Audit Report
District Inspector General for Audit
Rocky Mountain District
Brothers Redevelopment, Inc.
Denver, Colorado
Review of Housing Activities
In FHA Single Family
Insurance Programs
2001-DE-1002
September 28, 2001
Department of Housing and Urban Development
District Office of Inspector General For Audit
633 17th Street, 14th Floor
Denver, CO 80202-3607
2001-DE-1002
Audit Report
District Inspector General for Audit
Rocky Mountain District
Report: 2001-DE-1002 Issued: September 28, 2001
TO: Ronald C. Bailey, Director, Denver Homeownership Center, 8AHH
FROM: Robert C. Gwin, District Inspector General for Audit, 8AGA
SUBJECT: Review of Housing Activities in FHA Single Family Insurance Programs
Brothers Redevelopment, Inc.
Denver, Colorado
We have completed a review of Brothers Redevelopment, Inc. (Brothers Redevelopment),
Denver, Colorado, of their housing activities in the Federal Housing Administration (FHA) Single
Family Insurance Programs. This review was done as part of a nationwide audit of nonprofit
organizations’ participation in the FHA Single Family Insurance Programs. The objective of our
review was to determine whether Brothers Redevelopment is legitimate and independent (not
under the influence, control or direction) of other parties and is passing on the benefits of
discounts received on the purchase of HUD homes to low- and moderate-income homebuyers.
This audit report contains one audit finding dealing with Brothers Redevelopment not carrying
out its housing activities in conformity with its Affordable Housing Program and HUD
requirements.
At the start of our site work, your staff also initiated a monitoring visit to review the FHA Single
Family Insurance Program activities at Brothers Redevelopment. Their review results parallel
ours.
Within 60 days please furnish to this office, for each recommendation contained in the finding in
this report, a status report on: (1) the corrective action, (2) the proposed corrective action and the
corrective date to be completed, or (3) why action is considered unnecessary. Also, please
furnish us copies of any correspondence or directives issued because of the audit.
We appreciate the courtesies and assistance extended by the management and staff of Brothers
Redevelopment and their related contract parties and the Denver Homeownership Center.
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Should you have any questions, please contact Ernest Kite, Assistant District Inspector General
for Audit, at (303) 672-5452.
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Executive Summary
We have completed a review of Brothers Redevelopment, Inc. (Brothers Redevelopment),
Denver, Colorado, of their housing activities in the Federal Housing Administration (FHA) Single
Family Insurance Programs. This review was done as part of a nationwide audit of nonprofit
organizations’ participation in the FHA Single Family Insurance Programs.
Brothers Redevelopment is a nonprofit organization that has been approved by HUD to
participate in the FHA Single Family Insurance Programs. Brothers Redevelopment was
authorized by HUD to carryout the program in conformity with its Affordable Housing Program.
Under this program, Brothers Redevelopment purchased HUD properties at a discount,
rehabilitated the structures as needed and resold the houses at market value to qualifying
homebuyers. Brothers Redevelopment did not pass on any benefits realized from the discounted
property purchases from HUD to the low- and moderate-income homebuyer as intended by HUD.
We found that Brothers Redevelopment was not carrying out its Affordable Housing Program in
conformity with HUD requirements. Brothers Redevelopment allowed an outside independent
Contract Developer to administer all phases of its Affordable Housing Program. The Contract
Developer operated the program to realize the maximum profit possible. The realized profits
were shared by Brothers Redevelopment, the Contract Developer and a conflict of interest
program lender. As a result, no discounts were passed on to the ultimate homebuyer as intended
by the program. Basically, Brothers Redevelopment served as a strawbuyer for a fee for the
purchase of HUD properties while the Contract Developer functioned as an investor.
Members of the Denver Homeownership Center initiated a site review of Brothers
Redevelopment’s program activities at the same time we began our site audit. The results of our
review parallel the findings of the Denver Homeownership Center.
Nonprofit organizations can participate in the FHA’s Single
Nonprofit entities can
Family Insurance Programs. HUD approves the nonprofit
participate in FHA’s
organizations and authorizes them to carry out their Affordable
Single Family Insurance
Housing Program. Under HUD’s program, the nonprofits are
Programs allowed to purchase HUD properties at a discount ranging
primarily from 10 to 30 percent.
The nonprofits rehabilitate the discounted properties and then are
to sell the properties to low- and moderate-income homebuyers.
The primary intent of the HUD program is to pass on the
discounts from the purchase of HUD discounted properties to the
purchasing homebuyer. HUD has issued various HUD
mortgagee letters and notices setting out the parameters for
implementing the HUD programs by the nonprofit organizations.
The objectives of our audit were to determine whether Brothers
Audit objectives Redevelopment is:
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• Legitimate and independent (not under the influence,
control or direction) of other parties; and
• Passing on the benefits of discounts received on the
purchase of HUD homes to low- and moderate-income
homebuyers.
Brothers Redevelopment did not administer or carryout its
Affordable Housing Affordable Housing Program as approved by HUD or in
Program not carried out conformity with HUD requirements. Furthermore, intended
in accordance with savings realized from the discount purchase of properties from
HUD requirements HUD were not passed on to the low- and moderate-income
homebuyer.
Specifically, Brothers Redevelopment allowed an independent
Contract Developer to administer and control all aspects of its
Affordable Housing Program with very limited participation by
Brothers Redevelopment. In addition, the Contract Developer
maintained a conflict of interest relationship with the primary
lender for the Affordable Housing Program. The program was
administered by the Contract Developer to realize the maximum
possible profit that was distributed to the Contract Developer, a
conflict of interest lender and Brothers Redevelopment. The
discounted properties acquired from HUD were resold at market
value to a qualifying homebuyer. As such, any benefits realized
from the discounted acquired properties were not passed on to
the homebuyer as required by HUD.
Brothers Redevelopment implemented its affordable housing
program by allowing an outside independent contract developer
to administer the program. The Contract Developer operated the
program under a verbal agreement with Brothers Redevelopment
and controlled all aspects of the program. The Contract
Developer had a vested interest in the program in that the
Contract Developer received 40 percent of the profits realized
from the sale of the properties. In addition, the Contract
Developer secured financing for the acquisition and
rehabilitation of the properties from an identity of interest lender
who also realized 20 percent of the profits from the property
sales. Furthermore, Brothers Redevelopment received 40
percent of the net profits from the resale of the properties. In
actual practice, the Contract Developer used Brothers
Redevelopment as a strawbuyer for a fee and functioned as an
investor of HUD acquired properties.
In our opinion, deficiencies associated with Brothers
Redevelopment’s affordable housing program stem from
Brothers Redevelopment:
1) Not having a clear understanding of the intent of HUD
requirements to participate in FHA’s Single Family
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Insurance Programs, to create homeownership opportunities
for low- and moderate-income persons ; and
2) Not wanting to take part in the risk associated with the
purchase, rehabilitation, and resale of the properties.
As a result, Brothers Redevelopment did not administer their
affordable housing program to target low- and moderate-income
homebuyers and allowed excessive profits from the market sale
of the properties to be ultimately funded by the homebuyers.
This violated the intent of the program whereby benefits from
the discounted acquired properties from HUD were to be passed
on to the homebuyer rather than being absorbed by the nonprofit
and its contract developer and lender.
The results of the audit were discussed with officials of Brothers
Auditee Comments Redevelopment during the course of the audit. The draft audit
finding was submitted to Brothers Redevelopment on August 10,
2001 for their review and comments. On August 30, 2001,
Brothers Redevelopment provided us with their written response
to the draft finding. At that time, officials discussed the draft
finding and their written response. The officials disagreed with
our audit finding. At the meeting the draft audit report was
provided to Brothers Redevelopment who elected to not provide
any additional written comments. We have incorporated their
comments into the report as applicable and their complete
written response is included in Appendix 1.
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Table of Contents
Management Memorandum........................................................................ i
Executive Summary ................................................................................. iv
Table of Contents.....................................................................................vii
Abbreviations ........................................................................................viii
Introduction.............................................................................................. 1
Finding and Recommendations
1. Affordable Housing Program Not Carried Out in Conformity
With HUD Requirements............................................................ 5
Management Controls ............................................................................. 29
Follow-up on Prior Audits ....................................................................... 31
Appendices
1. Auditee Comments ................................................................... 33
2. Distribution.............................................................................. 48
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Abbreviations:
FHA Federal Housing Administration
HUD Department of Housing and Urban Development
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Introduction
Brothers Redevelopment was established on May 10, 1971, as a Colorado nonprofit corporation.
A Board of Directors made up of volunteers who represent a cross section of professions and
ethnic groups governs Brothers Redevelopment. One of Brothers Redevelopment’s primary
objectives is:
• To build, repair, remodel and refurbish houses and other dwelling units, and to finance
construction, reconstruction, remodeling and refurbishment of houses and other dwellings
units through various financial institutions for moderate and low income, elderly,
handicapped and minority people to help them improve their standard of living. The
welfare of the elderly and handicapped are high priority for these services.
The Purchase Repair Resale program at Brothers Redevelopment began in early 1995. Brothers
Redevelopment entered into a verbal agreement with an outside independent Contract Developer,
AmReal Companies, with the purpose to purchase and rehabilitate HUD homes for resale.
AmReal Companies was responsible for the selection, inspection, and submission of bids to
HUD, obtaining financing for purchase and rehabilitation, accomplishing the rehabilitation work,
marketing the properties for resale, and providing information to the title company, while
Brothers Redevelopment limited its involvement to providing HUD program approval to
purchase homes from HUD at a discount.
From March 1995 to March 2001, Brothers Redevelopment obtained financing for the purchase
and rehabilitation of acquired properties from various lenders in the form of recourse and
nonrecourse1 loans. Brothers Redevelopment’s primary le nder during the above mentioned time
period was US Capital, Inc. and business entities associated with the principal staff of US Capital,
Inc. The Board of Directors for US Capital, Inc. consists of three members: the President, Vice-
President and Brothers Redevelopment’s Contract Developer. Financing provided by US Capital,
Inc. is in the form of a nonrecourse loan at an interest rate of 19.5 percent.
Brothers Redevelopment entered into a verbal agreement with the outside independent Contract
Developer and its primary lender whereby proceeds from the subsequent resale of properties is
divided as follows:
• 40 percent to Brothers Redevelopment
• 40 percent to AmReal Companies
• 20 percent to US Capital, Inc.
On March 3, 2000, HUD issued Mortgagee Letter 00-8 requiring current and prospective
nonprofit entities to submit a recertification package to their local HUD Homeownership Center
to gain approval to participate in FHA Single Family Insurance Programs. Brothers
1
Nonrecourse financing is a type of debt whereby the borrower is not personally liable. If the borrower
defaults on the nonrecourse loan, the lender recovers the amount owed through foreclosure on the property,
which secures the loan.
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Redevelopment requested and was approved by the Denver Homeownership Center on May 30,
2000, to participate in the following activities:
• Participate as a mortgagor to obtain FHA-insured financing at the same attractive terms
as owner occupants.
• Purchase HUD foreclosed properties, in certain cases, at a discounted price.
• Provide down payment, closing cost or rehabilitation assistance with a secondary lien.
During the period from January 1, 1998 through January 31, 2001, Brothers Redevelopment had
purchased 92 discounted properties from HUD at a total cost of $8,055,378. The total discount
awarded to Brothers Redevelopment for these 92 properties was $1,123,405. Brothers
Redevelopment has used these properties in their Purchase Repair Resale program.
On May 1, 2001, members of the Denver Homeownership Center initiated a site review on
Brothers Redevelopment’s compliance with HUD requirements under HUD’s FHA Single Family
Insurance Programs. On June 5, 2001, the Homeownership Center temporarily suspended
Brothers Redevelopment’s authority to purchase HUD homes at a discount due to irregularities in
their affordable housing program. This suspension is to continue until the Homeownership
Center receives our final audit report.
The objectives of the audit were to determine whether Brothers
Audit Objectives and Redevelopment is:
Methodology
• Legitimate and independent (not under the influence,
control or direction) of other parties; and
• Passing on the benefits of discounts received on the
purchase of HUD homes to low- and moderate-income
homebuyers.
Our audit approach was to identify and evaluate the management
controls in place over the key areas of operations of Brothers
Redevelopment’s affordable housing program and within HUD’s
FHA Single Family Insurance Programs requirements. During
the review, we examined program records and related documents
of Brothers Redevelopment and other parties of their program
including their Contract Developer, primary lender, and loan
closing agent. We also reviewed applicable HUD records
relating to Brothers Redevelopment’s program. We conducted
interviews with officials and employees of these organizations.
Furthermore we conducted inspections of selected program
properties and interviewed the individual homebuyers.
Our audit generally covered the period of January 1, 1998
Scope through January 31, 2001. However, this period was expanded
to include the most current data available while performing our
site review. Therefore, where applicable, the audit period was
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expanded to include current data through June 30, 2001. We
conducted our field work from March through June 2001.
Our review was performed in accordance with generally
Generally Accepted accepted government auditing standards.
Government Auditing
Standards
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Finding
Affordable Housing Program Not Carried Out in
Conformity with HUD Requirements
Brothers Redevelopment did not administer or carryout its Affordable Housing Program as
approved by HUD or in conformity with HUD requirements. Furthermore, intended savings
realized from the discount purchase of properties from HUD were not passed on to the low- and
moderate-income homebuyer.
Specifically, Brothers Redevelopment allowed an outside independent Contract Developer to
administer and control all aspects of its Affordable Housing Program with very limited
participation by Brothers Redevelopment. In addition, the Contract Developer maintained a
conflict of interest relationship with the primary lender for the Affordable Housing Program. The
program was administered by the Contract Developer to realize the maximum possible profit that
was distributed to the Contract Developer, conflict of interest lender and Brothers
Redevelopment. Because Brothers Redevelopment resold its HUD acquired discounted
properties at market value to realize the maximum profit for themselves, the Contract Developer
and the program financing lender, any realized benefits from the discounted purchases were not
passed on to the low- and moderate-income homebuyer as intended by HUD.
Brothers Redevelopment’s implementation of HUD’s FHA Single Family Insurance Programs
was designed to pass on all risks under the program to the Contract Developer and the program
lender. By doing so, the Contract Developer used Brothers Redevelopment as a strawbuyer for a
fee and functioned as an investor of HUD acquired properties.
In our opinion, deficiencies associated with Brothers Redevelopment’s affordable housing
program stem from Brothers Redevelopment:
1) Not having a clear understanding of HUD requirements to participate in FHA’s
Single Family Insurance Programs, to create homeownership opportunities for low-
and moderate-income persons; and
2) Not wanting to take part in the risk associated with the purchase, rehabilitation, and
resale of the properties.
As a result, Brothers Redevelopment allowed an outside independent contract developer to
administer their affordable housing program and resold their HUD discounted acquired properties
at market value without any realized benefit from the discount purchase being passed on to the
homebuyer as specified and intended by HUD.
HUD requirements Under HUD’s FHA Single Family Insurance Programs,
nonprofits are eligible if certain qualifications are met to acquire
HUD owned properties at a discount, rehabilitate them and then
to sell them to low- to moderate-income buyers who are to
receive any benefit realized by the nonprofit acquisition of
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discounted properties. The program is governed by various
HUD Regulations, Handbooks, Notices and Mortgagee Letters.
HUD Regulation Section 291.110 of Title 24 of the Code of
Federal Regulations authorizes HUD to sell “as-is” valued HUD
properties to approved nonprofit organizations at a discount of
no less than 10 percent. HUD Handbook 4310.5 REV-2, Section
10-20 supplements the HUD Regulations and specifies the nature
and extent of discounts that can be granted to nonprofit property
purchases. In HUD approved revitalization areas, the discount to
nonprofits and government entities is 30 percent off the list
price. In non-revitalization areas, the discounts to nonprofits and
government entities is 10 percent off of the list price. An
additional 5 percent discount may be added to the 10 percent
discount if five or more properties are purchased simultaneously
by the nonprofit or government entity.
HUD in accordance with Mortgagee Letter 00-8, dated March 3,
2000, required each nonprofit organization to resubmit its
application and related Affordable Housing Program to HUD for
review and approval. HUD approval letters to the nonprofits
identified previously issued HUD issuances that related to
HUD’s FHA Single Family Insurance Programs. The listing
included some issuances that had previously expired expiration
dates.
Housing Notice 94-74 and Mortgagee Letter 97-5
established resale restrictions on properties sold to
nonprofit agencies at a 30 percent discount. Mortgagee
Letter 96-52 established program requirements concerning
acceptable affordable housing programs, in addition to
other programmatic changes. In addition, Mortgagee Letter
00-8 required current and prospective nonprofit agencies to
submit a recertification package to HUD for approval to
participate in FHA Single Family Insurance Program
activities.
Housing Notice 94-74 Housing Notice 94-74 and Mortgagee Letter 97-5
and Mortgagee Letter established resale restrictions on properties sold to non-
97-5 profit agencies at a 30 percent discount. HUD Housing
Notice 94-74 provides that properties purchased at a 30
percent discount are to be sold to individuals who intend to
occupy the property as their principal address and whose
income is at or below 115 percent of the median income in
the area when adjusted for family size.
Mortgagee Letter 97-5, further delineates requirements of
nonprofits that are participating in HUD’s FHA Single Family
Insurance Programs, which is referred to as HUD’s Real Estate
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Owned Discount Sales Program. Specifically, the Mortagee
Letter states:
“Under HUD's REO [Real Estate Owned] Discount Sales
Program, it is possible under certain circumstances for a
non-profit or government entity to receive up to a 30 percent
discount on the sales price of a property. HUD's intent is for
those buyers receiving a discount off the sales price in
excess of 15 percent to perform necessary repairs and resell
the property to individuals/families who intend to occupy
and whose income does not exceed 115 percent of the
median income for the area, when adjusted for family size.
The resale price of the property cannot exceed 110 percent
of the net development cost.”
“The net development cost is defined as the total cost of
the project, including items such as acquisition cost,
architectural fees, permits and survey expenses,
insurance, rehabilitation, and taxes (for a 203(k) loan,
use lines A-1 and B-14 of the 203(k) Maximum
Mortgage Worksheet, form HUD 92700). Total costs
incurred by the purchaser, including those for
acquisition financing, management fees and selling
expenses related to the project can also be included, but
are expected to be reasonable and customary for the
area in which the property is located. The purchaser
can also include up to three months' mortgage
payments (principal and interest only), less all rents
received. The net development cost cannot include gifts
to the eventual purchaser for the down payment,
financing or closing costs, nor any other related
expenses associated with that buyer's purchase of the
property.”
00-08
Mortgagee Letter 96-52 Mortgagee Letter 96-52 established program requirements
concerning acceptable affordable housing programs, in addition
to other programmatic changes. The affordable housing program
must be viable, well-run operation that successfully serves the
housing needs of low- and moderate-income individuals and
families. The affordable housing program is approved for a two-
year period. An acceptable affordable housing program is
defined as one in which the ultimate goal is the attainment of
affordable housing. Nonprofits are expected to fulfill their
commitment to low- and moderate-income families.
Also, there are certain elements in an affordable housing
program that make it successful. One element is remaining
affordable. The principal, interest, tax and insurance for
properties “should remain in the affordable range for
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homebuyers/assumptors, i.e., the end product will be within the
financial reach of those families it was designed to serve”. This
would mean low- and moderate-income families.
This mortgagee letter relates to the Affordable Housing
Programs of nonprofits in connection with their implementation
of HUD’s FHA Single Family Insurance Programs. The
requirements would be applicable to all HUD acquired properties
of the nonprofit. Accordingly, this would include 10, 15 and 30
percent discounted HUD properties.
In addition, the nonprofit agency is to demonstrate in its
affordable housing program that it is acting on its own behalf
and is not under the influence, control or direction of any outside
party seeking to derive profit or gain from the proposed project,
such as a landowner, real estate broker, contractor, builder,
lender, or consultant. Beneficiaries of the affordable housing
program itself may not be members of its board, employees or
others with an identity of interest to the nonprofit.
Mortgagee Letter 00-8
00-08 HUD issued Mortgagee Letter 00-8 in March 2000 detailing
provisions for nonprofit agencies participation in HUD’s FHA
Single Family activities. This letter stated that all nonprofit
agencies must follow the uniform standards for participation and
recertification in HUD activities. Further, this would ensure
nonprofits work to fulfill HUD’s goal of creating
homeownership opportunities for low- and moderate-income
persons.
Under the recertification process of Mortgagee Letter 00-8,
nonprofit agencies applied for participation in the following
three activities:
• The HUD Homes Program which allows nonprofit
agencies to purchase HUD homes at a discount.
• Nonprofit Agencies as Mortgagors which allows
nonprofit agencies to obtain FHA financing as an owner
occupant.
• Secondary Financing which allows nonprofit agencies to
provide secondary financing in the form of second
mortgages, forgivable second mortgages or “soft”
second mortgages.
Mortgagee Letter 00-8 also reiterated HUD’s stance regarding
conflicts of interest. Specifically:
“No person who is an employee, agent, consultant, officer,
or elected or appointed official of the lessee or purchaser of
property or who is in a position to participate in a decision
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making process pursuant to the affordable housing plan or
gain inside information with regard to the lease or purchase
of the property pursuant to the affordable housing plan, may
obtain a personal or financial interest or benefit from the
purchase of the property, or have an interest in any contract,
subcontract, or agreement with respect thereto, of the
proceeds there under, either for himself or herself or for
those with whom he or she has family or business ties,
during his or her tenure or for one year thereafter.”
This Mortgagee Letter established the minimum standards for
recertification. This included the ability of the nonprofit to meet
HUD’s and the nonprofit’s goal to expand affordable housing
opportunities for low- and moderate-income individuals and to
complete the rehabilitation of acquired properties from HUD
within set time frames. In addition, the nonprofit must follow
HUD’s resale requirements and maintain an acceptable
accounting system to report on property purchases,
rehabilitations, rentals and resales.
In the recertification process, the nonprofits are to detail in their
Affordable Housing Program how low- and moderate-income
persons benefit from their program. In addition the Affordable
Housing Program is to be designed to pass along to low-income
persons any savings the nonprofit may receive from the
discounted purchase of a HUD-owned property. Since no
distinction is made about the amount of the discount, the
Affordable Housing Plan is to be designed to pass on benefits
from all discount properties to low- and moderate-income
persons. This would include 10, 15 and 30 percent discounted
HUD property purchases.
Mortgagee Letter 00-8 also established conditions for removing
a nonprofit agency from the FHA approval list. These included
the following:
• Properties purchased under the HUD Homes Program
are not resold to persons who are at or below 115% of
median income for their area when adjusted for family
size.
• Discounts received by the nonprofit agency in
purchasing HUD Homes are not adequately passed on to
the homeowner.
• The nonprofit agency does not achieve the majority of
the goals as outlined in their affordable housing plan.
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• The nonprofit agency acts to further objectives not
described in the affordable housing plan, or participates
in activities or actions detrimental to the Department,
etc.
Brothers Redevelopment Prior to the implementation of Mortgagee Letter 00-8, Brothers
approved to participate in Redevelopment was approved to purchase HUD homes at a
FHA Single Family discount. On March 3, 2000, HUD issued Mortgagee Letter 00-
Insurance Program 8 requiring all current and prospective nonprofit agencies to
activities submit a recertification or approval package to their local
Homeownership Center. Accordingly, Brothers Redevelopment
submitted their recertification package and was approved on
May 30, 2000 by the Denver Homeownership Center to
participate in these FHA Single Family Insurance Program
activities:
• Participate as a mortgagor to obtain FHA-insured
financing at the same attractive terms as owner
occupants.
• Purchase HUD foreclosed properties, in certain cases, at
a discounted price.
• Provide down payment, closing costs or rehabilitation
assistance with a secondary lien.
Verbal agreement with In early 1995, Brothers Redevelopment entered into a verbal
Contract Developer, agreement with an outside independent Contract Developer and
AmReal Companies at-risk Investor, AmReal Companies, for a multitude of services
relating to the purchase, rehabilitation and subsequent resale of
HUD homes purchased at a discount. The Contract Developer
responsibilities entailed, but were not limited to the following:
• Selection and inspection of available HUD homes for
purchase.
• Bid submission for selected HUD properties using
Brothers Redevelopments assigned name address
identifier.
• Obtain financing for the purchase and rehabilitation of
awarded HUD properties.
• Coordination of rehabilitation work.
• Marketing of properties for resale.
• Provider of information on properties to Title Company.
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Brothers Redevelopment’s basic participation in the HUD FHA
Single Family Insurance Programs is limited to the signing of the
sales contract submitted for the acquisition of a HUD property
and the HUD-1 Settlement Statements for the initial purchase
and subsequent resale of a property. The Contract Developer is
responsible for the selection, inspection, and submission of bids
to HUD, obtaining financing for purchase and rehabilitation,
accomplishing the rehabilitation work, marketing the properties
for resale, and providing information to the title company.
Brothers Redevelopment does not review the rehabilitation work
accomplished by the outside independent Contract Developer
nor require the Contract Developer to submit a summary report
disclosing the type and amount of rehabilitation work performed.
The Contract Developer receives 40 percent of the net proceeds
from the subsequent resale of a property. Brothers
Redevelopment receives the same amount of proceeds as the
Contract Developer. However, in some cases the split of
proceeds may deviate from the set agreement, if for example
Brothers Redevelopment pays the $500 earnest money deposit to
HUD for a property. In this case, the Contract Developer’s
portion of the proceeds would be reduced by $500 while
Brothers Redevelopment’s portion would increase by $500.
During our audit period, January 1, 1998 through January 31,
2001, Brothers Redevelopment received a total of $379,682 in
net proceeds from the subsequent resale of properties. If funds
are not used from the rehabilitation of a property, the Contract
Developer keeps the monies for use on other properties.
Verbal agreement Brothers Redevelopment entered into a verbal agreement with its
primary lender, US Capital, Inc. Under the agreement, US
with primary lender,
Capital, Inc. provides funds in the form of nonrecourse loans at
US Capital, Inc. an excessive interest rate of 19.5 percent to Brothers
Redevelopment, for use in the purchase and rehabilitation of
properties. Additionally, as an incentive for providing the loans,
the two primary principals of US Capital, Inc. receive directly 20
percent of the net proceeds from the subsequent resale of a
property. The Contract Developer, with the acknowledgement of
Brothers Redevelopment, negotiated the agreement.
Relinquished control During our review, we found that Brothers Redevelopment’s
affordable housing program was actually administered by an
of affordable housing
independent Contract Developer, a for-profit entity, with very
program to for-profit limited involvement and participation by Brothers
entity Redevelopment. In its recertification package, Brothers
Redevelopment made the following certification:
“BRI [Brothers Redevelopment, Inc.] is acting on its own
behalf, and is not operating under the influence, control, or
direction of any outside party seeking to derive a profit or
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gain from the proposed project such as a landowner, real
estate broker, contractor, builder, lender or consultant.”
Our review disclosed that Brothers Redevelopment was not
acting on its own behalf in connection with implementing its
affordable housing program, but was under the influence,
control, and direction of the outside independent Contract
Developer, AmReal Companies, a for-profit entity. The
Contract Developer selected, inspected and placed bids for
discount properties. In addition to coordination of rehabilitation
work, the Contract Developer was responsible for maintaining
all financial records concerning rehabilitated properties and
payment of subcontractors and laborers. The Contract
Developer did not report or substantiate any of these costs to
Brothers Redevelopment.
The Contract Developer was responsible for determining the
marketability of rehabilitated properties. Discounted properties
were sold at market value of the properties to homebuyers. The
Contract Developer also signed as liable on five loans for
properties recently purchased at a discount from HUD. Brothers
Redevelopment’s involvement was limited to providing their
name address identifier for use by the Contract Developer in
bidding for properties and execution of the sales contracts for the
purchase of HUD properties and the HUD-1 Settlement
Statements.
We identified two conflict of interest issues in our review of
Conflicts of interest
Brothers Redevelopment’s affordable housing program:
• The Contract Developer’s financial interest in the
purchase, rehabilitation and resale of properties; and
• The Contract Developer’s relationship with the primary
lender, US Capital, Inc.
Under HUD requirements, the nonprofit agency is to
demonstrate in its affordable housing program that it is acting on
its own behalf and is not under the influence, control or direction
of any outside party seeking to derive profit or gain from the
proposed project, such as a landowner, real estate broker,
contractor, builder, lender, or consultant. Beneficiaries of the
affordable housing program itself may not be members of its
board, employees, others with an identity of interest to the
nonprofit.
Contract Developer During our review we found that the Contract Developer is in a
position to make decisions pursuant to the affordable housing
has financial interest program and has a financial interest in the purchase, rehabilitation
and resale of properties purchased at a discount from HUD.
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2001-DE-1002
The Contract Developer inspects the properties being sold by
HUD at a discount and determines if they should be purchased.
If the properties are found to be a good investment based on
assessment of rehabilitation costs and marketability, the Contract
Developer submits a bid for the HUD property using Brothers
Redevelopment’s name address identifier. The Contract
Developer bids on five properties at a time, as HUD increases
the discount given on 10 percent properties to 15 percent if 5 or
more properties are sold and closed the same day. The Contract
Developer does not coordinate (no prior approval) bids with
Brothers Redevelopment.
Upon completion of rehabilitation work, the Contract Developer
requests information from realtors concerning the market value
of homes in the area. The Contract Developer uses this
information to determine the sales price of the property.
Brothers Redevelopment has no involvement in this process.
In a response to a draft on-site review report issued by the
Denver Homeownership Center, Brothers Redevelopment stated:
“The only way [the Contract Developer] makes money is to
assure the sales close on time and under budget. [The
Contract Developer] has time and financial investment at
risk in order to assure this happens.”
It is evident that the Contract Developer has a vested financial
interest in the resale of each property. Furthermore, Brothers
Redevelopment had limited participation in HUD’s FHA Single
Family Insurance Programs and allowed an independent outside
contract developer and at-risk investor to operate the HUD
program on its behalf. The Contract Developer influenced,
controlled and directed Brothers Redevelopment’s program for a
fee of 40 percent of net market sales proceeds, contrary to
HUD’s program requirements and Brothers Redevelopment’s
own certification to HUD in its Affordable Housing Program.
Contract Developer is In addition, we found that the Contract Developer maintained a
member of Board of conflict of interest relationship with Brothers Redevelopment’s
Directors of primary primary lender. Specifically, the Contract Developer sits on the
lender Board of Directors for US Capital, Inc. The Contract Developer
introduced Brothers Redevelopment to US Capital, Inc. and
participated in the negotiation of the loan terms (e.g., interest
rate of 19.5 percent) and the 20 percent of net proceeds received
by US Capital, Inc. from the subsequent resale of properties.
The 20 percent of net proceeds from the sale of properties is
disbursed directly to the two principal staff of US Capital, Inc. as
it is more advantageous tax wise to realize the disbursements as
personal income.
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2001-DE-1002
Since 1997, US Capital, Inc. has provided a total of 126 loans
with a total original loan amount of $12,830,605 to Brothers
Redevelopment, Inc. In a discussion with US Capital, Inc.
officials, they indicated they would consider severing their
relationship with Brothers Redevelopment if they no longer
received the 20 percent of net proceeds. Even though they
charged an interest rate of 19.5 percent to offset their risk. US
Capital, Inc. feels they are taking all the risk involved with the
loans and they need to be compensated for that risk.
Savings not passed on Brothers Redevelopment has not passed the savings it received
to the low- and from the purchase of discount properties through the HUD FHA
moderate-income Single Family Insurance Programs to the low- and moderate-
homebuyer income homebuyers. Instead, Brothers Redevelopment
distributes the net profit from the sale of the properties to the
outside independent contract developer, the primary lender, and
itself. This is discussed in the following two main sections
dealing with properties purchased from HUD at a 30 percent
discount and those purchased at a 10 or 15 percent discount.
Thirty Percent Discounted Acquired Properties
During the audit period, Brothers Redevelopment purchased nine
30 percent discounted properties from HUD at a combined price
of $533,793. We reviewed records and files for all of these
properties that were subsequently resold.
We conducted a detailed review for three of the nine properties
to ascertain whether the costs incurred for the rehabilitation were
accounted for and supported. We interviewed the homebuyers
and inspected the properties to ensure claimed rehabilitation
work had been performed. In addition, we calculated the net
development costs for the properties, to determine whether
profits made by Brothers Redevelopment were in line with HUD
requirements and stipulated savings under the HUD’s FHA
Single Family Insurance Programs were passed on to a low- and
moderate-income buyer.
The results of our review of the sample properties are:
Rehabilitation costs We found not all of the rehabilitation costs were accounted for
neither accounted for nor supported. For example, rehabilitation costs for one property
nor supported were erroneously charged to another property. Also, proceeds
from the subsequent resale of one property were used to pay
down the financing costs of another property.
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2001-DE-1002
The following table provides the cost of rehabilitation reported
by Brothers Redevelopment and by the outside Contract
Developer, AmReal Companies, for the three properties
reviewed.
30 Percent Discount
Reported Rehabilitation Costs
Properties A B C Totals
Brothers $16,000 $9,800 $19,300 $45,100
Redevelopment
AmReal 10,744 3,156 18,641 32,541
Companies
Difference $5,256 $6,644 $659 $12,559
The amount reported by Brothers Redevelopment represents the
amount of the loan allocated to rehabilitation and the amount
reported to HUD. The amount reported by AmReal Companies
represents the amount of actual rehabilitation costs. The
difference of $12,559 in reported rehabilitation costs is the
amount of loan funds kept by AmReal Companies to be used
towards the rehabilitation of other acquired properties.
The following table provides our calculation of rehabilitation
cost and unsupported rehabilitation costs based on our review of
supporting documentation maintained by the Contract
Developer. We adjusted the cost reported by the Contract
Developer for costs not associated with the rehabilitation of the
property. The adjustments included such items as rehabilitation
expenditures that were improperly charged to the wrong
properties.
30 Percent Discount
Rehabilitation Costs – Adjusted
Properties A B C Totals
Rehabilitation $11,781 $2,119 $18,591 $32,491
Cost
Supported 8,286 1,756 18,109 28,151
Unsupported $3,495 $363 $482 $4,340
For the three properties, the Contract Developer was unable to
support $4,340 in claimed rehabilitation costs.
Homebuyer interviews Interviews of the homebuyers and inspections of the three
and property properties indicated that the rehabilitation work claimed by the
inspections Contract Developer had been accomplished. However, during a
property inspection on June 21, 2001, a homebuyer informed us
that the brand new furnace did not work. The homebuyer had
moved into the property in November 2000 and went without
heat through the winter months. A repairman hired by the
homebuyer was unable to repair the furnace. We inquired as to
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2001-DE-1002
whether the homebuyer had been provided with a warranty for
the furnace. The homebuyer had been provided with a warranty,
but did not understand how a warranty worked.
In their affordable housing program, Brothers Redevelopment
claimed to provide homeownership counseling. However, in our
review of a sample of 14 properties purchased and rehabilitated
by Brothers Redevelopment, only one of the homebuyers
received a certificate that they had received homeownership
counseling from Brothers Redevelopment. It is evident the
homebuyer, whose furnace did not work, did not receive any
homeownership counseling from Brothers Redevelopment.
Profits in excess of 110 For the three properties purchased at a 30 percent discount, we
percent of net found that Brothers Redevelopment received profits in excess of
development cost 110 percent of the net development cost, contrary to HUD
program requirements. This was due in part to the excessive
interest rate charged by US Capital, Inc. of 19.5 percent, the split
of proceeds from the subsequent resale of the properties, and the
use of unallowable costs in the net development cost calculation,
as defined by Housing Notice 94-74, Mortgagee Letter 97-5 and
the land use restriction addendum.
The following table provides Brothers Redevelopment’s
calculation of profit on the subsequent resale of the three
properties reviewed.
30 Percent Discount
Properties A B C Totals
Sales Price $119,900 $93,000 $119,900 $332,800
Net 113,538 87,829 110,259 311,626
Development
Cost
Profit $6,362 $5,171 $9,641 $21,174
The following table depicts our calculation of net development
cost and the excess profits made. Amounts were rounded to the
nearest dollar.
30 Percent Discount
Properties A B C Totals
Sales Price $119,900 $93,000 $119,900 $332,800
Net 93,231 72,069 81,648 246,948
Development
Cost
110% of Net 102,555 79,275 89,813 271,643
Development
Cost
Excess Profit $17,345 $13,725 $30,087 $61,157
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2001-DE-1002
For these three 30 percent discounted properties, Brothers should
have sold the properties to the buyer at the 110 percent of the net
development costs value as required by HUD. Instead, Brothers
Redevelopment sold the properties at market value. For
example, the buyer for property C shown above should have
purchased the home from Brothers Redevelopment for $89,813.
However, Brothers Redevelopment sold the property at market
value of $119,900. This means the buyer had to incur an
additional indebtedness of $30,087 for the house. In other
words, the buyer had to pay 33.5 percent more for the property
than the buyer should have.
The net profit realized by Brothers Redevelopment on the sale of
the 30 percent discounted properties exceeded the amount
stipulated by HUD. Under Mortgagee Letter 97-5 the resale of a
30 percent discounted property cannot exceed 110 percent of the
net development cost. Net development cost is defined as the
total cost of the project, including items such as acquisition cost,
architectural fees, permits and survey expenses, insurance
rehabilitation and taxes as well as selling expenses.
This same requirement was specifically stated in HUD’s May 30,
2000 approval letter of Brothers Redevelopment’s recertification
package. Even with these requirements, Brothers
Redevelopment has developed their Affordable Housing
Program to sell all of their 30 percent discounted properties at
the market value of the properties in order to maximize their
profits.
In selling properties at a 30 percent discount to nonprofit
organizations, HUD has intended to include in the sales
documents a land use restriction addendum that placed
restrictions on the resale of 30 percent discounted properties by
the nonprofit. For example, the 30 percent discounted property
B discussed above contained this addendum to the sales
documents.
The addendum sets out certain conditions for the resale of the
property. One condition was that the property is to be sold to a
buyer whose income is not to be more than 115 percent of the
median income in the area. This would be to low- and moderate-
income persons. A second condition was that the nonprofit was
not to sell the property for more than 110 percent of the net
development costs. Net development cost is defined in the
addendum as the total cost of the project including items as
acquisition costs, architectural fees, permits and survey
expenses, insurance, rehabilitation and selling expenses.
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2001-DE-1002
Brothers Redevelopment has not complied with the sales
restriction placed on the property by the land use restriction
addendum to sell the property at no more than 110 percent
of the net development cost. Instead, Brothers
Redevelopment elected to sell the 30 percent discounted
property at market value. The buyer of the property was an
individual who could afford to purchase the home. By doing
so, Brothers Redevelopment was not providing an
opportunity for the purchase of the property at the 110
percent above the net development cost value to a low- and
moderate-income person.
Ten and Fifteen Percent Discounted Acquired Properties
During the audit period, Brothers Redevelopment acquired 83
properties at 10 or 15 percent discount from HUD at a combined
price of $7,521,586. We reviewed records and files for nine of
these properties. For selected property acquisitions, we verified
whether the costs incurred for the rehabilitation were accounted
for and supported. In addition, we evaluated whether benefits
realized from the discount acquisition of the properties were
passed on to the low- and moderate-income homebuyer as
intended by HUD requirements.
From our review, we found that Brothers Redevelopment
process for acquiring, rehabilitating, and selling its 10 and 15
percent discounted properties followed the same procedures as
for its 30 percent discounted properties. We noted that not all of
the rehabilitation costs for its 10 and 15 percent discounted
properties were accounted for nor supported. Proceeds from the
subsequent resale on one property were used to pay down the
financing costs of another property. The sale of 10 and 15
percent discounted properties at market value prevents Brothers
Redevelopment from passing on any realized savings to low- and
moderate-income buyers as intended by HUD requirements.
To illustrate, Brothers Redevelopment acquired a 15 percent
discounted property from HUD at a cost of $74,550 performed
the needed rehabilitation repairs, which was funded at $12,700,
and resold the property at the market value of $114,900 to a
qualifying buyer.
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The sale of this property at market value did not fulfill Brothers
Redevelopment obligation to pass on any savings from the
discounted purchase to the ultimate homebuyer. Allowing a 10
percent amount for overhead and profit, Brothers Redevelopment
could have sold the house at a price of $95,975, thereby granting
the homebuyer the benefit of the HUD discounted property sales
program. The composition of the $95,975 selling price is:
Purchase price of home from HUD $ 74,550
Needed rehabilitation costs 12,700
Combined cost $ 87,250
Overhead and profit at 10 percent of cost 8,725
Sales Price $ 95,975
By selling the home at $114,900, an additional profit on the sale
in the amount of $18,925 was realized. This amount was used to
fund costs for another property, with the remaining amount
distributed to the Contract Developer at 40 percent, US Capital,
Inc. at 20 percent, and Brothers Redevelopment at 40 percent.
The true impact is that the additional profit realized by Brothers
Redevelopment and the two other contract entities is absorbed in
the market value price paid by the property buyer.
We identified two other 15 percent discounted properties
that were bought and sold by Brothers Redevelopment on
the same day. The properties were purchased at a discount from
HUD and then sold at market value. The only rehabilitation
costs we saw were $290 for appliances for one property and
$300 for heating for the other property. The profit realized from
the two property acquisitions and sales was distributed equally
between Brothers Redevelopment and the Contract Developer.
As a result, no benefit from the discounted purchase from HUD
was granted to the homebuyers, contrary to HUD requirements.
Details of these two purchases and sales are shown in the
following chart:
15 Percent Discount
Properties A B Totals
Sales Price $168,000 $80,000 $248,000
Acquisition Cost from 140,372 62,899 203,271
HUD
Realized Gain $27,628 $17,101 $44,729
This table shows that Brothers Redevelopment was able to use
HUD’s discount sales program to buy and immediately sell the
properties with a realized gain of $44,729. By selling the
properties at market value, no opportunity was granted to
providing any savings from the HUD program to low- and
moderate-income homebuyers.
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2001-DE-1002
Allowing a 10 percent amount for overhead and profit, Brothers
Redevelopment could have sold the two houses at a price of
$154,409 and $69,189 instead of $168,000 and $80,000
respectively as shown in the following chart. This would have
enabled the savings from the discounted HUD properties to be
passed on to the homebuyer.
15 Percent Discount
Properties A B Totals
Sales Price $168,000 $80,000 $248,000
Acquisition Cost from 140,372 62,899 203,271
HUD
Overhead and Profit at 14,037 6,290 20,327
10% of Cost
Discounted Sales Price $154,409 $69,189 $223,598
Overall impact of As shown by these discussions above, Brothers Redevelopment
deficient affordable has designed the implementation of its affordable housing
program by marketing its acquired discounted HUD properties to
housing program be sold at the market value of the property in order to maximize
the revenue from the HUD program. According to Brothers
Redevelopment, profits from their affordable housing program
made up for losses incurred in their other programs and to help
finance other activities being carried out by them.
Brothers Redevelopment officials expressed that they have
received an average of $5,000 profit per property sold under the
HUD program. Brothers Redevelopment in their July 12, 2001
response to HUD’s draft report of HUD review of Brothers
Redevelopment program implementation stated the following:
“BRI [Brothers Redevelopment, Inc.] has used the proceeds
created from this program to leverage the purchase of
additional properties from HUD in order to house still more
modest income families and to support ongoing overhead
and administrative expenses for the organization.”
“Nevertheless BRI [Brothers Redevelopment, Inc.] earned a
grand total of $163,184 for its efforts in this program last
year. However, in Housing Counseling (also funded in part
by HUD) we had a short fall of $3,962 and for the Paint-A-
Thon project (targeted toward maintaining low income
seniors in their homes) we experienced a short fall of
$16,063. These losses were made up in part from sales
proceeds earned from the Purchase Repair Resale
Program.”
Clearly, Brothers Redevelopment’s participation in HUD’s FHA
Single Family Insurance Programs has been primarily designed
and implemented to generate revenues to help finance its other
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2001-DE-1002
non-HUD related activities. This implementation process is
contrary to the requirements and intent of the HUD program.
The HUD program is designed to provide discounted properties
to be purchased from HUD, be rehabilitated, and then sold with
savings from the program being passed on to the low- and
moderate-income homebuyer. The HUD program was not
intended to generate revenue to finance activities of the nonprofit
entity and at the expense of the homebuyer.
Reporting to HUD not During our audit period, we found that Brothers Redevelopment
accurate submitted reports to the Denver Homeownership Center that
were not accurate. For example, rehabilitation costs reported by
Brothers Redevelopment in its activity reports were not correct.
Brothers Redevelopment incorrectly reported the amount of the
loan allocated to rehabilitation as rehabilitation cost, as opposed
to the actual rehabilitation costs incurred by its Contract
Developer. Brothers Redevelopment did not require its Contract
Developer to provide a summation or report on the actual cost to
rehabilitate a property.
Brothers Redevelopment At the time we started our site review, the Denver
suspended from Homeownership Center also performed an on-site review of
purchasing additional Brothers Redevelopment’s participation in the FHA Single
HUD properties Family Insurance Program activities. Based on the deficiencies
they identified during the on-site review, Brothers
Redevelopment was placed on temporary suspension until
program changes were made and put in place. The draft on-site
review report, dated June 28, 2001, contained the following five
findings.
• Brothers Redevelopment lack of control over the HUD
Home discount purchase program.
• Brothers Redevelopment exceeds the 110% net
development allowed on discounted sales.
• Inconsistencies in marketing to low- to moderate-income
purchasers (115% and below median income).
• Record keeping.
• Conflict of interest.
These findings parallel the deficiencies we identified in Brothers
Redevelopment’s operation of its HUD program.
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2001-DE-1002
Deficiencies in carrying In our opinion, the deficiencies addressed above in Brothers
out Affordable Housing Redevelopment carrying out their Affordable Housing Program
Program stem from two stem from two primary causes. Brothers Redevelopment did not:
causes
1) Have a clear understanding of HUD requirements to
participate in FHA’s Single Family Insurance Programs, to
create homeownership opportunities for low- and moderate-
income persons, nor
2) Want to take part in the risk associated with the purchase,
rehabilitation, and resale of the properties.
Lack of understanding First, Brothers Redevelopment has demonstrated that they did
of HUD program not fully understand the requirements of the program. Brothers
Redevelopment made the following statement in their affordable
housing program:
“There is no requirement for us to pass along to low income
persons any savings we receive from the discounted
purchase of a HUD owned property. We price our
properties at the lower end of the market range for
properties in a particular market area and if we can bring
the property up to a level of livability within the range of our
available budget, we have a workable project. The buyers
qualify for their loans independently, and they know how
much home they can afford. Most of the people we help buy
homes through our housing counseling efforts do not buy
homes from BRI [Brothers Redevelopment, Inc.].”
This statement is in direct conflict with HUD’s stated objectives
of the program to provide housing opportunities and to pass on
the savings from the purchase of discount properties to low- to
moderate-income homebuyers.
In addition, Brothers Redevelopment lacked a proficiency of
HUD Requirements and was negligent in the application of
them. An interview with a staff member of Brothers
Redevelopment suggested that Brothers Redevelopment had
been basing their Affordable Housing Program on a HUD
handbook that had since been revised with the issuance of
various Mortgagee Letters and HUD Directives. The staff
member indicated that Brothers Redevelopment was not aware
of other program requirements, even though attached to their
HUD approval letter to participate in FHA’s Single Family
Insurance Programs was a detailed listing of applicable HUD
requirements and guidelines.
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2001-DE-1002
Brothers Redevelopment Secondly, Brothers Redevelopment did not want to take part in
did not want any risk the risk associated with the purchase, rehabilitation and resale of
stemming from the HUD properties purchased at a discount. Brothers Redevelopment
program indicated this in the following statement they made in their
response to the draft on-site review report issued by the Denver
Homeownership Center on June 28, 2001:
“In terms of oversight by BRI [Brothers Redevelopment,
Inc.], we have drawn the program to rely upon the
motivations and risk of others for their involvement in this
program.”
Brothers Redevelopment relied solely on an outside independent
Contract Developer, AmReal Companies, to make such
decisions as to which properties to purchase, amount of
rehabilitation work to be performed, and the marketability of
rehabilitated properties. In addition, they obtained nonrecourse
loans with a high interest rate of 19.5 percent from US Capital,
Inc. shifting all risk to the lender.
The use of nonrecourse loans at the high interest rate of 19.5
percent from US Capital, Inc. has increased the cost to each of
the discounted properties. A Brothers Redevelopment official
provided us with an analysis that they had conducted comparing
the cost of using a nonrecourse loan from US Capital, Inc. at a
19.5 percent interest rate and a recourse loan by a separate
mortgage company at a 10 percent interest rate. This analysis
showed the projected premium for using the nonrecourse loan
was $4,345. This increased cost is included in the total net
development cost for each property.
Brothers Redevelopment has used some recourse loans under its
HUD program with considerable savings in connection with
interest rates on property loans. During the earlier part of the
HUD FHA Single Family Insurance Programs participation by
Brothers Redevelopment, Brothers Redevelopment obtained
recourse loans on properties with interest rates ranging from 9.75
to 10 percent.
In the first part of their program, Brothers Redevelopment even
obtained a lower interest rate for nonrecourse loans. A 12
percent interest rate loan was obtained from WK Investments.
After this loan, Brothers Redevelopment started using US
Capital, Inc. to obtain its nonrecourse loan financing with rates at
19.5 percent. The two main principals for WK Investments are
the two main principals of US Capital, Inc.
The 19.5 interest rates from US Capital, Inc. were negotiated
with the Contract Developer, who sits on the board of US
Capital, Inc. In addition, the negotiated arrangement allowed US
Capital, Inc. to also receive 20 percent of the profit realized from
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2001-DE-1002
the resale of the HUD discounted properties. Interestingly,
county records show that US Capital Inc. has provided loans to
the Contract Developer, AmReal Companies, for non Brothers
Redevelopment related properties with interest rates ranging
from 4.5 to 5.75 percent.
Brothers Redevelopment has designed the implementation of its
HUD program whereby the risks associated with it are passed on
to the outside independent Contract Developer and US Capital,
Inc. By doing so, the Contract Developer and lender were
investors taking the risk, while Brothers Redevelopment
functioned basically as a strawbuyer whose approval status was
used for a fee, 40 percent of net proceeds from the subsequent
resale of each property.
Participation in HUD’s Brothers Redevelopment has not operated its Affordable
Programs needs to be Housing Program to meet HUD’s basic requirements under the
discontinued FHA Single Family Insurance Programs. Brothers
Redevelopment:
• Has not controlled its’ program to ensure the minimum
program requirements were being met;
• Exceeded the 110 percent development allowed on
discounted sales for 30 percent discounted acquired
properties; and
• Did not pass on the benefits of the purchase of HUD
discounted properties to the ultimate homebuyer.
Instead, Brothers Redevelopment’s primary focus in
participating in the HUD programs has been to obtain the
maximum profit possible under the HUD programs to help
finance its’ other unrelated nonprofit activities and not to grant
any benefits realized under its’ program to the purchasing low-
and moderate-income homebuyer. Furthermore, Brothers
Redevelopment designed its program to allow it to be
implemented by others who would administer all phases of the
program and assume all risks.
Under this arrangement, Brothers Redevelopment did not
implement any major oversight or control over its Contract
Developer. The Contract Developer, with the knowledge and
acceptance of Brothers Redevelopment, was granted full
authority and responsibility under the program and to operate it
to maximize profits, not only for itself but also for an identity of
interest lender, and for the nonprofit. Brothers Redevelopment
marketed its properties at the market value for its properties in
order to gain the maximum profit for itself, the at-risk Contract
Developer, and the primary lender. and by doing so, did not pass
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2001-DE-1002
on any benefits under the program to the homebuyer as specified
by HUD.
For the 30 percent discounted properties acquired from HUD,
Brothers Redevelopment was required to sell these properties at
no more than 110 percent of the net development costs to low-
and moderate-income persons. This requirement was set out in
HUD requirements, HUD’s authorization letter for participation
in the HUD program, and on certain land use restriction
addendum to the 30 percent acquired properties from HUD.
HUD requirements specify that if the nonprofit does not comply
with the HUD provisions for the 30 percent acquired properties,
the nonprofit could be removed from the program.
Brothers Redevelopment did not carryout out its program for the
30 percent discount properties acquired from HUD but sold the
properties at market value to realize the maximum profit and did
not pass on any benefit from the program to the homebuyer.
Furthermore, the nonprofit allowed the Contract Developer to
function primarily as an investor under the program for a percent
of the net profit of the property sales and did not ensure that the
minimal requirements of the HUD program were met.
Since Brothers Redevelopment has shown through various
verbal and written correspondences that they do not intend to
change the administration of their affordable housing program to
conform to HUD’s FHA Single Family Insurance Program
requirements, further participation in the HUD program should
be discontinued.
With regards to excess profits made by Brothers Redevelopment,
the outside independent Contract Developer, and the primary
lender, the Denver Homeownership Center needs to make a
decision as to how the homebuyers will be compensated for the
excess profits that were passed on to the homebuyer in the form
of an increased purchase price.
Auditee Comments Brothers Redevelopment does not agree with the finding. The
written response is contained in Appendix 1. Brothers
Redevelopment states that the report ignored certain HUD
directives and the findings were slanted to support a
predetermined outcome. The response discusses several HUD
handbooks and directives and often details various sections to
support that the nonprofit is complying with the provisions
relating to the purchase, rehabilitation and resale of 30 percent
discounted properties from HUD. Furthermore, Brothers
Redevelopment discusses at length the differences under the
program for 30 percent discounted properties and less than 30
percent discounted properties.
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2001-DE-1002
Brothers Redevelopment acknowledged that it did rely too much
upon the incentives of the Contract Developer. In addition,
Brothers Redevelopment states that it was acting on its own
behalf and not under the influence, control, or direction of
AmReal Corp. and was contracting for their broad experience for
a percentage of the net gain which was comparable to paying
someone a real estate commission.
The response to the audit finding discussed that AmReal
Companies brought to the attention of Brothers Redevelopment
the funding source from US Capital, Inc. Even though, the rates
were higher than previously experienced, it provided Brothers
Redevelopment with an increase of funding with which to
acquire more HUD discounted properties. This was needed
according to Brothers Redevelopment if they were to continue in
the program. Furthermore, the experience encountered by
Brothers Redevelopment in the 1980s whereby they found
themselves in financial difficulty made the financing from US
Capital, Inc. beneficial. Also, the availability of nonrecourse
loans was not readily available except from US Capital, Inc.
In addition, the reply to the finding points out that the schedules
presented in the finding are confusing and indicate that the
requirements for 30 percent discounted properties are the same
as for less than 30 percent discounted properties. The
requirements for the 30 percent discounted properties are to be at
110 percent of the net development costs but Brothers
Redevelopment states that the requirement is from a HUD
document that refers only to the Section 203(k) program for
which Brothers Redevelopment is not doing. Therefore, the 110
percent requirement does not apply to Brothers Redevelopment’s
program. Accordingly, the position taken in the audit finding is
incorrect.
Evaluation of Auditee Brothers Redevelopment response to the draft finding stated that
Comments the auditors ignored written program directives and slanted the
finding to support a predetermined outcome and intended to
manipulate the program for the future. Brothers Redevelopment
assertion is totally false. Brothers Redevelopment was selected
for review since they are one of the larger nonprofits
participating in HUD’s FHA Single Family Insurance Programs.
Our review focused on how Brothers Redevelopment was
implementing its HUD programs and whether it was within the
HUD requirements. In fact, the implementation of the HUD
property discount program by Brothers Redevelopment as
presented in the finding is clearly acknowledged in Brothers
Redevelopment’s written response to the finding.
Since the response indicates that the finding omitted certain
HUD handbook and directives and misapplied others, we have
incorporated into the finding all of the HUD documents
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2001-DE-1002
specifically discussed by Brothers Redevelopment. These
additional references further detail and/or restate other program
requirements already cited in the finding.
The response indicates that Brothers Redevelopment was not
acting under any outside influence, control or direction of its
Contract Developer. The point presented in the finding is that
the Brothers Redevelopment allowed the Contract Development
to influence, control and direct the HUD discounted acquisition
program, not to influence, control and direct Brothers
Redevelopment.
Brothers Redevelopment’s reply to the finding states that they
used the nonrecourse loans from US Capital, Inc. to finance their
property purchases from HUD so that Brothers Redevelopment
would not be in a position to encounter property losses as they
experienced in the 1980’s. The point being presented in the
finding by Brothers Redevelopment allowed the HUD
discounted acquisition program to be administered by the outside
independent Contract Developer with program financing coming
from an identity of interest relationship with the Contract
Developer and the program lender. Brothers Redevelopment
allowed this arrangement in order to pass all risk under the
program to the Contract Developer and the program financing
lender for a fee of the net proceeds from the property sales.
In order to clarify the confusion on the definition of the net
development cost not being applicable to the program being
administered by Brothers Redevelopment, we have clarified in
the finding some of the criteria applicable to the definition and
use of net development cost. We point out in the finding that
Mortgagee Letter 94-74 discusses that under HUD’s Real Estate
Owned Discount sales program, which is the one Brothers
Redevelopment is participating in, that nonprofits that purchase
30 percent discounted properties from HUD are to be resold at
no more than 110 percent of the net development cost for the
property. This same requirement is specifically stated by HUD
in their approved letter of Brothers Redevelopment
recertification package. In addition, the finding is modified to
show that some of the 30 percent discount sales documents from
HUD contained land use restriction addendums that specifically
specified the properties were to be resold at no more than 110
percent of the net development cost. The net development cost
was clearly defined in the land use restriction addendums.
Even so, Brothers Redevelopment has elected to sell their 30
percent discounted properties at the market value of the property
that has been above the amount limited by HUD. In addition, the
sale of all of its properties have been to the buyers at the market
value without any benefit from the discounted property purchase
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from HUD being passed on to the homebuyer as also required
and intended by HUD.
RECOMMENDATIONS We recommend that the Denver Homeownership Center:
1A. Disapprove Brothers Redevelopment from further
participation in HUD’s FHA Single Family Insurance
Programs.
1B. Determine what the actual net development cost is for each
30 percent property purchased and rehabilitated by Brothers
Redevelopment. Based on the actual net development cost,
calculate the excess profits. Decide how the homebuyers
are to be compensated for the excess profits that were
passed on to them in the form of an increased property
purchase price.
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Management Controls
In planning and performing our audit, we obtained an understanding of the management controls
that were relevant to our audit. Management is responsible for establishing effective management
controls. Management controls, in the broadest sense, include the plan of organization, methods
and procedures adopted by management to ensure that its goals are met. Management controls
include the processes for planning, organizing, directing, and controlling program operations.
They include systems for measuring, reporting, and monitoring program performance.
We determined the following Brothers Redevelopment
Management controls management controls were relevant to our audit objectives:
assessed
• Governing policies and procedures as established by
Brothers Redevelopment relating to its HUD approved
Affordable Housing Program;
• Procedures for implementing its Affordable Housing
Program granting independence from other parties; and
• Procedures granting discounts from the purchase of HUD
discounted properties were passed on to low- and moderate-
income homebuyers.
The following audit procedures were used to evaluate the
Assessment procedures
management controls:
• Review of established procedures formulated by Brothers
Redevelopment in implementing its Affordable Housing
Program;
• Interviews with officials and employees of Brothers
Redevelopment and other related parties and entities;
• Review of Brothers Redevelopment’s Affordable Housing
Program records and related files;
• Review of program records and files maintained by
independent parties associated with Brothers
Redevelopment’s Affordable Housing Program;
• Review of records and files maintained by the Denver
Homeownership Center in connection with the approval and
oversight of the HUD FHA Single Family Insurance
Program activities by the approved nonprofit Brothers
Redevelopment, Inc.; and
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2001-DE-1002
• Interview with applicable officials and employees of the
Denver Homeownership Center relating to activities
associated with Brothers Redevelopment.
A significant weakness exists if management controls do not
Significant Weaknesses give reasonable assurance that resource use is consistent with
laws, regulations, and policies; that resources are safeguarded
against waste, loss, and misuse; and that reliable data is obtained
and maintained, and fairly disclosed in reports. Based on our
audit, we identified the following significant weaknesses:
• Brothers Redevelopment did not administer or carryout its
Affordable Housing Program as approved by HUD or in
conformity with HUD requirements, (Finding) and
• Benefits realized from the acquisition of discounted HUD
properties were not passed on to the low- and moderate-
income homebuyer as required (Finding).
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2001-DE-1002
Follow-up on Prior Audits
This is the first HUD Office of Inspector General for Audit review of activities of Brothers
Redevelopment, Inc.
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Appendices
Appendix 1 - Auditee Comments
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Appendix 2
Distribution
Secretary’s Representative, 8AS (2)
Director, Denver Homeownership Center, 8AHH (2)
Deputy Assistant Secretary for Single Family Housing, HU, Room 9282
Special Assistant for Single Family Housing, HU, Room 9278
Deputy Secretary, SD, Room 10100
Chief of Staff, S, Room 10000
Assistant Secretary for Administration, A, Room 10100
Deputy Chief of Staff, S, Room 10226
Deputy Chief of Staff for Operations, S, Room 10226
Deputy Chief of Staff for Programs and Policy, S, Room 10226
Assistant Secretary for Congressional and Intergovernmental Relations, J, Room 10120
Senior Advisor to the Secretary, Office of Public Affairs, S, Room 10132
Deputy Assistant Secretary for Public Affairs, W, Room 10222
Special Counsel to the Secretary, S, Room 10234
General Counsel, C, Room 10214
Deputy General Counsel, CB, Room 10220
Office of Policy Development and Research, R, Room 8100
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7106
Director, Office of Department Operations and Coordination, I, Room 2124
Chief Procurement Officer, N, Room 5184
Chief Information Officer, Q, Room 3152
Chief Financial Officer, F, Room 2202
Deputy Chief Financial Officer for Operations, FF, Room 10166
Director, Office of Budget, FO, Room 3270
Director, Enforcement Center, V, 200 Portals Building
Director, Real Estate Assessment Center, X, 1280 Maryland Ave., SW, Suite 800
Departmental Audit Liaison Officer, FM, Room 2206
Headquarters Audit Liaison Officer, Public and Indian Housing, PF, Room P8202
Field Audit Liaison Officer, 6AF, (2)
Director of Scheduling and Advance, AL, Room 10158
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108 (2)
Special Assistant to the Deputy Secretary for Program Management, SD, Room 10100
Acquisitions Librarian, Library, AS, Room 8141
Inspector General, G, Room 8256
The Honorable Joseph Lieberman, Chairman, Committee on Governmental Affairs, 340 Dirksen
Senate Office Building, United States Senate, Washington, DC 20510
The Honorable Fred Thompson, Ranking Member, Committee on Governmental Affairs, 706
Hart Senate Office Building, United States Senate, Washington, DC 20510
The Honorable Dan Burton, Chairman, Committee on Governmental Reform, 2185 Rayburn
Bldg., House of Representatives, Washington, DC 20515
Henry A. Waxman, Ranking Member, Committee on Governmental Reform, 2204 Rayburn
Bldg., House of Representatives, Washington, DC 20515
Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neil House
Office Building, Washington, DC 20515
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2001-DE-1002
Director, Housing and Community Development Issue Area, United States General Accounting
Office, 441 G Street, NW, Room 2474, Washington, DC 20548 (Attention: Stan
Czerwinski)
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy and Urban
Resources, B373 Rayburn House Office Building, Washington, DC 20515
Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street, NW,
Room 9226, New Executive Office Building, Washington, DC 20503
Andy Cochran, House Committee on Financial Services, 2129 Rayburn H. O. B., Washington,
DC 20515
49
Review of Housing Activities in FHA Single Family Insurance Programs, Brothers Redevelopment, Inc., Denver, Colorado
Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-09-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)