oversight

Michaelson, Connor, and Boul, Southfield, MI, Did Not Provide Adequate Oversight of Closings on the Sales of HUD Real Estate-Owned Homes

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-15.

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

                                                                                Issue Date
                                                                                       September 15, 2010
                                                                                
                                                                                Audit Report Number
                                                                                       2010-CH-1012




TO:             Vicki B. Bott, Deputy Assistant Secretary for Single Family Housing, HU


FROM:           Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: Michaelson, Connor, and Boul, Southfield, MI, Did Not Provide Adequate
           Oversight of Closings on the Sales of HUD Real Estate-Owned Homes

                                            HIGHLIGHTS

    What We Audited and Why

                 We audited Michaelson, Connor, and Boul, Incorporated (MCB), a management
                 and marketing contractor for U.S. Department of Housing and Urban
                 Development (HUD) real estate-owned properties in Michigan. We selected
                 MCB based on the results of our audit of Custom Closing, a HUD-designated
                 closing agent for the State of Michigan (see Office of Inspector General (OIG)
                 audit report #2009-CH 1021, issued September 2009). Our objective was to
                 determine whether MCB complied with HUD’s requirements regarding the sales
                 of HUD single-family real estate-owned homes (HUD homes) in Michigan, in
                 particular the closing activities. The audit was part of the activities in our fiscal
                 year 2010 annual audit plan.

    What We Found

                 MCB did not adequately provide oversight of the closings on the sales of HUD
                 homes. Specifically, it did not always request lead-based paint stabilization1



1
  Many homes built before 1978 have paint that contains high levels of lead. Lead-based paint stabilization reduces
the exposure to deteriorated paint by removal or repainting with safe paint.
                  services and/or city presale inspections2 in a timely manner. Further, it did not
                  adequately monitor the closing agents and report to HUD deficiencies with
                  closing sales of HUD homes as required under its contract.

                  As a result, HUD and MCB incurred an additional $1 million plus in holding
                  costs3 to maintain the homes in its inventory and lost the opportunity to receive
                  more than $47,000 in proceeds as buyers cancelled their sales contracts due to
                  closing delays.

                  On February 5, 2010, HUD awarded MCB the contract for overseeing and/or
                  monitoring lenders for compliance with HUD’s requirements. MCB’s current
                  management and marketing contract was scheduled to end on August 31, 2010.
                  However, HUD extended MCB’s current management and marketing contract to
                  September 30, 2010. Given that MCB’s contract is scheduled to expire in less
                  than 30-days, this report does not contain a recommendation for MCB to improve
                  its procedures and controls regarding the oversight of the closings on HUD homes
                  since it will no longer perform this function.

    What We Recommend

                  We recommend that the Deputy Assistant Secretary for Single Family Housing
                  require MCB to provide documentation showing that the buyers cancelled their
                  sales contracts for case numbers 263-335607 and 262-151588 for reasons other
                  than delayed actions by MCB and/or the closing agents or reimburse HUD
                  $47,947 from non-Federal funds for the losses HUD incurred on the sales of the
                  two homes.

                  We also recommend that the Deputy Assistant Secretary for Single Family Housing
                  implement requirements for the new management and marketing contracts that
                  provide specific responsibilities for performing activities under the contracts,
                  including but not limited to requesting city presale inspections and lead-based paint
                  stabilization, to ensure that sales of HUD homes close in a timely manner and
                  monitoring the closing agents for compliance with their contracts with HUD.

                  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.




2
  Certain cities in Michigan require compliance inspections before the sale or transfer of single-family residential
properties. City representatives and the seller(s) arrange the inspections.
3
  Holding costs are the costs incurred for maintaining a property in HUD’s inventory such as property maintenance
and upkeep, taxes, utilities, etc.


                                                          2
Auditee’s Response

           We provided the results of our review to MCB’s management during the audit.
           We also provided our discussion draft audit report to MCB’s management and
           HUD’s staff during the audit. We conducted an exit conference with MCB’s
           management on July 8, 2010.

           We asked MCB’s management to provide written comments on our discussion
           draft audit report by July 26, 2010. MCB provided written comments to the
           discussion draft report, dated July 23, 2010. MCB generally disagreed with the
           finding and recommendations. The complete text of the MCB’s written
           comments, along with our evaluation of that response, except for 7 exhibits
           consisting of 175 pages, can be found in appendix B of this report.




                                           3
                            TABLE OF CONTENTS

Background and Objective                                                       5

Results of Audit
        Finding: MCB Did Not Adequately Manage Closings on the Sales of HUD
                 Homes                                                         6

Scope and Methodology                                                         11

Internal Controls                                                             13

Appendixes
   A. Schedule of Questioned Costs                                            15
   B. Auditee Comments and OIG’s Evaluation                                   16
   C. Federal and Contract Requirements                                       59
   D. Schedule of Home Sales With Presale Inspection Delays                   61
   E. Schedule of Requests To Extend Sales Contracts’ Closing Dates           63
   F. Schedule of Closing Delays Resulting From Approved Contract Extension
      Requests                                                                66
   G. Schedule of Delayed Sales Closings Due To Untimely Corrective Action    68
   H. Schedule of Delayed Sales Closings Not Reported to HUD                  69




                                           4
                          BACKGROUND AND OBJECTIVE

The Federal Housing Administration (FHA) administers the single-family mortgage program.
Upon default and foreclosure of an insured mortgage loan, the lender files a claim for insurance
benefits. In exchange for payment of the claim, the lender conveys the foreclosed-upon property to
the U.S. Department of Housing and Urban Development (HUD). The property is then deemed a
HUD real estate-owned property. HUD, through management and marketing contractors, manages
and initiates the sale of these single family homes (HUD homes) to promote homeownership and
maximize the net return to the mortgage insurance fund.

Michaelson, Connor, and Boul, Incorporated (MCB), an asset management company, has
specialized in real estate services since 1994. HUD contracts with MCB to manage and market its
real estate-owned single-family homes in several geographic areas such as Nevada and Arizona.
In February 2008, HUD amended MCB’s contract to include the State of Michigan. On September
1, 2009, HUD awarded MCB a new management and marketing contract that specifically covered
the State of Michigan. MCB’s headquarters is located at 5312 Bolsa Avenue, Suite 200,
Huntington Beach, CA. MCB’s Michigan branch is located at 100 Galleria Office Center, Suite
414, Southfield, MI.

In addition to managing, marketing, and selling HUD real estate-owned single-family homes, MCB
monitors and oversees the closing agents4. Further, MCB is responsible for coordinating the
closings on the sale of HUD homes with the closing agents to ensure that sales close in a timely
manner, thus minimizing HUD’s holding costs.

On February 5, 2010, HUD awarded a contract to MCB to oversee lenders and monitor them for
compliance with HUD’s requirements. MCB’s current management and marketing contract was
scheduled to end on August 31, 2010. However, HUD extended MCB’s current management
and marketing contract to September 30, 2010. Given that MCB’s contract will expire in less
30-days, this report does not contain a recommendation for MCB to improve its procedures and
controls regarding the oversight of the closings on HUD homes since it will no longer perform
this function.

Our objective was to determine whether MCB complied with HUD’s requirements regarding the
sale of HUD homes in Michigan.




4
  HUD contracts with closing agents to close sales of HUD homes. Closing agents settle real estate transactions
through the preparation of the HUD-1 settlement statements and disbursement of the sale proceeds.


                                                         5
                                         RESULTS OF AUDIT

Finding: MCB Did Not Adequately Manage Closings on the Sales of
                         HUD Homes
MCB did not adequately manage closings on the sale of HUD homes. Specifically, it did not
always request lead-based paint stabilization services and/or city presale inspections in a timely
manner. Further, it did not provide adequate monitoring and oversight of the closing agents and
report deficiencies with closing sales of HUD homes to HUD as required under its contract. The
problems occurred because MCB lacked adequate procedures and controls to ensure that it
complied with its contract. As a result, HUD and MCB incurred an additional $1,059,651 in
holding costs and lost the opportunity to receive more than $47,000 in proceeds as buyers
cancelled their sales contracts due to closing delays.


    MCB Did Not Ensure That City
    Presale Inspections and Paint
    Stabilizations Were Requested
    in a Timely Manner

                    Using HUD’s and MCB’s systems, we determined that 12,899 real estate sales
                    contracts were ratified5 and closed plus 1,933 real estate sales that were ratified
                    but not closed during our audit selection period of July 1, 2008, to October 23,
                    2009. Of the 12,899 contracts, 1,323 sales of HUD homes took more than 90
                    days to close. We statistically selected 111 closing files from the 14,832 real
                    estate sales (12,899 plus 1,933) for review to determine whether MCB managed
                    sales of HUD homes in accordance with its contract. Of the 111 closing files, 73
                    had the following deficiencies:

                            The closings for 30 (27 percent) home sales were stalled due to delays in
                             requesting city presale inspections. The closing agents requested 2 of the
                             inspections, and MCB requested the remaining 28. The number of days it
                             took MCB and/or the closing agents to request city presale inspections
                             ranged from 12 to 336 days after the sales contracts for the purchase of the
                             HUD homes were ratified (see appendix D). The presale inspection
                             reports were not received until 54 to 372 days later. According to Section
                             C.2(1) of the closing agent’s contract, the closing agent has 1 day to order
                             city inspections after receipt of the closing file (see appendix C). Further,
                             Section 5.4.4.1.2 of MCB’s contract requires it to monitor the closing
                             agents for fulfillment of their contracts and ensure that all sales close
                             within the time specified by the sales contracts, 60 days (see appendix C).

5
    Sales contracts that have been approved by the buyer and seller are deemed ratified.


                                                            6
                  The closings for 23 (21 percent) home sales were stalled due to the
                   untimely receipt of presale inspections. The city presale inspection reports
                   did not contain the dates on which MCB or the closing agents requested
                   the inspections; however, these reports were received between 57 and 451
                   days after the sales contracts were ratified (see appendix D). Additionally,
                   the number of days that elapsed between the date the sales contracts were
                   ratified and the date the reports were received did not allow sufficient time
                   to close the sales for the HUD homes within HUD’s requirements.
                   Section 11-11 of HUD Handbook 4310.5, REV-2, requires a closing
                   timeframe to be established within a range of 30 to 60 days of sale
                   contract acceptance. MCB was unable to provide documentation showing
                   that either it or the closing agents ordered the city presale inspections in a
                   timely manner to ensure that sales of HUD homes closed in accordance
                   with the sales contracts and HUD’s requirements (see appendix C).

                  For 12 sales (11 percent), with buyers seeking to obtain FHA-insured
                   mortgages, MCB did not request approval from HUD for the contractors
                   selected to perform lead-based paint stabilizations or contract with the
                   approved contractors in a timely manner (see appendix G). MCB took
                   approximately 23 to 145 days after the sales contracts were ratified to
                   perform the required actions, thus delaying the closing on the sales of the
                   HUD homes. According to HUD Handbook 4310.5, REV-2, section 11-8,
                   sales will be closed as soon as possible after execution of the sales
                   contract (see appendix C). Further, section 5.3.8.1.2 of MCB’s contract
                   requires MCB to order all lead based paint inspection and elimination
                   services.

                  For eight sales (7 percent), MCB did not provide needed documentation to
                   the closing agents, discuss with the buyers resolutions for homes that had
                   been vandalized, or perform necessary actions to remove squatters from
                   the HUD homes in a timely manner (see appendix G). Due to MCB’s
                   failure to take quick remedial actions, the closings on these homes were
                   delayed. According to Section 5.4.4.2 of MCB’s contract, MCB shall
                   ensure that all sales close within the time specified by the sales contracts.
                   The contractor is required to communicate with selling brokers and
                   purchasers to ensure timely closing or a sale cancellation. The contractor
                   must give HUD’s closing agents all needed sale documentation in time to
                   ensure a timely closing (see appendix C).

MCB Did Not Effectively
Monitor the Closing Agents

           MCB did not effectively monitor the closing agents to ensure that sales of HUD
           homes closed in a timely manner. For the 111 closing files reviewed, MCB
           approved 601 requests from the closing agents to extend the sales contracts’


                                             7
closing dates. Of the 601 requests to extend the closing dates on the sales of
HUD homes (several had more than one issue),

      216 requests (36 percent) were approved after the sales contracts or
       previous extensions to the sales contracts had expired (see appendix E).

      328 requests (55 percent) were for delays in requesting or following up on
       requests for city presale inspections. The number of days the closings on
       the sales of HUD homes were delayed ranged from 15 to 507 (see
       appendix F). Of the 328 requests, 7 were for the sale of a home for which
       the city presale inspection report was received before the latest sales
       contract was ratified since the home was previously under contract (FHA
       263-323187). However, the closing on the sale of the home was
       prolonged for 54 days due to city presale inspections.

      45 requests (8 percent) were for delays in seeking HUD approval or
       contracting for lead-based paint stabilization services (see appendix F).
       The number of days the closings on the sales of HUD homes were delayed
       ranged from 22 to 102.

      57 requests (10 percent) either did not contain appropriate justifications of
       the requests, or MCB failed to follow up on or resolve other closing-
       related issues identified on the extension requests, such as missing
       documentation (see appendix F). The number of days the closings on the
       sales of HUD homes were delayed ranged from 8 to 104.

Section 5.4.4.1.2 of MCB’s contract requires it to monitor the closing agents for
fulfillment of their contracts and ensure that all sales close within the time
specified by the sales contracts (see appendix C). According to Part C of the
closing agent contract, the closing agent must coordinate with the management
and marketing contractor to affect the closing within the timeframe specified in
the sales contract unless an extension is necessary due to circumstances outside of
the contractor’s control (see appendix C).

Additionally, for 61 of the 111 (55 percent) closing files, MCB did not always
report delays in closing sales of HUD homes that were caused by the closing
agents (see appendix H). According to Section 5.4.4.1.2 of MCB’s contract,
MCB has to submit to HUD’s government technical representative monthly
reports disclosing closing agent deficiencies, late submissions, and errors
resulting from closing agent error or incapacity and complaints about the closing
agent’s performance (see appendix C).




                                 8
Delays in Closing Sales of HUD
Homes Resulted in Buyers’
Cancelling Sales Contracts

             MCB failed to appropriately manage closings on the sales of HUD homes. For 18
             closing files, the buyers cancelled the sales due to closing delays. Specifically, of
             the 18 files (see appendix F),

                   The sales for nine homes were cancelled because the sales contracts
                    expired due to delays in closing the sales of the homes.

                   The sales for five homes were cancelled due to delays in requesting city
                    presale inspections or lead-based paint stabilizations. For two of the five
                    cancelled sales (case numbers 263-335607 and 262-151588), the homes
                    were later resold for lesser amounts, thus HUD lost more than $47,000 in
                    potential proceeds.

                   The sales for three homes were cancelled due to changes in the property
                    condition. Specifically, the homes remained vacant for days awaiting
                    presale inspections or lead-based paint stabilization services. Therefore,
                    the homes were subjected to vandalism.

                   The sale for one home was cancelled; however, the reason for its
                    cancellation was not disclosed in the file.

Conclusion


             MCB lacked adequate procedures and controls to ensure that it complied with its
             contract. It relied on the closing agents to order city presale inspections without
             monitoring the process to ensure that it was performed efficiently. Additionally,
             instead of trying to assist the closing agents in resolving issues with closing sales
             of HUD homes, MCB continued to grant requests for extensions to the closing
             dates identified on the sales contracts without sufficient justification. Further,
             MCB did not maintain a tracking system to monitor the status of the requests it
             submitted to (1) the various cities in Michigan for presale inspections, (2) HUD,
             or (3) the contractor approved by HUD to provide lead-based paint stabilization
             services.

             However, as of June 2009, MCB had assumed the sole responsibility for ordering
             city presale inspections and created a system to monitor and track this process.
             Nonetheless, it still had difficulties in coordinating the closing activities with the
             closing agents to ensure that sales of HUD homes occurred by the date specified
             on the sales contracts. Additionally, MCB did not report closing delays to HUD



                                               9
                 because it believed that since the closing dates identified in the sales contracts had
                 been extended, the closings were not stalled.

                 As a result of MCB’s failure to properly manage closings on the sales of HUD
                 homes and oversee the closing agents, HUD and MCB incurred an additional $1
                 million plus in holding costs to maintain the homes in its inventory and lost the
                 opportunity to receive more than $47,000 in proceeds as buyers cancelled their
                 sales contracts due to closing delays.

                 MCB reduced the number of delayed home sales closings. Of the 14,832 homes
                 that were sold during our audit selection period, 1,463(10 percent) took more than
                 90 days to close. However, as of March 1, 2010, we determined, based on
                 reviewing the data in HUD’s Single Family Asset Management system6, that
                 MCB reduced the number of delayed closings on the sales of HUD homes by 50
                 percent. As of September 30, 2010, MCB will no longer manage and market
                 HUD homes for sale.
    Recommendations

                 We recommend that the Deputy Assistant Secretary for Single Family Housing
                 require MCB to

                 1A.     Provide documentation showing that the buyers cancelled their sales
                         contracts for case numbers 263-335607 and 262-151588 for reasons other
                         than delayed actions by MCB and/or the closing agents or reimburse HUD
                         $47,947 from non-Federal funds for the losses HUD incurred on the sale
                         of the two homes.

                 We also recommend that the Deputy Assistant Secretary for Single Family Housing

                 1B.     Implement requirements for the new management and marketing contracts
                         that provide specific responsibilities for performing activities under the
                         contracts, including but not limited to requesting city presale inspections and
                         lead-based paint stabilization, to ensure that sales of HUD homes close in a
                         timely manner and monitoring the closing agents for compliance with their
                         contracts with HUD.




6
  The Single Family Asset Management System is a HUD system that contains information on acquired single-
family homes from acquisition through foreclosure to sale.


                                                     10
                             SCOPE AND METHODOLOGY

We performed our audit work between October 2009 and April 2010. We conducted our audit at
MCB’s Southfield, MI, office and HUD’s Detroit field office. The audit covered the period
February 8, 2008, to August 31, 2009. We extended this period as necessary.

To accomplish our objective, we reviewed MCB’s contract and marketing plans, applicable HUD
regulations, mortgagee letters, the closing agent contracts, and other reports and policies related to
the disposition of HUD homes. We also reviewed MCB’s quality control plan and hard-copy
information/documentation maintained in MCB’s Electronic Management System, such as sales
closing files, closing documents, etc. We also conducted interviews with MCB’s management and
staff and HUD staff.

Using MCB’s data and HUD’s Single Family Data Warehouse7and Single Family Asset
Management System, we identified 12,899 homes that were sold and closed during our audit
selection period of February 8, 2008, to October 23, 2009. Of the 12,899 homes sales, 1,323 took
more than 908 days to close. Using variable sampling, at a 90 percent confidence, 10 percent
precision, and 50 percent error rate, we statistically selected 65 of the 1,323 closing files to review
the sales.

Using MCB’s data and HUD’s Single Family Data Warehouse and Single Family Asset
Management System, we determined that 1,933 homes had been sold but not closed as of October
23, 2009. Of these, the closings on the sales for 140 homes were still pending more than 90 days
after they were sold at the time of our review. Using variable sampling, at a 90 percent confidence,
10 percent precision, and 50 percent error rate, we statistically selected 46 of the pending home
sales’ closings files to review to determine the reason why the closings on these homes sales were
delayed.

We relied on computer-processed data contained in HUD’s Single Family Data Warehouse and
Single Family Asset Management System only to obtain property information (informational
purposes only). We relied on hard-copy documentation maintained in MCB’s closing files and
Electronic Management System to support our audit finding.

In interpreting the results of the samples, we estimate that the total number of days that closing on
the sales of HUD homes were delayed for the 1,463 (1,323 plus 140) closing files reviewed was
59,766 collectively. Therefore, using this estimated number of days and multiplying it by the
average holding cost to HUD during our review period (July 1, 2008, to October 23, 2009) 9 of



7
  The Single Family Data Warehouse is a HUD database that contains data regarding borrowers with FHA-insured
mortgages such as names, addresses, Social Security numbers, and related financial data.
8
  Although MCB’s contract requires a 60 day closing period, we conservatively selected the closing files that
exceeded HUD’s 60-day closing requirement by more than 30 days.
9
  Although our audit period was February 8, 2008, to August 31, 2009, the loans we selected were as of July 1,
2008, to October 23, 2009, allowing for a transition period from the previous management and marketing contractor.


                                                       11
$17.73 10 per day, we determined that the estimated additional holding costs that HUD incurred due
to delays in closing sales of HUD homes totaled more than $1,059,651.

As of March 1, 2010, MCB had improved its procedures and controls for overseeing the sales and
closing of HUD homes and reduced the holding time in which the homes are in HUD’s inventory
by approximately 50 percent.

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 finding and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusions based on our audit objective.




10
  The average holding cost per day was provided by HUD’s Philadelphia Single Family Homeownership Center.
This amount was determined by adding the estimated cost per quarter, then averaging the amount.


                                                    12
                              INTERNAL CONTROLS

Internal control is a process adapted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to:

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

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals and objectives. Internal controls 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 that the following internal controls were relevant to our audit
               objective:

                     Effectiveness and efficiency of operations – Policies and procedures that
                      management has implemented to reasonably ensure that a program meets its
                      objective.

                     Compliance with applicable laws and regulations – Policies and procedures
                      that management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiency

               Based on our review, we believe that the following item is a significant deficiency:




                                                 13
   MCB lacked adequate procedures and controls to ensure that it complied with
    its contract and/or HUD’s regulations regarding the management and
    marketing of HUD homes (see finding).




                               14
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS


                             Recommendation       Unsupported
                                 number               1/
                                   1A              $47,947
                                  Total            $47,947


1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a 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.




                                             15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1




                         16
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




                         17
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 5




Comment 6




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 9




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 10




                         21
Ref to OIG Evaluation   Auditee Comments




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 11




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 12




Comment 13




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 14




                         25
Ref to OIG Evaluation   Auditee Comments



Comment 15




Comment 16




                         26
Ref to OIG Evaluation   Auditee Comments




Comment 17




                         27
Ref to OIG Evaluation   Auditee Comments




Comment 18




                         28
Ref to OIG Evaluation   Auditee Comments




Comment 19




Comment 20




                         29
Ref to OIG Evaluation   Auditee Comments




Comment 21




                         30
Ref to OIG Evaluation   Auditee Comments




Comment 22




Comment 23




                         31
Ref to OIG Evaluation   Auditee Comments




                         32
Ref to OIG Evaluation   Auditee Comments




Comment 24




                         33
Ref to OIG Evaluation   Auditee Comments




                         34
Ref to OIG Evaluation   Auditee Comments




Comment 25




                         35
Ref to OIG Evaluation   Auditee Comments




                         36
Ref to OIG Evaluation   Auditee Comments




Comment 26




Comment 27




                         37
Ref to OIG Evaluation   Auditee Comments




Comment 28




Comment 29




Comments 30




                         38
Ref to OIG Evaluation   Auditee Comments




Comment 31




Comment 32




                         39
Ref to OIG Evaluation   Auditee Comments




Comment 33



Comment 34




                         40
Ref to OIG Evaluation   Auditee Comments



Comment 35




Comment 36




Comment 37




                         41
Ref to OIG Evaluation   Auditee Comments




Comment 38




Comment 39




                         42
Ref to OIG Evaluation   Auditee Comments




Comment 40




Comments 41




                         43
Ref to OIG Evaluation   Auditee Comments




Comment 42




Comment 43




Comment 44




                         44
Ref to OIG Evaluation   Auditee Comments




Comment 45




                         45
Ref to OIG Evaluation   Auditee Comments




Comment 46




Comment 47




                         46
Ref to OIG Evaluation   Auditee Comments




                         47
                         OIG Evaluation of Auditee Comments

Comment 1   The audit addressed MCB’s awarding of HUD homes to the winning bidder and
            its oversight of the closing agents to ensure that sales of HUD homes closed in a
            timely manner. However, the discussion draft audit report only reported on
            MCB’s oversight of the closing on the sales of HUD homes due to the
            deficiencies identified in this process. Therefore, we adjusted the audit report to
            clearly distinguish that the audit focused only on this performance aspect of
            MCB’s contract. The role of HUD and non-HUD contractors was identified in
            the background section of the report, and considered during the audit only when
            determining the entity(s) that were responsible for delays in closing sales of HUD
            homes. Although outside influences may have contributed to delays in closing
            sales of HUD homes, we only cited deficiencies in which MCB did not act in a
            timely manner to ensure that the sales of HUD homes closed within the
            timeframes specified in buyers’ sales contracts.

            Further, in conducting the audit, we excluded outside factors that contributed to
            closing delays that were not under MCB’s authority or control. Therefore, we
            considered the roles other entities played in causing closing delays for every HUD
            home identified in this audit report. The audit focused on MCB’s compliance
            with its contract.

Comment 2   As mentioned in comment 1, the discussion draft audit report focused on the
            actual sales and closings of HUD homes. We agree that MCB’s contract with
            HUD entails many other aspects as a management and marketing contractor.
            However, this audit focused on the area, which disclosed indicators of potential
            noncompliance as indicated by a backlog of homes that were sold, but did not
            close in accordance with HUD’s requirements. For instance, during our review,
            of the 12,899 sales of HUD homes that closed during our audit period, more than
            29 percent (3,793) exceeded HUD’s 60-day requirement. However, this report
            only discussed the homes that were sold in excess of 90 days, which was 10
            percent (1,323) of the 12,899 sales. Therefore, a rate of nearly 30 percent
            indicated that there were problems with the closing on the sales of HUD homes,
            which is a performance measurement under MCB’s contract. According to MCB,
            it sold 13,855 homes during the period (this number differed from the number
            identified in the audit report); however, it did not provide the number of homes
            that was in its inventory at the time to support its assertion of its 127 percent
            success rate. Nonetheless, we adjusted the audit report to clearly identify the area
            of MCB’s contract that was reviewed.

Comment 3   As mentioned in comment 1, we excluded outside factors that contributed to
            delays in closing the sales of HUD homes that were not under MCB’s authority or
            control. Therefore, we considered the roles other entity(s) in causing closing
            delays for every HUD home identified in this audit report. Our discussion draft
            audit report addressed MCB’s delays in performing actions, such as (1) ordering
            lead paint inspections and lead-based paint abatements, (2) initiating requests for



                                             48
            documents, (3) ordering presale inspections, (4) approving unjustified requests for
            extension to the closing dates in the sales contracts, (5) requesting approval from
            HUD when required, and (6) reporting delays in closing on the sales of HUD
            homes to HUD as required under its contract. These delays were not the result of
            waiting on actions by another party as indicated by MCB, since a number of the
            actions identified in this audit report were initiated by MCB and/or required under
            its contract.

Comment 4   The review period covered by this audit report was for sales contracts ratified
            between July 1, 2008, and October 23, 2009. We specifically excluded the HUD
            homes that were managed by the previous marketing and management contractor
            and/or any delayed actions that were the result of the previous management and
            marketing contractor. Additionally, as mentioned in the Scope and Methodology
            section of this audit report, we removed all property transactions that occurred
            before and during MCB’s transition period or did not result in a delayed sale
            because of MCB. MCB provided exhibit A, which was electronic mail
            correspondence between MCB and a lead-based paint contractor. However, the
            home or homes that were impacted by this correspondence were not
            specified/identified. Further, if MCB provided documentation that clearly
            demonstrated that it was actively trying to correct the problems and the homes
            were identified, these homes and any related actions by MCB were not identified
            as being a performance deficiency of MCB; thus, they were excluded from this
            report.

Comment 5   As previously mentioned in comments 1, 2, and 3, our discussion draft audit
            report only reported on delays in closing sales of HUD homes as a result of MCB.
            If another entity contributed to the delays, we excluded the home(s) or excluded
            the days that elapsed due to delays of another entity. MCB provided exhibits B,
            C, and D (exhibit A was discussed in comment 4) as evidence of outside factors
            that contributed to closing delays. However, exhibits B and C do not identify the
            home or homes that were impacted. Additionally, the home identified in the
            correspondence provided by MCB as exhibit D was not identified in this audit
            report. Further, the correspondence, dated September 4, 2009, referred to by
            MCB, is an e-mail from HUD about a stop work order to a HUD lead-based paint
            contractor. However, the same e-mail also authorized MCB to obtain the required
            services from other qualified entities. As previously mentioned, our discussion
            draft audit report only reported on the delays of MCB that were not the result of
            others. Therefore, we did not include the time that elapsed due to the
            nonperformance of others, except when MCB failed to follow-up with HUD’s
            contractors to ensure that the lead-based paint abatement was performed within a
            reasonable timeframe. However, for a number of the lead based paint abatements,
            MCB did not initiate the required actions to procure the services of lead-based
            paint contractors after it received approval from HUD in a timely manner.

Comment 6   HUD’s closing agents have specific requirements in their contracts for obtaining
            city presale inspections as discussed in this audit report. Additionally, MCB’s



                                            49
            contract required it to coordinate the closing activities and oversee HUD’s closing
            agents. Therefore, if MCB identified concerns with closings on sales of HUD
            homes, these specific cases should have been reported to HUD as required under
            its contract. However, MCB did not report the delayed closings identified in this
            audit report to HUD. Additionally, MCB’s contract gives it the authority to
            approve requests for extensions to the closing dates identified in the sales
            contracts from the closing agents. Therefore, although HUD may have been
            aware of performance issues related to the closing agents, as discussed in our
            discussion draft audit report, MCB repeatedly approved requests for closing
            extensions that did not justify why the sale could not be closed without delays and
            that closings would be imminent. Additionally, since MCB approved the
            extension requests, it did not report the delayed closings on its monthly closing
            agent deficiency reports to HUD. Although the closing agent is not a sub-
            contractor of MCB, under its contract, MCB was required to coordinate with the
            closing agents and report each problem with closing sales of HUD homes to
            HUD.

Comment 7   As mentioned in comments 3 and 6, we excluded outside factors that contributed
            to closing delays that were not under MCB’s authority or control. Additionally,
            this audit report identified delays in closing the sales of HUD homes that were
            caused by MCB’s or the closing agents’ delays with ordering city pre-sale
            inspections. We considered the actions of the closing agent because MCB’s
            contract required it to monitor the closing agents to ensure sales of HUD homes
            closed in a timely manner. Further, MCB continued to approve unjustified
            requests for extensions to buyers’ sales contracts, for the purchase of HUD
            homes, from the closing agents due to city pre-sale inspections and did not report
            these delays to HUD. MCB contends that it took weeks to get city pre-sale
            inspections performed and certificates issued even when the inspections were
            ordered early in the sales process by the closing agents or others. This report
            addressed the time it took for MCB and/or the closing agents to order the pre-sale
            inspections. The time it took for the pre-sale inspections were identified in this
            report only because MCB was unable to provide documentation to determine
            whether it or the closing agents requested the inspections in a timely manner.

Comment 8   As mentioned in comment 6 and in reviewing exhibit F provided by MCB, we
            agree that MCB notified HUD of some closing issues with the closing agents, and
            HUD was aware of some particular cases. However, as mentioned in this audit
            report, MCB contributed to the delays in closing sales of HUD homes by
            continuing to grant requests for extensions to the closing dates identified in the
            sales contracts that were not justified, and without reporting these delayed
            closings on the closing agent deficiency reports to HUD as required under its
            contract. As part of this exhibit, MCB provided an e-mail from HUD, which
            specifically stated that if MCB receives an extension request that is incorrect, it
            should not be approved. For instance, if lead-based paint is annotated on the
            extension as the reason for the request but the lead-based paint was cleared a
            month prior, the extension request is not in compliance with HUD’s program.



                                            50
              Further, MCB contends that HUD told it to stop reporting certain issues with the
              closing agent to HUD. However, in reviewing the response from HUD to MCB,
              it did not indicate that HUD instructed MCB to stop reporting any issues on the
              closing agent deficiency reports. Instead, according to the documentation, HUD
              informed MCB to stop reporting issues related to extensions requested by buyers
              for which extension fees were already collected. Further, we did not evaluate
              exhibit G, which was MCB’s proposal to HUD for closing agent services in
              Michigan, since it was out of the scope of its contract requirements and, thus, not
              addressed in this audit report.

Comment 9     We acknowledge that HUD provided us with the estimated holding costs per
              quarter, along with the components that makes up this cost. We also
              acknowledge that we used the data obtained from HUD to compute the average
              holding cost amount for the State of Michigan. However, the amounts or costs
              that comprised these quarterly estimates were reviewed by us and documented in
              our audit workpapers before issuing our discussion draft report to MCB.
              However, at the exit conference, the supporting data was not readily available to
              provide the requested information. We provided an example of some of the
              expenses that comprised the estimate. However, as mentioned during the
              conference with MCB, we would provide a breakdown of the costs after a
              discussion with HUD’s staff, who participated in the exit conference. However,
              this recommendation, including the amount identified as the holding costs, was
              provided to MCB previously in communication e-mails with MCB and our draft
              finding outline. Therefore, MCB had opportunities to inquire about the cost with
              us before the exit conference. Additionally, as acknowledged by MCB during the
              same conference, it uses the holding cost figure itself in its operations; however, it
              never fully understood what made up the cost. Further, for reporting purposes, we
              used the data to estimate the potential loss but did not use the data in the finding
              or the recommendations as money to be repaid to HUD since it is an estimated
              cost. However, we modified the wording in our audit report and finding to state
              that the estimate for the holding cost is an estimated loss to HUD and MCB, since
              HUD also incurs costs associated with delays in closing sales of HUD homes.

Comment 10 We disagree with MCB’s assertion that the cancellation of the two sales we cited
           was due to market conditions and lender denial and was not under MCB’s control.
           For case number 263-335607, we noted that the sale that occurred on July 18,
           2008, was cancelled by the lender on October 28, 2008, due to the property’s
           lead-based paint issues were still not addressed. After the sale was cancelled,
           MCB approved three more requests from the closing agent to extend the closing
           date. Consequently, MCB did not relist this property for sale until December 5,
           2008. Additionally, MCB did not provide documentation to support its assertions
           that this contract for the property was cancelled due to the borrower’s inability to
           obtain financing.

              Additionally, for case number 262-151588, MCB’s closing file did not show
              when the well/septic inspection was ordered, but it was obtained 114 days after



                                               51
              the second sale of this property. MCB did not keep track of the date it ordered the
              inspection. The first sale was cancelled 337 days after the sale due to delays with
              the well/septic inspection. According to MCB’s contract, it must ensure that sales
              close within the dates specified in the sales contract. However, MCB did not keep
              track of the date on which the inspection was ordered to ensure a timely closing.
              Further, MCB did not provide documentation to support its assertion that the
              contract was cancelled because the borrower could not obtain a home loan.

              The losses to HUD, cited for these two sales, were calculated as the difference in
              estimated net proceeds between the original sales price and the lower subsequent
              sale. Holding costs were not used to calculate this loss. In both of these cases,
              the documentation provided to us by MCB disclosed that MCB did not act in a
              timely manner to order the required inspections or procure the services to abate
              the properties. Further, in determining the number of days it took for required
              actions to be performed, we did not include the time it took the contractors to
              perform the services. We only determined the number of days it took MCB to
              act.

              Therefore, the homes cited in this audit report only identified the delayed actions
              of MCB to perform the required duties under its contract. If outside factors or
              entities contributed to the delays, we did not count the number of days that
              elapsed as contributable to MCB.

Comment 11 As mentioned in comment 9, we consulted with HUD on numerous occasions
           regarding estimated holding cost figures. Therefore, the estimate was reviewed.
           However, since the number is an estimated figure, it is not practical to attribute
           the actual costs for HUD and MCB. We adjusted our report to state that the
           estimated holding costs are estimated costs to both MCB and HUD. The
           estimated holding costs amount is not a cost to be repaid to HUD. It is an
           estimated amount of the costs incurred by both parties to maintain homes in
           HUD’s inventory for extended periods. As mentioned in comments 1, 3, and 5,
           we only reported deficiencies in which MCB was responsible. If another entity
           contributed to the closing delays, we did not cite MCB for the days that elapsed
           due to the other entity(s). Although MCB’s contract does not include a provision
           for liquidated damages, to pursue collection from a management and marketing
           contractor due to negligence is a viable option of HUD. Additionally, whether or
           not HUD acted quickly to add more closing agents in Michigan does not negate
           MCB’s responsibilities under its contract. It still was required to approve
           extensions only when reasons were justified and closings were imminent and
           report unjustified delayed closings to HUD. Therefore, the losses cited for the
           two cancelled and resold properties were caused by MCB’s delay in performing
           needed actions; therefore, it is appropriate for HUD to recover the losses.

Comment 12 The discussion draft audit report acknowledged that MCB had reduced the
           number of late closings by 50 percent. Although the number of delayed closings
           on the sales of HUD homes was significantly reduced, MCB, even with the



                                               52
              implementation of its additional systems and processes, did not always order
              presale inspections in a timely manner when it initiated this process as disclosed
              in this audit report. It also continued to approve requests from the closing agents
              to extend the closings on the sales of HUD homes without sufficient justification
              during the audit period of July 2008 to October 2009. This period addressed
              home sales that occurred before and after HUD issued MCB a Cure Notice.
              According to MCB, HUD lifted the Cure Notice in June 2009. However, we
              identified deficiencies with MCB’s oversight of the closings on the sales of HUD
              homes that occurred after the notice was lifted. Additionally, since MCB
              approved requests for extensions to home sales contracts, it did not report the
              delayed closings to HUD as a closing agent-caused defect as required under its
              contract. Therefore, as mentioned in this report, although MCB made
              improvements, more were needed.

Comment 13 This audit report included a recommendation to HUD that would aid it in
           overseeing and monitoring marketing and management contractors for
           compliance with their contract. Additionally, as mentioned in comment 6, HUD’s
           closing agents have specific requirements in their contracts for obtaining city
           presale inspections. However, MCB’s contract required it to coordinate the
           closing activities and oversee HUD’s closing agents. Further, as mentioned in
           comment 5, this audit report only reported on the delays of MCB that were not the
           result of others. Therefore, we did not include the time that elapsed due to the
           performance of others, except when MCB did not follow-up with HUD’s
           contractors to ensure that homes with lead-based paint were abated in a
           reasonable timeframe. However, for a number of lead-based paint abatements,
           MCB did not initiate required actions to procure the services of lead-based paint
           contractors after it received approval from HUD in a timely manner.

Comment 14 Although MCB may or may not have authority to “fix the problems” that it
           notices during its oversight; however, under its contract, MCB is responsible to
           coordinate with the closing agents and report delayed sales closings to HUD that
           were due to the closing agent(s), and report delayed closings on the sales of HUD
           homes to HUD.

Comment 15 This audit addressed MCB’s compliance with its contract and excluded outside
           factors that resulted in delays in closing sales of HUD homes that were not under
           MCB’s control or caused by other entity(s). The audit considered the roles other
           entities played in causing delays with the sale for each HUD home identified in
           this audit report. However, reviewing the capacity of the closing agent to perform
           under its contract was not a factor in this audit. Had MCB reported delays in
           closing the sales of HUD homes to HUD as required under its contract due to the
           closing agent(s) or other entities, we would have excluded the properties from this
           audit report since MCB performed its contractual duties.




                                               53
Comment 16 As mentioned in comments 1 and 2, we adjusted our audit report to specifically
           identify the area of focus for this audit, which was MCB’s coordination and
           oversight of the closings on the sales of HUD homes.

Comment 17 We provided the information about MCB’s new upcoming contract and the
           ending of its current contract as background information only. Our review did not
           include the content of the new M&M III contracts, which were effective after
           August 31, 2010.

Comment 18 We agree and adjusted this report accordingly.

Comment 19 MCB alleged that it is not allowed or required or even authorized to step in a take
           steps to remedy the closing agent’s problems, which is HUD’s responsibility. As
           previously mentioned in comment 14, under MCB’s contract, it is responsible to
           coordinate with the closing agents and report delayed sales closings to HUD that
           were caused by the agents. Also, it is required to ensure that sales of HUD homes
           close in a timely manner. Had MCB reported the delayed closings to HUD as
           required, the homes that were identified as delayed due to the closing agents
           would have been excluded from this audit report.

Comment 20 As mentioned in comment 10, the loss to HUD for the two homes that were sold
           totaled more than $47,000. We determined this amount by subtracting the
           difference in the net proceeds between the original sales contract price and the
           lower subsequent sale. Estimated holding costs were not used to calculate this
           loss. Additionally, the sales of the two homes were cancelled by the buyers due
           to delays with closings. Further, documentation in the buyers’ closing files
           disclosed that MCB was the main contributor to the delays.

Comment 21 As mentioned in comment 9, the estimated holding costs are incurred by both
           HUD and MCB. Although the contractor bears responsibility for some of the fees
           associated with managing HUD homes, HUD also shares in these costs. HUD is
           responsible for the taxes, etc., and the costs incurred to repair vacant homes.
           HUD also incurs losses if it has to reduce the homes’ selling prices due to
           vandalism. These are examples of the costs that are paid by HUD. Therefore,
           HUD’s risk is increased the longer homes remain in its inventory.

Comment 22 This audit report does not recommend that MCB reimburse HUD for holding
           costs. As mentioned in comment 20, the loss amount was calculated based on the
           difference between the net proceeds that HUD would have received between the
           original sale and what HUD actually received in the subsequent sale due to the
           cancellation of the original sale. Additionally, as mentioned in comment 9, this
           recommendation, including the amount identified as the total holding cost, was
           provided to MCB previously in a number of communication e-mails and in our
           draft finding outline. Therefore, MCB had opportunities to inquire about the
           components of the holding cost with us prior to the exit conference. Further, we




                                              54
              used the estimated holding cost for reporting purposes only. We did not use this
              estimate to determine the potential loss to HUD.

Comment 23 See comments 9, 10, 11, 20, and 22.

Comment 24 As previously mentioned in comment 19, under MCB’s contract, it is responsible
           to coordinate with the closing agents and report delayed sales closings to HUD
           that were caused by the closing agents. Also, it is required to ensure that sales of
           HUD homes close in a timely manner. Had MCB reported the delayed closings to
           HUD as required, the homes that were identified as delayed due to the closing
           agents would have been excluded from this audit report.

Comment 25 As previously mentioned in comment 8 and in reviewing exhibit F provided by
           MCB, we do not disagree that MCB notified HUD of some closing issues with the
           closing agents and HUD was aware of some particular cases. However, as
           mentioned in this audit report, MCB contributed to the delays in closing sales of
           HUD homes by continuing to grant requests for extensions to the closing dates
           identified in the sales contracts that were not justified and without reporting these
           delayed closings on the closing agent deficiency reports to HUD as required under
           its contract. As part of exhibit F, MCB provided an e-mail from HUD, which
           specifically stated that if MCB receives an extension request that is incorrect, it
           should not be approved. For instance, if lead-based paint is annotated on the
           extension as the reason for the request but the lead-based paint was cleared a
           month prior, the extension request is not in compliance with HUD’s program.
           Additionally, as mentioned in comment 24, had MCB reported the delayed
           closings to HUD as required, the homes that were identified as delayed due to the
           closing agents would have been excluded from this audit report.

Comment 26 According to documentation provide by MCB and HUD, we agree that HUD
           instructed MCB to temporarily stop ratifying sales due to a new closing agent
           being added. However, our audit focused on MCB’s and/or the closing agents’
           actions after the sales contracts were ratified.

Comment 27 This audit report addressed the sales of HUD homes that did not close in the
           timeframes specified in the buyers’ sales contracts. We agree that there was a
           backlog of HUD homes waiting to close. MCB’s contract required it to oversee
           the closing activities and provide oversight of HUD’s closing agents to ensure that
           sales of HUD homes closed in a timely manner. However, MCB did not
           effectively monitor the closing agents for compliance with their contracts by
           failing to report deficiencies with the closing agents to HUD as required under its
           contract.

Comment 28 As previously mentioned in comments 1 and 15, our audit addressed MCB’s
           compliance with its contract and excluded outside factors that resulted in delays in
           closing sales of HUD homes that were not under MCB’s control or caused by
           other entity(s). We considered the role other entities played in causing delays



                                              55
              with the sale for each HUD home identified in this audit report. However,
              reviewing the capacity of the closing agent to perform under its contract was not a
              factor in this audit. Had MCB reported delays in closing the sales of HUD homes
              to HUD as required under its contract due to the closing agent(s) or other entities,
              we would have excluded the properties from this audit report since MCB
              performed its contractual duties.

Comment 29 See comments 14 and 24.

Comment 30 See comments 1, 3, 5 and 6.

Comment 31 As previously mentioned in comment 6, MCB’s contract required it to monitor
           HUD’s closing agents for fulfillment of the closing agent contracts. MCB was
           required to report delays in closing the sales of HUD homes to HUD and the
           cause for the delays.

Comment 32 See comment 10.

Comment 33 As previously mentioned in comments 6 and 31, MCB’s contract requires it to
           monitor HUD’s closing agents for fulfillment of the closing agent contracts.
           MCB is required to reported delays in closing the sales of HUD homes to HUD
           and the cause for the delays.

Comment 34 See comments 10 and 20.

Comment 35 See comment 12.

Comment 36 As previously mentioned in comment 6, HUD’s closing agents have specific
           requirements in their contracts for obtaining city presale inspections as discussed
           in this audit report. Additionally, MCB’s contract required it to coordinate the
           closing activities and oversee HUD’s closing agents. Although MCB’s contract
           did not clearly state that it should order the city presale inspections, MCB took on
           the responsibility and ordered a number of the inspections identified in this audit
           report. However, it did not always order the inspections in a timely manner.
           Under MCB’s contract, it was required to report delays with closing sales of HUD
           homes that were caused by HUD’s closing agents. Therefore, only the delayed
           home sales that were not reported to HUD as required are cited in this audit
           report. Additionally, under its contract, MCB was responsible for ensuring that
           sales of HUD homes closed within the timeframes on the sales contracts, which is
           60 days.

Comment 37 As mentioned in comment 1, although outside factors may have contributed to
           delays in closing sales of HUD homes, we only cited deficiencies in which MCB
           did not act in a timely manner to ensure that the sales of HUD homes closed
           within the timeframes specified in buyers’ sales contracts. Additionally, as
           discussed in comment 3, our discussion draft audit report addressed MCB’s



                                               56
              delays in performing actions such as (1) ordering lead paint inspections and lead-
              based paint abatements, (2) initiating requests for documents, (3) ordering presale
              inspections, (4) approving unjustified requests for extension to the closing dates in
              the sale contracts, (5) requesting approval from HUD when required, and (6)
              reporting delays in closing on the sales of HUD homes to HUD as required under
              its contract. These delays were not the result of waiting on actions by another
              party as indicated by MCB since a number of the actions identified in this audit
              report were initiated by MCB.

Comment 38 MCB maintained that it established a tracking system when it was clear that
           MCB, rather than the closing agent, was required to request the city inspection.
           During our audit, we requested a copy of the tracking control worksheet on more
           than one occasion; however, MCB did not provide the control worksheet for our
           review. We acknowledged in our report that MCB reduced the number of delayed
           closings by half and that improvements occurred, but the delayed closings were
           still significant.

Comment 39 See comments 15and 25.

Comment 40 MCB contends that it was in an untenable position due to the closing agent(s)
           failure to do its work in a timely manner. MCB indicated that it was reasonable to
           extend the sales contracts since if it denied the extensions, it would have to resell
           the properties with the same result but for less money. However, MCB did not
           report the delayed closing on the sales of HUD homes to HUD due to the closing
           agents’ nonperformance as required under its contract. Instead, MCB repeatedly
           approved unjustified requests for extension to buyers’ sales contracts.
           Additionally, MCB did not provide documentation to show that it reported delays
           in closing sales of HUD homes as required under its contract.

Comment 41 See comments 1, 3, 5, 6, and 15.

Comment 42 As previously mentioned in comments 1, 3, and 15, our audit addressed MCB’s
           compliance with its contract and excluded outside factors that resulted in delays in
           closing the sales of HUD homes that were not under MCB’s control. The role of
           HUD and non-HUD contractors was considered during the audit only when
           determining the entity(s) that were responsible for delays in closing sales of HUD
           homes. Although outside influences may have contributed to delays in closing
           sales of HUD homes, we only cited deficiencies in which MCB did not act in a
           timely manner to ensure that the sales of HUD homes closed within the
           timeframes specified in buyers’ sales contracts. Additionally, our discussion draft
           audit report addressed MCB’s delays in performing actions such as (1) ordering
           lead paint inspections and lead-based paint abatements, (2) initiating requests for
           documents, (3) ordering presale inspections, (4) approving unjustified requests for
           extension to the closing dates in the sale contracts, (5) requesting approval from
           HUD when required, and (6) reporting delays in closing on the sales of HUD
           homes to HUD as required under its contract. These delays were not the result of



                                               57
              waiting on actions by another party as alleged by MCB, since a number of the
              actions identified in this audit report were initiated by MCB.

              Further, as mentioned in comment 5, if another entity contributed to the delays,
              we excluded the home(s) or excluded the days that elapsed due to delays of
              another entity. Additionally, had MCB reported deficiencies on the closing
              agents in closing sales of HUD homes to HUD as required under its contract, the
              delayed closings would have not been cited in this audit report.

Comment 43 The legal argument that HUD cannot recover its damages because HUD was
           aware of delays caused by third parties is one to be decided by the board that
           hears the Government’s claim. HUD has remedies under the Contract’s Disputes
           Act to recover damages caused by a contractor’s breach of contract.

Comment 44 See comments 1, 3, 5 and 42.

Comment 45 We disagree with MCB’s assertion that the cancellation of the two sales we cited
           were due to market conditions and lender denial and were not under MCB’s
           control. See comment 10.

Comment 46 As previously mentioned in comment 19, under MCB’s contract, it is responsible
           to coordinate with the closing agents and report delayed closing on the sales of
           HUD homes to HUD that were caused by the closing agents. Additionally, as
           mentioned in comment 15, our audit addressed MCB’s compliance with its
           contract and excluded outside factors that resulted in delays in closing sales of
           HUD homes that were not under MCB’s control or caused by other entity(s). Our
           audit considered the role other entities played in causing delays with the sale for
           each HUD home identified in this audit report. However, reviewing the capacity
           of the closing agent to perform under its contract was not a factor in this audit.
           Had MCB reported delays in closing the sales of HUD homes to HUD as required
           under its contract due to the closing agent(s) or other entities, we would have
           excluded the properties from this audit report since MCB performed its
           contractual duties. Also, see comments 1 and 6.

Comment 47 See comments 1, 3, 5, 6, 12, and 15.




                                              58
Appendix C

             FEDERAL AND CONTRACT REQUIREMENTS

HUD’s Property Disposition Handbook – One for Four Family (4310.5), REV-2, chapter 11,
section 11-8, states that sales shall be closed as soon as possible after execution of the sales
contract. For all individual property sales, the sales contract should provide for a specific time
within which the sale shall be closed. Field offices shall follow up on each sale to ensure a
timely closing or a contract cancellation, as possible.

Section 11-11 of the handbook requires a closing timeframe to be established within a range of
30 to 60 days of sales contract acceptance.

Section 11-12 of the handbook states that if scheduled closing dates cannot be met, purchasers
may make a written request to extend the closing date. Extensions may be granted in 15-day
increments on a case-by-case basis, when extenuating circumstances preclude closing as
scheduled. Standardized extension fees must be collected unless the delay is the fault of HUD or
its direct endorsement lender.

MCB’s contract agreement with HUD, effective February 8, 2008, section 1.1.2, states that the
services to be provided are to manage, market, and sell HUD-owned single-family properties.
The services include the successful oversight of HUD-designated closing agents which conduct
the sales closings for HUD. One of the three primary objectives is marketing and selling the
HUD-owned properties in a way that maximizes the net return to HUD and minimizes holding
times for the properties.

Section 5.3.8.1.2 of the contract requires MCB to fully comply with HUD’s policy for
elimination of lead-based paint hazards in homes built before 1978. MCB shall order all lead-
based paint inspection and elimination services.

Section 5.4.4.1.2 of the contract requires MCB to monitor HUD’s closing agents for fulfillment
of the closing agent contracts. MCB has to submit to HUD’s government technical
representative monthly reports disclosing closing agent deficiencies, late submissions, and errors
resulting from closing agent error or incapacity and complaints about the closing agent’s
performance.

Section 5.4.4.2 of the contract states MCB shall ensure that all sales close within the time
specified by the sales contracts. MCB is required to communicate with selling brokers and
purchasers to ensure timely closing or a sale cancellation. MCB must give HUD’s closing agents
all needed sale documentation in time to ensure a timely closing.

Section 5.4.4.4 of the contract states that when a transaction will not close in the specified time, a
broker or purchaser may submit, through the closing agent, a written request for an extension.
Extension requests must demonstrate that a closing is imminent and must be submitted and



                                                 59
approved before contract expiration. The sales contracts for the properties sold by MCB provide
a closing deadline of 60 days from the date the sale was ratified.

The closing agent contract with HUD, effective March 1, 2008, part C, performance work
statement, states that the contractor must coordinate with the management and marketing
contractor to affect the closing within the timeframe specified in the sales contract unless an
extension is necessary due to circumstances outside the contractor’s control.

Section C.2(1) of the contract states that to reduce the closing timeframe, the contractor will
advance the inspection fees on behalf of HUD and forward the applications to the various cities
within 1 day of receipt of file.




                                                 60
Appendix D
       SCHEDULE OF HOME SALES WITH PRESALE
                 INSPECTION DELAYS
      (PRESALE INSPECTION ORDER DATE KNOWN)
                                                            Closing
                           Days after        Days after      agents         MCB
                              sale              sale       requested      requested
                FHA case   inspection        inspection   city presale   city presale
      Count      number     ordered           received     inspection     inspection
        1     261-846268      25                72                            X
        2     261-882781      28                69                            X
        3     263-373355      28                123                           X
        4     261-871380      31                90                            X
        5     261-856867      34                54                            X
        6     261-834221      37                58                            X
        7     261-761819      37                68                            X
        8     261-770452      44                70                            X
        9     261-778987      44                242                           X
       10     261-784563      47                57             X
       11     261-887818      48                58                            X
       12     261-865081      49                78                            X
       13     262-156123      50                77                            X
       14     261-692074      52                54                            X
       15     261-842882      56                110                           X
       16     261-879813      62                94                            X
       17     261-885865      67                178                           X
       18     261-592036      77                92                            X
       19     261-850457      85                88                            X
       20     261-905620      90                95             X
       21     261-899093      97                103                           X
       22     261-695757      98                113                           X
       23     261-902751      151               273                           X
       24     261-787790      156               292                           X
       25     261-879787      336               372                           X
       26     261-795671      19                62                            X
       27
              261-892617      22                69                            X
       28
              261-868064      18                96                            X
       29
              262-162901      12                97                            X
       30
              261-743090      22                58                            X
                  Totals     1,922             3,362           2             28




                                        61
   SCHEDULE OF HOME SALES WITH PRESALE
          INSPECTION DELAYS (CONT.)
(PRESALE INSPECTION ORDERED DATE UNKNOWN)

                        Days after
                           sales       Days after
                         contract    sales contract   Closing agent      MCB
                          ratified       ratified      requested      Requested
             FHA case   inspection     inspection        presale        presale
   Count      number    requested       received       inspection     inspection
     1     261-824547   Unknown            57                             X
     2     261-647640   Unknown            59              X
     3     261-867041   Unknown            60              X
     4     261-689471   Unknown            62              X
     5     261-817281   Unknown            63              X
     6     261-698704   Unknown            65              X
     7     261-901219   Unknown            71              X
     8     261-883094   Unknown            72                             X
     9     261-749199   Unknown            82              X
    10     262-160297   Unknown            82              X
    11     261-897769   Unknown            85              X
    12     261-888148   Unknown            89              X
    13     261-904785   Unknown            89                             X
    14     261-893574   Unknown            92              X
    15     261-659170   Unknown            99              X
    16     261-889927   Unknown            105             X
    17     261-753909   Unknown            162                            X
    18     261-900348   Unknown            173             X
    19     261-803096   Unknown            209             X
    20     261-750698   Unknown            220                            X
    21     261-800428   Unknown            230             X
    22     262-163233   Unknown            283                            X
    23     262-151588   Unknown            451             X
              Totals                     2,960             17             6




                                      62
Appendix E

      SCHEDULE OF REQUESTS TO EXTEND SALES
           CONTRACTS’ CLOSING DATES
                               Number of     Number of late
             FHA case number   extensions   extension requests
               261-774667           3                2
               261-887414           2                1
               261-883094           3                2
               261-901219           3                1
               261-803096           9                4
               261-899093           5                1
               261-647640           6                1
               261-784563           4                1
               261-800428          10                6
               263-382645           5                2
               261-763674          13               12
               261-834221           5                1
               261-889927           4                2
               261-887527           3                2
               261-881946           5                4
               261-879813           5                3
               261-761819           4                2
               261-756582           3                3
               261-905620           7                4
               261-692074           4                1
               261-698704           7                7
               261-659170           3                1
               261-888148           3                3
               261-817281           3                1
               261-911851           4                1
               261-846268           5                3
               262-142542           3                1
               261-848499           6                2
               261-893574           3                1
               261-698754           4                2
               263-323187           7                1
               261-890562           4                2
               263-363068           4                2
               261-856867           4                2
               261-871380           4                2
               263-376017           2                1
               263-351059           3                2
               261-897769           3                2
               261-882781           3                1
               261-770452           7                2
               263-335607           5                4
               261-771182           2                1
               262-162822           3                -
               261-824547           2                1
               261-892617           3                2
               263-403391           2                -




                                   63
SCHEDULE OF REQUESTS TO EXTEND SALES
   CONTRACTS’CLOSING DATES (CONT.)
                                              Number of late
                                                extension
     FHA case number   Number of extensions      requests
       261-749199               5                   2
       263-328193               3                   1
       261-743090               4                   1
       261-904785               4                   1
       262-151764               6                   2
       262-112491               3                   -
       261-862691               6                   -
       261-868064               4                   2
       261-865081               3                   1
       263-357109               4                   2
       261-689471               8                   7
       261-900348               6                   3
       261-867041               4                   2
       261-795671               3                   1
       261-664851               3                   2
       263-358404               7                   5
       261-592036               3                   2
       262-160297               3                   2
       261-891421               3                   -
       261-859475               4                   -
       262-151588               6                   -
       263-315559               8                   2
       261-881002               4                   2
       261-879787              18                   8
       261-920141               5                   3
       261-885865              10                   5
       261-901060               7                   3
       263-403351               6                   -
       261-870493               4                   3
       261-850457               3                   2
       262-156123               6                   -
       261-827607              17                   5
       262-162901               4                   2
       263-373355               6                   2
       261-862448               2                   -
       261-884584               5                   2
       261-835322               1                   -
       263-350138               8                   4
       261-750965              16                   9
       261-887818               4                   -
       261-704715               8                   -
       262-152710               3                   -
       261-859023               4                   1
       261-800139               3                    -
       262-163233              16                   1
       261-902751              16                   1
       261-695757               7                   5
       263-376898               3                    -
       261-895564               4                    -
       261-842882               4                    -
       263-379807               3                    -
       261-807911               4                    -




                              64
SCHEDULE OF REQUESTS TO EXTEND SALES
  CONTRACTS’ CLOSING DATES (CONT.)

                                           Number of late
        FHA case                             extension
         number     Number of extensions      requests
       261-909949            4                    -
       261-750698            9                   2
       261-850318           14                   2
       261-611075            5                   2
       261-875945            2                    -
       261-787790           12                   1
       261-753909            8                   1
       261-904663            6                   1
       263-343682            8                   4
       263-378743            4                    -
       263-354725            8                   4
       262-160803            5                   1
       261-778987           13                    -
          Totals           601                  216




                            65
 Appendix F

       SCHEDULE OF CLOSING DELAYS RESULTING FROM
         APPROVED CONTRACT EXTENSION REQUESTS


                                                                                          Extensions
                                     Extensions                                            for other
                Extensions            for lead-                  Extensions                 closing-
   FHA case     for presale Days    based paint      Days         without        Days       related     Days     Canceled
    number      inspections delayed stabilization   delayed     justification   delayed      issues    delayed     sale
261-848499           4         45
263-357109           4         77
261-592036           3         36
261-756582           1         45
261-899093           5         67
261-824547           2         40
261-771182           1         30
261-750698           9        180                                                                                   X
261-778987           13       195                                                                                   X
261-850318           1         30                                                                                   X
263-323187*          7         54
261-902751           16       240                                                                                   X
261-827607           17       253                                                                                   X
261-753909           8        105
261-692074           2         30
261-885865           10       137                                                                                   X
261-865081           3         41
262-163233           16       240
261-904785           4         49
261-887818           3         30
263-373355           6         84
261-842882           4         45
262-162901           4         55
262-156123           6         87
261-695757           5         60
261-850457           3         42
263-358404                                 7         102
261-774667                                 2         30              1            16
263-363068                                 4         52
263-351059                                 3         36
261-890562                                 4         57
261-763674                                                                                   12         104
263-382645                                                           2            24         1           15
262-151764                                                           2            45
261-887527                                                           2            30
261-905620                                                           1            15          5          43
261-900348          3          30                                                             1          17
261-862691          3          45         2           22
262-151588***       24        507                                                                                   X
261-897769          3          45
261-888148          2          29                                    1             6
261-881946          1          15                                    2            18          2          30
261-689471          1          15                                    3            45
261-889927          3          45                                    1            14




                                                           66
       SCHEDULE OF CLOSING DELAYS RESULTING FROM APPROVED
              CONTRACT EXTENSION REQUESTS (CONT.)

                                                                                                   Extensions
                                    Extensions                                                      for other
               Extensions            for lead-                            Extensions                 closing-
  FHA case     for presale Days    based paint            Days             without        Days       related     Days     Cancelled
   number      inspections delayed stabilization         delayed         justification   delayed      issues    delayed     sale
261-698754          3         45
261-647640          2         30                                              1            15
261-867041          4         52
261-817281          3         40
261-659170          3         39
261-784563          4         38
261-879787          18       345
261-803096          9        150
261-749199          5         74
261-901219          3         45
261-800428          6        121                                              4            60
261-879813          4         32                                              1            25
261-871380          2         30                                              2             8
261-770452          7        103
261-883094          3         60
261-882781          3         31
261-846268          4         60                                              1            8
261-834221          5         43
261-761819          4         43
261-892617          3         38
261-743090          2         30
261-795671          2         45
261-856867          4         42
261-868064          4         41
261-787790          12       219                                                                                             X
263-376017                                3                 37
261-704715                                                                                             4          45         X
261-884584                                                                                                                   X
263-403351                                   5              75
261-800139                                                                                                                   X
263-379807                                                                                                                   X
261-870493                                   4              68
263-335607**                                 5              36                                         3          37         X
261-611075                                   4              45
263-378743                                                                                                                   X
261-859475                                   2              30
261-859023                                                                                             4          15
261-835322                                                                                                                   X
261-807911                                                                                                                   X
261-862448                                                                                                                   X
261-875945                                                                                                                   X
262-160297           3          31
261-893574           3          32
261-698704           6          15                                             1          16
    Totals          328       4,902          45             590               25          345         32         306         18
    Legend
    *Inspection ordered before the sale
    **Loss on cancellation of sale $15,272
    ***loss on cancellation of sale $32,675
    ****32 plus 25 equals 57 (amount contained in audit report page 8)




                                                                     67
Appendix G

       SCHEDULE OF DELAYED SALES CLOSINGS
       DUE TO UNTIMELY CORRECTIVE ACTION

                FHA case    Lead based     Unresolved
                 number     paint delays     issues
               263-358404        X
               261-774667        X
               263-363068        X
               263-351059        X
               261-890562        X
               261-862691        X
               263-376017        X
               263-403351        X
               261-870493        X
               263-335607        X             X
               261-611075        X
               261-859475        X
               261-763674                      X
               263-382645                      X
               261-905620                      X
               261-900348                      X
               261-881946                      X
               261-704715                      X
               261-859023                      X
                 Count            12           8




                             68
Appendix H

       SCHEDULE OF DELAYED SALES CLOSINGS
             NOT REPORTED TO HUD
                FHA case   Number of days   Closing delays not
                 number       delayed       reported to HUD
             261-883094         60                  X
             261-901219         45                  X
             261-803096         150                 X
             261-899093         67                  X
             261-647640         85                  X
             261-784563         38                  X
             261-800428         181                 X
             261-763674         119                 X
             261-834221         43                  X
             261-889927         59                  X
             261-887527         45                  X
             261-881946         78                  X
             261-879813         57                  X
             261-761819         43                  X
             261-756582         75                  X
             261-905620         73                  X
             261-692074         59                  X
             261-698704         31                  X
             261-659170         39                  X
             261-888148         35                  X
             261-817281         40                  X
             262-142542         34                  X
             261-848499         50                  X
             261-893574         32                  X
             261-698754         54                  X
             263-323187         54                  X
             261-890562         57                  X
             263-363068         52                  X
             261-856867         42                  X
             261-871380         38                  X
             263-376017         37                  X
             263-351059         36                  X
             261-897769         45                  X
             261-882781         31                  X
             261-770452         103                 X
             261-771182         45                  X
             261-824547         40                  X
             261-892617         38                  X
             261-749199         74                  X
             261-743090         59                  X
             261-904785         49                  X
             262-151764         67                  X
             261-862691         82                  X
             261-868064         41                  X
             261-865081         41                  X
             263-357109         77                  X
             261-689471         113                 X
             261-900348         153                 X
             261-867041         52                  X
             261-795671         58                  X




                                   69
SCHEDULE OF DELAYED SALES CLOSINGS
    NOT REPORTED TO HUD (CONT.)

       FHA case    Number of days   Closing delays not
        number        delayed       reported to HUD
      262-160297        31                  X
      262-151588        507                 X
      263-315559        116                 X
      261-750698        188                 X
      261-850318        211                 X
      261-787790        234                 X
      261-753909        116                 X
      263-354725        116                 X
      261-778987        207                 X
      263-358404        102                 X
      261-592036        36                  X
         Total                              61




                           70