City of New Haven, New Haven, CT

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-05-07.

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

                            Audit Report
                            District Inspector General for Audit
                            New England District
                            Report: 98-BO-249-1004                     Issued: May 7, 1998

TO: Mary Ellen Morgan, Director, Office of Community Planning and Development,
                                 Connecticut State Office, 1ED

FROM: William D. Hartnett, District Inspector General, Office of Audit, 1AGA

SUBJECT: City of New Haven
         Community Housing Corporation (Subgrantee)
         New Haven, Connecticut

We performed a review of the Subgrantee, Community Housing Corporation, (CHC) use of
HUD funds and the FHA Single Family Insurance Programs pertaining to the acquisition,
rehabilitation and sale of properties in the City of New Haven.

The objectives of the audit were to determine whether CHC was operating its programs in an
economical and efficient manner and whether adequate safeguards were in place to assure
compliance with HUD Program requirements.

This report contains one finding. We are recommending that the City evaluate the Subgrantee’s
performance to assure the accountability of program funds and institute controls to assure the
program is cost effective.

Within 60 days please furnish for each recommendation, a status report on: (1) the corrective
action taken; (2) the proposed corrective action with the date to be completed or, (3) why action
is not necessary. Also, please furnish any copies of any correspondence or directives issued
because of this audit.

If you have any questions, please call our office at (617) 565-5259.

Executive Summary
We performed an audit of the City of New Haven's (CITY) housing programs as
operated through Community Housing Corporation (CHC). The objective of our
audit was to determine whether the City of New Haven adequately controlled its
Subgrantee to assure federal funds were properly used in a cost-effective manner
and the program achieved the desired results.

The City needs to assure its subgrantee, CHC, is meeting the contract obligations
in an efficient and effective manner and achieving the desired results. Our review
disclosed that while rehabilitation work on the 19 properties we inspected meets
standards, there were operational deficiencies at CHC which are detrimental to
achieving the program goals of providing affordable housing to low- or moderate
income persons. CHC is not operating in a cost effective and efficient manner and
is not safeguarding federal funds. Deficiencies include, inadequate accounting
records; lack of proper cost documentation for acquisition and rehabilitation of the
properties; undisclosed related party transactions; excessive holding periods for
properties; and questionable charges. These deficiencies result in higher program
costs and do not benefit the City’s residents as intended by the program.

We are recommending that you instruct the City to evaluate the Subgrantee’s
performance and recover any misspent HUD funds. The City needs to assure that
the Subgrantee is operating in accordance with the contracts, in an efficient and
cost-effective manner.

On March 27, 1998, we furnished the Mayor of the City of New Haven a draft
copy of our audit report. The Mayor advised that an exit conference was not
necessary. On May 1, 1998, the Mayor acknowledged the factual accuracy of the
findings in the audit report. The Mayor advised that the City will hire an outside
accounting firm to design a compliance protocol and implementation program for
the City to administer this program. In addition, the City is immediately
suspending any future funding of CHC until all issues raised by the audit are

We have included excerpts of the Mayor’s response in the finding section of this
report. The Mayor’s full response is included as Appendix 2 of this report.


Table of Contents
Management Memorandum ..................................................................i

Executive Summary.............................................................................ii

Table of Contents ...............................................................................iii


Finding and Recommendations

         1. The City of New Haven Needs to Evaluate
            CHC’s Activities ..................................................................7

Internal Controls................................................................................28


         1. Schedule of Property Universe as of 3/1/98 ........................29

         2. Auditee Comments .............................................................31

         3. Distribution ........................................................................32



CHC        Community Housing Corporatio
FHA        Federal Housing Administration
City       City of New Haven
CDBG       Community Development Block Grant
CPA        Certified Public Accountant
DBA        Doing Business As
ESSG       Energy Shelter Grant
HOPWA      Housing Opportunity for Persons with Aids
HUD        Department of Housing and Urban Development
ICDC        Inner City Development Corporation
IOI         Identity of Interest
ICDC        Inner City Development Corporation
LCI         Livable City Initiative
OHND        Office of Housing and Neighborhood Development
OIG         Office of Inspector General
UDA        Urban Development Associates
UDAG        Urban Development Action Grant


Funds Provided

Since June 1992, HUD provided the City over $34 million through the various
HUD programs:

   YEAR            CDBG          HOME          ESG        HOPWA         TOTALS
    1992         $3,958,000         $0          $0           $0        $3,958,000
    1993         $4,371,000         $0          $0           $0        $4,371,000
    1994         $4,813,000         $0          $0           $0        $4,813,000
    1995         $5,278,000     $1,470,000   $174,000        $0        $6,922,000
    1996         $5,175,000     $1,509,000   $134,000     $403,000     $7,221,000
    1997         $5,132,000     $1,471,000   $134,000     $969,000     $7,706,000
  TOTALS        $28,727,000     $4,450,000   $442,000    $1,372,000    $34,991,000

CDBG - Community Development Block Grant
ESG   - Energy Shelter Grant
HOPWA - Housing Opportunities for Persons with AIDS

In addition, the City has received $5 million from the Section 108 fund for the
purpose of Housing Rehabilitation.

Community Development Block Grant (CDBG)

The CDBG program provides annual grants for use of a wide range of community
development activities directed toward neighborhood revitalization, economic
development, and improved community facilities and services. The grantees
develop their priorities and activities. Grantees must ensure that each activity
meets one of the program's three national objectives: the primary objective of
benefiting low-and moderate-income persons; aid in the prevention or elimination
of slums or blight; or meet other community development needs that present a
serious and immediate threat to the health or welfare of the community.

The Home Program - Home Investment Partnerships

The HOME Program provides funds to States and local governments to implement
local housing strategies designed to increase the supply of housing for low-income
persons. All HOME-assisted housing and rental assistance is targeted for low-
income families, with deeper targeting required for rental housing.


Section 108 Loans

Section 108 is the loan guarantee provision of the CDBG program. Section 108
provides communities with a source of financing for economic development,
housing rehabilitation, public facilities, and large scale physical development

Section 203(k) Mortgage Insurance

The Section 203(k) program is HUD’s primary program for the rehabilitation and
repair of single family properties. HUD insures rehabilitation loans processed by
private lenders which can be used to (1) finance rehabilitation of an existing
property; (2) finance rehabilitation and refinancing of the outstanding indebtedness
of a property; or (3) finance purchase and rehabilitation of a property. In 1995,
HUD Section 203(k) program regulations were revised to allow non-profit
organizations to participate, as homeowners.

The City’s Administration of HUD Funds

The Office of Housing and Neighborhood Development (OHND) administered the
HUD funds through 1996. As part of the City's reorganization, in 1996, the City
abolished OHND and replaced it with the Livable City Initiative office (LCI). LCI
is responsible to carry out the City’s comprehensive and strategic program to
address the housing problems in the City of New Haven. LCI operates various
programs through its staff and contracts various functions to non-profit entities.
The City contracted with 14 non-profit entities which use HUD funds for
acquiring and renovating housing. These non-profit entities are:

                              NONPROFIT ENTITIES
               Community Housing Corporation (CHC)
               Dixwell Community Development Corporation
               Edgewood Elm Housing, Inc.
               Fair Haven Development Corp.
               Greater New Haven Community Loan Fund
               Habitat for Humanity of New Haven
               Hazel Street Development
               Hill Development Corporation
               HOME, Inc.
               Mutual Housing Association
               Neighborhood Housing Services
               New Life Corporation
               Newhallville Restoration
               West Rock Development Corporation


Community Housing Corporation

The City contracted with CHC, formerly known as Inner City Community Housing
Corporation, to carry out part of its housing programs. CHC’s mission is to
provide housing to low and moderate income households in the Greater New
Haven Area. To accomplish this mission, CHC entered into agreements with the
City for CDBG funds and received about $100,000 each year. The City also
signed agreements with CHC in August 1995 to provide HOME funds and in June
1995 to provide Section 108 Loan funds. CHC proposed to acquire and
rehabilitate single family and multifamily properties using the CDBG funds for
developing, marketing, preliminary underwriting, and counseling on the identified
properties. CHC proposed using HOME and Section 108 Loans funds primarily
for acquisition. In conjunction, CHC proposed obtaining mortgage funds,
including mortgages insured under the Section 203(k) program, for rehabilitation.
After the completing of repairs, CHC would sell the property to low- moderate
income persons. In some cases, CHC sold properties “as is” with agreements for
rehabilitation contacts and the buyer obtaining the mortgage.

Between July 1992 and February 1998, CHC expended $4.3 million obtained from
the following sources:

                        Funds expended on CHC properties

   $2,000,000                                                $1,872,900

   $1,600,000              $1,339,856

                $438,940                $411,740
     $400,000                                                              $164,200
                 CDBG        HOME        Section    UDAG      Section         Non-
                                          108                 203(k)        federal

In addition, CHC and its for-profit affiliate, Inner City Development Corporation,
conducts various housing operations for the State of Connecticut. Urban
Development Associates, Incorporated, a Consultant, administers CHC and Inner
City Development operations. Urban Development Associates, Incorporated is the
owner of JR Property Management, Inc.; JR Property Management, Inc., d.b.a.
Rosenberry Construction; and K Development and Construction. The organization
is displayed as follows:


                                   Urban Development Associates, Inc.

                  Community Housing Corporation        Inner City Development Corporation

  JR Property Management, Inc,        JR Property Management, Inc.        K Development and Construction
                                     d.b.a. Rosenberry Construction

CHC and the Identity of Interest companies (IOIs) own and operate other
properties not developed under the City’s program. These properties include,
Chamberlain Court Apartments, Orchard Hill Apartments, Howard Courts
Apartments and Fairmont Height Apartments which are located in New Haven,
Connecticut and Glen Oaks Apartments which is located in West Haven,
Connecticut. CHC also has acquired and renovated properties in other parts of

Prior to July 1995, CHC identified a qualified buyer and matched them up with a
property in the designated area. The buyer selected the property and repairs were
completed timely. Properties sold without significant holding costs.

In 1995, CHC revised their plan of operations to take advantage of the change in
the Section 203(k) Program. CHC proposed a plan to combine the soft-second
loans (forgivable loans) from the City with the use of Section 203(k) mortgages
taken in the name of CHC. The acquisition and rehabilitation would take place
before identifying a low-or moderate-income home buyer.

 The City awarded CHC contracts for HOME funds and Section 108 loans in
August and June 1995 respectively. At that time, CHC became active as a
speculator and in the Section 203(k) program. CHC purchased 19 properties and
used Section 203(k) insured mortgages for rehabilitation of the property without
identifying, in most cases, a qualified buyer. CHC selected an IOI contractor who
developed work write-ups and performed the rehabilitation work. In several cases,
another IOI Company collected rents from tenants living in the units.

The Section 203(k) program allows for one to five of mortgage payments to be
charged against the mortgage proceeds. When properties do not sell within a short
time period, holding costs begin accumulating thereby inflating total program

Problems With A Subgrantee Reported to HUD


A local television station reported that renovations made to homes under CHC’s
program using HUD funds were of poor quality that the homes were marginally
habitable. Representatives from the television station met with the HUD
Secretary’s Representative for New England to discuss the problems found. Based
on this meeting, the HUD Secretary’s Representative asked us to review the
programs. The documentation provided by the television crew and data obtained
from the HUD State Office confirmed that HUD funds were used at the properties
identified by the news crew. The properties questioned were:

       •   40 Orchard Street

       •   588 Howard Avenue

       •   89 Wolcott Street

From January through July 1997, the Board of Aldermen - Joint Committee of
Community Development and Human Resources held a series of meetings to
discuss the reported problems. The Controller and the Corporate Counsel for the
City of New Haven also conducted an internal review of the LCI files for these
properties. The Joint Committee recommended that CHC and the homeowners
should work out an acceptable resolution of the problem. Since the City had
reviewed these cases, we did not include a review of these properties in our audit,
but concentrated our review on the CHC’s operations and the use of HUD funds.

Audit Objective

The objective of our audit was to review the City of New Haven’s Subgrantee,
CHC’s program as it pertains to the acquisition, rehabilitation and sale of
properties in conjunction with HUD funds and FHA insured programs. During our
review, the Mayor of New Haven requested that OIG review the City’s procedures
to ensure New Haven is in compliance with all regulations pertaining to loans to
non-profits and homeowners and the program is cost-effective and beneficial to the
citizens of New Haven.

Scope & Methodology

We obtained a schedule from the City identifying funds disbursed to CHC for
various properties involved with the programs. According to the schedule, the
City released HUD funds for 72 properties between July 1992 and July 1997. We
prepared a schedule of property universe from the information available at CHC
and the City as well as information obtained from the law firm handling the
closings. We reconstructed the data to identify the universe from the best available


Our initial review included 54 property files handled by CHC for the City. We
refined our sample to cover these 33 properties (see listing of properties in
Appendix 1). Only 33 of these 54 properties used HUD-related funds (HOME,
Section 108 Loan or UDAG), after June 30, 1995, for the acquisition of the
properties. CHC obtained Section 203(k) insured mortgages for 19 of the 33

We inspected 15 properties in various stages of development in the current
inventory and four properties processed before June 1995 with mortgages insured
under the Section 203(b) program.

We reviewed the City files relating to the activities at CHC including the CDBG
program, HOME funds and Section 108 Loan funds. We interviewed appropriate
City, CHC and related companies personnel. We also obtained the records
identifying the various individuals involved with the entities engaged in the

We also contacted the servicing mortgage companies to obtain the loan status of
the HUD insured properties.

Our audit period was generally July 1995 to January 1998; however, where
necessary, we expanded the audit period. We performed the audit field work from
July 1997 through January 1998. We conducted the audit in accordance with
generally accepted government auditing standards.


The City of New Haven Needs To Evaluate CHC’s

The City of New Haven (City) needs to evaluate its subgrantee Community
Housing Corporation’s (CHC) performance and practices. The City needs to
ensure that funds provided to CHC are being used in an efficient and effective
manner to meet the program’s objectives. The goals of the City's housing program
are to preserve and rehabilitate the existing housing stock and improve access to
homeownership for low and moderate income families. Since January 1995, CHC
has received over $4.3 million in Federal funds and FHA mortgages. During this time,
the City has provided CHC over $2.3 million to acquire and rehab homes, and
continues to fund CHC, without assurance that CHC is efficiently and effectively
implementing the housing programs. Further, HUD/FHA is at risk of paying out
$710,250 in Section 203(k) Rehabilitation Mortgage Insurance proceeds if CHC does
not clear the defaults on seven of its mortgages.

Our review disclosed weaknesses in CHC’s performance and administration of its
housing program. Specifically, we found that CHC:

   •   Is not operating in an efficient and effective manner.

   •   Has not established adequate accountability over $2.3 million in HUD
       grant funds and $1.8 million in Section 203(k) funds provided to support
       the City’s housing program.

   •   Is not achieving desired housing results;

   •   Is contributing to higher program costs by the use of Identity-of-Interest
       companies; and

   •   Is using Federal funds for related party transactions and purposes other
       than those intended.

CHC Activity

For the period of January 1995 to December 1997, CHC requested funds to
acquire 27 single family and six multifamily properties utilizing federal funding
provided through the City of New Haven. As of March 1, 1998, CHC received
over $4.3 million for this purpose.
       Source                        Purpose                        Amount


HOME                      Acquisition and Rehabilitation                     $ 1,339,856
Section 108               Acquisition and Rehabilitation                     $ 411,740
UDAG                      Acquisition and Rehabilitation                     $    73,038
Other                     Acquisition and Rehabilitation                     $ 164,200
Section 203(k)            Acquisition and Rehabilitation                     $ 1,872,900
CDBG                      Administration                                     $ 438,940
                             Total                                           $ 4,300,674

CHC and its Company Relationships

CHC and its affiliate Inner City Development Corporation (ICDC), a for-profit
company, are operated by Urban Development Associates, Incorporated (UDA), a
paid consulting company. CHC contracted with UDA to assist in the acquisition
and sale of single family and multifamily properties for CHC, develop rehabilitation
work write-ups and present offers to lending institutions. UDA is the owner of JR
Property Management, Inc., JR Property Management, Inc. d.b.a. Rosenberry
Construction and K Development Corporation. JR Property Management collects
rents, performs general property management and repairs for the CHC-owned
properties while Rosenberry Construction and K Development and Construction
performed the majority of the rehabilitation on these properties.

                                   Urban Development Associates, Inc.

                  Community Housing Corporation        Inner City Development Corporation

   JR Property Management, Inc       JR Property Management, Inc.         K Development and Construction
                                     d.b.a. Rosenberry Construction

As illustrated below, two individuals, the President and Secretary of UDA, control
the operations of all the IOI companies doing business under the City’s housing


 Community Housing Corporation   Inner City Development Corporation   Urban Development Associates, Inc     JR Property Management, Inc.        Rosenberry Construction       K Development and Construction

  Reverend Abraham Marsach          Reverend Abraham Marsach               Gerardo Canto,                 Urban Development Associates, Inc   JR Property Management, Inc.   Urban Development Associates, Inc
    President and Director            President and Director            President and Director

 Reverend Armando Hernandez        Reverend Armando Hernandez             Lawrence Hall, Jr.                   Gerardo Canto,                    Gerardo Canto,                   Gerardo Canto,
  Vice President and Director       Vice President and Director
                                                                        Secretary and Director              President and Director            President and Director           President and Director

    Reverend Luis Gonzalez            Reverend Luis Gonzalez                                                  Lawrence Hall, Jr.                Lawrence Hall, Jr.               Lawrence Hall, Jr.
          Secretary                         Secretary
                                                                                                            Secretary and Director            Secretary and Director           Secretary and Director

      Gerardo Canto,                    Gerardo Canto,                                                           James Rosenberry                  James Rosenberry
        Consultant                        Consultant                                                                Employee                          Employee
                                                                                                                                                  Contractor's License

   Lawrence Hall, Jr.
  Development Manager
      (To 6/30/97)

Rosenberry Construction, K Development and Construction, JR Property
Management, and Urban Development Associates (UDA) operate from the same
office building in New Haven as CHC and Inner City Development Corporation.
All these companies share the same address, telephone system and administrative
staff. There is no separate office space set-aside for CHC.

CHC Did Not Achieve Desired Housing Results

Excessive Holding Period Of Properties

The CHC did not efficiently or effectively carry out its housing program. The
purpose of the program is to purchase, rehabilitate and sell homes to persons of
low and moderate incomes. CHC was unable to find qualified buyers on a timely
basis. This Program is resulting in increased costs to the government and
decreasing the availability of scarce funds for further development.


CHC requested funding from the City of New Haven to purchase 27 single family
and six multifamily properties. As of March 1, 1998, the status of the 33
properties acquired is as follows:

          Status              Single Family       Multifamily           Total        Percent
 Sold                              14                  0                 14          42.4%
 Awaiting Sale                      9                  0                  9          27.3%
 Newly Purchased                    0                  3                  3           9.1%
 Never Purchased                    3                  1                  4          12.1%
 Office/Rental Unit                 1                  2                  3           9.1%
 Total                             27                  6                 33         100.00%

CHC purchased 23 single family properties for the purpose of selling them to low-
moderate income persons and one property for commercial and rental purposes.
The multifamily properties were acquired for ownership and rental operation rather
than resale. As depicted below, CHC has been unable to sell its properties timely,
holding some properties for over two years.

              Holding Period of Sold CHC Properties From Date of Acquisition
                                                                          Days Held By
                                        Date Acquired    Date Sold by   CHC to Day Sold
   Property Address      Total Funding     by CHC       CHC or 3/1/98        or 3/1/98
211Fitch                   $ 84,950        04/30/95       11/28/95              212
89 Wolcott                  $ 118,407      01/10/95       11/28/95              322
344 Blatchley               $ 202,095      06/30/95       04/09/96              284
10 Kensington              $ 60,400        03/31/95       10/07/96              556
288 Exchange                $ 172,590      06/30/95       11/06/96              495
588 Howard                  $ 224,535      01/31/96       12/30/96              334
59 Redfield                $ 53,400        08/19/96       01/17/97              151
68 James                    $ 164,000      06/30/95       09/30/97              823
Total/Average Sold         $1,080,377                                           397
            Holding Period of Unsold CHC Properties From Date of Acquisition
242 Shelton                $ 185,159        6/30/95        Unsold               975
75 Norton                  $ 176,476        8/10/95        Unsold               934
153 Lloyd                  $ 152,313        8/17/95        Unsold               927
168 Wolcott                $ 103,245        8/17/95        Unsold               927
268 Peck                   $ 148,343        8/31/95        Unsold               913
67 Clay                    $ 132,269        2/01/96        Unsold               759
150 Shelton                $ 137,931        1/31/96        Unsold               760
120 Greenwood              $ 14,000         9/26/96        Unsold               521
233 Blatchley              $ 12,500         4/15/97        Unsold               320
Total/Average              $1,062,236                                           782
Unsold Properties

Grand Total/Average       $2,142,613                                                601

               This chart excludes six properties sold the same day as purchased.


Of the twenty-three single family properties that were purchased by CHC, nine
remain unsold. Many of the unsold properties have been in CHC’s inventory for
over 2 ½ years. The average holding period for all the properties is 601 days.
However, the average holding period to March 1, 1998 for the nine unsold
properties is 782 days or 26 months. In order to be effective and cost efficient, the
program, as designed by the consultant, requires that the properties be sold within
five months from the date of obtaining the 203(k) insured mortgage. Generally, the
date the property was acquired by CHC (as shown in the above table) is also the
date of the 203(k) insured mortgage.

Program Changes Allowed Speculation by CHC

Prior to July 1995, CHC’s housing program operated on a much smaller scale.
CHC would identify a qualified buyer and match them with a property. At that
time the program worked well, because prospective homeowners selected the
property and repairs and the sales were completed timely. There were no
significant holding costs as property turnover was rapid. Operating under this
method, the program basically guaranteed success.

In 1995, HUD regulations began permitting non-profits to participate as
homeowners in the Section 203(k) Rehabilitation Insurance Mortgage Program.
CHC became a eligible non-profit mortgagor under the program in July 1995.
CHC changed their method of operations to take advantage of the change in
regulations. Thereafter, CHC’s housing program expanded to a larger scale and
began to involve speculation in the market. As the City awarded additional funds,
CHC began purchasing many properties using HOME funds for the acquisition
and obtaining HUD-insured Section 203(k) loans for the rehabilitation. CHC’s
plans were to then sell the properties to qualified low and moderate income buyers
who had not been previously identified. CHC did not have buyers for the
properties at the time of purchase as they did under the pre-July 1995 program.
CHC also began purchasing properties and selling them “as is” to qualified buyers.
CHC, would also assist the “as is” buyer in selecting the IOI contractor to do the
rehabilitation work.

City Awarded Funding For Property Acquisition In Unstable Real Estate
Market Without Evaluating On Going Performance

While the goal of increasing homeownership opportunities for low and moderate
persons is certainly a worthy one, we have concerns that the City was willing to
award CHC funds and continuously increase the funding for the acquisition of the
properties considering that the real estate market in New Haven in 1995 was not
strong and was uncertain. For example, according to a May 25, 1995 independent
appraisal of 344 Blatchley Avenue in New Haven (a CHC-purchased property), the
appraiser stated:


        “After analysis of the local real estate market it is apparent that in certain
        areas, and in certain sub-markets, there is an oversupply of properties for
        sale. The predominant marketing time is approximately six (6) to eight (8)
        months…Property values in New Haven continue to decline due to the
        sluggish economic climate, oversupply of homes for sale and foreclosure
        sales and listings in the subject’s market area.”

Yet given what the appraiser stated, the City provided CHC over $70,000 in
HOME funds for this property and received a Section 203(k) HUD-insured loan of
$132,000. This property was actually one of the faster sellers, selling in 9 ½
months since the buyer was pre-qualified as an eligible purchaser. The slow
rehabilitation start date on this property is what held-up the property sale.
However, many of the properties took much longer to sell and are now requiring
the City to fund mortgage payments. Given the condition of the real estate market
in New Haven at the time, it should have been foreseen that CHC was going to
have long holding periods which increase carrying costs. Yet, we have no evidence
that the City took this into consideration when awarding funding to CHC.

Longer Holding Period Result In Higher Costs

Due to the excessive holding periods, CHC requested HOME funds from the City
for the monthly mortgage payments on properties insured under HUD’s Section
203(k) program. As exhibited below, the City provided CHC $145,143 in HOME
funds to make monthly mortgage payments in order to avoid default and possibly
foreclosure. However, even with this influx of funds, seven HUD-insured
properties are currently in default and in fear of foreclosure. The defaults on these
seven properties total $128,146 at March 1, 1998.

                   203(k) Mortgage Payments Made With Home Funds
                                                                      Total Mortgage
                            Period Mortgage      Number of Mortgage   Payments With
    Property Address         Payments Made         Payments Made       HOME Funds
211 Fitch                     10/95-11/95                2              $ 1,850
344 Blatchley                  11/95-4/96                5              $ 10,125
68 James                      10/95-11/96               14              $ 13,976
242 Shelton*                  11/95-11/96               13              $ 15,495
75 Norton*                    10/95-11/96               14              $ 19,367
288 Exchange                  11/95-10/96               12              $ 14,273
268 Peck*                     11/95-11/96               13              $ 15,344
168 Wolcott*                  10/95-11/96               14               $ 12,445
153 Lloyd*                    10/95-11/96               14              $ 16,314
89 Wolcott                    10/95-11/95               14              $ 1,857
588 Howard                     6/96-11/96                6              $ 10,997
150 Shelton*                   6/96-11/96                6              $ 7,131


                    203(k) Mortgage Payments Made With Home Funds
                                                                             Total Mortgage
                         Period Mortgage      Number of Mortgage             Payments With
   Property Address       Payments Made         Payments Made                 HOME Funds
67 Clay*                     7/96-11/96               5                        $ 5,969
Total HOME Funds Provided to CHC to Make 203(k) Mortgage                       $145,143

                         * Currently In Default - See Table Below

CHC has not requested additional funds for mortgage payments since November

Potential Loss to HUD Insurance Fund of $710,250

CHC currently owns seven properties in default that may be foreclosed upon by
the mortgagee. Before the property can be sold, CHC, will need to payoff the
delinquent balances of $128,146 (3/1/98). If this is not done, HUD could be
paying out mortgage insurance proceeds of $710,250 as the defaulted loans are
assigned to HUD.

                         CHC-HELD PROPERTIES IN DEFAULT

  Property                       Acquisition    Date of    Amount Past         203(k) Loan
   Address       Mortgagee          Date        Default   Due As of 3/1/98       Amount
268 Peck      Homeside Lending    08/31/95     02/01/97      $ 18,569            $ 98,000
75 Norton     Homeside Lending    08/10/95     02/01/97      $ 24,412           $112,150
242 Shelton   Homeside Lending    06/30/95     02/01/97      $ 19,499           $109,700
153 Lloyd     Homeside Lending    08/17/95     02/01/97      $ 17,959           $101,000
168 Wolcott   Homeside Lending    08/17/95     02/01/97      $ 14,419            $ 76,300
150 Shelton   Homeside Lending    01/31/96     04/01/97       $ 19,125           $108,800
67 Clay       North American      02/01/96     06/01/97       $ 14,163           $104,300

Total Unpaid Installments and 203(k) Loan                    $128,146           $710,250

Rental Receipts Are Not Being Used To Pay Mortgage For Properties in

CHC is not using rental receipts earned on CHC-owned properties in default to
make monthly mortgage payments. JR Property Management, an IOI company,
collects and keeps the rents earned on the CHC-owned properties. These funds
are not reimbursed to CHC and, according to CHC’s consultant, are used by JR
Property Management for miscellaneous housing costs. We believe that the City


should ensure that accountability is established over rental receipts and that the
funds are used by CHC to keep mortgages current.

Due to CHC’s inability to find qualified buyers, the program is not successfully
meeting its objective of selling rehabilitated housing to low and moderate income
persons. In addition, the long holding periods are increasing costs to the City with
little benefit. Funds used to pay outstanding mortgages do not increase the value
of the property and prevent these funds from being used for the purposes of
increasing affordable housing stock.

CHC’s Questionable Practices

The City has allowed CHC to engage in practices which are questionable and add
unnecessarily to the cost of homes.

Federal Funds Used To Pay Sellers Costs

CHC paid $208,265 for back taxes and utility charges in federal funds for
properties. Usually, past due taxes or water/sewer arrears are the responsibility of
the seller and not the buyer. However as shown below, for twelve properties
acquired by CHC, it was the buyer (CHC) who paid the past due taxes and charges
using limited Federal funds. We found no evidence that these payments were
included as part of the acquisition price.

                  Schedule of Back Charges Paid With Federal Funds

                     Date                                                  Water &
     Property       Acquired             Seller            Back Taxes       Sewer
 344 Blatachley    06/30/95    Conn. Bank Commerce          $    4,986     $1,238
 233 Blatchley     04/15/97    Patrick & Nicola Carusone    $    2,041
 67 Clay           02/01/96    Branford Savings Bank        $    5,000
 120 Greenwood     09/26/96    WPCA of New Haven            $    1,902     $1,858
 518 Howard        12/13/96    Peter M. Lerner              $   34,777
 588 Howard        01/31/96    Branford Savings Bank        $ 5,000
 68 James          06/30/95    Conn. Bank of Commerce       $ 4,986        $1,238
 101 Judith        12/30/97    First Union National Bank    $ 34,008
 93 Judith         12/30/97    First Union National Bank    $ 32,406
 171 Quinnipiac    12/30/97    First Union National Bank    $ 57,294
 242 Shelton       06/30/95    Conn. Bank of Commerce       $ 15,798       $ 733
 150 Shelton       01/31/96    Branford Savings Bank        $ 5,000
                   Total Back Charges                       $203,198       $5,067


At least three of the above properties were purchased through foreclosure sales.
CHC received a total of $377,575 in HOME funds for the acquisition of these
three properties. The combined foreclosure sale price totaled $245,500. For these
three properties alone, an additional $123,708 was paid with HOME funds for
back taxes. The remaining HOME funds of $8,367 were used for closing costs.

 Property         Home Funds Received   Sales Price         Back Taxes Paid
 93 Judith             $100,678          $ 70,000              $ 32,406
 101 Judith            $ 96,623          $ 55,500              $ 34,008
 171 Quinnipiac        $180,274          $120,000              $ 57,294
 Total                 $377,575          $245,500              $123,708

The $123,708 should have been paid by the seller from the foreclosure proceeds
and not from HOME funds. With the limited resources available to the City of
New Haven for its Housing Rehabilitation programs, the $208,265 paid for back
charges could have been utilized to rehabilitate other housing in the City and
benefit a greater number of low- and moderate income families. Payment of these
back charges by CHC increases the cost of the program and benefits the seller
rather than the City.

Use of Identity-of-Interest Companies Result In Higher Costs

CHC is engaging in transactions which may not be in the best interest of the City
or the community. These transactions allow related parties to make profits at the
Program’s expense and are increasing costs. Our review disclosed that:

   •   CHC is profiting from sale of properties;

   •   Inner City Development Corporation (ICDC), an IOI is profiting from sales
       to CHC; and

   •   IOI related companies are receiving a majority of the rehab work and are
       receiving questionable commissions.

Profit on Sale of Properties by CHC Resulting in Higher Costs

Our review disclosed that CHC, and its for-profit affiliate, ICDC, acquired
properties using HOME funds and resold them on the same day to low and
moderate income persons for a profit. As exhibited below, CHC and ICDC
purchased and then re-sold six properties on the same day at a profit of $105,000.
These transactions represent an overall markup of 50 percent.


      Profits By ICDC/CHC on Property Sales to Third-Party Using Federal Funds

   Property      Acquisition Acquired   Acquisition      Selling                Percentage
    Address     and Sale Date   By         Price          Price      Mark-Up     Mark-Up
230 Lloyd         02/08/96    ICDC       $ 17,000       $ 29,000     $ 12,000     70.6%
40 Orchard        02/08/96    ICDC       $ 5,000        $ 17,500     $ 12,500    250.0%
92 Kensington     02/26/96    ICDC       $ 20,000       $ 29,000     $ 9,000      45.0%
518 Howard        12/13/96     CHC       $ 60,000       $ 75,000     $ 15,000     25.0%
40 Ward           12/23/96     CHC       $ 33,500       $ 45,000     $ 11,500     34.3%
408 Edgewood      03/31/97     CHC       $ 75,000       $120,000     $ 45,000     60.0%

                 Total                   $210,500       $315,500     $105,000    49.9%

The mark-ups unnecessarily increased the costs to the homebuyer, the City, and to
HUD. The higher acquisition cost increased the amount of HOME funds the City
provided and increased the amount of the Section 203(k) HUD-insured loans.
This type of transaction does not contribute to providing housing at the lowest
possible cost.

Inter-Company Trading Profited IOI Company and Increased Program

We found that for an additional thirteen properties, ICDC purchased properties
and then transferred them to CHC the same day, for a profit. These inter-company
property transfers resulted in mark-ups of as high as 292 percent and netted
$195,311 profit to ICDC. Since these costs will be passed on they will result in
higher costs to the homebuyer, the City, and HUD Program.

                          Inter-Company Property Transfers

  Property Acquired Transferred   Closing    Purchase     Transfer              Percentage
  Address    By         To          Date       Price      Amount     Mark-up     Mark-up
89 Wolcott  ICDC       CHC        01/10/95   $50,400      $75,000    $24,600      48.4%
211 Fitch   ICDC       CHC        04/30/95   $17,500      $30,000    $12,500      71.4%
288         ICDC       CHC        06/30/95   $34,000      $50,000    $16,000      47.1%
344         ICDC       CHC        06/30/95   $49,500      $56,000     $6,500      13.1%
242 Shelton ICDC       CHC        06/30/95   $69,000      $75,000      $6,000     8.7%
68 James    ICDC       CHC        06/30/95   $36,500      $42,500      $6,000    16.4%
168 Wolcott ICDC       CHC        08/17/95    $8,500      $32,500     $24,000    282.4%


                            Inter-Company Property Transfers

153 Lloyd       ICDC       CHC       08/17/95    $8,500   $30,000 $21,500       252.9%
268 Peck        ICDC       CHC       08/31/95   $58,800 $58,776     ($24)       (0.04%)
150 Shelton     ICDC       CHC       01/31/96    $9,566   $35,000 $25,434       265.8%
588 Howard      ICDC       CHC       1/31/96    $41,430 $60,000 $18,570          44.8%
67 Clay         ICDC       CHC       02/01/96   $23,269 $45,000 $21,731          93.4%
338 Grand       ICDC       CHC       05/23/96   $35,000 $47,500 $12,500          35.7%
Total                                           $441,965 $637,276 $195,311       44.2%

IOI Contractor Received 94 Percent of the Rehabilitation Dollars

Our review disclosed that IOI companies performed almost all the functions
relating to the acquisition, maintenance, rehabilitation, rental, and sales of these
properties. These companies were selected by CHC without benefit of competition
and received the majority of the City-granted funds.

As shown below, Rosenberry Construction Company and K Development and
Construction, both owned by UDA, were awarded $1,488,636 or 94 percent the
rehabilitation funds.

                Contractor and Cost of Rehab for 21 Rehabilitated Properties

     Property Address             Rehabilitation Contractor        Rehabilitation Amount
344 Blatchley                      Rosenberry Construction               $120,750
338 Grand                          Rosenberry Construction               $171,020
68 James                           Rosenberry Construction                $77,877
75 Norton                          Rosenberry Construction                $70,750
288 Exchange                       Rosenberry Construction                $72,221
10 Kensington                      Rosenberry Construction                $22,500
67 Clay                            Rosenberry Construction                $75,749
92 Kensington                      Rosenberry Construction                $84,873
211 Fitch                          Rosenberry Construction                $47,300
153 Lloyd                          Rosenberry Construction                $97,638
150 Shelton                        Rosenberry Construction                $87,951
40 Orchard                         Rosenberry Construction                $79,166
168 Wolcott                        Rosenberry Construction                $52,277
242 Shelton                        Rosenberry Construction                $84,077
230 Lloyd                          Rosenberry Construction                $86,392
588 Howard                         Rosenberry Construction               $110,227


                Contractor and Cost of Rehab for 21 Rehabilitated Properties

40 Ward                               Rosenberry Construction                $75,368
408 Edgewood                       K Development & Construction             $37,500*
59 Redfield                        K Development & Construction             $35,000*
Total Rehab Dollars to IOI Companies                                       $1,488,636
268 Peck                                PMG Construction                     $67,090
89 Wolcott                              PMG Construction                     $21,895
Total Rehab Dollars to non-IOI Companies                                     $88,985
Total Rehab Dollars                                                        $1,577,621
* Connecticut Housing Finance Authority Funded

In total nineteen (19) of the twenty-one (21) properties were rehabilitated by these
companies. For six of these properties, CHC guided the homebuyer to use these
IOI construction companies. There was no evidence that this work was subjected
to competition on the open-market. Therefore, there is no assurance that the
costs are reasonable. However, based upon our inspections for 15 of these
properties, we found that the properties were in compliance with HUD’s housing
standards and that the rehabilitation work cited was completed.

As discussed in more detail in the Introduction section, a local television station
identified three homes, repaired under CHC’s program, where renovations were
of poor quality. The City reviewed these cases and recommended that CHC and
the homeowners resolve the dispute.

IOI Company Received Commissions

UDA, an IOI company, received commissions from the sale of CHC-owned
properties. As exhibited below, UDA received a total of at least $75,295 in
commissions from both inter-company and third-party sales of CHC-owned
properties when a Section 203(k) loan was involved.

                                   Commissions Paid To UDA
                Property Address                                Commissions Paid
                                   Inter-Company Transfers
344 Blatchley                                                      $1,680
288 Exchange                                                       $1,500
211 Fitch                                                   No documentation in file
588 Howard                                                         $4,200
68 James                                                           $1,275
89 Wolcott                                                         $4,500


                             Commissions Paid To UDA
67 Clay                                                     $3,150
338 Grand                                                   $5,000
153 Lloyd                                                   $8,500
75 Norton                                                   $5,600
150 Shelton                                                 $2,450
242 Shelton                                                 $2,250
168 Wolcott                                                 $5,500
268 Peck                                                    $1,500
Commission from Inter-Company Sales                         $47,105
                                Sales To Third-Party
10 Kensington                                               $3,990
230 Lloyd                                                   $6,000
40 Orchard                                                  $6,000
408 Edgewood                                                $7,200
59 Redfield                                          No documentation in file
92 Kensington                                               $5,000
Commission from Third-Party Sales                           $28,190
Total Commissions Paid                                      $75,295

On July 1, 1993, CHC signed-off on a proposal for contractual services written by
the President of UDA on CHC’s letterhead. The contract provided that UDA
would assist in the acquisition and sale of single family and multifamily properties
for CHC, develop rehabilitation work write-ups and present offers to banks. The
Secretary of UDA was also paid by CHC as its Development Manager through
June 30, 1997. The Development Manager’s duties are to perform various real
estate functions for CHC, including purchasing and selling property, identifying
financing and coordinating rental and other property management strategies. Since
the Development Manager performed most of the work involved with the
acquisition and sale of these properties, as evidenced by his signature on
documents, there appears to be no justification for the commissions paid to UDA.

Funds Provided to CHC for Properties Never Acquired

Inattention by the City over the releasing of funding to CHC for property acquisition
has cost the City money and has tied up scarce financial resources. The following three
examples illustrate the lack of oversight by the City over its own operations, as well as
over CHC’s operations, and shows that CHC’s motivation could be to enhance
financial profitability to their IOI’s rather than improve the City’s housing program.

The City of New Haven provided CHC $87,000 from its CDBG funds for the
acquisition of three properties:

          Property Address                Date Funds Awarded          Funds Provided
 105 Greenwood                                  8/11/95                  $57,500


 151 Butler                                   4/11/97                $17,500
 254 Grand                                    2/27/97                $12,000
 Total                                                               $87,000

These properties were never purchased by CHC, the funds were never recorded on
CHC’s accounting books, and the funds for 151 Butler and 254 Grand were only
returned in October 1997, by CHC, upon request by the City when concerns were
raised about these transactions. The City is still awaiting the return of funds for
105 Greenwood. The following is a summary of these three transactions.

105 Greenwood

In August 1995, the City released $57,500 to CHC for the acquisition and closing
costs associated with the purchase of property located at 105 Greenwood Street.
The City released the money and CHC purchased the bank note on the property
even though the Mayor had directed the Office of Housing and Neighborhood
Development (OHND) to withdraw financial support for this property because he
believed this building should be demolished. CHC never recorded these funds on
their books.

This property was owned by James Rosenberry (previous owner of JR
Management and Rosenberry Construction and current employee of JR
Management) who had defaulted on the mortgage back in 1991. CHC paid the
bank $45,000 for this note even though in 1986 the payoff amount on the loan was
only $35,000. This may have had to do with the fact that this purchase was tied
into a favorable note modification of a $435,000 mortgage on another property
owned by CHC and ICDC (Glen Oaks).

CHC used nearly $3,000 of the acquisition money awarded by the City for this
property for attorney costs relating to the modification of the bank note of Glen
Oaks. In addition, CHC paid over $8,000 to JR Construction. Any rehabilitation
work done prior to ownership by CHC should have been paid by the previous
owner, not CHC. Had the City reviewed the closing statements, they would have
seen that almost $11,000 of the funds were expended for items not related to this

Further, CHC never tried to collect from Rosenberry on the mortgage note or did
CHC try to foreclose on the property. CHC never acquired the property. Instead,
CHC’s IOI, JR Property Management, rented out the property and collected rents.
The rental receipts were not recorded on CHC’s books. Rents on this property
were deposited in JR Property Management accounts. It was not until November
1996 that the City’s Assistant Corporation Counsel questioned CHC as to why this
property was never acquired. In February 1997, CHC wrote to the City requesting
demolition of the property by the City because rehabilitation of the property was
too costly and later asked the City for forgiveness for the $57,500. In June 1997,
the City demolished the building at a cost of $19,000. Neither the City nor the


community benefited from this transaction. The only parties that benefited from
this transaction were CHC’s related companies and the bank.

151 Butler Street

In April 1997, the City issued a check for $17,500 to CHC for the acquisition and
closing costs associated with the purchase of property located at 151 Butler Street.
The City owned the property and intended to sell the property to CHC for $1,000.
Despite this, CHC requisitioned $17,500 the City; $16,500 more than was needed
(less any closing cost) to purchase the property, and the City approved the request.
This transaction would have provided CHC with about a 1600 percent profit at the
City’s expense.

Adding to this, the City’s Tax Office intended on holding the $17,500 in order to
satisfy CHC’s outstanding tax obligations with the City, but unbeknown to the
City, these funds were released to CHC. The funds were never recorded on CHC’s
accounting books but were held by CHC’s attorney in an escrow account. It was
not until our Office inquired about this transaction that the City was made aware
that the funds were released and that the property was never acquired. In October
1997, CHC reimbursed the City $17,500.

254 Grand Street

In February 1997, the City released $12,000 to CHC for the acquisition and
closing costs associated with the purchase of a property located at 254 Grand
Street. The funds were never recorded on CHC’s accounting books but were held
by CHC’s attorney in an escrow account. It was not until our Office inquired as to
why this property was not acquired that the City requested reimbursement by
CHC. In October 1997, CHC reimbursed the City $12,000.

Acquisition of 75 Norton Street Did Not Benefit City But CHC Related

ICDC had a $166,000 mortgage on 75 Norton Street. ICDC obtained this
mortgage on February 18, 1992 for the purpose of acquiring and rehabilitating the
property. On August 10, 1995, CHC used federal funds to release ICDC from its
mortgage obligations on 75 Norton Street. A deal was configured in such a way,
that at the time of CHC closing on two properties, 75 Norton Street (owned by
ICDC) and 27-35 Main Street (independently-owned), ICDC would be released
from the mortgage on 75 Norton Street. $145,000 of this mortgage was re-
assigned to 27-35 Main Street and ICDC paid-off the remainder of the mortgage
for $21,916.

The selling price for 75 Norton Street was $80,000. As mentioned, $21,916 of the
$80,000 was used by ICDC to pay-off the remainder of the loan. This left ICDC


with a profit of over $58,000 on the sale of this property and possibly more
depending upon what the actual payoff balance on the loan was.

On the flip-side, CHC now has a $145,000 mortgage on 27-35 Main Street. The
City provided CHC a HOME grant of $160,000 for the acquisition of 27-35 Main
Street. Had the property purchase not been connected to the sale of 75 Norton,
CHC could have used the HOME funds to pay the seller his asking price of
$136,500 and for closing costs. CHC would not have been saddled with a
$145,000 mortgage on this property.

CHC received $112,150 in Section 203(k) loans and a HOME grant of $44,959
from the City for the acquisition and rehabilitation of 75 Norton Street. The goals
of the City’s housing program is to preserve and rehabilitate the existing housing
stock. This property, at the time of acquisition, was not in need of rehabilitation,
since it had been rehabilitated only three years earlier in 1992. The 1995
rehabilitation done on the property was not to fix-up a run down property, but to
convert the building from four-units to a three-units. We believe that this is not is
an optimum use of the scarce resources available to the City for housing
revitalization. The City could have used these funds to rehabilitate a run-down
property thereby providing better and more affordable housing to the City.

The only parties that truly benefited from this transaction were CHC’s identity-of-
interest companies. For $21,916 ICDC was released from a mortgage; Rosenberry
Construction received $33,000 from ICDC at the time of closing on 75 Norton
Street and an additional $70,750 from CHC for the rehabilitation of the property;
and UDA received $5,600 from ICDC at closing. Conversely, the City spent
$45,000 in HOME funds for a property that was already benefiting the City and
later over $19,000 to CHC to make its monthly mortgage payments on the 203(k)
loan in order to avoid default. Mortgage payments have not been made on this
property since January 1997. The property is currently in default and in fear of
foreclosure. Unless the mortgage is brought current, HUD may be paying out
mortgage insurance proceeds of $112,150.

City Oversight Over Subgrantees Needs Improvement

Had the City instituted proper safeguards in place to monitor CHC’s operations,
these limited resources could have been available to revitalize other properties and
benefit the citizens of New Haven. While the City requires all fourteen of its
housing subgrantees to maintain proper accounting records and supporting data and
to maintain separate files identifying activities that were carried out under each
program, the City has implemented few procedures to ensure that CHC or any of its
subgrantees follow its contracts and properly expend City funds.

The City of New Haven has inadequate controls to ensure that its subgrantees are
implementing its housing program in an efficient and effective manner. The goals of


the City's housing program are designed to preserve and rehabilitate the existing
housing stock and improve access to homeownership for low and moderate
income families. Since January 1995, the City has provided CHC over $2.3 million to
acquire and rehabilitate homes, and continues to fund CHC, without assurance as to
whether CHC is efficiently and effectively implementing the housing program.

Contract Requirements

The City enters into a separate contracts with CHC for each specific federal grant: i.e.
HOME, CDBG and, Section 108. Although each contract has variations in the terms
and conditions, some of the common requirements are that the subgrantee:

1.       Establish and maintain fiscal control and accounting procedures which assure
         the proper accounting of funds and comply with the principles and standards of
         administering grants contained in OMB Circular A-110 and A-122;

2.       Report any income generated as a direct result of the funds to the City and be
         used in accordance with program requirements; and

3.       Maintain adequate supporting data and separate files identifying activities
         that were carried out under the program.

Our review disclosed that CHC did not adhere to any of the contract requirements and
that the City was unaware of CHC’s non-compliance. CHC did not properly account
for over $2.3 million of HOME, Section 108 Loans and UDAG Loans funds in their
accounting records. The only funds the City reviewed were the CDBG funds given to
CHC of about $100,000 per year. Accordingly, the City is unaware of CHC’s use of
over $2.3 million in program funds.

Records Not Maintained In Accordance With Contracts

CHC does not maintain its accounting records in accordance with its contracts. As a
result the City does not have assurance that CHC has established adequate internal
controls and financial accountability. For example:

     •   The accounting records for CHC are combined with several other IOI entities
         on two separate computerized accounting systems. One system is maintained
         primarily for the management side of the business by the Office Manager
         for JR Property Management. The second system is maintained for the
         development side of the business by a contract employee.

     •   Purchases of properties and notes are not recorded as assets in accounting


   •   CHC does not record all necessary transactions. CHC received HOME and
       Section 108 funds for acquisition which were not recorded on CHC’s
       books of account. CHC turned the funds over to its attorney to be held in

   •   Disbursements from the escrow account made by the attorney are not
       recorded by CHC.

   •   Property files do not contain sufficient documentation to support financial
       transactions. Documentation is missing or incomplete. The Certified Public
       Accountant’s (CPA) management letter identified that receipts and invoices
       cannot be located for certain transactions.

   •   Rents are neither reported to the City nor recorded as program income by

   •   CHC does not separate the activities carried out under each of its grants; nor
       does it maintain separate accounts for each grant.

   •   Other funds committed to the project are not recorded

   •   Sale of properties are not recorded on the books.

Property Files Incomplete


The City identified disbursements to CHC for 72 properties while CHC maintained
files to support transactions for 54 properties. CHC’s property files were
incomplete, for example:

       •   closing statements were missing, unsigned or incomplete
       •   construction contracts did not identify initiation and completion date
       •   sales documents were missing or unsigned
       •   no documentation to identify that the purchaser was low-
       •   inspections were missing
       •   payment information was missing.

City Only Reviews 19 Percent of CHC’s Funding

While the City does perform some monitoring over the subgrantee, we do not believe it
is adequate. Currently, only the CDBG program funds are reviewed by the City’s
Controller for compliance and are audited annually. Funds provided through the
HOME, Section 108 Loans, UDAG contracts and rental income are neither reviewed
by the City Controller nor audited by a CPA.

        Grant                         Funds Expended as of 2/28/98
CDBG                                          $ 438,940
HOME                                          $1,339,856
Section 108                                   $ 411,740
UDAG                                          $ 73,038
TOTAL                                         $2,263,574

A Certified Public Accountant (CPA) consolidates data from the two accounting
systems in conjunction with other documentation to audit the financial statements
for the CDBG contract. CDBG is the only grant receiving any independent
review. The CDBG grant represents only 19% of the HUD funding expended by


                          Section 108

                       CDBG                              60%

The CDBG audited financial statements have a year end of June 30 to coincide
with fiscal year end for the City of New Haven. The CPA also prepares a
compilation of the financial position for CHC for its fiscal year end of December
31. The CPA utilizes unsigned closing statements on the properties and the two
accounting systems to prepare the compilation. The CPA also performs individual
reviews of four properties purchased by CHC with subsidized loans from the
Connecticut Housing Finance Authority: Chamberlain Court, Orchard Hill
Apartments, Howard Court, and Fairmont Height Apartments.

The City does not have any written procedures for reviewing and monitoring
subgrantees performance under the terms and conditions of the contracts. The Deputy
for Administrative Service for Livable City Initiative stated that they are in the process
of developing written procedures. We believe that the City needs to evaluate CHC to
ensure that they are providing quality housing to lower income persons in the most
efficient and effective manner possible.


The Mayor, rightfully, expressed concerns in stating that the City needs to develop
and maintain programs that are not only beneficial to the citizens of New Haven,
but are also cost effective. It is the City’s desire to make optimum use of the
limited resources available to revitalize and sustain the City. Safeguards to prevent
the misuse of federal funds need to be developed and implemented by the City.
The Mayor stated that the HOME program has allowed the City to aggressively
promote homeownership and supplement resources committed by private and non-
profit sector. The non-profit developers continued to acquire properties from
banks at deep discount to improve access to homeownership for low and moderate
income families.

In order to accomplish their objectives, the City contracted with non-profit
organizations to implement parts of the housing programs. The City entrusted
CHC with HUD/FHA insured funds of $4.3 million for the administration of its
housing programs. As shown throughout, the finding, the City needs to improve
its monitoring and evaluation of CHC’s performance. The City needs to examine


CHC’s activities especially related party transactions to assure that funds are being
utilized efficiently and effectively. The condition cited in this report disclose
breakdowns both at the City and Subgrantee levels. Therefore, there is limited
assurance that the expenditures for the City’s housing rehabilitation programs are
properly accounted for and represent eligible program costs. The City must ensure
that all Subgrantees, including CHC, operate in a manner which makes optimum
use of the City’s resources for providing homeownership to low and moderate
income families.

Mayor’s Response

       The Mayor advised that:

       “. . . the City acknowledges and accepts the factual accuracy of
       the findings in the Audit Report. Given the same, the City is
       immediately committed to hiring an outside accounting firm which
       will, within the next (60) days, design a compliance protocol and
       implementation program which will ultimately be administered by
       the City’s Internal Audit Division along with additional City staff.
       We look forward to HUD assistance in the organization of
       protocols and changes.

       Additionally, consistent with the Audit Report’s recommendations,
       the City of New Haven is immediately suspending any future
       funding of CHC until all of the issues raised by the Audit Report
       are resolved to the satisfaction of both the City and HUD . . . .”


We recommend that you instruct the City to:

1A.    Obtain a full financial and programmatic accounting of CHC’s
       activities and recover any misspent HUD funds.

1B.    Suspend any future funding of the Subgrantee until proper controls
       and safeguards are in place to assure the program is cost effective.


Internal Controls
In planning and performing our audit, we considered the City’s and the
management and fiscal controls to determine our audit procedures and not to
provide assurance on the controls.       The City is responsible for establishing
effective management and fiscal controls over Subgrantees operations funds with
Federal Funds in its Housing programs. Controls consists of interrelated
components, including integrity, ethical values, competence, and management and
fiscal control environment.

Management controls include the plan of organization, methods and procedures
adopted by management to ensure that its goals are met. Fiscal controls include
the establishment of proper accounting books and records and maintaining
adequate accountability for all transactions. This would include a system for
measuring, reporting and monitoring program performance in meeting program

We obtained an understanding of management controls through inquiries,
observations, and inspections of documents and records. We focused our review
on management and fiscal controls relating to program oversight of CHC’s (1)
operations; (2) program performance; and (3) financial accountability. Based on
our review, we found that there were significant weaknesses in City’s monitoring
of CHC’s operation and in CHC’s financial systems which are detrimental to the
integrity of program (see Finding).


Appendix 1

Schedule of Property Universe as of March 1, 1998

                                           Sec. 108 &
                  Date                      UDAG
   Property     Acquired    Date Sold        Funds            203K       Other         Total

                                        Properties Sold

518 Howard      12/13/96    12/13/96       $ 106,880                               $   106,880
344 Blatchley   06/30/95    04/09/96       $ 70,095       $ 132,000                $   202,095
68 James        06/30/95    09/30/97       $ 63,500       $ 100,500                $   164,000
588 Howard      01/31/96    12/30/96       $ 99,035       $ 125,500                $   224,535
92 Kensington   02/26/96    02/26/96       $ 45,000       $ 74,000                 $   119,000
89 Wolcott      01/10/95    11/28/95       $ 31,857       $ 86,550                 $   118,407
230 Lloyd       02/08/96    02/08/96       $ 30,000       $ 91,700                 $   121,700
40 Orchard      02/08/96    02/08/96       $ 30,000       $ 74,000                 $   104,000
211 Fitch       04/30/95    11/28/95       $ 15,950       $ 69,000                 $    84,950
288 Exchange    06/30/95    11/06/96       $ 73,590       $ 99,000                 $   172,590
10 Kensington   03/31/95    10/07/96       $ 15,000       $ 42,000      $ 3,400    $    60,400
40 Ward         12/23/96    12/23/96       $ 30,000       $ 94,000                 $   124,000
59 Redfield     08/19/96    01/17/97       $ 15,000                     $ 38,400   $    53,400
406 Edgewood    03/31/97    03/31/97       $ 27,500                     $ 92,400   $   119,900

                                  Properties On-Market

268 Peck        08/31/95   On-Market       $   50,343     $    98,000              $   148,343
168 Wolcott     08/17/95   On-Market       $   26,945     $    76,300              $   103,245
75 Norton       08/10/95   On-Market       $   64,326     $   112,150              $   176,476
153 Lloyd       08/17/95   On-Market       $   51,313     $   101,000              $   152,313
242 Shelton     06/30/95   On-Market       $   75,459     $   109,700              $   185,159
150 Shelton     01/31/96   On-Market       $   29,131     $   108,800              $   137,931
67 Clay         02/01/96   On-Market       $   27,969     $   104,300              $   132,269
233 Blatchley   04/15/97   On-Market       $   12,500                              $    12,500
120 Greenwood   09/26/96   On-Market       $   14,000                              $    14,000

                     Property Keeping (New Office/Renting 2nd Floor)

338 Grand       05/23/96     Office        $   30,000     $ 174,400     $ 30,000   $ 234,400


                                               Sec. 108 &
                     Date                       UDAG
   Property        Acquired      Date Sold       Funds          203K           Other               Total
                                       Multi-Family Properties

101 Judith          12/30/97     Not Sold      $ 96,623                                        $ 96,623
93 Judith           12/30/97     Not Sold      $ 100,678                                       $ 100,678
171 Quinnipiac      12/30/97     Not Sold      $ 180,274                                       $ 180,274
80 Sherman          02/12/97     Not Sold      $ 69,299                                        $ 69,299
35 Main             08/10/95     Not Sold      $ 160,000                                       $ 160,000

                         Properties Never Acquired With Funds Provided

151 Butler                     Single Family   $   17,500   Subsequently Returned              $    17,500
254 Grand                      Single Family   $   12,000   Subsequently Returned              $    12,000
105 Greenwood                  Single Family   $   57,500                                      $    57,500
608 George                     Multi-Family    $   13,750                                      $    13,750

                                Additional Funds Provided To CHC

Homeownership Seminar                          $   21,617        -0-                -0-        $    21,617
Predevelopment Funds                           $   60,000        -0-                -0-        $    60,000

Grand Total All Properties                     $1,824,634     $1,872,900      $164,200         $3,861,734


Appendix 2

Auditee Comments


Appendix 3


Director, Office of Community Planning and Development, Connecticut State
        Office, 1ED
Secretary’s Representative, 1AS
Deputy Assistant Secretary, Office of the Deputy Assistant Secretary for Single
        Family Housing, HS (Room 9282)
Office of the Comptroller, A (Room 3152)
Director, Administrative Service Center, 2AA
Director of Budget, David Gibbons, ARB
Director, Field Accounting Division, 4AFA
Director, ASC Contracting Division, 2AA
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Acquisition Librarian, Library, AS (Room 8141)
Director, Housing Finance Analysis Division, REF (Room 8204)
Chief financial Officer, F (Rm. 10164)
Deputy chief Financial Officer for Finance, FF (Room 10164)
AIG, Office of Audit, GA (Room 8286)
Deputy AIG, Office of Audit, GA (Room 8286)
Director, Program Research and Planning Division, GAP (Room 8180)
Director, Financial Audits Division, GAF (Room 8286)
Central Records, GF (Rm. 8266)
Semi-Annual Report Coordinator, GF (Rm. 8254)
SAC, Office of Investigation, Boston
HUD OIG Webmaster
Michael Zegera, Public Affairs Officer, G, (Room 8256)
Public Affairs Officer, New England 1AS
Andrew Cianci, ALO, 3AFI

Director, Housing and Community Development Issue Area, US
GAO, 441 G Street, NW, Room 2474, Washington, DC 20545
Attn.: Judy England-Joseph

Department of Veterans Affairs, OIG (52A)
810 Vermont Ave.
NW, Washington, DC 20420

The Honorable Rosa L. Delauro, Member of Congress
436 Common House Office Building
Washington, DC 20515-0703


Dan Burton, Chairman
Committee on Government Reform and Oversight
House of Representatives
Washington, DC 20515-6143

Ms. Cindy Sprunger, Sub Committee on General Oversight & Investigations,
Room 212, O’Neill House Office Bldg., Washington, DC 20515

Mr. Pete Sessions, Government Reform and Oversight Committee, Congress of
the United States, House of Representatives, Washington, DC 20515-4305

The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs,
United States Senate, Washington, DC 20510-6250

The Honorable John Glenn, Ranking Member, Committee on Governmental
Affairs, United States Senate, Washington, DC 20510-6250