U.S. Department of Housing and Urban Development Office of Inspector General Pacific/Hawaii Region IX 611 West Sixth Street, Suite 1160 Los Angeles, California 90017-3101 (213) 894-8016 Fax (213) 894-8115 Memorandum No. 2005-LA-1804 January 3, 2005 MEMORANDUM FOR: John C. Weicher, Assistant Secretary for Housing, Federal Housing Commissioner and Chairman of Mortgagee Review Board, H Margarita Maisonet, Director, Departmental Enforcement Center, CV FROM: Joan S. Hobbs, Regional Inspector General for Audit, 9DGA SUBJECT: GMAC Commercial Mortgage Pasadena, CA Canoga Care Center Canoga Park, CA Project No. 122-22028 INTRODUCTION We have completed a review of the Canoga Care Center project, located in Canoga Park, California. We initiated the review as part of an overall Office of Inspector General inquiry into the default of Section 232 insured projects, and due to concerns raised by the Los Angeles Multifamily Hub about the Canoga Care Center project. Our objectives were to determine whether the project was operated in accordance with the regulatory agreements and to identify the reasons for the mortgage loan default. Although our initial focus and approach was a review of project operations to identify the cause of the default, we concluded that the loan was jeopardized prior to any operations under HUD’s Section 232 insurance program. We found that GMAC Commercial Mortgage did not properly originate the loan, and the improper loan origination substantially contributed to the mortgage default. We therefore recommend that GMAC Commercial Mortgage be held accountable for the improper $6.7 million insured loan origination and the $3.3 million loss incurred by HUD when the insured note was sold. We also recommend civil and/or administrative actions against the individual lender, owner, and operator officials involved in the improper loan origination. METHODOLOGY AND SCOPE We reviewed pertinent records and interviewed officials of the Los Angeles HUD Multifamily Hub, GMAC Commercial Mortgage (lender), UHCSC/Canoga, Inc. (owner), and Living Center of Canoga Park, Inc./Eldercare Inclusive Foundation (operator). We reviewed the reports and working papers prepared by the project’s independent auditor, and also reviewed documents obtained from two title companies. Our review generally covered the period from Firm Commitment application in May 2000 through project note sale in April 2004. However, we reviewed other periods of time as appropriate. BACKGROUND The Canoga Care Center is a 200 bed skilled nursing facility built in 1968, and purchased by UHCSC/Canoga, Inc. in October 2000. Financing for the purchase was provided in part by a $6,696,000 Section 232 insured mortgage loan originated by GMAC Commercial Mortgage.1 The insured loan defaulted in October 2002, and the note was assigned to HUD in August 2003. HUD paid claims to GMAC Commercial Mortgage totaling $6,692,518 in conjunction with the assignment, and resold the note in April 2004, for $3,262,104. Losses to HUD on this loan after various fees and adjustments totaled $3,321,917. RESULTS OF REVIEW GMAC Commercial Mortgage did not properly originate the HUD insured mortgage loan, and the improper loan origination was a critical factor in the subsequent mortgage default and claim. The project was also not operated in accordance with the regulatory agreements, but issues pertaining to project operations are being pursued independently of the loan origination issues, and will be addressed in a separate report. The mortgage note should not have been submitted to HUD for insurance endorsement GMAC Commercial Mortgage misled HUD relative to key aspects of the insured loan transaction in requesting both Firm Commitment approval and final insurance endorsement. As a result, HUD insured the $6.7 million loan for a project operated by an entity encumbered by over $3 million of delinquent debt. The improper loan origination substantially contributed to the mortgage loan default that ultimately resulted in a loss of over $3.3 million to HUD. GMAC Commercial Mortgage processed the majority of the Canoga Care Center loan documents as if the existing operator (Living Center of Canoga Park, Inc.) would be replaced with a management agent (Living Center of the Valley, Inc.). A new operating entity or management agent was deemed necessary because the existing operator was encumbered by over $3 million of (primarily Federal tax) liens. GMAC Commercial Mortgage officials were aware of the liens against the existing operator. However, when it was determined that the new operator could not qualify for State licensing, the loan was closed and submitted for insurance endorsement with Living Center of Canoga Park, Inc. substituted as the operator. 1 GMAC Commercial Mortgage is a HUD approved mortgage lender under 24 CFR 202. 2 On May 10, 2000, GMAC Commercial Mortgage provided HUD with the Firm Commitment application package stipulating Living Center of the Valley, Inc. was the project management company. The Firm Commitment application included an affirmative statement from GMAC Commercial Mortgage that Living Center of the Valley, Inc. was then managing, and would continue to manage, the property.2 However, Living Center of the Valley, Inc. never did manage the property, and just days before the loan closed, several key documents were executed and/or altered, substituting Living Center of Canoga Park, Inc. for Living Center of the Valley, Inc. as the operator.3 The Firm Commitment application package included a variety of requisite exhibits, including Previous Participation Certifications (Form HUD-2530s), Supplement to Application for a Multifamily Housing Project (Form HUD-92013 Supp) and commercial credit reports.4 All of these documents were prepared and submitted to HUD by GMAC Commercial Mortgage representing that Living Center of the Valley, Inc. was the project management agent. If the loan had been processed with Living Center of Canoga Park, Inc. as the management agent or operator, the significant Federal tax lien problem would have been disclosed to HUD on the Form HUD-92013 Supp and/or the commercial credit report, and would have resulted in an application rejection. The undisclosed $3 million in liens against Living Center of Canoga Park, Inc. remained in force after the HUD loan closing, and led to the operator filing for bankruptcy protection within three months after insurance endorsement. The bankruptcy proceedings temporarily held other creditors at bay, so the loan remained current for nearly two years. However, the loan defaulted in October 2002, shortly after the Living Center of Canoga Park, Inc. bankruptcy was dismissed without relief from any creditors. Notwithstanding the fact that all loan processing, including the Firm Commitment, application underwriting, mortgage credit analysis and approval, reflected operation of the project by Living Center of the Valley, Inc., GMAC Commercial Mortgage allowed the loan to close on October 4, 2000, and submitted the note for HUD’s insurance endorsement with Living Center of Canoga Park, Inc. continuing as lessee operator of the project. The loan file submitted to HUD included opinion statements and certifications from the mortgagor attorney and the mortgagor falsely attesting to the propriety of all loan and supporting documents. HUD relied on these opinion statements/certifications, GMAC Commercial Mortgage’s fiduciary responsibility to HUD, and the assumed integrity and competence of GMAC Commercial Mortgage, in endorsing the loan for insurance. 2 This statement was in the “Review of Ownership and Management” section of the “Underwriting Review and Summary” and was signed by both a GMAC Commercial Mortgage Vice President and an Assistant Vice President. 3 The Regulatory Agreement was executed by Living Center of Canoga Park, Inc., and the Management and Operating Agreement was altered substituting Living Center of Canoga Park, Inc. for Living Center of the Valley, Inc. Virtually all other operator/management agent documents pertained to and were executed by Living Center of the Valley, Inc. 4 These exhibits were required by HUD Handbook 4470.1 REV-2 and/or the Los Angeles HUD Multifamily Hub for all Principals as defined by 24 CFR 200.215(e)(1) including management agents and nursing home operators. 3 AUDITEE COMMENTS AND OIG EVALUATION OF AUDITEE COMMENTS An advance copy of the memorandum report was provided to GMAC Commercial Mortgage for their comments, and was discussed with them at an exit conference on December 2, 2004. The December 2, 2004, written response from GMAC Commercial Mortgage expressed disagreement with our conclusions generally, and categorically denied any assertion that they had actively misled HUD or misrepresented the facts or circumstances of the Canoga Care Center loan. Their written response is included as Appendix B, and our evaluations of the response comments are as follows: Comment Synopsis GMAC Commercial Mortgage contends that HUD was advised of the legal/financial problems associated with Living Center of Canoga Park, Inc. via the title Commitment provided with the application for Firm Commitment on May 10, 2000, and the September 24, 2000, facsimile transmission of a draft pro-forma title policy including correspondence from the owner attorney. OIG Evaluation The title Commitment submitted with the Firm Commitment application did not identify any title problems that would be unusual or alarming for an existing nursing home operation. Moreover, it did not identify or allude to the over $3 million of delinquent debt against Living Center of Canoga Park, Inc. Also, the September 24, 2000, facsimile transmission (from the GMAC Commercial Mortgage attorney to the HUD attorney) did not identify any of the financial problems faced by Living Center of Canoga Park, Inc. Comment Synopsis GMAC Commercial Mortgage disclaims any role in or knowledge of the last minute substitution of Living Center of Canoga Park, Inc. for Living Center of the Valley, Inc., but asserts that the substitution did not impact on the eventual mortgage default. They suggest that the cause of the default may have been faulty and possibly unlawful project operations, and delays by both the mortgagor and HUD in removing Living Center of Canoga Park, Inc. as manager/operator. OIG Evaluation We do not know whether GMAC Commercial Mortgage officials were actively involved in the manager/operator substitution, but they were aware of the substitution.5 They were also aware of the substantial debt encumbering Living Center of Canoga Park, Inc. Nevertheless, they allowed the loan to close and requested insurance endorsement with Living Center of Canoga Park continuing as operator. HUD was never advised of any significant financial problems pertaining to the manager/operator. In fact, it does not appear that HUD was even aware that Living Center of the Valley, Inc. was a separate legal entity from Living Center of Canoga Park, Inc. HUD had issued the Firm Commitment under the assumption that Living Center of the Valley, Inc. was then managing and would continue to manage the property. 5 On September 27, 2000, the GMAC Commercial Mortgage attorney provided HUD with the Regulatory Agreement – Nursing Homes referencing Living Center of Canoga Park, Inc. as the Lessee and Operator. 4 The connection between Living Center of Canoga Park, Inc.’s preexisting financial impediments, the bankruptcy filing and dismissal, and the mortgage default is described in a June 18, 2003, operator response to the draft Independent Public Accountant audit of the project. Our review also supports this scenario although there were other owner and operator issues that exacerbated the project’s financial difficulties. However, the principal issue is not whether the loan would also have defaulted under Living Center of the Valley, Inc.’s management. HUD’s Commitment for insurance was based on project management by Living Center of the Valley, Inc., and no such Commitment would have been issued with proper disclosure and processing of the loan with Living Center of Canoga Park, Inc. as operator or management agent. Full disclosure to HUD of facts known by GMAC Commercial Mortgage regarding the two manager/operator entities as required and expected of any HUD approved prudent lender,6 would have prevented the ultimate $3.3 million loss to HUD because the loan would not have been closed or endorsed for insurance. Several efforts were made by the owner and HUD to replace the operator but these efforts were inhibited primarily because the nursing home license belonged to the operator, Living Center of Canoga Park, Inc. The legal status of the altered Management and Operating Agreement was also questionable, as was the lease agreement between the previous owners and Living Center of Canoga Park, Inc. that included a provision binding all successors in interest of the original parties. Comment Synopsis The GMAC Commercial Mortgage written response contrasts the lender loan origination responsibilities under HUD’s “fast-track” and “Multifamily Accelerated Processing” programs and contends that a credit and claims history on an operator/manager, i.e. Living Center of Canoga Park, Inc., was not required under the fast-track processing applicable to this project. OIG Evaluation We did not suggest that the Canoga Care Center project was subject to any of the new or different processing requirements promulgated under HUD’s Multifamily Accelerated Processing program. We also acknowledge that there may be differing interpretations as to the requirements of HUD Handbook 4470.1 REV and 24CFR 200.215(e)(1). However, the HUD Los Angeles Multifamily Hub’s interpretation of the handbook and CFR was and is that credit histories (credit reports) and the disclosure of any delinquent Federal debt (on form HUD-92013 Supp) have always been required for all management agents and nursing home operators. The fact that GMAC Commercial Mortgage did submit both credit reports and form HUD-92013 Supps for the intended management agent, Living Center of the Valley, Inc., is tacit acknowledgement of the LA Multifamily Hub requirement if not the handbook and CFR requirements. Moreover, GMAC Commercial Mortgage did have both knowledge and documentation of the over $3 million of delinquent debt against Living Center of Canoga Park, Inc. They were obligated by their fiduciary responsibility as a HUD approved lender to disclose this information to HUD. 6 Code of Federal Regulations 24 CFR 202.5(j)(4) provides that “Neither the lender or mortgagee, nor any officer, partner, director, principal or employee of the lender or mortgagee shall … Be engaged in any business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility.” 5 Comment Synopsis GMAC Commercial Mortgage categorically denies that they may have misrepresented the facts or circumstances of the Canoga Care Center loan to HUD. They characterize their statement that “Living Center of the Valley, Inc. dba Management Resources is the current management company of the property and will continue to manage the property,”7 as inconsequential and only a “minor error.” OIG Evaluation We view the subject statement differently. We believe it constitutes an overt misstatement by GMAC Commercial Mortgage officials that misled HUD as to the identities of the existing and proposed operator/manager entities. HUD’s processing of the loan suggests that they were not even aware there were two different operator/manager entities. This likely occurred because of the similarities between the two entity names, and the signed statement by GMAC Commercial Mortgage officials actively promoting the misconception to HUD. The September 24, 2000, facsimile sent to the HUD attorney by the GMAC Commercial Mortgage attorney was a re-transmittal of part of the facsimile they received from the owner attorney on September 18, 2000. The facsimile sent to HUD did not include the last nine pages of the owner attorney facsimile, which detail the over $3 million of liens against Living Center of Canoga Park, Inc. Whether intentional or not, this omission facilitated the closing and unwitting insurance endorsement by HUD of a loan involving an operator with serious and prohibitive financial difficulties. At the very least, the actions and inactions of GMAC Commercial Mortgage officials in the origination of the Canoga Care Center loan represent imprudent and irresponsible lending practices which are grounds for administrative action by the Mortgagee Review Board under 24 CFR 25.9(p). RECOMMENDATIONS We recommend the Assistant Secretary for Housing – Federal Housing Commissioner and Chairman, Mortgagee Review Board: 1A. Initiate settlement negotiations with GMAC Commercial Mortgage seeking reimbursement for the $3,321,917 in losses on the Canoga Care Center insured loan. If an equitable settlement cannot be reached, undertake appropriate remedial actions against GMAC Commercial Mortgage as available under Mortgagee Review Board regulations and authority. 7 This statement was in the May 10, 2000, Firm Commitment application Underwriting Review Summary and was signed by two GMAC Commercial Mortgage officials. 6 We recommend the Director, Department Enforcement Center: 1B. Take appropriate civil and/or administrative actions against the individual lender, owner, owner attorney and operator officials principally involved in the improper loan origination. In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each recommendation without a management decision, a status report on: (1) the corrective action taken; (2) the proposed corrective action and the date to be completed; or (3) why action is considered unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for any recommendation without a management decision. Also, please furnish us copies of any correspondence or directives issued because of the review. If you have any questions, please contact me at (213) 894-8016, or Charles Johnson, Assistant Regional Inspector General for Audit, at (602) 379-7243. 7 Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS PUT TO BETTER USE Recommendation Type of Questioned Cost Funds Put to Number Ineligible 1/ Unsupported 2/ Better Use 3/ 1A $3,321,917 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law, contract or Federal, State or local policies or regulations. 2/ Unsupported costs are costs charged to a HUD-financed or HUD-insured program or activity and eligibility cannot be determined at the time of audit. The costs are not supported by adequate documentation or there is a need for a legal or administrative determination on the eligibility of the costs. Unsupported costs require a future decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of Departmental policies and procedures. 3/ Funds Put to Better Use represent costs that will not be incurred in the future if our recommendations are implemented. This includes funds that may be collected and deposited into the insurance fund to offset outlays (claims). 8 Appendix B 9 10 11 12 13 14
Canoga Care Center, Canoga Park, CA, Project No. 122-22028
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-01-03.
Below is a raw (and likely hideous) rendition of the original report. (PDF)