oversight

Enterprise Home Ownership partners-Dallas, INC., Dallas, TX Achieved Program Objectives But Did Not Fully Comply With Certain Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-02-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                Issue Date
                                                                       February 18, 2009
                                                                Audit Report Number
                                                                       2009-FW-1006




TO:         Brian D. Montgomery
            Assistant Secretary for Housing–Federal Housing Commissioner, H



FROM:       Gerald R. Kirkland
            Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: Enterprise Home Ownership Partners–Dallas, Inc., Dallas, Texas, Achieved
         Program Objectives but Did Not Fully Comply with Certain Requirements


                                   HIGHLIGHTS

 What We Audited and Why

             As part of a nationwide internal audit of the U. S. Department of Housing and
             Urban Development’s (HUD) asset control area program (program), we
             performed an external audit of Enterprise Home Ownership Partners–Dallas, Inc.
             (EHOP-Dallas). Our objective was to determine whether EHOP-Dallas
             administered the program in compliance with its agreement with HUD and the
             program objective to promote the revitalization, through expanded
             homeownership opportunities, of revitalization areas.

 What We Found
             EHOP-Dallas administered its program in an effective manner, increasing
             homeownership in revitalization areas and contributing to reducing blight in some
             neighborhoods. However, it did not comply with requirements when it (1)
             provided home buyers excess equity in the homes it resold, (2) did not resell all
             homes within the time limits established under the agreement, and (3) included
             ineligible expenses associated with theft and vandalism in net development costs.
What We Recommend


           We recommend that the Assistant Secretary for Housing–Federal Housing
           Commissioner require EHOP-Dallas to calculate home-buyer enforcement notes
           as defined in the agreement and to exclude expenses associated with casualty losses
           in its calculations of net development costs. In addition, we recommend revising
           the agreement to address disposition of properties that the purchaser cannot sell
           within 18 months because of market conditions or other factors beyond its
           control.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We provided a draft report to EHOP-Dallas on January 30, 2009, and asked for a
           written response by February 13, 2009. We held an exit conference to discuss the
           results of the audit on February 9, 2009. EHOP-Dallas provided its written
           response at the exit conference. EHOP-Dallas generally agreed with the findings
           and provided additional explanations for its actions. The complete text of EHOP-
           Dallas's response, along with our evaluation of that response, can be found in
           appendix A of this report.




                                            2
                          TABLE OF CONTENTS

Background and Objectives                                                   4

Results of Audit
      Finding   EHOP-Dallas Achieved Program Objectives but Did Not Fully   5
                Comply with Requirements

Scope and Methodology                                                       9

Internal Controls                                                           10

Appendix
   A. Auditee Comments and OIG’s Evaluation                                 11




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                     BACKGROUND AND OBJECTIVES

The purpose of the asset control area program (program) was to promote the revitalization,
through expanded homeownership opportunities, of designated revitalization areas. The U. S.
Department of Housing and Urban Development (HUD) sold single family homes in
revitalization areas at a discount to units of local government and approved nonprofit
organizations (purchaser); it did not offer discounts to approved for-profit organizations. The
purchaser performed rehabilitation work on the homes and resold them to eligible buyers. An
eligible buyer was an officer or teacher who was required to reside in the home for one year, or a
family with a household income at or below 115 percent of median income which was required
to reside in the home for three years. The resale price was the lesser of fair market value at the
time of resale or 115 percent of the purchaser’s net development costs.

HUD enforced the occupancy requirements with a home-buyer enforcement note which was a
forgivable loan in the amount of the difference between market value at the time of resale and
the resale price. If a home buyer did not meet the occupancy requirement, HUD required the
home buyer to repay a prorated portion of the note based on the amount of time the buyer
remained in the home.

HUD executed an asset control area agreement with Enterprise Home Ownership Partners–
Dallas, Inc. (EHOP-Dallas), an approved nonprofit organization, on June 21, 2005. Enterprise
Community Partners, Inc. was founded in 1982. It is a national nonprofit that provides expertise
for affordable housing and sustainable communities. It created EHOP-Dallas to serve low- and
moderate-income families by helping them achieve long-term homeownership. Its office is
located at 100 North Central Expressway, Suite 1299, Dallas, Texas 75201.

HUD conveyed the first properties to EHOP-Dallas in October 2005. In total, HUD conveyed
199 properties to EHOP-Dallas under the two-year agreement. The original controlling
agreement expired June 22, 2007, but continued to apply to unsold homes. At the time of this
audit, EHOP-Dallas and HUD were negotiating the terms of a new agreement. HUD had not
issued regulations for the program. As of October 8, 2008, EHOP-Dallas had rehabilitated all of
the properties and resold 166 of them.

Our audit objective was to determine whether EHOP-Dallas administered the program in
compliance with the agreement and the program objective to promote the revitalization, through
expanded homeownership opportunities, of revitalization areas.




                                                4
                                      RESULTS OF AUDIT

Finding           EHOP-Dallas Achieved Program Objectives but Did Not
                  Fully Comply with Requirements
Although EHOP-Dallas administered its program in an effective manner, it did not comply with
three aspects of the program that require resolution. Specifically, EHOP-Dallas resold properties
with home-buyer enforcement notes that exceeded the amount allowed under the agreement. In
doing so, it essentially provided gift funds to the resale buyer, provided resale buyers with excess
equity, and incurred losses on the properties. In addition, it did not resell 75 percent of homes
within 12 months of acquisition or 100 percent of homes within 18 months as required. Further,
rather than make claims against its insurance policy, EHOP-Dallas included the cost of
replacement air conditioners and other ineligible expenses associated with vandalism in net
development costs, thereby inflating costs that were passed on to the resale buyer.


    EHOP-Dallas Provided
    Excessive Resale Home-Buyer
    Enforcement Notes

                  EHOP-Dallas routinely provided resale home-buyer enforcement notes that
                  exceeded the amount required under the agreement.1 The home-buyer enforcement
                  note was forgiven if the resale buyer remained in the home for the required period.
                  If the buyer moved out before the required period, the buyer was required to repay
                  HUD a prorated portion of the note amount.

                  EHOP-Dallas increased the amounts of home-buyer enforcement notes as a form of
                  subsidy to assist buyers who did not have enough money for a downpayment or who
                  could not qualify for a mortgage at the resale price. EHOP-Dallas provided the
                  additional subsidy from its own funds as a way to carry out the program. It also
                  offered up to $20,000 home-buyer enforcement notes as a sales incentive to help
                  move properties that were not otherwise selling.

                  Excessive home-buyer enforcement notes provided resale buyers with increased
                  equity in homes. In some cases, EHOP-Dallas provided such funds when it spent
                  more on the property than it was worth. This practice could result in a resale buyer
                  being obligated to repay HUD more than the intended amount if the buyer did not
                  reside in the home for the required period. EHOP-Dallas commented that it lost
                  money on this program but wanted to honor its commitment to an underserved
                  community.

                  EHOP-Dallas submitted documentation of its costs and related calculations to HUD
                  for each property it acquired under the program. Through reviewing this

1
     Section 5.5(b) of the agreement required the resale home-buyer enforcement note to be in an amount equal to
     the difference between the resale price and the fair market value of the property at the time of resale.
                                                         5
                 documentation, HUD should have been aware of this practice, yet EHOP-Dallas said
                 that HUD had not commented on it. HUD’s primary monitoring objective was
                 ensuring that EHOP-Dallas did not make excess profit upon resale. HUD’s system
                 for capturing cost and price data for the program concentrated on excess profit rather
                 than the terms defined in the agreement, making it difficult for HUD to identify
                 excessive home-buyer enforcement notes. Nonetheless, HUD’s monitoring should
                 ensure that participants operate according to the program requirements.

                 EHOP-Dallas should limit the home-buyer enforcement note to the required amount
                 and classify separately additional subsidy that it provides.

    EHOP-Dallas Exceeded Resale
    Time Limitations

                 HUD required EHOP-Dallas to resell 75 percent of homes within 12 months of
                 acquisition and 100 percent of homes within 18 months.2 As of October 8, 2008,
                 EHOP-Dallas had resold 166 of the 199 properties it acquired under the program;
                 it still had 33 properties in inventory, all of which exceeded the 12-month
                 requirement and 22 of which exceeded the 18-month requirement. Of the 199
                 properties, 66 (33.2 percent) and 35 (17.6 percent) were held longer than the 12-
                 and 18-month time limitations, respectively.

                 Because the agreement did not allow for alternative means of disposition, EHOP-
                 Dallas continued to offer the completed properties for sale but also continued to
                 incur holding costs, thereby increasing net development costs and the related
                 development fee and decreasing the amount of equity that could be passed on to
                 the resale buyer. EHOP-Dallas was unable to sell homes within established
                 deadlines because (1) HUD did not approve demolition, (2) buyers were unable to
                 obtain financing, or (3) other market conditions impacted sales.

                 HUD Did Not Approve Demolition

                 According to EHOP-Dallas, three of its properties should have been demolished.
                 Conceptually, staff said it made no sense for EHOP-Dallas to rehabilitate the
                 properties. Further, they believed that they could have demolished the properties
                 and rebuilt them to provide a better useful life of the property. EHOP-Dallas
                 requested HUD to approve demolition, but HUD did not approve the request.
                 Eventually, EHOP-Dallas rehabilitated the properties at considerable expense
                 with limited benefits. In one example, it exceeded the 18-month resale deadline
                 because of the delays and extensive rehabilitation work. It incurred $90,319 in
                 rehabilitation costs on a property it purchased for $1 from HUD in October 2005.
                 The property appraised and sold for $87,500 in November 2007.




2
     Section 5.4 of the Asset Control Area agreement between HUD and EHOP-Dallas.
                                                     6
            Prospective Buyers Were Unable to Obtain Financing

            EHOP-Dallas stated that it had difficulty with prospective buyers being able to
            obtain financing. For example, it could not sell one of its condominiums that was
            under contract twice because lenders would not finance properties in that
            neighborhood. This situation led EHOP-Dallas to request and receive an
            amendment removing condominiums from the agreement.

            In other cases, EHOP-Dallas held open houses to attract potential buyers which
            generated interest among neighborhood residents who wanted to rent the homes
            rather than purchase them. EHOP-Dallas stated that it preferred not to enter the
            rental business but requested that HUD allow it to enter into lease-purchase
            arrangements on properties that it could not sell to eligible buyers.

            Market Conditions Impacted Sales

            There had been a decline in the local housing market over the past two years. The
            decline affected the number of homes sold and median sale prices. According to
            one report, local real estate agents sold 14 percent fewer homes in 2008 than in
            2007 in addition to an 8 percent decline in 2007. Further, the local median sales
            price dropped to $140,580 in October 2008 from a high of $158,000 in June 2007.
            EHOP-Dallas attributed part of its difficulty in selling the properties in a timely
            manner to the housing market conditions.

            HUD staff preferred that EHOP-Dallas not meet the resale deadlines rather than
            resell to ineligible buyers or those who could not afford the homes. HUD should
            consider revising the agreement to address the issue of unsalable properties.

EHOP-Dallas Included
Ineligible Expenses in Net
Development Costs

            Of the 14 property files reviewed, five contained documentation of some type of
            casualty loss generally resulting from theft or vandalism. For example, in two cases,
            the initial rehabilitation contract included new central air conditioning units, which
            were later stolen. Net development costs on these properties included both the
            original units and the replacement units, with costs ranging from $1,600 to $3,500
            each. EHOP-Dallas included both the original rehabilitation cost and the expenses
            associated with the theft in net development costs.

            At another property, a water leak in an adjacent property caused damage to EHOP-
            Dallas’s property. EHOP-Dallas made the necessary repairs and included the cost in
            net development costs instead of pursuing a claim against the owner of the
            neighboring property.




                                              7
                 Only expenses specifically identified in the agreement as eligible could be included
                 in the calculation of net development costs.3 EHOP-Dallas appropriately included
                 the cost of insurance premiums as eligible holding costs, yet chose not to submit
                 insurance claims for the losses. Hazard insurance premiums were eligible expenses
                 but the insurance deductibles and theft or casualty losses were not.

                 By including these ineligible expenses in net development costs, EHOP-Dallas
                 passed the costs on to resale buyers and overstated its fees. However, its practice of
                 regularly providing excess subsidy to resale buyers generally prevented it from
                 realizing excess profit upon resale.

                 HUD staff expressed tolerance for including limited amounts of expenses
                 associated with vandalism and insurance deductibles in net development costs.
                 However, the agreement prohibited the inclusion of these expenses. EHOP-
                 Dallas should not include expenses associated with casualty losses in its
                 calculation of net development costs. If HUD wishes to allow these expenses, it
                 should revise the agreement accordingly.

    Conclusion


                 EHOP-Dallas managed the program well and achieved the program objectives.
                 Despite its good faith efforts, EHOP-Dallas did not meet the resale deadlines
                 established in the agreement and continued to incur holding costs on the
                 properties it could not sell. It also provided excessive home-buyer enforcement
                 notes to resale buyers and included ineligible expenses associated with casualty
                 losses in net development costs. HUD should address these technical
                 noncompliance issues with specific policy guidance.

    Recommendations

                 We recommend that the Assistant Secretary for Housing–Federal Housing
                 Commissioner

                 1A. Require EHOP-Dallas to calculate home-buyer enforcement notes as defined
                     in the agreement and to classify and report separately any additional funds that
                     it provides.

                 1B. Revise the agreement to allow for alternative disposition methods when
                     participants are unable to resell rehabilitated properties to eligible buyers
                     within a reasonable period.

                 1C. Require EHOP-Dallas to exclude expenses associated with casualty losses in
                     its calculation of net development costs.

3
     Only costs specifically included in Exhibit 8 of the Asset Control Area agreement between HUD and EHOP-
     Dallas may be included in calculating net development costs.
                                                       8
                            SCOPE AND METHODOLOGY

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.

We conducted the audit at EHOP-Dallas’s offices in Dallas, Texas, and in our office in Fort
Worth, Texas, from August 2008 to January 2009. The audit period was calendar years 2006
and 2007, which we modified to include the most current information related to whether resale
timeframe requirements were met. To achieve the audit objective, we

        Obtained and reviewed relevant laws, draft regulations, HUD standard operating
        procedures, the program agreement, audit reports, and HUD monitoring review reports.

        Reviewed property and buyer records for a representative nonstatistical sample of
        properties that EHOP-Dallas rehabilitated and resold during the audit period. We
        reviewed supporting documentation for development costs, market value, and resale
        buyer eligibility.

        Inspected and photographed a nonstatistical sample of rehabilitated properties, including
        both unsold inventory and resold homes.

        Interviewed staff at EHOP-Dallas, the Fort Worth Office of Single Family Housing, the
        Denver Homeownership Center, and HUD headquarters.

        Obtained data showing acquisition and resale dates for the properties acquired under the
        agreement and aged the data to determine holding periods.

        Performed public records searches to identify any potential conflicts of interest.

We used data provided by EHOP-Dallas to determine its compliance with the resale time
limitations. The data covered the period from October 4, 2005, through October 8, 2008. We
tested the data for reliability4 by tracing data elements to source documentation. We determined
the data were sufficiently reliable as a basis for audit testing and reporting.

We selected a representative nonstatistical sample of 14 items for review of 140 properties
closed during the audit period. Since the sample was randomly selected, we expect the results to
be representative of EHOP-Dallas's operations. The resulting sample size allowed auditors to
complete the assignment in the time allotted. We used a judgment sample for the property
inspections by requesting EHOP-Dallas’s construction manager to show us a variety of
properties throughout its asset control area. We inspected and photographed three sold homes
and eight inventory homes and viewed and photographed an additional 10 homes from the street.
4
    We assessed reliability using Government Accountability Office (GAO) guidelines in publication GAO-03-
    273G, Assessing the Reliability of Computer-Processed Data.
                                                      9
                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are achieved:

       Effectiveness and efficiency of operations,
       Reliability of financial reporting, and
       Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.



 Relevant Internal Controls


       We determined the following internal controls were relevant to our audit objective:

          Program operations – Policies and procedures that management implemented to
          reasonably ensure that its program met its objectives.

          Validity and reliability of data – Policies and procedures that management
          implemented to reasonably ensure that valid and reliable data were obtained,
          maintained, and fairly disclosed in reports.

          Compliance with laws and regulations – Policies and procedures that management
          implemented to reasonably ensure that its resource use was consistent with laws and
          regulations.

       We assessed the relevant controls identified above.

       A significant weakness exists if management controls do not provide reasonable assurance
       that the process for planning, organizing, directing, and controlling program operations will
       meet the organization’s objectives.


 Significant Weaknesses


              We did not identify any significant weaknesses in the controls we assessed.




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                        APPENDIX

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation     Auditee Comments




                           11
12
Comment 1




            13
Comment 2




            14
Comment 3




            15
Comment 4




            16
17
                         OIG Evaluation of Auditee Comments

Comment 1   EHOP-Dallas agreed with the facts disclosed in the report but provided additional
            comments to explain the conditions reported. We acknowledge EHOP-Dallas's
            additional comments.

            We modified language in the report in response to EHOP-Dallas's comments
            concerning the cost of holding properties for an extended period of time and the
            opportunity costs of not being able to do additional development because of
            inventory build-up.

Comment 2   EHOP-Dallas provided additional comments to explain the conditions reported.
            We acknowledge that EHOP-Dallas made good faith efforts to sell its homes
            within the contractually stipulated time periods.

Comment 3   EHOP-Dallas provided additional comments to explain the conditions reported.
            We acknowledge EHOP-Dallas's additional comments.

Comment 4   We maintain our position that only expenses identified as eligible could be
            included in the calculation of net development costs. Casualty losses were not
            eligible expenses.

            We acknowledge EHOP's refined processes and procedures.




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