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AUDIT REPORT
FIRST PRESTON FORECLOSURE SPECIALISTS
MARKETING AND MANAGEMENT CONTRACT
BLUE BELL, PENNSYLVANIA
00-NY-229-1006
SEPTEMBER 21, 2000
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NEW YORK/NEW JERSEY
Issue Date
September 21, 2000
Audit Case Number
00-NY-229-1006
TO: Engram A. Lloyd, Director, Homeownership Center
Philadelphia, Pennsylvania, 3AHH
FROM: Alexander C. Malloy, District Inspector General for Audit, 2AGA
SUBJECT: First Preston Foreclosure Specialists
Marketing and Management Contract
Blue Bell, Pennsylvania
We completed an audit of First Preston Foreclosure Specialists (First Preston) a Management and
Marketing (M&M) contractor. This report presents the results of our audit of First Preston’s
ability to manage and market the U.S. Department of Housing and Urban Development (HUD)
single family properties. The report includes three findings with recommendations for corrective
action.
Within 60 days, please provide us, 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 not considered necessary. Also, please furnish us copies of any correspondence
or directives issued related to this audit. Please be advised that Handbook 2000.06 REV-3
requires management decisions to be reached on all recommendations within 6 months of report
issuance. It also provides guidance regarding interim actions and the format and content of your
reply.
We appreciate your cooperation during the audit, and would like to thank First Preston for its
cooperation during the audit. Should you or your staff have any questions, please contact
William H. Rooney, Assistant District Inspector General for Audit, on (212) 264-8000, extension
3976.
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Management Memorandum
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Executive Summary
We performed an audit of First Preston to assess its performance under its Marketing and
Management (M&M) Contract Number C-OP-21522. Specifically, our audit objectives were to
assess First Preston’s ability to manage and market properties in a manner that enables HUD to
accomplish its mission. This audit is one of a series of audits the Office of Inspector General
(OIG) is performing regarding the operations of M&M contractors. Each audit is part of OIG’s
nationwide assessment of HUD’s ability to meet its program mission while outsourcing
management and marketing activities.
Under Secretary Andrew Cuomo, the U.S. Department of
HUD outsourced Housing and Urban Development (HUD) has undergone
management and marketing significant changes in response to the Secretary’s “HUD
activities 2020 Reorganization Plan.” One major change is the
outsourcing of HUD’s management and marketing of its
single family properties. Although HUD outsourced these
activities, its program mission did not change. The
program mission is to reduce the single family inventory in
a manner that: (1) expands homeownership, (2) strengthens
neighborhoods and communities, and (3) ensures a
maximum return to the mortgage insurance fund.
.
In March 1999, HUD awarded 7 contractors a total of 16
Contract awarded to First M&M contracts to manage its single family property
Preston on September 23, inventory. One of the original contractors failed to
1999 effectively manage and market properties; as a result, HUD
terminated the contractor. On September 23, 1999, HUD
awarded a M&M contract to First Preston for the
Philadelphia Homeownership Center (HOC) Area 3, which
includes New York, New Jersey, Pennsylvania, Delaware,
Washington, DC, and Virginia.
First Preston has demonstrated success in several key areas.
It has instituted an electronic bidding system; reduced the
number of properties in inventory; and increased the sales
of properties. Despite these accomplishments,
improvements are still needed.
Physical inspections performed by the OIG, and by
Properties not adequately subcontractors of First Preston showed numerous
maintained or safeguarded deficiencies, evidencing inadequate maintenance and
safeguarding of property assets. The unfavorable property
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Executive Summary
conditions occurred because First Preston did not always
repair, maintain and properly secure properties in
accordance with the contract provisions. Consequently,
efforts to effectively market assets for sale diminished,
while health and safety hazards became more prevalent. In
our opinion, this increased the risk of potential liabilities to
HUD, and may have caused property values in surrounding
neighborhoods to decline. Unless First Preston enacts
adequate controls that ensure prompt and complete
recognition of existing property deficiencies, and
establishes procedures necessary to correct deficiencies
identified, marketing efforts will be impeded; properties
needing repair will remain in inventory as unsold;
neighboring communities may be adversely affected; and
shoddy property conditions will likely occur.
An essential objective of the M&M contract is the selling
Properties in inventory for 12
of the properties and reducing the inventory. In the eight
months or longer has
months since executing the M&M contract, First Preston
increased
has reduced the overall inventory by eight percent; however
the number of properties held in the inventory longer than
12 months increased by 63 percent. In our opinion, this
occurred because First Preston has not placed enough
emphasis on the sale of properties that have been in the
inventory for long periods of time. The failure to dispose
of these properties results in higher holding costs; but,
more importantly, such properties have a negative effect on
the surrounding neighborhoods.
Furthermore, First Preston has not complied with all the
First Preston has not
requirements in its contract. Specifically, First Preston: (a)
complied with all the
charged for ineligible costs; (b) did not performed tasks in a
requirements in its’ contract
timely manner; (c) did not always included the required
documentation in the appropriate files; and (d) did not
report all problems to the Government Technical
Representative (GTR). We believe these deficiencies
occurred because First Preston did not implement the
necessary controls to ensure that all contract provisions
were met. As a result, First Preston’s performance may
have lead to excessive costs and properties remaining in the
HUD inventory for extended periods of time.
On August 22, 2000, we held an exit conference with First
Exit Conference Preston Officials to discuss our draft findings and
recommendations.
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Executive Summary
First Preston’s written response is shown in Appendix B.
In addition, we have included a summary of First Preston’s
pertinent comments after each finding.
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Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1 Properties Not Adequately Maintained or Safeguarded 5
2 Number of Properties in Inventory for Twelve Months
or Longer Increased 13
3 First Preston Needs to Comply with all the Provisions
of its Contract 19
Management Controls 31
Follow Up On Prior Audits 33
Appendices
A Property Condition Examples 35
B Auditee Comments 39
C Distribution 61
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Table of Contents
Abbreviations
ACL Audit Command Language
GTR Government Technical Representative
HOC Homeownership Center
HUD Department of Housing and Urban Development
M&M Management and Marketing
OIG Office of Inspector General
SAMS Single Family Accounting Management System
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Introduction
HUD’s Single Family Mortgage Insurance Program helps low and moderate income families
become homeowners by reducing down payments and limiting lender fees. Every year, however,
thousands of borrowers default on their HUD insured loans. When borrowers default, HUD
encourages lenders to work with them to bring their payments current. If the lenders are
unsuccessful, the borrowers’ homes may be sold to third parties, voluntarily conveyed to the
lenders, or surrendered to lenders through foreclosure. Once lenders obtain the properties, they
generally convey title to the Secretary of HUD and submit a claim to the HUD insurance fund.
Background The National Housing Act of 1934 gives the Secretary of
HUD the authority to manage, rehabilitate, rent, and
dispose of properties acquired under the Single Family
Property Disposition Program. Title 24, Code of Federal
Regulations, Part 291 implements statutory authority to
manage and dispose of acquired properties. Handbook
4310.5, REV-2, dated May 17, 1994, Property Disposition
Handbook - One to Four Family Properties, supplements
the regulations.
The mission of HUD’s single family property disposition
HUD mission is to reduce program is to reduce the property inventory in a manner
property inventory that expands home ownership opportunities, strengthens
neighborhoods and communities, and ensures a maximum
return to the mortgage insurance fund.
HUD’s Office of Insured Single Family Housing, Asset
Management Division, is responsible for developing
property disposition policies and procedures governing
program administration. Each of HUD’s four
Homeownership Centers (HOCs) is responsible for
program operations within its geographical jurisdiction.
The Philadelphia HOC is responsible for overseeing First
Preston’s management of Area 3 properties.
First Preston awarded M & M As part of a nationwide restructuring of HUD’s Single
contract on September 23, Family Property Division, on March 29, 1999, HUD
1999 awarded seven contractors a total of 16 contracts to manage
and market its properties nationwide. HUD awarded seven
of the contracts to Intown Management Group, LLC. Two
of Intown’s contracts were for properties located in The
Philadelphia HOC’s Areas 2 and 3. Area 2 consisted of
New York, New Jersey, Pennsylvania and Delaware, and
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Introduction
Area 3 consisted of Washington, DC, Maryland, Virginia
and West Virginia. Because of Intown’s failure to
effectively manage and market properties, HUD terminated
all of the contracts with Intown. On September 23, 1999,
HUD awarded a M&M contract to First Preston for a
revised Philadelphia HOC Area 3 that now includes New
York, New Jersey, Pennsylvania, Delaware, Washington,
DC, and Virginia.
First Preston’s main offices are located in Addison Texas,
and the Regional Office for Area 3 is located at 475 Sentry
Parkway, Suite 5000, Blue Bell, Pennsylvania. The
President of First Preston is Ms. Nancy Richards.
Contract Objectives The primary objectives of First Preston’s contract are to
ensure that: (1) properties are protected and preserved,
properly managed, evaluated, and marketed in a manner
which produces the highest possible return to the insurance
fund; (2) average losses on sales and the average time
properties remain in inventory are reduced; and, (3) the
overall program and the image of properties are positive.
The contract’s scope of work requires First Preston to
perform all of the management and marketing duties and
responsibilities formerly performed by HUD. First Preston
is responsible for inspecting, appraising, securing,
maintaining and selling the properties. For these services,
HUD pays First Preston a fee based on a percentage of the
properties’ selling prices. The fee is paid in two
installments, 30 percent upon the listing of the property for
sale and the remainder when the property is sold. The
estimated value of the contract is $35,518,270 for the
period September 23, 1999, though January 31, 2001.
Intown’s mismanagement had created an excessive property
inventory, poor property conditions, lack of adequate
Prior contractor problems records, poor public relations and many other problems.
resulted in special contract Because of the unique problems in taking over the
provisions management and marketing function, after Intown’s
termination, several special provisions were included in
First Preston’s contract. A distinction was made between
the properties previously assigned to Intown “transition
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Introduction
properties” and new properties “newly assigned properties.”
Among other things the contract made concessions on time
frames required for listing the properties and adjusted the
management fee to 70 percent for properties previously
listed by Intown. In addition, Exhibit 16 of the contract
allowed First Preston to be paid on a reimbursement basis
during the first 60 days of the contract, the actual costs to
remove debris and defective paint, as well as actual costs to
secure the property. Also, during the first 75 days of the
contract, the contract allowed First Preston to be
reimbursed as pass through costs for fines, interest or other
penalties on transition properties
The inventory of properties at the end of September 1999,
was 9,626, which represented about 19 percent of the total
properties held nationwide. At May 31, 2000, the
inventory of properties assigned to First Preston was 8,817,
representing about 22 percent of the total nationwide
properties.
The audit objectives were to determine if First Preston: (1)
Audit Objectives and Scope managed properties according to HUD policies, procedures
and regulations and with the terms and conditions of its
M&M contract; (2) instituted adequate controls to ensure
HUD’s assets are adequately protected; and (3) established
operations that resulted in HUD accomplishing its mission
and performance goals.
To meet our objectives, we:
• Interviewed First Preston and HOC officials;
• Reviewed 29 active property cases in two cities,
Buffalo, New York and Philadelphia, Pennsylvania;
• Selected 29 active properties using the random
sampling function in the Audit Command Language
(ACL);
• Reviewed 15 closed cases selected using ACL’s
random sampling function;
• Inspected a judgmental sample of 27 properties;
• Reviewed a judgmental sample of First Preston
payment vouchers;
• Examined 100 percent of vouchers between October 1,
1999 and March 31, 2000, using ACL for indications of
possible duplicate payments;
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Introduction
• Reviewed First Preston’s policies and procedures and
observed its operations; and,
• Analyzed inventory and sales trends.
We assessed management controls regarding: (1) property
preservation and protection, (2) billings to HUD for
services, (3) property sales, (4) property appraisals, (5)
sales closing documents, and (6) subcontracting.
The audit is one in a series of audits OIG performed of
M&M contractors’ operations. Each audit is part of OIG’s
nationwide assessment of HUD’s ability to meet its
program mission and goals while outsourcing its
management and marketing activities.
We performed our field work from April 2000 through
Audit Period August 2000. The audit covered the period between
September 23, 1999 and May 31, 2000. We updated our
report to reflect current actions, where applicable. We
conducted our audit in accordance with generally accepted
government auditing standards.
A copy of this report was sent to First Preston.
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Finding 1
Properties Not Adequately Maintained or
Safeguarded
Physical inspections performed by the OIG, and by subcontractors of First Preston, showed
numerous deficiencies evidencing inadequate maintenance and safeguarding of property assets.
The unfavorable property conditions exist because First Preston did not always repair, maintain
or properly secure properties in accordance with contract provisions. Consequently, efforts to
effectively market assets for sale have been diminished while health and safety hazards have
become more prevalent. Thus, this has increased the risk of potential liabilities to HUD, and may
have caused property values in surrounding neighborhoods to decline.
Criteria The M&M contract between HUD and First Preston
contains requirements relative to issues of maintenance and
security of the properties. Section C-2, paragraph V.5
defines one of the contractor’s tasks to routinely inspect
and take all actions necessary to preserve, protect and
maintain each property in a reasonable condition at all
times. Further, Section C-3, paragraph VI of the contract
stipulates that the contractor shall be responsible for
safeguarding all government property. The contractor shall
be held liable for damages to government property due to
causes such as vandalism, neglect, negligence of employees
and subcontractors, failure to secure property or other
misconduct by the contractor.
Scope Our audit included a review of First Preston’s management
and marketing operations using a sample of 29 properties
located in Philadelphia, Pennsylvania and Buffalo, New
York. To determine the quality and accuracy of inspections
performed by First Preston’s subcontractors, and to verify
current property conditions, we performed physical
inspections of the 27 properties in the sample. In addition,
we performed exterior inspections of six additional
properties in Buffalo and two in Philadelphia to assess the
impact of the properties on the surrounding neighborhood.
The inspections focused on conditions associated with
property maintenance, safeguarding, and health and safety
matters. We compared the results of our inspections to the
latest inspections that were performed by First Preston’s
subcontractors.
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Finding 1
Numerous deficiencies noted during OIG inspections
Inspections Results The HOC’s monthly assessment reports of First Preston’s
performance have continually stated that property
maintenance was at an unacceptable level of performance.
In its letter of May 31, 2000, the HOC stated that for the
month of April, of the 1,510 inspections performed, 59
percent (889) were unacceptable. Our inspections
corroborated the existence of property maintenance
problems. While overall results varied broadly, our
inspections showed that all 27 properties, were deficient in
at least one, but often several, of the 22 relevant categories
examined (See Table Below).
Property Deficiency First Preston OIG
Foundation Cracks 0 7
Exterior Appearance 1 3
Kitchen and Bath 0 21
Heating 0 3
Plumbing 0 5
Electrical 0 5
Roof Leaks 5 10
Water Damage 1 6
Vandalism 1 6
Needed Repairs 3 10
Defective Interior Paint 9 21
Interior Appearance 0 3
Door Key Did Not Work 0 3
Lawn Not Cut 10 14
Debris in Yard 6 6
Poor Roof Condition 2 6
Signs Not Posted 3 19
Unsecured Doors 2 2
Windows Not Boarded 7 22
Windows Not Secured 1 13
Exterior Hazards 2 5
Defective Paint 8 15
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Finding 1
Properties were in poor condition and contained health and
safety hazards
Examples of poor property Several properties inspected were in poor condition and
conditions contained alarming health and safety hazards. Among other
things, our inspectors disclosed that a shotgun was under
the porch of one property; a decaying rat was in the
basement of another, and an entire window was laying on
the ground outside a third property. Moreover, some
properties have been broken into and vandalized; some
were laden with debris, and/or were in need of vital repair.
Some of the more notable property deficiencies are
identified within the pictures of Appendix A to this report.
Differences were noted between OIG and subcontractors’
inspections
Subcontractors’ inspections not Significant differences were noted between the results of
consistence with OIG results our inspections and those recently conducted by First
Preston’s subcontractors. Yet, it would be reasonable to
expect the observations to be similar since the OIG
inspections were performed, in most instances, within two
weeks or less of the latest documented subcontractor
inspection. Notwithstanding, for nearly all 22 areas
inspected, the subcontractor classified significantly fewer
properties as deficient than the OIG. The following is a
graphical illustration that compares the number of deficient
properties, for nine pertinent inspection categories, as
identified by both First Preston’s subcontractors and OIG
appraisers.
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Finding 1
Inspection Deficiencies Noted
25
20
Deficient Cases
15
(27 Properties Inspected)
10
OIG
5 FP
0
Interior Paint
Debris in
Vandalism
Not Secured
Defective
Hazards
Roof Leaks
Needed
Repairs
Damage
Exterior
Exterior
Water
Defective
Windows
Yard
Paint
Deficiency Type
Subcontractor inspections appear to be incomplete
Subcontractor inspections As illustrated, OIG inspections consistently classified more
incomplete properties as deficient than did First Preston’s
subcontractors. In particular, subcontractors’ inspections
appear incomplete relative to detecting property
deficiencies such as: defective paint, water damage,
vandalism, needed repairs, and, inadequate security. These
results indicate that subcontractors’ inspections may be less
than adequate and may most likely contain errors and/or
omissions.
We believe the poor maintenance and security of the
properties that we inspected is the result of First Preston’s
lack of adequate controls over its subcontractors. Without
proper controls to verify and promote the accuracy of
subcontractors’ performance, First Preston cannot be
ensured that inspections will identify all existing
deficiencies, all completed repairs or whether all
properties are properly secured. The poor condition of the
properties negatively effects the sale of the properties; may
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Finding 1
allow health and safety situations to go uncorrected; can
increase potential liabilities to HUD; and possibly decrease
the value of surrounding homes and neighborhood.
First Preston has not performed requirements concerning
lead-based paint timely
Inefficient processing of lead Apart from the above, First Preston has been less than
based paint requirements expedient or efficient in its efforts to market certain
properties located in Philadelphia, Pennsylvania.
Exhibit 15 of the M & M contract contains special
provisions based on a court decree mandating that lead-
based paint be abated in all properties sold within
Philadelphia that were built before 1978. Specifically, it
provides that upon acquisition of pre-1978 HUD owned
homes, the M&M Contractor shall, on a weekly basis,
furnish to the City of Philadelphia, Department of Public
Health a written task order listing properties requiring
initial inspections for lead-based paint. The Exhibit further
states that if Health Department employees cannot access a
property to perform the requested inspection or re-
inspection, the M&M Contractor shall be charged a “lock
out” fee of $60 for each occurrence.
Discussions with Philadelphia HOC staff, and a review of
pertinent documentation showed that First Preston often did
not request an initial lead-based paint inspection until
several weeks subsequent to the date of property
acquisition. In addition, as evidenced by numerous
instances where HUD incurred costs for lock out fees, First
Preston has not always assured access to properties
subsequent to its request for an inspection.
In addition to adversely effecting the marketing of
Philadelphia properties, First Preston’s delay in requesting
lead-based paint inspections and not assuring access to
properties may have allowed a serious health and safety
condition to continue unabated.
Contractor actions required Unless First Preston enacts adequate controls to ensure
prompt and complete recognition of existing property
deficiencies, and until it establishes procedures necessary to
correct the deficiencies identified, marketing efforts will be
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Finding 1
impeded, properties needing repairs will remain in the
inventory as unsold, neighboring communities may be
adversely affected, and shoddy property conditions such as
those previously described will likely occur.
Auditee Comments First Preston disagrees with our conclusions. Its comments
provide that the OIG inspections and the HOC’s monthly
assessments do not take into consideration the inherent risk
verses contractor compliance. First Preston considers there
to be serious conflicts of interest because several of HUD’s
Special Property Inspectors are disqualified M & M
contract bidders and are operating under terms that are
inconsistent with First Preston’s contract.
First Preston comments also provide that its inspectors do
not look at needed repairs the way the OIG does.
According to its comments First Preston will not replace
siding, paint and carpet, etc.; therefore, First Preston’s
inspectors will not write up these items during routine
inspections.
Regarding, our first recommendation First Preston
indicated that it will work with HUD to readdress its
requirements. Regarding the second recommendation,
concerning lead-based paint, First Preston, agreed that the
problem existed early on during its contract; however, First
Preston claims that it is now in compliance with its
contract.
OIG Evaluation of Regarding inherent risks, First Preston has a contract with
Auditee Comments HUD that requires First Preston to adequately maintain and
safeguard the properties in accordance with its contract.
When we performed the inspections, we used an OIG
Appraiser. Our inspections revealed that First Preston was
not adequately maintaining or safeguarding the properties
in accordance with the requirements of its contract. We
performed our inspections in accordance with the contract
which requires First Preston to routinely inspect and take
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Finding 1
all actions necessary to preserve, protect and maintain each
property in a presentable condition at all times.
Regarding the lead-based paint issue, we recommend that
the HOC ensure that First Preston is in compliance with the
requirements.
Recommendations We recommend that you require First Preston to:
1A. Establish procedures that: ensure all
significant property deficiencies are identified;
monitor the accuracy of subcontractor property
inspections; and, provide assurance that the needed
repairs are completed promptly.
1B. Ensure that the requirements of Exhibit 15
of the M&M contract, regarding lead-based paint
are met.
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Finding 1
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Finding 2
Number of Properties in Inventory for Twelve
Months or Longer Increased
An essential objective of the M&M contract is to sell HUD owned properties and thereby reduce
the inventory of HUD owned properties. In the eight months since executing the M&M
contract, First Preston has reduced the overall inventory by eight percent; however, the number
of properties held in the inventory longer than 12 months has increased by 63 percent. In our
opinion, this occurred because First Preston has not placed enough emphasis on the sale of
properties that have been in the inventory for long periods of time. The failure to dispose of
these properties results in higher holding costs, but more importantly such properties have a
negative effect on the surrounding neighborhoods.
Criteria The M&M contract as executed on September 23, 1999,
lists six primary objectives in Section C-2 paragraph I. Two
of those objectives are to ensure: (1) that HUD owned
properties are protected and preserved, properly managed,
evaluated, and marketed in a manner which produces the
highest possible return to HUD's mortgage insurance fund,
and (2) that average losses on sales and the average time
properties remain in inventory are reduced.
Scope We reviewed the inventory, sales and profit and loss data
from HUD’s Single Family Accounting Management
System (SAMS). Our audit included a review of the
Acquired Properties Monthly Summaries reports and the
Cash Management Profit and Loss reports for October 1999
to May 2000. In addition, we reviewed First Preston’s
monthly Executive Reports since the execution of its
contract on September 23, 1999.
Properties 12 months and over increased by 63 percent
Inventory of older properties During the period that First Preston had the M&M contract,
has increased Area 3 showed an 8 percent decrease in the number of
properties in the inventory. At the end of September 1999,
the inventory of HUD properties was 9,626, and as of May
31, 2000, the inventory was 8,817. While properties in the
inventory over 6 months decreased by 12 percent,
properties that have remained in the inventory for 12
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Finding 2
months or longer have increased by 63 percent from 1,150
to 1,876.
End Of Month SEPT OCT NOV DEC JAN FEB MAR APR MAY
Total Inventory 9,626 9,903 10,175 10,227 10,060 9,903 9,583 9,240 8,817
Properties > 12 Mo. 1,150 1,375 1,555 1,733 1,855 2,001 2,119 2,089 1,876
Steady increase in the percent of properties 12 months and
older
Properties that were in the inventory 12 months or longer
accounted for 12 percent of the total inventory at the end of
September 1999, and had increased to 21 percent at the end
of May 2000. According to the Andersen Consulting
Industry Benchmarking and Best Practices Report the real
estate industry standard is 2 to 3 percent.
AGE OF PROPERTIES BY PERCENT
100%
12% 14% 15%
90% 17% 18% 20% 21%
22% 23%
80%
70%
60%
50%
88% 86% 85%
40% 83% 82% 80% 79%
78% 77%
30%
20%
10%
0%
SEPT OCT NOV DEC JAN FEB MAR APR MAY
Properties less than 12 Months Properties older than 12 Months
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Finding 2
Older properties have a higher holding cost and greater
probability of deterioration
Increased likelihood of The failure to timely dispose of properties results in higher
deterioration and vandalism holding costs and increases the likelihood that the property
will deteriorate or be vandalized. Not only does this reduce
the marketability of the property, but the deteriorating
properties have a negative effect on the surrounding
neighborhoods and the value of nearby properties. Because
the M&M contract principally concentrated on selling
properties quickly, we believe that First Preston has not
placed enough emphasis on the sale of properties that have
been in the inventory for long periods of time.
Revenue losses have increased significant
$9,529,517 in lost revenue HUD measures revenue losses based on the differences
between average sales price and appraised value, the HUD
goal is to sell properties at 98 percent of appraised value.
During the period of time that First Preston has been under
contract to perform the management and marketing
function, there has been a steady decrease in the sales price
as a percent of the appraised value and an increase in the
loss of revenue. The following schedule shows that sales
prices decreased to 90 percent of the appraised value in
May 2000; and that there has been $9,529,517 in lost
revenues since October 1999.
ACTUAL % OF 98% REVENUE
APPRAISED SALE APPRAISED GOAL SALES GAIN/
MONTH VALUE PRICE VALUE AMOUNT DIFFERENCE VOLUME (LOSS)
Oct-99 $61,985 $62,233 100% $60,745 $1,488 667 $992,496
Nov-99 $66,237 $66,463 100% $64,912 $1,551 681 $1,056,231
Dec-99 $62,503 $61,963 99% $61,253 $710 929 $659,590
Jan-00 $59,462 $58,127 98% $58,273 -$146 1,140 ($166,440)
Feb-00 $61,699 $60,051 97% $60,465 -$414 1,192 ($493,488)
Mar-00 $59,073 $56,943 96% $57,892 -$949 1,427 ($1,354,223)
Apr-00 $57,738 $53,981 93% $56,583 -$2,602 1,293 ($3,364,386)
May-00 $58,782 $52,703 90% $57,606 -$4,903 1,399 ($6,859,297)
($9,529,517)
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Finding 2
The Good Neighbor Program may have contributed to the
increase in the loss of revenue
The large increase in the loss of revenue in May could
have, in part resulted from HUD’s implementation of the
Good Neighbor Program that began on May 1, 2000. The
program was designed to sell properties that are 6 months
or older to the local governments for $1.00. The intent of
the program is to reduce the inventory of older properties.
However, the sale of older properties for $1.00 will
increase the loss of revenue and significantly impede HUD
from meeting its goal of selling properties at an average of
98 percent of appraised value. While the Good Neighbor
Program may have contributed to the increase in the loss of
revenue in May, the overall trend since October 1999, has
been a decrease in the sales price compared to the appraised
value.
The lack of a significant reduction in the inventory is due to
First Preston’s failure to sell older properties in the
inventory. In our opinion, this results from First Preston
failure to allocate sufficient resources to the marketing of
the older properties. As a result, loss revenue to HUD has
increased and the average sales price has decreased to
significantly below HUD’s goal of a 98 percent average
return.
First Preston disagreed with our conclusion and found the
Auditee Comments
finding to be deceptive and misleading. First Preston’s
comments provided that the reference to an industry
standard of 2 to 3 percent for properties in the inventory
longer than 12 months is inapplicable to HUD’s situation.
The comments further provide that the industry standard
does not apply because it does not take into consideration
such items that are beyond First Preston’s control, for
example, lead-based paint abatement, bad cases held off
market, and the properties held off market for purchase by
the City of Buffalo.
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Finding 2
First Preston disagrees with our opinion that it has not
placed enough emphasis on sale of the properties that have
been in the inventory for long periods of time. Its
comments provide that where the audit reports a loss
revenue of $9.5 million based on percentage of sales
compared to appraised value, First Preston can argue a real
increase in revenue of over $83 million due to the increase
in HUD’s average sales price. First Preston agreed that the
Good Neighbor Program and other special interest
programs has caused an increase in revenue loss that has
made it difficult to obtain the stated goal of selling
properties at an average of 98 percent of appraised value.
First Preston does not interpret the 98 percent goal as a
contract requirement.
Our review disclosed that for Area 3, properties in the
OIG Evaluation of
inventory over 12 months increased by 63 percent since
Auditee Comments First Preston was awarded the M & M contract. As for the
industry standard, we used the standard because it is
accepted in the industry. As for the lead-based paint
properties and properties held off market, we recognize that
these properties have contributed to the fact that properties
over 12 months in the inventory increased significantly.
These are the type properties that in our opinion, First
Preston has not placed enough emphasis on removing from
the inventory. As mentioned in our recommendation, First
Preston needs to work with the HOC to develop incentives
to sell these properties.
In addition, one of HUD’s performance indicators is to sell
properties at 98 percent of the appraised value. First
Preston does not interpret the 98 percent goal as a
requirement of the contract. For this reason we made the
recommendation that the HOC evaluate this goal and make
applicable adjustments.
Recommendations We recommend that you:
2A. Work with First Preston to increase the
emphasis on the sale of older properties and/or
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00-NY-229-1006
Finding 2
develop incentives to encourage the sale of older
properties.
2B. Evaluate HUD programs such as the Good
Neighbor Program to determine their impact on the
goal of selling properties at an average of 98 percent
of appraised value. Based on that evaluation make
adjustments to either the goal or the programs so
they are not in conflict.
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Finding 3
First Preston Needs to Comply with all the
Provisions of its Contract
First Preston has not complied with all the requirements in its contract. Specifically, First
Preston (a) has charged for ineligible costs; (b) has not performed tasks in a timely manner; (c)
has not always included the required documentation in the appropriate files; and (d) has not
reported all problems to the Government Technical Representative (GTR). We attribute the
cause of these deficiencies to First Preston’s failure to implement the necessary controls to ensure
that all contract provisions are met. As a result, First Preston’s performance may have lead to
excessive costs and properties remaining in the HUD inventory for an extended periods of time.
Criteria Section B, paragraph I of the M&M contract requires First
Preston to provide services to successfully manage single
family properties owned by or in the custody of HUD, to
successfully market those single family properties, and to
successfully oversee the sales closing activity, including
proper accounting for HUD's sales proceeds.
First Preston charged ineligible costs
Section C, exhibit 16, paragraph 3 of the contract provides
Ineligible pass through costs that only for the initial transitional properties,1 First Preston
could be paid costs (pass through costs) for such items as
debris removal, securing the property, and defective paint
removal. However, our review disclosed that First Preston
charged HUD for debris removal etc., for properties newly
assigned to it. The HOC reviewed requests for
reimbursements and determined that $212,436.63 was not
allowable. This review performed by the HOC was, in part,
precipitated by the fact that an employee of First Preston,
who was responsible for the maintenance of the properties
in the Buffalo, New York area, was arrested for financial
extortion and kickbacks.
First Preston responded to the HOC stating that requests for
T.O.C. reimbursement of costs for such items as debris removal
etc., were submitted to HUD in error. Officials of First
1
Properties assigned to First Preston by HUD at the start of First Preston’s contract.
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Page 19 00-NY-2291006
Finding 3
Preston claimed they performed a reconciliation that
identified $238,959 as ineligible requests that were
inadvertently submitted and received. Thus, First Preston
reimbursed the funds to HUD.
It is apparent that the controls implemented by First Preston
were unable to ensure that requests for reimbursement from
HUD were only for eligible expenditures. As such, First
Preston needs to institute management controls that will
ensure that requests for reimbursement from HUD are for
eligible costs.
Our review noted additional instances of questionable
Project files did not contain
invoices or GTR approvals controls at one of First Preston’s Field Offices. This Field
Office was unable to locate copies of invoices for various
completed work and had not requested the necessary GTR
approval for certain costs. Further, the Field Office’s work
orders were not numbered. As a result, First Preston’s
controls could not be relied upon to ensure that only
requests for eligible costs were submitted to HUD.
Possible duplicate charges Our review disclosed another situation involving First
Preston’s controls, which pertains to pass through costs that
were forwarded to HUD for reimbursement. Using an audit
software package, (Audit Command Language), we
reviewed all pass through costs forwarded by First Preston
to HUD for the period October 1, 1999, through March 31,
2000. We identified 479 items that may be duplicate
payments. Section C-4, paragraph III. B, of the contract
provides that reimbursement by HUD for pass through
costs may not be requested until First Preston pay for the
service or item. We reviewed a sample of these requests at
one of First Preston’s Field Offices and at the HOC. Our
review disclosed that some records were not available at
neither the First Preston Field Office nor the HOC.
However, a member of First Preston’s staff told us that the
records should be available at First Preston’s Texas Office.
Because we could not verify if duplicate costs exist, we
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00-NY-229-1006 Page 20
Finding 3
originally questioned $32,549.45 of pass through costs as
duplicate costs2.
At our exit conference, officials of First Preston stated that
of the $32,549.45 of questioned duplicate costs, $20,196.95
had been reimbursed to HUD, and that the remaining
balance of $12,352.50 was for invoices that are not
duplicative. Upon review, we verified that the $20,196.95
was reimbursed to HUD. First Preston repaid $6,551.20 of
the $20,196.95 directly as a result of our audit inquires.
More importantly, duplicate costs occurred and we have
recommended that First Preston needs to institute
management controls to prevent duplicate costs from
occurring.
First Preston did not meet contract time thresholds
First Preston is required to meet certain time thresholds to
ensure that properties are listed and sold within a
reasonable time period. The timely listing and sale of
properties reduces holding costs, and provides for a greater
monetary return to the insurance fund. Our review found
several instances in which First Preston was not meeting
contract time thresholds.
For the newly assigned properties, First Preston was to
Inspection were not performed
obtain an inspection within 24 hours per Section C-2,
within 24 hours
paragraph V. B. 3A, of its contract. Our sample included 15
newly assigned properties. For 11 of these properties, the
inspections were not completed within 24 hours. However,
four of the 11 were a week or more late with one being 43
days late.
Appraisals were not performed Also, Section C-2, paragraph V. B. 9, of the contract
within 10 business days requires First Preston to obtain an appraisal of a property
within 10 business days of being assigned to First Preston.
For 12 of the 15 properties in our sample, the appraisals
were not received within the 10 day criteria. In fact, eight
were five or more business days late with one being 51
business days late.
Disposition programs were not
approved within 3 business
Section C-3, paragraph II, requires First Preston to comply
days with HUD Handbook 4310.5 REV-2. Section 6-17 of the
2
We arrived at this amount by questioning the second reimbursement by HUD for a service or item previously
reimbursed to First Preston by HUD. The details of the 479 items were provided to First Preston.
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Finding 3
Handbook requires the review and approval of a disposition
program within three business days of receipt of the
appraisal. There were seven cases from a possibility of 20
cases in our sample in which the disposition program was
not approved within the required time frame. One of the
disposition programs was approved 32 business days late.
Section C, exhibit 11-1 of the contract requires First
Title evidence was not
Preston to review and approve or reject title evidence of a
approved timely
property within 10 calendar days of receipt from the
mortgagee. First Preston took an excess of 10 days to
approve the title evidence in six of a possible 13 cases in
our sample. Failure to perform within required time frames
results in possible increased interest payments to the
mortgagees which results in a greater expense to HUD.
The files did not always contains the required
documentation
Section C-3, paragraph XI. of First Preston’s contract
provides that: First Preston will ensure that hard copies of
any and all required documentation under the contract be
maintained in the appropriate property or subject matter
file. Our review of the property files indicated that many
items could not be located in the files. Further, we were
unable to determine from the files whether First Preston
had been completing various required tasks, since the
information was not documented in the file. Our review
indicated that First Preston was not always documenting the
reconciliations of sales information, reviews of closing
documents, wire transfer receipts, actions taken on held off
market properties, HUD 27011 reviews, and title evidence.
Section C, exhibit 8-7 C, of the contract requires First
Reconciliations were not
Preston to reconcile the sales information with the sales
adequately documented
proceeds. Section 11-19 D of HUD Handbook 4310.5
REV-2 explains that no case will remain unreconciled
longer than 30 days past the closing without an explanation.
First Preston did not reconcile the sales proceeds for two of
15 cases within the required time frame. For the two cases,
the lack of reconciliations became apparent when we
requested reconciliation information from First Preston.
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Finding 3
Thus, the sales proceeds for one property were reconciled
111 days late. We believe that this situation was
precipitated by the fact that First Preston has not adequately
documented the sales reconciliation in its files. For eight of
the 15 cases in our sample there were inadequate evidence
that cases were reconciled.
First Preston did not document that it performed the form
Lack of evidence that
HUD-1, Settlement Statement, review as required in
Settlement Statement form
HUD-1 was reviewed Section C, exhibit 8-8 of the contract. The review assures
the appropriateness of charges to HUD. A First Preston
closing official claimed that they are reviewing the HUD-
1’s. However, First Preston is not documenting that the
reviews are being performed. In addition, First Preston is
not reviewing the closing documents prior to closing.
Section C, exhibit 8-4 B requires that First Preston must
ensure the accuracy of all closing documents and that all
costs being charged to HUD are appropriate. Members of
First Preston’s staff stated that they do not review the
documents prior to closing because the closing agents are
not required to submit pre-closing packages to First
Preston. Without this review, inappropriate charges to
HUD could occur, which First Preston would not be aware
of, until several days after the closing.
First Preston is not obtaining adequate evidence that sales
Wire transfer receipts were
proceeds have been properly wired to Treasury. Section C,
missing from the files
exhibit 8-7 B, of the contract stipulates that First Preston
will ensure that wire transfer receipts indicate that the
proper funds were wired to Treasury. For all 15 cases in
our sample, we could not locate the wire transfer receipt in
the files. First Preston staff maintained that the SAMS
screens indicated when the funds were transferred.
However, First Preston’s contract requires First Preston to
obtain the wire transfer receipts.
First Preston explained that the properties in our sample are
First Preston is not adequately
maintained as held off market (HOM) for two primary
monitoring HOM properties
reasons; they were either aged inventory that has not had
any bids for a lengthy period of time, or properties whose
files, had missing or incorrect information. Our review
indicated that First Preston is not adequately monitoring the
properties that are HOM. For four of 10 properties that we
reviewed, First Preston had not taken adequate steps to
resolve missing document problems. As such, these
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Finding 3
properties remained HOM when they could have been re-
listed and possibly sold.
Section C, exhibit 12 requires First Preston to review the
Files do not contain evidence
Mortgagee Claim form HUD-27011. For 17 of 21 cases,
of form HUD-27011 review
which First Preston should have reviewed the HUD-27011,
we could not locate any evidence that First Preston met
this requirement. First Preston staff claimed that the
entering of the information into SAMS was their evidence
that Part A of the HUD-27011 was reviewed. The Chief
Operating Officer told us that First Preston has created a
form to be completed by staff to show that staff reviewed
Parts B, C, and D of the HUD-27011. However, we could
not locate any of these forms for the properties in our
sample to verify this review.
Mortgagees are required to submit evidence of a good and
First Preston is not adequately
marketable title within forty-five (45) days after the date a
monitoring title evidence
receipt deed to the Secretary of HUD is filed for record. This is
outlined in Section C, exhibit 11 of First Preston’s contract.
Further, First Preston is responsible for reviewing and
approving all extension requests for conveying title,
submission of title evidence, submission of fiscal data, and
for filing supplemental claims. There were seven cases in
our sample in which the title evidence was not received
within 45 days, and there was no evidence in the files of
any requests for extensions. We believe that First Preston
needs to closely monitor the timely receipt of title evidence.
First Preston has not notify the GTR of problems
The contract requires First Preston to notify the GTR when
certain situations occur. Our review disclosed that First
Preston is not properly notifying the GTR in regards to
mortgagee neglect and deficiencies pertaining to closing
agents.
After a property’s initial inspection, Section C, exhibit 11-
First Preston is not formally
19 requires First Preston to notify the GTR, if the
notifying the GTR of
mortgagee neglect inspection discloses that the property was damaged due to
mortgagee neglect. There were six cases in our sample in
which mortgagee neglect was identified during the initial
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Finding 3
inspection. In all of those cases, First Preston did not
formally notify the GTR of the neglect. First Preston
claimed that it stopped reporting mortgagee neglect to the
HOC because the HOC was not allowing the costs of
repairing the mortgagee neglect. We believe that it is still
the responsibility of First Preston to notify the GTR
regardless of the previous actions taken by the HOC.
Furthermore, our review disclosed that three initial
Initial inspection did not
inspections contained items that would constitute
identify apparent mortgagee
neglect mortgagee neglect. Items identified in these inspections
included excessive debris and holes in the roof that caused
additional damage. The First Preston Inspectors, in all three
cases, did not identify the properties as having a mortgagee
neglect condition. We believe that First Preston needs to
closely monitor the initial inspections to ensure that all
instances of mortgagee neglect are reported.
Section C, exhibit 8-7 of the contract requires First Preston
First Preston is not notifying
to notify the GTR in those instances where the closing
GTR of closing agent
problems agent failed to comply with the wire transfer procedures
specified in its contract. Also, the GTR should be notified
when the closing agent failed to submit the final sales
closing package within the time specified in the closing
agent's contract. The purpose of this requirement is to
ensure that the closing agent is assessed the proper
liquidated damages for any late delivery of wire transfers.
We found that for six of 15 properties reviewed, the closing
agents did not wire the sales proceeds to HUD in a timely
manner. However, First Preston did not formally notify the
GTR when instances such as these occurred.
Also, we found that for three of the same 15 properties,
First Preston did not enter HUD-1 data into SAMS in a
timely manner. The only explanation provided by First
Preston was that sometimes closing information came in
late from the closing agents. But, First Preston staff was
unable to provide documentation indicating such situations.
Furthermore, there was no evidence in the files indicating
that if the closing information was late that First Preston
notified the GTR. We believe that First Preston needs to
track the dates when pertinent documents are received and
notify the GTR if such information is late.
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Finding 3
In summary, we believe that First Preston has not
Summary
implemented the necessary management controls to ensure
that all contract provisions are followed.
Auditee Comments First Preston comments indicate that because there was an
inability to obtain SAMS information during the initial
takeover, and because of the volume of properties, it was
not possible to delineate between the takeover properties
and newly assigned cases. This caused calendar issues and
reimbursements that were inadvertently submitted and
received by First Preston. First Preston’s contract
compliance accounting team conducted a quality control
review of all pass-through items in March 2000 and
identified $238,959 that was refunded to HUD.
Concerning files not containing invoices and GTR
approvals, First Preston stated that the OIG review was
performed in a field office; and that a field office file does
not have a complete case file. First Preston’s files are
integrated into the case file upon closing. The case files are
maintained in the Blue Bell, Pennsylvania, Office in
accordance with its Quality Control Plan. Further, in an
effort to eliminate the risk of duplicate payments, all
original invoices with GTR approval are sent to the
Corporate Accounting Department in Addison, Texas.
First Preston stated that of the $32,549.45 of questioned
pass through costs $20,196.95 was reimbursed to HUD
between March 23, 2000 and August 21, 2000. Also, First
Preston indicated that the remaining $12,352.50 was for
invoices that are not duplicative.
First Preston explained how it is currently operating and
described its new procedures.
OIG Evaluation of We recognize that First Preston has reimbursed HUD the
Auditee Comments $238,959 of ineligible costs that it improperly requested
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Finding 3
and received. Our concern is that requests for ineligible
costs occurred. Therefore, we recommended that the HOC
ensure that First Preston has adequate management controls
to prevent this from occurring again.
Our review of two First Preston Field Offices in our sample
revealed that the controls at these Field Offices could not be
relied upon to ensure that only requests for eligible costs
were submitted to HUD. We believe that as a minimum
First Preston Field Offices should maintain copies of
numbered work orders, invoices for completed work, and
any necessary GTR approvals. We raised this issue and
made an appropriate recommendation to the HOC for its
consideration.
Regarding the questioned costs, we verified that $20,196.95
was reimbursed to HUD. Regarding the $12,352.50 that
First Preston states are not duplicate costs, we have
recommended that the HOC determine whether First
Preston is correct. More importantly, our reason for raising
the issue is to show that duplicate costs occurred and that
the HOC must ensure that First Preston has adequate
management controls to prevent duplicate costs submitted
to HUD for reimbursement.
Regarding First Preston’s current procedures, we made
various recommendations to the HOC to ensure that First
Preston’s contractual time thresholds are met, that files are
adequately documented and that the GTR is notified when
applicable.
Recommendations We recommend that your Office require First Preston to:
3A. Ensure that it institutes management
controls that will ensure that requests for
reimbursement from HUD are for eligible costs.
3B. Review the remaining questionable pass
through costs to determine whether there are any
duplicate payments and that each charge has an
original invoice and supporting documentation. If
additional duplicates are found, First Preston should
be required to reimburse HUD.
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Finding 3
3C. Maintain complete project files in its Field
Offices. At a minimum, those files should include
work orders, invoices, and GTR approvals when
necessary.
3D. Ensure that all contract requirements are
performed within the required time frames, including
the following requirements:
• Properties inspected within 24 hours of
assignment.
• Appraisals are received within 10 business days.
• Disposition programs are approved within 3
business days.
• Title evidence approved within 10 calendar days.
3E. Document in each property file that a
reconciliation of the sales information with the sales
proceeds has been performed.
3F. Develop a checklist to indicate what is to be
reviewed on the form HUD-1 and include a copy of
the completed checklist in the property file.
3G. Ensure that wire transfer receipts are
obtained from the closing agents and are maintained
in the property file.
3H. Establish and implement procedures that
ensure that all properties listed as HOM are
legitimate. If the properties are HOM due to missing
documents, First Preston must take the appropriate
efforts to obtain the missing documents and document
the tracking of these efforts in the files.
3I. Document in the property file the items
reviewed on form HUD-27011, Parts A, B, C, D.
3J. Monitor the receipt of title evidence to
ensure that a title is submitted to First Preston within
the applicable time frame.
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Finding 3
3K. Establish procedures that clearly identify
what constitute mortgagee neglect, and which
neglects should be reported on the initial inspection.
Formally notify the GTR of those properties where
mortgagee neglect has been identified.
3L. Formally notify the GTR of deficiencies
which the closing agent did not performed in
accordance with the its contract.
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Finding 3
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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 its goals are met.
Management controls include the processes for planning, organizing, directing and controlling
program operations. They include the systems for measuring, reporting and monitoring program
performance.
Relevant Management Relevant Management Controls
Controls
We determined that the following management controls
were relevant to our audit objective:
• Program operations - Polices and procedures for
ensuring that HUD owned properties are protected and
preserved, properly managed, evaluated, and marketed in
a manner which produces the highest possible return to
HUD's mortgage insurance fund.
• Validity and Reliability of Data - Administrative
controls for ensuring the validity and reliability of the
data entered into the Single Family Accounting
Management System (SAMS).
• Compliance with Laws and Regulations - Procedures
for ensuring that First Preston complies with all
contract requirements.
• Safeguarding Resources - Policies and procedures for
ensuring that there are adequate controls over
processing and payments for services and controls for
ensuring the disposition of properties that have been in
the inventory for over 12 months.
We assessed all of the relevant controls identified above.
The scope of our assessment is identified in the
Introduction Section of this report and in the respective
findings.
It is a significant weakness if management controls do not
provide reasonable assurance that the process for planning,
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Management Controls
organizing, directing and controlling program operations
will meet an organization’s objectives.
Based on our review, we believe that significant
weaknesses exist in the following management controls.
These weaknesses are described in the findings section of
this report.
• First Preston did not adequately maintain or safeguard
HUD properties. Finding 1 (Program Operations)
• First Preston did not comply with all requirements of
the contract. Finding 3 (Compliance with Laws and
Regulations) (Program Operations).
• First Preston was unable to ensure that requests for
reimbursements from HUD were only for eligible
expenditures. Finding 3, (Safeguarding Resources).
First Preston did not place enough emphasis on the sale
of properties that have been in the inventory for long
periods of time. Finding 2, (Safeguarding Resources).
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Follow Up On Prior Audits
This was the first OIG audit of the HOC’s Area 3 contract.
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Follow Up On Prior Audits
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Appendix A
Property Condition Examples
DRIVE-BY INSPECTION
OIG Inspection: 06-01-00 Location: Buffalo, NY
Condition: Property appearance adversely impacts surrounding neighborhood.
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Property Condition Examples
Acquired: 01-14-00 Case No: 372-166691
OIG Inspection: 06-01-00 Location: Buffalo, NY
Condition: Shotgun under deck is a serious health and safety hazard.
Acquired: 09-23-99 Case No: 441-309878
OIG Inspection: 06-06-00 Location: Philadelphia, PA
Condition: Window on street shows inadequate safeguarding of assets.
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Property Condition Examples
Acquired: 08-13-99 Case No: 372-265070
OIG Inspection: 06-01-00 Location: Buffalo, NY
Condition: Mass of wiring is an electrical hazard.
Acquired: 12-11-99 Case No: 441-444362
OIG Inspection: 06-08-00 Location: Philadelphia, PA
Condition: Roof leaks have caused significant ceiling damage
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Property Condition Examples
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Appendix B
Auditee Comments
August 28, 2000
Mr. Alexander C. Malloy
District Inspector General for Audit
U.S. Department of Housing and Urban Development
New York/New Jersey
26 Federal Plaza, Room 3430
New York, NY 10278-0068
Subject: OIG Audit (Draft) Response
Dear Mr. Malloy:
First Preston Foreclosure Specialists, Inc., is in receipt of your draft audit report dated July 28,
2000. This report reviews aspects of our Philadelphia regional Marketing and Management
Contract operation for the U.S. Department of Housing and Urban Development (HUD), and we
appreciate the opportunity to provide a response. We are also grateful for the occasion to meet
with yourself and senior members of your staff on August 22, 2000 to discuss this report in
detail. During the audit, your team was very professional and courteous to all of our employees.
The atmosphere surrounding the various interrelations between your team and First Preston was
open and direct, which is essential to the overall success of this program.
Before responding to specific issues detailed in your report, please allow us to recap the historical
condition of this portfolio and the progress we have made to date.
Takeover Anomalies
Opening Day
At the onset of the audit, a Senior OIG Auditor mentioned that he felt it was too early in our
contract tenure to adequately review performance. On September 23, 1999, we became the
successor to a failed contractor. First Preston had 21 days from HUD’s signing of the
contingency contract and 1 day from HUD’s notice to proceed to begin operating under this
contract. We hired in excess of 200 employees and subcontractors to help us meet this challenge.
Subcontractors were not eager to engage in our employ due to the unpaid invoices owed to them
by the previous contractor.
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Auditee Comments
Disarray of Files
On September 24, 1999, approximately 60,000 case files and numerous boxes of loose paper that
needed to be filed were delivered to First Preston to reconcile. It appeared the former contractor
had six case files for each property. We worked with a File Transfer Protocol (FTP) report that
was provided by HUD, which was an extraction of the First Preston assigned properties
contained in HUD’s SAMS system, requiring the manual removal of duplicate entries. This
report provided limited information for reconciliation purposes.
Aged Inventory
First Preston continues to reduce the quantity of assets that remain in inventory over six months.
In September 1999, the number of properties in inventory over six months, according to HUD’s
MEAP report (SAMS Report MEAPSS00), was 4,219, or 44% of HUD-owned inventory.
Today, there are less than 3,500 properties that have been held by HUD more than six months.
This represents a reduction of over 22%, under the constraint of the requirement for higher
acceptable bid thresholds and without the use of marketing incentives that were typical prior to
privatization. The statements made in your report referring to the 12-month inventory will be
addressed on pages 6 - 8 of this response.
Philadelphia Region
Aging of Inventory
6 Plus Months
5,250
5,000
4,750
4,500
4,250
4,000
3,750
3,500
3,250
3,000
Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00
(Information provided by HUD MEAPSS01 report)
Title Evidence
The other M&M contractors opened their offices and began processing title evidence they had
just received from the Mortgagees. First Preston’s Philadelphia region inherited over 5,000 title
evidences from the previous contractor that had not been approved or rejected. As you can
imagine, reconciling these along with the current flow of new title evidence was a monumental
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task. The OIG’s report should take this into consideration when determining whether or not we
are performing the review process within 10 calendar days of receipt.
Customer Dissatisfaction
The lack of production during the eight months prior to our contract left a negative impact on the
communities involved in the HUD marketing program. For these months, brokers, sales agents,
closing attorneys, etc., had witnessed a tremendous drop in the number of available properties.
This meant several disgruntled members of the industry had to be courted back to the program by
First Preston’s staff. The number of customer complaints at the onset of this contract was
overwhelming. Ten thousand (10,000) calls per week were fielded by our customer service
representatives. Much of our time and emphasis was dedicated to this endeavor.
This chart illustrates the number of properties processed through the system, therefore, the
number of cases the industry experienced relative to sales, closings, title policies, etc.
Contractor Takeover Total Sales Ending Total Time
Inventory Inventory Inventory
Managed
Previous 5,669 < 1,500 9,854 8 months
Contractor
First Preston 9,854 > 12,000 8,442 10 months
First Preston Successes
Inventory Reduction
Prior to our contract in September 1999, HUD’s inventory for the Philadelphia 3 area was 9,854.
As of July 2000, HUD’s inventory for this same region was 8,332. This represents a 15%
reduction in the total number of properties held in inventory since the start of our involvement in
this region. This significant decrease is due to First Preston’s overall plan of action within the
scope of the contract and HUD’s regulations, and our efforts of hiring and training a sufficient
number of real estate industry professionals dedicated to the success of this privatized marketing
and management concept.
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Philadelphia Region Inventory
12,000
11,000
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00
(Information provided by HUD MEAPSS01 report)
Reduced Turnover Rate – Returns $18.4 Million to HUD Annually
One of the major factors leading up to such a dramatic reduction of inventory can be found in the
fact that First Preston successfully lowered the turnover rate of properties by 18%. We compared
the turnover rate experienced by HUD prior to the M&M program, since the turnover rate during
the time of our predecessor was skewed heavily due to the lack of closings. A reduction of this
size represents a savings to the government of $18.4 million dollars per year, or $92.4 million
over the life of our contract. We calculate this savings by multiplying current inventory by the
turnover rate reduction and holding per diem cost, then we annualize this figure (8,442 X 46 days
X $28/day X 1.7 periods/year = $18,484,603). [Note: The $28 per day figure is HUD’s annually
calculated and reported per diem holding cost per property.]
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Turnover Rate
Months from Acquisition Date to Reconciliation
HUD Previous Contractor First Preston
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-
99 99 99 99 99 99 99 99 99 99 99 00 00 00 00 00 00 00
(Information provided by HUD MEAPSS01 report)
Processing Time
According to HUD’s MEAP report, processing times were reduced from 9.09 to 2.13 months
when comparing the period prior to First Preston’s takeover with our current results. This
represents the number of days it takes from acquiring an asset to listing, which represents a 77%
greater success rate.
Processing Rate
Months from Acquisition Date to Original Listing Date
Previous Contractor First Preston
10
9
8
7
6
5
4
3
2
1
0
Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-
99 99 99 99 99 99 99 99 99 99 99 00 00 00 00 00 00 00
(Information provided by HUD MEAPSS01 report)
Higher List Prices – Returns $83.3 Million to HUD
In monitoring First Preston’s progress, we also measure sales proceeds in relationship to past
performance. We are currently experiencing a 14% increase in average sales price over the sales
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price experienced prior to the M&M contracts. This achievement resulted in an increased net to
HUD of 16%, and has returned over 12,000 homes to private homeownership. First Preston’s
success at selling this inventory has returned $83.3 million in revenue to the FHA Fund over the
amount realized prior to the program.
Philadelphia Region List Price History
63,000
57,500
52,000
46,500
41,000
35,500
30,000
HUD Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00
(Information provided by HUD’s SAMS helpdesk)
Findings
Finding 1: Number of Properties in Inventory for 12 Months or Longer has Increased
Properties 12 months and over have increased by 61 percent
For the purpose of reporting on First Preston performance, we determine this finding to be
deceptive and misleading. Page 2 of the auditor’s report references an industry standard of 2 to 3
percent according to Andersen Consulting Industry Benchmarking and Best Practices Report,
which is inapplicable to HUD’s foreclosures by comparison. Although HUD’s reporting figures
will substantiate the percentage quoted by the OIG, your report fails to expand on reasons. The
following bullets illustrate reasons for the number of cases exceeding 12 months in inventory, all
of which are beyond the control of First Preston:
A. At the time of the audit over 800 properties required Lead-Based Paint abatement in the city
of Philadelphia. HUD, not First Preston, controls the process of abatement. Currently, First
Preston is acquiring and selling these properties at a much faster pace than HUD is capable of
locating subcontractors to perform the abatement causing this inventory to increase substantially.
B. Over 500 bad cases were in Step 3 Held-Off-Market. These cases have been in HUD’s
inventory for well over a year and do not represent a cost to the government, although per diem
charges are allocated to these case numbers.
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C. Approximately 100 aged properties were held off market for purchase by the city of
Buffalo.
D. The number of properties in inventory over 12 months doubled from the time the
predecessor’s contract ended and our contract began. In other words, if the IG had performed
this audit on the first day of our contract, the finding would have read: “The number of properties
held in the inventory longer than 12 months has increased by 83%.”
E. Further price reductions beyond the scope of our contract require GTR approval. None of
the cases marketed longer than 135 days were granted a further price reduction until February,
2000, when we received a directive from HUD Headquarters in Washington D.C.
Your letter states “In our opinion, this occurred because First Preston has not placed enough
emphasis on the sale of properties in the inventory for long periods of time.” We totally disagree
with this opinion, due to the fact that HUD has stipulated how properties are marketed during
subsequent listing periods and First Preston must follow the thresholds set forth in our contract.
Furthermore, First Preston has conducted over one hundred training seminars throughout the
country, with attendances in excess of 60,000 brokers. No other M&M contractor can match this
marketing and training effort. These seminars were heavily concentrated in the Philadelphia 3
Region during the first few months of our contract.
Steady increase in the percent of properties 12 months and older
Clearly, when First Preston took over management of the Philadelphia 3 region, cases exceeding
12 months in inventory were growing at a rate of 100-200 properties per month, with exception
of the first month of our contract when these cases grew by 522. Today, this same inventory is
decreasing at a rate of 100-200 properties per month. So, in fact, First Preston is decreasing the
number of marketable properties that have been in inventory for 12 months or longer, as the
following graph illustrates.
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Philadelphia Region
Aging of Inventory
12 Plus Months
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00
(Information provided by HUD MEAPSS01 report)
The Andersen Consulting Industry Benchmarking and Best Practices Report states that the real
estate industry standard of aged inventory greater than 12 months is 2 to 3 percent, but does not
take into consideration bad cases, lead-based paint abatement, lack of approval for price
reductions, and a starting inventory where 12 percent already exceeded 12 months since
acquisition. Therefore, comparisons of First Preston’s performance to the Andersen Consulting
Industry Benchmarking and Best Practices Report are misleading.
Older properties have a high hold cost and greater probability of deterioration
First Preston agrees with this statement, however, the 500 bad cases have no direct costs and
HUD controls the lead-based paint abatement costs and holding time. As demonstrated in the
previous paragraph, First Preston has been successful in reducing the twelve-month inventory
with the exception of the bad cases and the lead paint abatement properties. The length of hold
time related to these older properties is a concern of First Preston and a considerable financial
burden to our firm under this contract. The costs of maintaining these properties for extended
periods are borne by First Preston. This frustration is evidenced by 425 properties in Step 8
awaiting abatement measures of which First Preston has no control.
Prior to the M&M contracts, HUD provided an addendum to the purchasers of properties
requiring lead-based paint abatement in the city of Philadelphia. This addendum allowed the
purchaser to place $1,500 in escrow, close on the property in the normal closing period, and then
abate the paint prior to move-in. When HUD changed this program, even though the courts ruled
it was allowed, the increased costs of holding these properties began. We have respectfully
requested that HUD evaluate this abatement process and take immediate corrective action to
reverse the backlog of inventory awaiting service.
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Revenue loss has increased significantly
In the twelve months prior to the M&M program (for the period ending March 1999), HUD’s
average sales price was $49,151, with an average net proceeds of $43,006. Today, under First
Preston’s management the twelve-month average through July 2000, for HUD’s average sales
price is $56,197 with a net of $49,948. Where the OIG audit reports a revenue loss of $9.5
million based on the percentage of sales price compared to appraised value, First Preston can
argue a real increase in revenue of over $83 million.
56,197
60,000
49,151 49,948
50,000 43,006
40,000
HUD (12 Months Period Ending
March 1999)
30,000
First Preston (12 Months Period
20,000 Ending July 2000)
10,000
-
Average Sales Price Average Net to HUD
(Information provided by HUD’s SAMS helpdesk)
The Good Neighbor Program may have caused some of the increase in revenue loss
We agree with the auditors that the Good Neighbor Program has caused an increase in revenue
loss. However, we would like to expand by stating HUD’s special interest sales programs
including Officer Next Door, Teacher Next Door, Good Neighbor Program and Non-Profit sales,
make it difficult to attain the stated goal of selling properties at an average of 98 percent of
appraised value. These special interest programs and the 98% laudable-goal are mutually
inconsistent, or otherwise self-contradictory, and are issues concerning HUD policy that are
inappropriate measures of First Preston’s performance.
Another major cause that skews the measurement of our performance relative to the 98% goal, is
the ITMG legacy inventory which hadn’t moved significantly for eight months. Although, the
time ITMG had the contract can certainly be considered “under the M&M program,” it should
not reflect as poor performance on the part of First Preston.
Recommendations
We recommend that you:
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1A. Work with First Preston to increase the emphasis on the sale of older properties and/or
develop incentives to encourage the sale of older properties.
1B. Evaluate HUD programs such as the Good Neighbor Program to determine their impact
on the goal of selling properties at an average of 98 percent of appraised value. Based on that
evaluation make adjustments to either the goal or the programs so they are not in conflict.
Contractor response:
1A. First Preston welcomes HUD’s approval of the use of sales incentives such as those used
by HUD prior to the M&M program. Also, we respectfully request HUD to remove all bad cases
and revert to the lead-based paint escrow program it previously used.
1B. We do not interpret this goal as a contract requirement, so First Preston should not be
held to this performance criteria. Contradictory goals should not be the vehicle to penalize the
contractor, therefore, we request the evaluation criteria be changed to reflect actual performance,
i.e., increases in net sales proceeds to HUD.
Finding 2: Properties Not Adequately Maintained or Safeguarded
Numerous deficiencies noted during OIG inspections
The OIG inspections and the HOC’s monthly assessments do not take into consideration inherent
risk verses contractor compliance. First Preston remains concerned, and considers there to be
serious conflicts of interest in the fact that several of HUD’s Special Property Inspectors are
disqualified M&M contract bidders and are operating under terms that are inconsistent with our
contract. The fact that the contracts between HUD’s inspectors and First Preston are mutually
inconsistent sets out a false measurement of our performance. We should not be rated
“unacceptable” based on standards we are not required to meet.
17 out of the 22 categories in the audit report suggest the way a property looks, or the inherent
risk of vandalism or traffic in and out of the properties. If a vandal breaks a window, First
Preston is required to repair the window within 24 hours of discovery. However, when the OIG
or HUD’s Special Property Inspectors find the broken window, First Preston receives an
unacceptable performance rating. Due to the large number of properties in the Philadelphia
region located in blighted urban neighborhoods, and based on the parameters HUD uses when
inspecting, our performance will never be addressed appropriately. This audit and other’s
performed on HUD’s behalf should reflect First Preston’s performance in accordance with the
contract, and should not equate our standards to that of the inherent risk of vandals, etc. Section
C of the contract requires routine inspections and the repair of situations that represent safety
hazards within 24 hours. Our inability to stop vandalism is not a failure under this contract, and
we continue routine inspections and the issuing of work orders to correct these issues as required.
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Furthermore, First Preston is committed to the communities that HUD serves and is receptive to
modifications or revisions to our contract that would allow us to better serve these communities.
Properties were in poor condition and contained health and safety hazards
Again, the OIG inspections revealed the ongoing inherent risk of vandalism, etc. The shotgun,
decaying rat and window lying on the ground are merely conditions that existed at the time of the
OIG inspection, and were not necessarily present upon our last inspection. In fact, First Preston
re-inspected and never found the shotgun shown in the OIG’s pictures attached to the report.
Simply, someone used the space under a vacant house as a temporary hiding place for a weapon.
In reference to the OIG’s statement: “Moreover, some properties have been broken into and
vandalized, were laden with debris, and/or were in need of vital repair” in no way is a direct
reflection of our performance under this contract. Again, we are required to cure some of these
type issues upon discovery and this contract does not intend nor require a cosmetic repair
program. Also, it should be noted that the OIG chose properties in two of the most vandal-ridden
areas of our region.
The first two properties in the Appendix indicate stripped siding, boarded windows and a broken
window. We agree that these conditions adversely impact surrounding neighborhoods.
However, when we discover broken windows, we repair by boarding or replacing within 24
hours. The mass of wires and ceiling damage reflect conditions of the properties that are
unsightly, yet in and of themselves do not represent safety hazards, and under our contract
require no action.
First Preston and the M&M contractor cannot be held accountable for vandalism in high crime
areas. However, we are accountable to preserve and protect the properties in the communities
that we serve. It is to that end, we have expanded all oversight and have updated our quality
control plan.
Differences were noted between OIG and subcontractor inspections
The rationale that First Preston’s inspector’s inspections differ so widely from those of the OIG
is likely for two reasons. First, our inspector indicates a snapshot of a property at the time of the
inspection. If the windows are secure, no debris is present, a prior roof leak is inactive and
vandalism has not occurred, the inspection will reflect such. Second, our inspectors do not look
at repairs needed the way the OIG possibly would. We know that we will not replace siding, un-
board windows, paint and carpet, etc., therefore, our inspectors will likely not write these items
up on routine inspections. Mainly, routine inspections will denote attention needed due to lack
of maintenance, vandalism, acts of God, broker/buyer traffic, etc. Again, the OIG inspected
properties in seriously low-value areas that endure heavily vandalism. In fact, much of the
expense for maintenance over our entire portfolio is as a direct result of vandalism.
Subcontractor inspections appear to be incomplete
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The OIG mentions subcontractor inspections appear incomplete relative to detecting property
deficiencies such as: defective paint; water damage; vandalism; needed repairs; and, inadequate
security. First Preston has spent considerable time over the last three to four months re-training
our inspectors to conform to all requirements of our contract. Our inspectors are trained to
understand that defective paint is scraping, pealing or chipping paint on the exterior or interior of
properties built prior to 1978. Furthermore, First Preston is only required to remove this
defective paint prior to the closing of the property. Without examples of these cases, it is
difficult to provide a comprehensive response. With respect to water damage, if we have cured
the cause it would not be reported again due to the likelihood of duplicated efforts. Vandalism,
needed repairs and inadequate security suggest a condition present at the time of the OIG
inspections that might not have been present upon our last inspection. Again, without examples
of these cases, it is difficult to provide a reasonable response.
In an ongoing effort to better train our inspectors and improve property conditions, we instituted
a weekly regional conference call between the Regional Property Director and all Property
Management Centers. The purpose of this call is to highlight deficiencies denoted on our own
property condition inspections and to discuss the upcoming properties to be listed. Also, in July
2000, we conducted a region-wide property maintenance meeting with all of our Property
Management Centers attending, to further train and stress the requirements of the contract. All
forms for inspection were reiterated and the Regional Property Director further explained to all
Property Managers the requirements of each property inspection.
Routine inspections are performed per the contract and reviewed by the appropriate staff daily.
Data is input into the database as a measure of accountability. Work Orders are sent out for any
corrective action as determined in the routine inspections.
An additional level of quality control has been developed by our Corporate Office. A corporate
oversight division has been created to review contract compliance and procedures. The staff is
geographically located to cover all areas and perform property inspections on 10% of the
inventory, selected randomly as required by our Quality Control Plan. Findings are submitted to
corporate oversight coordinators, who are responsible to document and request written responses
from the field offices. See the attached oversight chart.
First Preston has not performed requirements concerning lead based paint timely
The OIG is obviously referring to the handling of the Philadelphia properties requiring lead-
based paint abatement at the onset of this contract. We regret that our actions within the first few
weeks of contract commencement were less than we would have desired. In order to
satisfactorily perform in tandem with HUD’s newly implemented procedures for procurement
and abatement, First Preston formed a team to focus specifically on the process. Our issues were
further complicated within the first sixty days of the contract when a lock we were using required
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a “thinner” master key than those being used prior. We have explained and corrected this issue
with HUD and the City earlier this year, and since then we have not received any complaints.
Although our team is current with all procedures in the process that we control, and lockouts do
not present a problem, we are still concerned that HUD’s abatement contractors cannot keep pace
with the acquisitions and sales of First Preston on these properties. We have requested the
HOC to readdress their decision on how to process lead abatement and anxiously await their
decision.
Contractor actions required
First Preston internally performs property inspections and file reviews every 60 days at the
Property Management Centers. These are random and began in the second quarter of this year.
As a result of these audits, we have redistributed portfolios and restructured local offices.
We created a corporate oversight division to further review First Preston’s portfolio for
compliance, timeliness and attention to maintenance issues. This adds an additional 10% of the
properties reviewed. Vendors and inspectors will be held accountable for lack of performance.
Any subcontractors not performing to our standards will be placed on probation and closely
monitored. During such time they are subject to termination. Inspectors are well trained and will
continue to receive additional training throughout the year.
An additional level of oversight is provided by the BLB. BLB’s perform an inspection within 24
hours of listing. Any property maintenance issues are sent to the Property Director and Contract
Manager for immediate processing. This will reduce the likelihood that any properties listed
have been vandalized.
Recommendations
We recommend that you:
A. Establish procedures that: ensure all significant property deficiencies are identified; monitor
the accuracy of subcontractor property inspections; and, provide assurance that the needed repairs
are completed promptly.
Contractor response:
We will work with HUD on these recommendations and urge the HOC to readdress its
requirement to rate our performance unacceptable when its subcontractor denotes the risks
inherent with owning properties in highly vandalized neighborhoods. Our performance should
be rated as a strict compliance with our contract. We are prepared to honor the required
inspections, maintenance and repairs of our contract, and are happy to do more if the Statement
of Work and contract is modified. Placing the level of expectations of the OIG or Special
Property Inspectors on First Preston, without the consideration of inherent risks involved, is
entirely unreasonable nor contractually required.
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We recommend that you:
B. Adopt controls, applicable to the requirements of Exhibit 15 of the M&M contract, ensuring
lead-based paint inspectors access to applicable properties, and that minimize the time elapsed
from date of property acquisition to the date initial lead-based paint inspections are requested.
Contractor response:
Due to the delay in time from when this finding was an issue, we believe HUD would agree that
we are acting in accordance with Exhibit 15 and the problems we experienced early on in the
contract no longer exists.
Finding 3: First Preston is Not Always Performing in Accordance with the Contract
Provisions
This section references that First Preston (a) charged for ineligible costs, (b) has not performed
its tasks in a timely manner, (c) has not always included the required documentation in the
appropriate files, and (d) has not reported all problems to the Government Technical
Representative (GTR). We will fashion our response in the same order as noted above.
Ineligible pass-through costs
Given that First Preston took over this contract in a contingent position within twenty-one (21)
days, we were working without the benefit of a master list other than the FTP and did not have
Internet connectivity. To date, First Preston was never supplied a comprehensive takeover
inventory list. From September 24, 1999 until October 10, 1999, we only received FTP reports
of the properties. The properties were assigned to our field property management offices off of
the FTP report that during 1999 did not include the acquisition date. Further the connectivity of
the field offices took about sixty days (due to delay in getting lines from the phone companies) to
complete in order to fully automate those offices.
With the inability to obtain SAMS information in the initial takeover and the volume of
properties that were acquired without services, it was not possible to delineate clearly between
the takeover properties and newly assigned cases. This caused calendar issues and
reimbursements that were inadvertently submitted and received by First Preston. Our contract
compliance accounting team conducted a quality control review of all pass-through items in early
March 2000 and identified $238,959.00 that was refunded to HUD.
On March 17, 2000, First Preston contacted the Philadelphia HOC Director to discuss the
findings our quality control group had found in batches of invoices that had been processed. At
this time, we requested that he direct his staff to return all batches of invoices in his office back
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to First Preston for an additional review. This telephone conversation was followed by an email
confirming the conversation.
Additionally, telephone messages were left with the GTR’s and the Deputy Director seeking
return of the bills and a meeting to discuss our findings. The HOC staff did not respond to
multiple requests for meetings regarding these issues. On March 23, 2000, First Preston
submitted six checks totaling $238,959.00 to the HUD lockbox with the required SAMS 1100
detailing the case numbers to apply payments. These checks cleared First Preston’s bank on
March 27, 2000.
On March 31, 2000, Mr. Michael Perretta, then acting REO Director of the Philadelphia HOC,
sent a letter requesting reimbursement of $212,436.63. This letter did not include any detail of
the amount. On April 13, 2000, First Preston responded to Mr. Perretta in writing detailing the
reimbursement that had already been submitted and cleared prior to the date of his letter. We
denoted our attempts to establish a meeting to discuss these issues and again no meeting was
established. We also advised Mr. Perretta that First Preston had submitted in excess of the
amount requested and since we did not have a detail that we would be happy to discuss any
variances with our submission. Shortly thereafter, Mr. Perretta left HUD.
In conclusion, First Preston maintains that this is a false finding. We have enclosed copies of the
cancelled checks for the reimbursements that will verify HUD has been in receipt of the funds
since March 27, 2000. Further, additional controls have been in place since the quality control
audit in March to ensure that requests for reimbursements from HUD are in compliance.
Project files did not contain invoices or GTR approvals
This finding does not represent a review of all file documents. This review was performed in a
field office, and a field office file does not represent a complete case file. These files are
integrated into the case file upon closing. The case files are maintained in the Blue Bell, PA
office in accordance with our GTR approved Quality Control Plan. Further, in an effort to
eliminate the risk of duplicate payments, all original invoices with GTR approval attached is sent
to the Corporate Accounting Department in Addison, TX. These invoices are attached to a check
copy maintained in the corporate office and a copy is attached to the HUD transmittal that is
submitted for reimbursement. The review did not occur at the appropriate location to ensure that
all documentation was included such as work orders and GTR approvals.
Possible duplicate charges
We are in receipt of the list of reimbursements under scrutiny totaling $32,549.45 from the OIG
staff. The following details the reconciliation of those charges:
Items reimbursed to HUD from 3/23/00 to 8/21/00 $20,196.95
Invoices that are not duplicates $12,352.50
Total amount detailed $32,549.45
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A number of the items listed as possible duplicate charges are for services with similar dollar
amounts or with similar post codes. A review of the individual invoices identifies separate
services and/or service dates. Additionally, a large number of the items noted were for lock
changes. At the takeover of this contract, First Preston acquired all the approved locking
mechanisms available from the manufacturer. Since a high percentage of the properties had not
been secured and sufficient lock stock was not available, First Preston had to put temporary locks
on inventory to secure it. Within the initial thirty days, all temporary locks were converted to
permanent locks in order to allow maximum access to the brokerage community. This was an
inherent risk due to the manner in which this contract was awarded.
Our Contract Compliance Accounting team reviews the transmittals for compliance with the
contract, documentation in accordance with those requirements and compares the detail to
information in SAMS to ensure that invoices are not submitted more than once. This team has
been instrumental in identifying items that need reimbursement to HUD out of the original
takeover submissions. Additionally, this team reviews all transmittals prior to submission to
HUD to ensure compliance. This team was established in early 2000 as a result of the increased
volume of transmittals prepared by First Preston due to the Philadelphia 3 contract.
First Preston did not meet contract time thresholds
At the time of the takeover by First Preston, the inventory had grown from 5,669 properties in
March 1999, to 9,854 properties. This eight-month period under the previous contractor had
caused the processing time to increase to a high of 9.09 months. Currently, the processing rate is
at 2.13 months, which is a 77% decrease in the time from acquisition date to original listing.
Further, First Preston has decreased the turnover rate by 18% compared to HUD’s rate at the start
of the M&M program. While this review may identify instances where the timeframes were not
met, the overall performance of First Preston indicates substantial compliance with these
requirements that has significantly reduced holding costs. Thus, there has been a greater
monetary return to the insurance fund.
Inspections were not performed within 24 hours
The Contract Manager along with the Property Director receives a log sheet of all initial
assignments. Weekly the Property Management Centers are to verify that all inspections are
performed within 24 hours of assignment. This database is used to verify that the inspection was
completed to First Preston’s and HUD’s specifications. First Preston is also in the process of
expanding and upgrading our internal reporting system to provide a more detailed tracking
system.
An additional quality control checkpoint has been implemented by First Preston’s Corporate
Office. A corporate oversight division has been created to review compliance and contract
procedures. The staff is geographically located to cover all areas and perform property
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inspections on 10% of the inventory, selected randomly as required by the contract. Findings are
submitted to corporate oversight coordinators who are responsible to document and require
written responses from the field offices. See attached organizational chart.
Appraisals were not performed within 10 business days
First Preston has expanded our roster of appraisers and retained new FHA appraisers who
understand the requirements of appraisal reform. Simultaneously with the takeover of this
inventory came the implementation of the new requirements of appraisal reform that on a short-
term basis created confusion among FHA appraisers. Appraisers were required to obtain
certifications and the FHA roster was continuously changing. Through education and
certification we have aligned ourselves with competent appraisers that are capable of meeting the
required timeframes. This improvement is already evidenced by the substantial reduction of Step
1’s over the last several months. Currently, our Step 1 portfolio represents less than three weeks
of inventory.
Disposition programs were not approved within 3 business days
First Preston, with the knowledge of the HOC, is listing properties on a weekly basis. This
removes the need to perform the disposition as required by the HUD handbook. Under the
guidelines of the handbook, HUD previously listed properties more often. However, from a
marketing standpoint, the weekly listing program is more user friendly to the public and the
brokerage community which is served by a routine listing day. This routine, predictable day
fosters greater competition in bidding.
Title evidence was not approved timely
At the takeover of the contract by First Preston, there were over 5,000 cases with titles that were
not approved. Currently, First Preston is current on approvals of all title evidence received for
new acquisitions and have obtained over 69% of the initial 5,000 outstanding titles evidence.
First Preston also has 344 cases that are sold and reconciled without title approval. We have sent
multiple requests to lenders requesting the title packages. In cases where title has transferred to
new owners, it is very difficult for lenders to go back and obtain title evidence. We have been
working with the GTR on a resolution on the remaining outstanding title and the action which
can be taken to obtain the evidence.
Reconciliation’s were not adequately documented
The reconciliation of the sales information is documented within the HUD-1 Checklist as
discussed below. In addition, the closing staff reviews the unmatched sales proceeds and
unreconciled sales closings daily for items that need attention. We are diligent in contacting
closing agents for necessary items and preparing SAMS transmittals to correct any errors or
payments required. The closing staff sends daily emails to the GTR (or their designee) on any
transactions that cannot be corrected in-house or to identify any closing agent issues.
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Auditee Comments
Lack of evidence that Settlement Statement form HUD-1 was reviewed
In an effort to address the concerns that our files lacked evidence on the review of the HUD-1,
First Preston has established a HUD-1 Checklist which details the information which is reviewed
and is signed by the appropriate personnel. This checklist details thirty-four (34) items that are
reviewed on each HUD-1 statement in accordance with the contract. The use of this checklist
has been in place for the past several months.
None of the contracts of HUD’s closing agents in Philadelphia area 3 require pre-closing HUD-
1’s be sent to the M&M contractor. First Preston recently met with the Philadelphia HOC
representatives asking them to modify the closing agent contract to require pre-closing packages.
Effective October 1, 2000, the Philadelphia HOC Contracting office will require the closing
agent to submit a pre-closing HUD-1 to the M&M Contractor. This will provide First Preston
the ability to correct problems on the HUD-1 prior to closing. Additionally, we will require our
Contract Managers to provide a weekly notification letter to the GTR listing all cases that close
without First Preston’s review of the pre-closing HUD-1. This letter will detail the case number,
date of closing and the closing agent. We anticipate that the GTR will address these concerns
with the appropriate closing agent.
Wire transfer receipts were missing from the files
Prior to the M&M contract, acknowledgement of wire transfers were submitted by many of the
closing agents to the HOC in response to this requirement. Evidence of the Step 10 sweep
confirmed the validity of the wire transfer acknowledgement. Our closing staff has notified the
closing agents that the acknowledgments are not acceptable and wire transfer receipts must be
submitted. We will notify our GTR daily of non-compliance by the closing agent.
First Preston is not adequately monitoring Held Off Market (HOM) properties
At the takeover of the contract, there were over 800 properties in Step 3. A large number of
these properties did not have case files. First Preston has worked diligently to resolve these
issues. During meetings with the HOC in October and November, First Preston was advised to
place these assets in a Step 3 and the HOC would review and assist us in resolving. In January
2000, a ninety-day quality control audit was performed by First Preston. This audit was provided
to the OIG staff. This report detailed the status of the Step 3 properties by HOM code and
requested assistance from the HOC. Over the course of the contract, some of the original Step
3’s have been confirmed as HUD properties and moved to listing. The vast majority of cases are
still pending HUD’s removal. To assist HUD with this process, First Preston has hired a
Troubled Asset Coordinator who is working with municipalities and taxing authorities to
determine ownership. Although, this is beyond the scope of our contract, we find this imperative
to resolve the final disposition of bad cases. First Preston can only advise of the status and
cannot remove these cases. This action must be performed by the HOC.
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Auditee Comments
Files do not contain evidence of form HUD-27011 review
First Preston reviews each 27011A it receives from Mortgagees to ensure accurate information is
input into SAMS. We do not have a formal form for this review, but check marks on the form
and precise input will set new cases up in SAMS, at which point we print the CMC1 screen and
various screens from SFIS. We verify the address, by cross checking the 27011A with the
attached title policy or deed. Legal descriptions on these two documents will inform us if a
condo unit must be added to the street address.
We do have a comprehensive check list for the review of the 27011B,C&D forms, and perform
this review on all properties prior to conducting a final close-out of a file. Any discrepancy in
reporting by the Mortgagee is forwarded to our GTR with proper documentation. This is
evidenced whereby thousands of the completed review check list can be found in Step 10 files
located in our off-site storage. We recently heard from the HOC that Mortgagees were offset
over $10,000 due to improper claims concerning review of these B,C&D forms in a single
month.
First Preston is not adequately monitoring title evidence receipt
First Preston’s title department monitors the title evidence due report from SAMS on a daily
basis. Letters are drafted and mailed on evidence that is overdue. In some instances, repeated
efforts to obtain evidence have failed and First Preston is currently working with the HOC to
address the issues of Step 10’s without title approval. See title evidence not approved timely
paragraph above.
First Preston is not formally notifying the GTR of mortgagee neglect
First Preston has invested significantly in an upgrade to our internal reporting systems and will
include a Mortgagee Neglect report that can be provided by lender, HOC area or case number.
This report will allow our firm in conjunction with the GTR’s to identify the serious offending
lenders and take appropriate corrective action. The completion and implementation of this
upgrade is anticipated by the calendar year-end of 2000. In the interim, our offices will continue
to submit mortgagee neglect reports weekly via an Excel spreadsheet to the corporate office
where the information is downloaded to an Access database for comparative purposes.
Upon receipt of a new property, our staff is assigning the property to the appropriate property
management firm for inspection and securing. Along with the initial assignment, we provide the
CMC1 screen and any Property Preservation and Protection (P&P) requests (and approvals) for
this asset. The property management inspector must provide an initial inspection and confirm
that all approved P&P work is complete and acceptable. If mortgagee neglect is identified upon
the initial inspection, our Acquisition staff is contacting the lender for copies of their inspections
for comparative purposes. This contact is documented in writing (fax, letter or email) and placed
in the file. Our regional staff will continue to utilize the B, C and D checklist to identify any
claims made by lenders that are not acceptable. While this checklist has been used for many
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Auditee Comments
months, we have not identified this as an additional Quality Control checkpoint. This review
enables the staff to deny any items that have not been completed.
First Preston provided updated inspector and property manager training in August 2000 regarding
the property preservation and protection guidelines. This training will reinforce previous
sessions and will solely focus on the mortgagee neglect reporting.
Initial Inspection did not identify apparent mortgagee neglect
See the response above regarding mortgagee neglect reporting.
First Preston is not notifying GTR of Closing Agent problems
First Preston’s closing staff reviews the unmatched sales proceeds and unreconciled sales
closings daily for items that need attention. We are diligent in contacting closing agents for
necessary items and preparing SAMS transmittals to correct any errors or payments required.
The closing staff sends daily emails to the GTR (or their designee) on any transactions that
cannot be corrected in-house or to identify any closing agent issues. Additionally, the corporate
accounting staff prepares a weekly report on both unmatched sales proceeds and unreconciled
sales closings for the Contract Administrator. The accounting staff details the efforts of both
accounting and the closing staff and identifies any action needed by the Contract Administrator.
These reviews have occurred throughout the term of the contract and will continue as established.
Also, First Preston has met with HUD staff on numerous occasions to report closing agent
problems. A Special Report, containing our in-house 90-day Quality Assurance Audit (dated
January 10, 2000), and detailing serious issues with two of HUD’s closing agents, was delivered
to HUD and the OIG. One of the closing agents, after our reporting of information to the HOC,
was terminated by HUD. The other, will not have their present contract renewed.
Effective October 1, 2000, the Philadelphia HOC Contracting office will require the closing
agent to submit a pre-closing HUD-1 to the M&M Contractor. This will provide First Preston
the ability to correct problems on the HUD-1 prior to closing. Additionally, we will require our
Contract Managers to provide a weekly notification letter to the GTR listing all cases that close
without First Preston’s review of the pre-closing HUD-1. This letter will detail the case number,
date of closing and the closing agent. We anticipate that the GTR will address these concerns
with the appropriate closing agent.
In closing, First Preston has worked diligently and tirelessly to accommodate any and all
concerns expressed through monthly HOC assessments, Cox reviews, and OIG audits. In each
case, First Preston has responded timely and proactively to reports and recommendations.
Today, our critical paths (SAMS Report “Cases Exceeding Time in Current Step”) in each region
are at an all-time high success rate. Our inventory continues to reduce. Our sales prices remain
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Auditee Comments
stronger than months preceding the M&M contracts, despite new discounted programs of
OND/TND and Dollar Homes. Our processes in terms of turnover rate, processing rate, and
closing rate have never been stronger and in many cases, are superior to those under previous
HUD management. We have employed consultants with the highest name recognition in the
industry to upgrade asset-tracking systems and expand accounting systems, specifically tailored
to HUD requirements. We have incorporated an oversight team of five oversight managers
supervising seventeen field inspectors that are in place and working diligently monitoring all
field maintenance. We have trained several thousand brokers in all six states. In short, First
Preston has never wavered from its passion for the success of this program or its commitment to
HUD and the communities it serves.
Again, we thank you for the opportunity to respond and please let me know if we can be of
further assistance.
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00-NY-229-1006 Page 60
Appendix C
Distribution
Chief Operating Officer, First Preston, Addison, Texas (2)
Deputy Secretary, SD, Room 10100
Chief of Staff, S, Room 10000
Special Assistant to the Deputy Secretary for Project Management, SD, Room 10100
Assistant Secretary for Administration, S, Room 10110
Assistant Secretary for Congressional & Intergovernmental Relations, J, Room 10120
Senior Advisor to the Secretary, Office of Public Affairs, S, Room 10132
Director of Scheduling and Advance, AL, Room 10158
Counselor to the Secretary, S, Room 10234
Deputy Chief of Staff, S, Room 10266
Deputy Chief of Staff for Operations, S, Room 10226
Deputy Chief of Staff for Programs and Policy, S, Room 10226
Deputy Assistant Secretary for Public Affairs, W, Room 10222
Special Assistant for Inter-Faith Community Outreach, S, Room 10222
Executive Officer for Administrative Operations and Management, S, Room 10220
Senior Advisor to the Secretary for Pine Ridge Project, W, Room 10216
General Counsel, C, Room 10214
Director, Office of Federal Housing Enterprise Oversight, O, 9th Floor Mailroom
Assistant Secretary for Housing/Federal Housing Commissioner, H Room 9100
Office of Policy Development and Research, R, Room 8100
Assistant Secretary for Community Planning and Development, D, Room 7100
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108
Government National Mortgage Association, T, Room 6100
Assistant Secretary for Fair Housing & Equal Opportunity, E, Room 5100
Chief Procurement Officer, N, Room 5184
Deputy Secretary, SD, Room 10100
Assistant Secretary for Public and Indian Housing, P, Room 4100
Chief Information Officer, Q, Room 3152
(Acting) Office of Departmental Operations and Coordination, I, Room 2124
Chief Financial Officer, F, Room 2202
Office of Deputy General Counsel, CB, Room 10220
Director, Enforcement Center, V, 200 Portals Building, 1250 Maryland Avenue SW, Washington,
DC 20024
(Acting) Real Estate Assessment Center, X, 1280 Maryland Avenue, SW, Suite 800, Washington,
DC 20024
Director, Office of Multifamily Assistance Restructuring, Y, 4000 Portals Building, 1280 Maryland
Avenue SW, Washington, DC 20024
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Appendix C
Secretary’s Representative, New York/New Jersey, 2AS (2)
Director, HOC, Pennsylvania State Building, Pa (2)
Assistant General Counsel, New York/New Jersey, 2AC
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108 (2)
Deputy Chief Financial Officer for Finance, FF, Room 2202
Director, Office of Budget, FO, Room 3270
CFO, Mid-Atlantic Field Office, 3AFI (2)
Office of Single Family, HF (Attention: Special Projects Coordinator Officer,
Room 6232) (2)
Departmental Audit Liaison Officer, FM, Room 2206 (2)
Acquisitions Librarian, Library, AS, Room 8141
Steve Redburn, Chief
Office of Management and Budget
725 17th Street, NW Room 9226
New Executive Office Building
Washington, DC 20503
Deputy Staff Director
Counsel Subcommittee on Criminal Justice
Drug Policy & Human Resources
B373 Rayburn House Office Building
Washington, DC 20515
The Honorable Henry A. Waxman
Ranking Member
Committee on Governmental Reform
2204 Rayburn Building
House of Representatives
Washington, DC 20515-4305
The Honorable Joseph Lieberman
Ranking Member
Committee on Governmental Affairs
706 Hart Senate Office Building
United States Senate
Washington, DC 20510
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Appendix C
The Honorable Dan Burton
Chairman
Committee on Government Reform
2185 Rayburn Building
House of Representatives
Washington, DC 20515-6143
The Honorable Fred Thompson
Chairman
Committee on Governmental Affairs
340 Dirksen Senate Office Building
United States Senate
Washington, DC 20510-6250
Director, Housing & Community Development Issue Area,
United States General Accounting Office
441 G Street, NW, Room 2474
Washington, DC
(Attention: Judy England-Joseph)
Ms. Cindy Fogleman
Subcommittee on General Oversight & Investigations
O'Neill House Office Building, Room 212
Washington, DC 20515
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First Preston Foreclosure Specialists, Marketing and Management Contract, Blue Bell, Pennsylvania
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)