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.
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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.
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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
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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.
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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
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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;
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• 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.
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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
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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-
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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,
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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:
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• 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.
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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
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• 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.
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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.
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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.
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Appendices
Appendix A
Auditee Comments
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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
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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)