oversight

Congressional Request Regarding Columbus Properties Limited Partnership's Property Renovations, Columbus, OH

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-08-03.

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

                                             U.S. Department of Housing and Urban Development
                                             Office of Inspector General for Audit, Region V
                                             Ralph H. Metcalfe Federal Building
                                             77 West Jackson Boulevard, Suite 2646
                                             Chicago, Illinois 60604-3507

                                             Phone (312) 353-7832 Fax (312) 353-8866
                                             Internet http://www.hud.gov/offices/oig/




                                                                                MEMORANDUM NO.
                                                                                     2010-CH-1809

August 3, 2010

MEMORANDUM FOR: Scott M. Hunley, Director of Columbus Multifamily Housing, 5EHM


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

SUBJECT: Columbus Properties Limited Partnership
         Property Renovations
         Columbus, OH

                                      INTRODUCTION

In response to a request from Congresswoman Mary Jo Kilroy, we conducted a review of the
allegations that Columbus Properties Limited Partnership (Columbus Properties) did not
renovate six apartment complexes in Ohio for which it obtained U.S. Department of Housing and
Urban Development (HUD)-insured mortgages. Congresswoman Kilroy asked for a review
based on local newspaper articles that alleged waste and abuse stemming from HUD’s Section
221(d)(4) program. The program insures mortgage loans for multifamily properties owned by
profit-motivated entities. The newspaper articles alleged that Columbus Properties obtained
Federal Housing Administration (FHA) mortgages totaling $26.6 million in 1997 to purchase
and renovate the six apartment complexes but did not perform the renovations. Congresswoman
Kilroy asked us to provide answers to five specific questions.

Our objectives were to determine whether HUD followed its standard operating procedures for
monitoring the inspection of renovation activities designed to ensure compliance with the
specifications and to address the questions outlined in the congressional request. We concluded
that HUD followed its procedures to monitor the renovation of the six projects. We also
addressed the congresswoman’s questions in the Results of Review section.

We provided our discussion draft memorandum report to the Director of HUD’s Columbus
Office of Multifamily Housing during the review. We asked HUD to provide written comments
on our discussion draft memorandum report by July 8, 2010. HUD advised via an electronic
message, dated July 12, 2010, that the discussion draft memorandum report was accurate.
                                         BACKGROUND

The program. Authorized under the National Housing Act, as amended, Section 221, Public
Law 86-372, 12 U.S.C. (United States Code) 1715(1), the Section 221(d)(4) program insures
mortgage loans to facilitate the purchase or rehabilitation of multifamily rental housing.
Participants in the Section 221(d)(4) program must apply for FHA-insured multifamily financing
with an FHA-approved lender. HUD, through FHA, insures lenders against loss on mortgage
defaults.

The purpose of the Section 221(d)(4) program is to assist private industry in providing
comfortable and attractive rental accommodations for moderate-income families that have been
displaced from urban renewal areas or as a result of governmental action or a major disaster as
determined by the President.

The Section 221(d)(4) program is used by profit-motivated borrowers or sponsors. The program
allows for long-term mortgages (up to 40 years) that can be financed with Government National
Mortgage Association mortgage-backed securities. Profit-motivated borrowers or sponsors using
Section 221(d)(4) can receive a maximum mortgage of 90 percent of the HUD/FHA replacement
estimate. A Section 221(d)(4) loan is secured by a pledge of the property as collateral. The loan
is nonrecourse, meaning that the borrower is not personally liable if the borrower defaults on the
loan.

The approval process. HUD currently uses multifamily accelerated processing (MAP) almost
exclusively to process Section 221(d)(4) loans. The sponsor works with the MAP-approved
lender, which submits required exhibits for the preapplication stage. HUD reviews the lender’s
exhibits and will either invite the lender to apply for a firm commitment for mortgage insurance
or decline to consider the application further. If HUD determines that the exhibits are
acceptable, the lender then submits the firm commitment application, including a full
underwriting package, to HUD’s local multifamily housing office for review. The application is
reviewed to determine whether the proposed loan is an acceptable risk. Considerations include
market need, zoning, architectural merits, capabilities of the borrower, availability of community
resources, etc. If the proposed project meets program requirements, the local multifamily
housing office issues a commitment to the lender for mortgage insurance.

At the time the Columbus Properties complexes were insured, loans were processed by HUD’s
field office staff under traditional application processing. The sponsor has a preapplication
conference with the local HUD multifamily housing office to determine preliminary feasibility of
the project. The sponsor must then submit a site appraisal and market analysis (SAMA)
application (for new construction projects) or feasibility application (for substantial rehabilitation
projects). Following HUD’s issuance of a SAMA or feasibility letter, the sponsor submits a firm
commitment application through a HUD-approved lender for processing. If the proposed project
meets program requirements, the local multifamily housing office issues a commitment to the
lender for mortgage insurance.

The six Columbus complexes. HUD’s Columbus Office of Multifamily Housing used the
traditional application processing for the six complexes’ loans for Columbus Properties. On

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November 6, 1996, HUD held an initial conference with the lender, Armstrong Mortgage
Company, for the six complexes (Chatterton Club, Gahanna Commons, Greenbriar/Greenleaf,
Monticello, The Savoy, and Thurber Square). Based on the information Armstrong Mortgage
Company provided, on November 15, 1996, HUD invited Armstrong Mortgage Company to
submit a separate firm application for Section 221(d)(4) mortgage insurance for the six
complexes. Columbus Properties was also required to submit information on historic rents and
occupancy along with rent rolls for each unit. HUD’s Columbus Office of Multifamily Housing
also asked the complexes’ architect to work with its staff architect to prepare the work write-ups
or specifications.

HUD’s Columbus Office of Multifamily Housing issued a firm commitment on August 15, 1997,
an initial endorsement on August 28, 1997, and a final endorsement on January 18, 2000, after
the property renovations were complete.

Columbus Properties received mortgages totaling more than $26.6 million for the six complexes
with more than $8.1 million in rehabilitation costs. None of six complexes was subsidized
directly by HUD. The following table summarizes the mortgage amounts and rehabilitation
costs for each complex.

                                       Number of        Mortgage      Rehabilitation
                   Complex               units          amount             cost
               Chatterton Club           144           $4,203,900     $1,407,792
              Gahanna Commons            128            4,907,600      1,199,580
             Greenbrier/Greenleaf        181            6,478,600      1,959,901
               Thurber Square             96            2,893,000        922,076
                  The Savoy              111            4,500,300      1,322,955
                 Monticello              116            3,712,700      1,337,620
                    Totals               776          $26,696,100     $8,149,924

On June 14, 2005, the FHA-insured loans for all six complexes were assigned to HUD following
a financial default of the mortgage loans. On December 21, 2005, HUD sold the mortgage notes,
resulting in more than $10.5 million in losses as detailed in the following table.

                                       Loan
                    Complex           balance          Sale amount    Loss
                 Chatterton Club     $4,016,598          $2,480,561 $1,536,037
               Gahanna Commons        4,688,946           2,994,884  1,694,062
               Greenbrier/Greenleaf   6,189,951           3,558,975  2,630,976
                 Thurber Square       2,720,058           1,859,497    860,561
                   The Savoy          4,252,689           2,094,820  2,157,869
                   Monticello         3,547,283           1,859,497  1,687,786
                     Totals         $25,412,525        $14,848,234 $10,562,291

                               METHODOLOGY AND SCOPE

To accomplish our objectives, we reviewed

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      The National Housing Act, as amended, Section 221, Public Law 86-372, 12 U.S.C.
       1715(1); applicable and pertinent HUD handbooks; and Office of Inspector General
       (OIG) Audit Report number 2008-BO-0001.

      HUD’s files and records (maintained at HUD Columbus Office) related to the six
       complexes, including the approval process files and documents, the preapplication letter,
       the firm commitments, contractor’s and borrower’s cost breakdown listing all of the
       repair items with cost and description (work specifications), fee inspectors’ trip reports,
       change orders, applications for advance of mortgage proceeds and certificates of
       payment, HUD’s 2004 management review report, and the Real Estate Assessment
       Center’s physical inspection reports between 1999 and 2005. We also reviewed the
       Departmental Enforcement Center’s files (maintained at the Chicago Office) relating to
       the chronology of events and the financial analysis of the six complexes.

We interviewed HUD’s staff, the two fee inspectors who certified the renovation work, and the
Franklin County, OH, health inspector identified in the newspaper articles. We made site visits
and conducted visual inspections of the six complexes in July 2010.

The review covered the period August 1997 through June 2005 and was expanded as determined
necessary. We did not perform our review in accordance with generally accepted government
auditing standards. Our scope was limited to responding to the Congresswoman’s questions.

                                    RESULTS OF REVIEW

Based on the review of the renovation documentation, specifications, trip reports, and certificates
of payment, we determined that HUD appropriately monitored and ensured that Columbus
Properties renovated the six complexes in accordance with the HUD-approved specifications.
The fee inspectors reported that they inspected the renovations at the six complexes weekly, as
evidenced by trip reports. HUD requires two site visits per month. The reports were signed by
fee inspectors and included the names of attendees, which usually included a HUD official,
owner’s representative, architect, and the fee inspector. We also found that the application for
advance of mortgage proceeds and certificates of payments were properly executed. The
applications contained the work completed and the cost. The certificate for payments contained
certifications by the architect, the inspector, and the contractor. The architect and the inspector
certified that based on their site visit and observation, the identified work in the application was
completed. We did not verify the actual cost of the renovations because the vendor invoices and
the records relating to labor costs were not available for our review.

We made site visits and conducted visual inspections of the six complexes in July 2010. We also
interviewed the site managers at the complexes. We found five of the six complexes were in
good to excellent condition and one was in fair to poor condition. The ownership of the six
complexes had changed since HUD sold the mortgage notes on December 21, 2005. Four
complexes changed ownership in 2009 and two in March 2010. None of the complexes had
HUD-insured mortgages. Under the new ownership, all six complexes had been substantially
renovated, or were in the process of undergoing partial or substantial renovations. Since the
complexes had been renovated after 1999, we were not able to determine the amount and quality

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of renovations completed between 1997 and 1999. During our site visit to the Chatterton Club
complex, we interviewed a tenant who had resided at the complex for 20 years. The tenant
stated that she remembered that the complex was renovated approximately 12 years ago, around
1998. She also stated that she remembered this because she was required to move from one
apartment to another while the contractors completed the renovations.

Congressional Request Concerns Addressed

Question 1:    What are the procedures used by HUD inspectors to verify that all renovations
               were performed by HUD-assisted landlords, and what procedures are in place that
               allow HUD officials to verify the work of HUD inspectors?

The following are HUD’s procedures to verify renovation work. When HUD insures a mortgage
for a private owner to build or renovate a property, HUD regulations require periodic
observations of construction at the project site for the purpose of protecting the interest of HUD.
HUD outsources this oversight to contract fee inspectors with specialized knowledge to oversee
these contractors.

The assigned fee inspectors are required to make at least two site visits per month or more
frequently when warranted by problems or impending default. The field review inspections are
recorded on a HUD Representative’s Trip Report, Form HUD-5379, in accordance with HUD
Handbook 4480.1.

According to HUD’s procedures, HUD staff should visit each project site once during
construction. The visits are to assess the performance of the fee inspector, compare project
design and construction with conventional projects in the area, and remain current with changes
in that jurisdiction. HUD staff members are to require the contract fee inspector to accompany
them on the project review. For the Columbus Properties complexes, HUD’s files evidenced that
compliance with these procedures.

Question 2:    What criminal and civil actions can the Federal Government pursue against HUD
               inspectors that signed off on renovations that were not performed or against
               recipients of HUD-assisted loans that did not fully perform the work for which the
               loans were authorized?

HUD inspectors are subject to personnel policies and under specific circumstances, could be
subject to civil and criminal prosecution. HUD also uses fee inspectors who are under contract.
Remedies would be dictated by the terms of the contract as well as those available through civil
and criminal prosecution.

Recipients of HUD-assisted loans must use funds in accordance with their agreements (closing
documents and regulatory agreement) with HUD. In this case, the loan funds for each property
covered the purchase of the property and the costs to rehabilitate each. As renovations were
completed, the general contractor is paid from the loan funds. If the owner did not make the
improvements that were required and did not draw down the loan funds, the loan would not
reach final closing until the repairs were completed. If the owner took the loan funds and

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submitted false documents claiming that work was done when it was not, he would be subject to
the following legal statutes.

Criminal equity skimming (12 U.S.C. 1715z-19) occurs when an owner willfully uses loan
proceeds or property income for anything that is not necessary for the property other than
distributions in accordance with requirements. The owner can be fined up to $500,000 and
imprisoned up to 5 years. The statute of limitations is five years to bring an action under
criminal equity skimming.

Civil equity skimming (12 U.S.C. 1715z-4a) is similar to criminal equity skimming except the
intent does not have to be proved. The owner is subject to double the amount of the damages.
An action can be brought under this section at any time up to and including six years after HUD
discovers the misuse of loan proceeds or property income.

The False Claims Act is the government’s principal weapon in the prosecution of fraud. One
may be held either civilly or criminally liable for submitting a fraudulent claim to the
government for payment or approval.

The Civil False Claims Act, codified at 31 U.S.C. 3729-3733, provides that any person
(including a corporate entity) who knowingly submits or who knowingly causes someone else to
submit false claims for payment of government funds is liable for treble damages and civil
penalties of $5,500 to $11,000 per false claim. Under the False Claims Act, an action must be
brought within six years after the date a person committed the violation. A person submitting a
false claim could also be charged under the Criminal False Claims Act, 18 U.S.C. 287. The
statute of limitations is five years from the date of occurrence for the Criminal False Claims Act.

Question 3:    What is the application and approval process for determining whether an
               individual meets the standards of HUD-assisted loans under Section 221(d)(4)?

The Section 221(d)(4) program is used by profit-motivated sponsors and it insures mortgage
loans to facilitate the new construction or substantial rehabilitation of multifamily rental or
cooperative housing for moderate-income families. Participants of the Section 221(d)(4)
program must apply for FHA-insured multifamily financing with an FHA-approved lender. The
following briefly explains the approval process.

Preapplication: As part of the traditional application process, the sponsor had an initial
conference or preapplication meeting with the local HUD multifamily office to determine the
preliminary feasibility of the project before a SAMA or a feasibility letter is submitted. For
MAP, the sponsor works with a MAP-approved lender, which submits certain required exhibits
for the preapplication stage. If the proposal is approved, the lender is invited to submit a firm
commitment application. An environmental assessment is required for this program.

Application: In traditional application processing, following HUD’s issuance of a SAMA (new
construction) or feasibility letter (substantial rehabilitation), the sponsor submits a formal
mortgage insurance application through a HUD-approved mortgagee to the local HUD
multifamily office for processing. For MAP, the lender submits the required exhibits, including

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a full underwriting package, which are then reviewed by the local HUD multifamily housing
office before a firm commitment is issued.

Award: The local HUD multifamily housing office is to review the application to determine
whether the proposal is feasible. Considerations include market need, zoning, architectural
merits, capabilities of sponsors, availability of community resources, etc. If the project meets
program requirements, HUD issues the lender a commitment to insure the project mortgage.

HUD currently uses MAP almost exclusively for Section 221(d)(4) loans. The creation of the
MAP guidelines merely standardized the fast-track processing across all HUD field offices so
that the procedures would be consistent and required HUD approval of the lenders that
underwrite loans. The HUD-approved lenders prepare underwriting documents and analysis to
determine the eligibility of the owner, project, and rehabilitation activity. Based on its analysis,
the lender recommends whether HUD should approve the project for insurance.

HUD’s Columbus Office of Multifamily Housing office used traditional application procedures
to underwrite and approve the mortgages for the six Columbus complexes. On November 6,
1996, an initial conference was held for the six complexes between HUD and the lender,
Armstrong Mortgage Company. On November 15, 1996, HUD sent Armstrong Mortgage
Company a letter inviting it to submit a separate firm application for the Section 221(d)(4)
program to rehabilitate the complexes. HUD also asked Armstrong Mortgage Company to
submit additional information with its application. HUD issued the commitment for insurance
on August 8, 1997.

Question 4:    Does HUD have adequate resources to sufficiently monitor, evaluate, and manage
               the stock of Section 221(d)(4) properties?

The essential information to evaluate the adequacy of the field office and headquarters staffing
and workload levels from 1996 to the current time were not readily available and we cannot
directly respond to the question. However, evidence existed that HUD staff monitored and
evaluated problems with these complexes in accordance with its procedures and in a relatively
timely manner as shown below.

Project monitoring is an integral part of HUD’s responsibilities. In 1998, HUD created the Real
Estate Assessment Center, which has a major role in evaluating the physical and financial status
of HUD’s portfolio. The physical inspections are contracted out to independent third parties, and
the financial statements are submitted electronically and evaluated by HUD staff. HUD’s
multifamily offices also conduct onsite management reviews that are designed to work in
conjunction with Real Estate Assessment Center inspections and financial statement reviews.
OIG also performs audits of specific properties from time to time to determine whether the
owners are complying with HUD requirements.

For the six Columbus complexes, the Real Estate Assessment Center referred the annual
financial statements for the years 2000 to 2003 to HUD’s Departmental Enforcement Center for
financial noncompliance. The annual financial statements identified underfunded tenant security
deposits, unauthorized loans of project funds, unauthorized distributions of project funds, failure

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to invest the reserve accounts, and comingling of project funds. On February 26, 2004, HUD’s
Columbus Office of Multifamily Housing also conducted a management review of the six
complexes to determine compliance with HUD’s regulations and management procedures and
practices. In the report, dated March 19, 2004, the Columbus Office of Multifamily Housing
rated the complexes’ maintenance as below average and the financial management, general
management, and overall rating as unsatisfactory. Some of the findings the Columbus Office of
Multifamily Housing cited in its management review included commingling of funds,
underfunded tenant security deposits, failure to submit financial reports on a timely basis, and
that all six complexes were in mortgage delinquency status.

The Departmental Enforcement Center’s review of the complexes’ financial statements found
that there were unauthorized loans and unauthorized distributions totaling $660,935. In May
2005, HUD issued notices of violation of the six complexes’ regulatory agreements. In January
2008, the president of Columbus Properties proposed to pay $275,410 to settle the violations,
depending on his financial ability to pay. As of July 22, 2010, HUD’s tolling agreement1 with
the president of Columbus Properties expired. Therefore, the Federal civil statute of limitations
expired under which HUD could pursue a settlement. Further, the Federal criminal statute of
limitations has also expired to pursue the unauthorized loans and unauthorized distributions since
more than five years have passed.

Question 5:       What is the total current exposure to FHA for all HUD-assisted loans, and what is
                  the total amount of losses from defaulted mortgages auctioned to recoup on
                  defaulted loans?

According to HUD’s Office of Multifamily Housing Asset Management, as of August 31, 2009,
HUD had 11,911 multifamily insured properties in its portfolio with an unpaid balance of $58.8
billion.

Public Law 104-134, The Debt Collection Improvement Act of 1996, provides government
agencies with the authority to sell government-held assets. Specific language in this law requires
that assets “will be disposed of under an asset sales program within 1 year after becoming
eligible for sale, or later than 1 year if consistent with an asset sales program and a schedule
established by the agency and approved by the Director of the Office of Management and
Budget.”

Between 2004 and 2009, 514 multifamily mortgages were assigned to HUD following a financial
default of the mortgage loans with an unpaid balance of $2.9 billion. Of the 514, HUD sold 327
of the mortgage notes in a mortgage sale, which resulted in $1 billion in losses. During this
period, HUD collected $1.6 billion in insurance premiums. The following table shows the yearly
losses.


1
 A “tolling agreement” is an agreement between the Department and a third party that suspends or temporarily stops
the statute of limitations. It agrees to waive the right to claim that a lawsuit should be dismissed due to the
expiration of a statute of limitations. Its purpose is typically to allow a party additional time to assess the legitimacy
or viability of their claims and/or the amount of their damages without the necessity of filing an action. During the
tolled period, the parties waive any defense by way of any statute of limitations which would otherwise exist.

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         Fiscal     Number
          year      of loans    Loan balance         Sale amount             Loss
         2004           80       $491,891,569        $286,227,713        $205,663,856
         2005         104         886,880,072         540,890,373         345,989,698
         2006           51        308,045,903         204,400,869         103,645,034
         2007           29        292,235,579         145,789,038         146,446,541
         2008           23        129,575,967          50,383,301          79,192,665
         2009           40        214,634,250          93,970,595         120,663,655
         Totals       327      $2,323,263,342      $1,321,661,891      $1,001,601,451

                                   RECOMMENDATION

Based on the results of our review, this report contains no recommendation.




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