservation work represented on Parts B, C, and D, of form HUD- 16 00-DE-222-1003 27011 was properly completed by the mortgagee. Finally, the initial inspection report serves as a means to verify that the property is not being conveyed to HUD for items involving mortgagee neglect. For 12 of 23 cases, 52.17%, First Preston did not approve, and/or Property disposition properly document the case disposition programs within 3 business days program deficiencies of receipt of the appraisal. Specifically, 2 of the reviewed cases were approved late and 10 of the reviewed cases did not have an approved date on the SAMS documentation provided in the case file. First Preston staff stated that the reason the case disposition programs did not have an approved date on the SAMS documentation is because First Preston staff was only approving case dispositions on Mondays and Tuesdays. During the remaining portion of the week, staff personnel would enter the information into SAMS, without the approval date, and then wait until the following Monday or Tuesday to approve the program. Once the program was approved, First Preston staff did not update the new SAMS case disposition screen with the approved date in the case file. This process did not ensure that the case disposition programs were prepared and approved within 3 business days of receipt of the appraisal. First Preston indicated during the review that they have changed their procedures so that case dispositions are now prepared and approved daily. The disposition program establishes the sales method and the listing price of each property. Failure to timely approve and properly document the property disposition programs may result in delayed property listing; thus, properties may remain in inventory longer, which increases the risk of property deterioration and may delay the sale of the property. For our review of the processing of form HUD-27011, we only reviewed Deficient review of Parts the 17 randomly selected cases for the New Orleans area. Our review B, C, and D of form involved the proper documenting and timely processing of the forms, HUD-27011 particularly Parts B, C, and D of form HUD-27011. Based on our review, we determined that in 16 of 17 cases, 94.12%, First Preston did not receive and/or show indications of review of Parts B, C, and D of form HUD-27011 in a timely manner. Specifically, in 12 of the 17 cases, 70.59%, Parts B, C, and D were not received within 45 days of the date the deed was filed for record, or within 15 days of title approval, whichever was later. In 4 of the 17 cases, 23.53%, Parts B, C, and D were received in a timely manner but there were no indications that they were reviewed. Failure to receive and review Parts B, C, and D of form HUD 27011 in a timely manner may result in inappropriate costs being passed on to HUD by the mortgagee. Review of Parts B, C, and D will help confirm that: 1) any property protection or preservation work represented on Parts B, C, 17 00-DE-222-1003 and D was properly completed by the mortgagee, and 2) whether taxes charged were actually paid by the mortgagee and that no tax penalties or interest were charged to HUD. First Preston’s subcontractors are not fulfilling the requirements of their Deficient performance by contracts. The initial inspections are not being accomplished within 24 First Preston’s hours of assignment and appraisals are not being completed and sent to subcontractors First Preston within 10 business days after assignment. HUD’s Real Estate Owned Division has noted these conditions on their monthly assessments to First Preston. Although First Preston has a Management and Marketing Contract’s Quality Control and Quality Assurance Plan, and a Contract Oversight Division, these conditions continue to exist. The procedures written in the Quality Control and Quality Assurance Plan appear to be adequate; however, the above noted discrepancies indicate an apparent weaknesses in the implementation and accomplishment of the Plan. Modifications are needed by First Preston to ensure the timely inspections and appraisal of acquired properties by its subcontractors. In summary, case processing delays can lead to deteriorated property Summary conditions; properties remaining in HUD’s inventory longer than they should; and a possible decline in revenue earnings for FHA’s insurance fund. Because of these possible adverse effects, it is essential that First Preston undertake sufficient action to ensure the timely completion of initial inspections, property appraisals, case disposition program approvals, and receipt and review of Parts B, C, and D of form HUD-27011. First Preston has basically concurred with our finding and related Auditee’s Comments recommendations on the timely accomplishment of processing step and has initiated positive steps to alleviate the root causes of the problem. Several of the improvements include: • Implementing an atmosphere of zero tolerance when it comes to property conditions; and • Implementing improvements in their monitoring, tracking, and follow-up procedures for the processing of HUD owned properties. A complete copy of First Preston’s response to the audit can be found in Appendix A. Recommendations We recommend that First Preston: 2.A. Modify its managment and marketing procedures to ensure that the terms and conditions contained in its contract with HUD are met. This would include procedures that will: 18 00-DE-222-1003 • Ensure initially assigned acquired properties are inspected within 24 hours; • Obtain property appraisals within 10 business days after assignment; • Ensure that form HUD-27011 is properly and timely completed and used; and • Ensure the individual case disposition programs are prepared and approved within three days of the property appraisal. The modified management and marketing procedures will need to be incorporated into First Preston’s Quality Control and Quality Assurance Plan. 2.B. Improve its monitoring and oversight of its subcontractors to ensure the subcontractors are properly and timely carrying out their contract responsibilities. In additon, First Preston needs to amend its contract with its subcontractors to impose fines and penalities for poor performance. 19 00-DE-222-1003 THIS PAGE INTENTIONALLY LEFT BLANK 20 00-DE-222-1003 Management Controls In planning and performing our audit, we obtained an understanding of the management controls that were relevant to our audit. Management is responsible for establishing effective management controls. Management controls, in the broadest sense, include the plan of organization, methods, and procedures adopted by management to ensure that its goals are met. Management controls include the processes for planning, organizing, directing, and controlling program operations. They include systems for measuring, reporting, and monitoring program performance. We determined the following management controls were relevant to our Management controls audit objectives: assessed • Controls that ensure compliance with the Management and Marketing Contract; • Controls that ensure compliance with HUD regulations; and • Controls that ensure reliable reporting data. The following audit procedures were used to evaluate the management Assessment procedures controls: • Interviews with Single Family personnel, First Preston employees and others deemed necessary for our audit; • Reviews of servicing files, accounting records, and other records maintained by those entities reviewed; and • Evaluation of established policies and procedures for implementing the Management and Marketing Contract, compared against actual policies and procedures followed by the contractor. We did not test the general and application controls over HUD’s Single HUD data systems Family Acquired Asset Management System (SAMS), and relied on HUD’s assertions that the information systems provided the only source of data needed for the audit. A significant weakness exists if management controls do not give Significant weaknesses reasonable assurance that resource use is consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss, and misuse; and that reliable data is obtained and maintained, and fairly disclosed in reports. Based on our audit, we believe the following items are significant weaknesses within First Preston’s management controls: • The protection and preservation of HUD properties and the monitoring and maintenance of property disposition files is insufficient; and 21 00-DE-222-1003 • The processing steps for acquired HUD owned properties, managed and marketed by First Preston Management, Inc., are not accomplished in the time frame specified within the Management and Marketing Contract. 22 00-DE-222-1003 Follow Up on Prior Audits This is the Office of Inspector General’s first audit of First Preston’s Management and Marketing Contractor for Denver Area 3. 23 00-DE-222-1003 THIS PAGE LEFT BLANK INTENTIALLY 24 00-DE-222-1003 Other Matter Needing Action Since the inception of the Management and Marketing Contract, First Preston has continued to improve the process to ensure that the pass through vouchers are in compliance with the Contract. This improvement of the pass through voucher process is demonstrated in the April 2000 implementation of the Contract Compliance Division. This capable pass through process is, however, allowing deficiencies to pass through the system. Examples of the deficiencies include not submitting all required supporting documentation, not including the required information on all of the documentation, and inconsistent information on the documentation. These deficiencies are in violation of the Management and Marketing Contract; however, these deficiencies do not cause the pass through vouchers to be invalid. During the review of pass through vouchers requesting the payment of real estate taxes, we discovered several instances where First Preston requested, and HUD caught, the payment of taxes that had already been paid. These taxes had been paid by an entity other that First Preston, and due to the circumstances, First Preston should not have known that these taxes were already paid. We recommend that within 10 business days of assignment/acquisition, First Preston verify the tax status of each newly acquired property by reconciling tax information from both the taxing authority(s) and the mortgagee. Then the tax information could be entered into SAMS on the Tax Account Screen (STXTA). On a weekly basis, the tax records for each property could be updated in SAMS. 25 00-DE-222-1003 THIS PAGE LEFT BLANK INTENTIALLY 26 00-DE-222-1003 Appendices Appendix A Auditee Comments 27 00-DE-222-1003 28 00-DE-222-1003 29 00-DE-222-1003 30 00-DE-222-1003 31 00-DE-222-1003 32 00-DE-222-1003 33 00-DE-222-1003 34 00-DE-222-1003 35 00-DE-222-1003 36 00-DE-222-1003 37 00-DE-222-1003 38 00-DE-222-1003 39 00-DE-222-1003 THIS PAGE LEFT BLANK INTENTIONALLY 40 00-DE-222-1003 Appendix B Distribution Assistant Secretary for Housing/Federal Housing Commissioner, H, Room 9100 Deputy Assistant Secretary for Single Family Housing, HU, Room 9282 Director, Asset Management Division, HUAM, Room 9286 Director, Denver Single Family Homeownership Center, 8AHH Secretary’s Representative, 8AS (2) Deputy Secretary, SD, Room 10100 Chief of Staff, S, Room 10000 Office of Administration, S, Room 10110 Assistant Secretary for Congressional and Intergovernmental Relations, J, Room 10120 Senior Advisor to the Secretary, Office of Public Affairs, S, Room 10132 Deputy Assistant Secretary for Public Affairs, W, Room 10222 Counselor to the Secretary, S, Room 10234 General Counsel, C, Room 10214 Office of Policy Development and Research, R, Room 8100 Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7106 Chief Procurement Officer, N, Room 5184 Chief Information Officer, Q, Room 3152 Chief Financial Officer, F, Room 2202 Deputy Chief Financial Officer for Operations, FF, Room 10166 Director, Office of Budget, FO, Room3270 Departmental Audit Liaison Officer, FM, Room 2206 Headquarters Audit Liaison Officer, Housing, HF, Room 9116 Acquisitions Librarian, Library, AS, Room 8141 Director, Office of Information Technology, AMI, Room 160 Secretary, Mortgagee Review Board, VD, Suite 200, Portals Building The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, 340 Dirksen Senate Office Building, United States Senate, Washington, DC 20510 The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs, 706 Hart Senate Office Building, United States Senate, Washington, DC 20510 Honorable Dan Burton, Chairman, Committee on Governmental Reform, 2185 Rayburn Bldg., House of Representatives, Washington, DC 20515 Henry A. Waxman, Ranking Member, Committee on Governmental Reform, 2204 Rayburn Bldg., House of Representatives, Washington, DC 20515 Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neil House Office Building, Washington, DC 20515 Mr. Pete Sessions, Government Reform and Oversight Committee, Room 212, O’Neil House Office Building, Washington, DC 20515 Director, Housing and Community Development Issue Area, United States General Accounting Office, 441 G Street, NW, Room 2474, Washington, DC 20548 (Attention: Judy England-Joseph) Department of Veteran Affairs, Office of Inspector General (52A), 810 Vermont Avenues, NW, Washington, DC 20410 41 00-DE-222-1003 Steve Redburn, Chief Housing Branch, Office of Management and Budget, 725 17th Street, NW, Room 9226, New Executive Office Building, Washington, DC 20503 Inspector General, G, Room 8256 42
Management and Marketing Contract for Denver Area 3, First Preston Management Inc., Denver, Colorado
Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-09-21.
Below is a raw (and likely hideous) rendition of the original report. (PDF)