oversight

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)

                                                       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