U.S. Department of Housing and Urban Development
Office of Inspector General for Audit, Midwest
77 West Jackson Boulevard, Room 2646
Chicago, Illinois 60604-3507
Phone (312) 353-7832 Fax (312)353-8866
Internet http//www.hud.gov/oig/oigindex.html
Audit Related Memorandum
98-CH-184-1805
January 14, 1998
Memorandum For: Shirley Bryant, Director of Housing, Grand Rapids Area Office
From: Dale L. Chouteau, District Inspector General for Audit, Midwest
Subject: Hotline Complaint
Section 203(k) Rehabilitation Home Mortgage Insurance Program
Grand Rapids, Michigan
We completed a limited review of the Section 203(k) Rehabilitation Home Mortgage Insurance
Program in the Grand Rapids Area. The review was performed in response to a citizen's complaint to
the HUD Hotline. The complainant alleged: (1) lenders in the Grand Rapids area used the same
consultant/inspector for most of their Section 203(k) loans; and (2) the consultant/inspector being used
did not do proper inspections. The objective of our review was to determine if the complaint was valid
and if HUD's rules and regulations were violated.
The 203(k) Program allows a borrower to obtain a single mortgage at a long-term (or adjustable) rate,
to finance both the acquisition and the rehabilitation of a property. To provide funds for the
rehabilitation, the mortgage amount is based on the projected value of the property when the work is
completed, taking into account the cost of the work. A HUD-approved consultant prepares the work
write-ups and cost estimates for the rehabilitation of a property to be insured under the 203(k)
program. A HUD-approved fee inspector inspects the property to verify that the work was properly
completed according to the work write-ups. The lender uses the results of the inspections as the basis
to release funds from the rehabilitation escrow account to pay for the work.
To achieve our objectives, we interviewed HUD personnel and officials from the four lenders with the
highest volume of loans in the Grand Rapids area. The four lenders were: Norwest Mortgage
Company; Mortgage Corporation of America; DMR Mortgage Corporation; and Van Dyk Mortgage
Corporation. We reviewed nine properties whose mortgages were funded by these companies. We
evaluated the work write-ups and cost estimates, and the quality of the inspections. We also
interviewed the owners of all nine properties.
Audit Related Memorandum
We found that the complaint was valid. The lenders used the same consultant/inspector for most of
their Section 203(k) loans. However, this did not violate any HUD rules. The consultant/inspector
who was the subject of the complaint, however, did not always prepare adequate work write-ups and
cost estimates, and did not always perform proper inspections. The consultant/inspector certified that
work was completed when the work either was not done or was unsatisfactory. Additionally, the
HUD Grand Rapids Office was aware that the consultant/inspector was not doing proper inspections,
but HUD did not take any action against him. Details of our review are contained in the attached
finding.
Within 60 days, please provide us, for each recommendation made in this report, a status report on: (1)
the corrective action taken; (2) the proposed corrective action and the date to be completed; or (3)
why corrective action is unnecessary. Also, please furnish us copies of any correspondence or
directives issued because of the audit.
Should you or your staff have any questions, please contact me at (312) 353-7832.
98-CH-184-1805 Page 2
Audit Related Memorandum
RESULTS OF REVIEW
The consultant/inspector who was the subject of the HUD complaint did not always prepare adequate
work write-ups and cost estimates, and perform proper inspections. The lenders in the Grand Rapids
area used this same consultant/inspector for most of their Section 203(k) loans. HUD did not take any
action against the consultant/inspector although the Chief of Single Family Production was aware that
the consultant/inspector had not performed adequately. As a result, HUD may have insured loans for
excessive amounts and the low or moderate income person who purchased a property may have paid
for rehabilitation work not completed or improperly completed.
Mortgagee Letter 95-40, explains the responsibilities of a
HUD’s Requirements
consultant. The responsibilities include preparing work write-
ups and cost estimates for the rehabilitation of a property.
HUD Handbook 4240.4 REV-2, 203(k) Handbook, Chapter 1,
Paragraph 1-9 (D), requires a HUD-approved fee inspector to
perform all the inspections during construction and after the
rehabilitation work is completed. The consultant is also
allowed to act as a fee inspector.
Chapter 5, Paragraph 5-2 (C) states that the lender who
controls the Rehabilitation Escrow Account should only release
funds to a borrower after the lender has received a properly
executed draw request and inspection report. Permits from the
local or State building authority are required where necessary
and under no circumstances is a draw request to be approved
for work that is not yet complete.
Paragraph 5-2 (C)(2) requires that improvements must be
satisfactorily completed in compliance with industry standards,
local practices and to the satisfaction of the fee inspector.
HUD Handbook 4060.01 REV-1, Mortgagee Approval
Handbook, Chapter 6, requires all lenders to have and maintain
a Quality Control Plan. The Plan must be a prescribed function
of the mortgagee's operations and assure that the mortgagee
maintains compliance with HUD-FHA requirements and its
own policies and procedures.
We randomly selected nine recently rehabilitated properties that
We Reviewed Nine
Properties had Section 203(k) loans originated by the four lenders with
the biggest volume in the Grand Rapids area, and for which the
consultant/inspector who was the subject of the complaint did
98-CH-184-1805 Page 3
Audit Related Memorandum
the rehabilitation work write-ups, cost estimates, and
inspections. We obtained the services of a HUD inspector to
reinspect the properties and evaluate the quality of the original
inspections.
Three of the nine loans were originated by Van Dyk Mortgage
Corporation, three by Mortgage Corporation of America, two
by DMR Mortgage Corporation, and one by Norwest
Mortgage Company.
The four lenders used the same consultant/inspector for the
The Lenders Used The majority of their loans in the Grand Rapids area. Officials from
Same Consultant/Inspector the lenders said they developed a working relationship with the
For Most Loans
consultant/inspector and referred most homebuyers to him.
Van Dyk used the consultant/inspector for 22 of 22 loans they
processed in 1997, Mortgage Corporation of America used
him for 19 of 21 loans, and Norwest used him for 21 of 31
loans. DMR Mortgage Corporation was unable to provide the
exact number of loans they used him for, but said it was the
majority of approximately 100 loans they originated in 1997.
Seven of the property owners we interviewed, said the lenders
referred them to the consultant/inspector, and two said
someone from HUD recommended the consultant/inspector.
The Vice President of Van Dyk Mortgage said the
consultant/inspector did an acceptable job, and his costs were
less than other inspectors.
We found that the consultant/inspector charged about $300 to
do the work write-ups. We called another consultant who was
on HUD's approved list and he said he charged between $400
and $700 depending on the amount of work required.
HUD regulations do not dictate which consultant/inspector(s) a
lender/homebuyer uses. The regulations also do not
specifically require reinspection of a sample of a
consultant/inspector's work to assure its quality. However, the
regulations require a mortgage company to maintain a quality
control plan that assures a mortgagee maintains compliance
with HUD-FHA requirements. Proper and accurate work
write-ups and inspections are a HUD-FHA requirement.
98-CH-184-1805 Page 4
Audit Related Memorandum
The consultant/inspector did not prepare adequate work write-
Work Write Ups And ups for four of the nine properties. Specifically, all health and
Inspections Were Not safety and city code violation items requiring correction were
Adequate
not included. Additionally, for three of the nine properties, the
cost estimates were excessive. The three properties were
owned by two non profits. The Presidents of the non profits
said that because of the methods they used to accomplish and
pay for the repairs required by the work estimates, they could
not provide records that showed the actual cost of completed
work.
The consultant/inspector also did not always perform proper
inspections of the repairs made under the 203(k) program
before he certified the repairs were completed and funds could
be released from the rehabilitation escrow account. For five of
the properties, the consultant/inspector certified that all repairs
were completed. He approved draw requests of funds from the
escrow account when the work was either not completed or
was unsatisfactorily completed. For example:
Inadequate Work Write Up
For the dwelling at 1307 Wealthy, the write-ups did not
include: a hand rail at the front steps; the replacement of the
old unsafe roof on the second story deck; the replacement of an
unsecured and unsafe guard rail on the roof deck; replacement
of substandard electrical wiring in the basement; and the repair
of a porch ceiling. The work write-ups only required the
patching of the roof on the second story deck which was not
safe to walk on. The porch ceiling had rotted and was sagging
in one place.
Excessive Cost Estimates
For the dwelling at 1050 Dickenson, the HUD inspector
determined that the cost estimates were excessive for the
following items:
Consultant/Inspector‘s HUD Inspector’s
Item Estimate Estimate
House Roof $5,425 $3,500
Garage Roof 1,920 1,400
Kitchen Cabinets 800 300
Kitchen Floor 680 400
Paint Windows 450 175
98-CH-184-1805 Page 5
Audit Related Memorandum
Inadequate Inspections
For the dwelling at 1307 Wealthy, the inspector certified the
exterior entry door and storm doors were replaced; the exterior
windows, trim, and garage were painted; a large hole in the
stairwell ceiling was patched; and the heat run in the foyer was
boxed. None of this work was done.
The following chart shows the results of the
consultant/inspector’s work for the nine properties we
reviewed:
Inadequate Excessive Inadequate
Lender Address Write Up Estimate Inspection
Mortgage 10785 Lovers Ln X X
Corporation
Mortgage 3908 Milan SW
Corporation
Mortgage 2056 College
Corporation
Van Dyk 544 Westway NW
Van Dyk 1135 Benjamin X X
Van Dyk 1050 Dickenson X X X
DMR 908 Nagold NW X X
DMR 131 Rose SW X
Norwest 1307 Wealthy SE X X
The lenders depended on the consultant/inspector to provide
adequate work write-ups, accurate cost estimates and assure
that the work was properly completed. However, the lenders
did not ensure the consultant/inspector did adequate work. One
of the lenders did not have a quality control plan. The other
three had quality control plans, but the plans were not effective.
Additionally, HUD did not review the adequacy of the
consultant/inspector's work and did not take appropriate action
when it was noted the consultant/inspector’s work was not
adequate.
The Chief Underwriter at DMR Mortgage Corporation said
Quality Review Plans Did
Not Exist Or Were Not that DMR did not have a quality control plan for Section
Adequately Implemented 203(k) loans and did not do quality control reviews of these
loans.
98-CH-184-1805 Page 6
Audit Related Memorandum
Mortgage Corporation of America had a quality control plan
but did not perform any quality control reviews. Its plan did
not require reinspection of any rehabilitated properties.
Norwest Mortgage Company's quality control plan required
reinspections, but it only did file reviews as part of its quality
control reviews.
Although, Van Dyk Mortgage Corporation's quality plan did
not call for reinspections, they did reinspections on 9 properties
between December 1995 and January 1997 to verify that the
original inspections were adequate and the work was properly
completed. Van Dyk found that for 7 of the 9 properties the
inspections were not adequate because all the work was not
completed as certified on the HUD fee inspector's inspection
reports. Van Dyk assured the problems noted during the
reinspections were corrected; however, they did not take
corrective action against the consultant/inspector, and
continued to use him.
Van Dyk's Underwriting Manager said he had conversations
with the Chief of Single Family in the HUD Grand Rapids
Office and told him the consultant/inspector was not doing
thorough inspections. He said he and the Chief agreed that all
the items on the work write-ups did not need to be corrected as
long as the health and safety items were corrected. It is
important for all items in the work write-ups to be satisfactorily
completed, since the mortgage amount is based on the
projected value of the property with these items corrected.
The Chief of Single Family Production and Real Estate Owned
HUD Did Not Take Any Branch in the Grand Rapids HUD Office told us that his Office
Action Against The did not monitor the 203 (k) program because of a lack of staff.
Inspector However, we found that the HUD Office was aware that this
consultant/inspector's work was inadequate and should have
taken action against him.
In September 1996, in response to concerns about the
properties being rehabilitated nationwide by Faith Housing Inc.,
a HUD inspector inspected three properties in the Grand
Rapids area that were owned and rehabilitated by Faith
Housing. For each of the three properties, the
consultant/inspector who is the subject of the Hotline
complaint did the inspections. The HUD inspector found that
the repairs that had been certified as complete were either not
98-CH-184-1805 Page 7
Audit Related Memorandum
completed or unsatisfactorily completed for all of the
properties. For example for the dwelling at 2017 Melita:
. Damaged siding was supposed to have been replaced but
was not.
. The crawl space to the rear addition was supposed to have
been ventilated but no ventilation was installed.
. No interior doors were replaced as required by the work
write-up.
. The entire house was to have been scraped, primed and
repainted. The HUD inspector found the property was
only spray painted with no scraping or priming, and work
was of poor quality.
We asked the Chief of Single Family Production and Real
Estate Owned Branch about what actions HUD took as a
result of the Faith Housing reinspections. He said Faith
Housing was suspended as a non-profit organization; however,
he could not remember if any action was taken against the
consultant/inspector. We could not find any evidence of any
action. We believe, at a minimum to protect HUD’s interests
both Faith Housing and the consultant/inspector should have
been suspended or debarred from further participation in
HUD's programs.
We recommend that the Director of Housing, Grand Rapids
Recommendations Area Office:
1A. Issue a Limited Denial of Participation against the
consultant/inspector and initiate debarment
proceedings.
1B. Require all mortgage companies doing business under
Section 203(k) to reinspect each property for which
they used the services of the subject
consultant/inspector and ensure all items that were not
completed or were not properly completed are
repaired.
1C. Require DMR Mortgage Corporation, Mortgage
Corporation of America, Norwest Mortgage Company,
and Van Dyk Mortgage to demonstrate that they have
98-CH-184-1805 Page 8
Audit Related Memorandum
implemented an effective quality control plan within six
months. For the entities that can not show they have
an effective plan, take action to prevent them from
participating in HUD’s programs.
1D. Take action deemed appropriate against any HUD
employee who did not adequately fulfill his/her
responsibility to protect HUD's interests.
98-CH-184-1805 Page 9
Distribution
Secretary’s Representative, Midwest District
State Coordinator, Michigan State Office
Assistant General Counsel for the Midwest
Field Controller, Midwest
Director Field Accounting Division, Midwest
Director, Office of Housing, Michigan State Office (2)
Director, Administrative Service Center 1
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Finance FF (Room 10164) (2)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Participation and Compliance Division, HSLP (Room 9164)
Director, Housing Finance Analysis Division, REF (Room 8204)
Comptroller/Audit Liaison Officer, HF (Room 5132) (5)
General Counsel, C (Room 10214)
Deputy Secretary (Room 10100)
Assistant Secretary for Congressional and Intergovernmental Relations, J (Room 10120)
Deputy Assistant Secretary for Public Affairs, W (Room 10220)
Chief of Staff, S (Room 10000)
Counselor to the Secretary, S (Room 10234)
Senior Advisor to the Secretary for Communication Policy, S (Room 10222)
Assistant Secretary for Housing, H (Room 9100)
Assistant to the Secretary for Labor Relations, (Acting), SL (Room 7118)
Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street,
NW, Room 2474, Washington, DC 20548 (2)
The Honorable John Glenn, Ranking Member, Committee on Governmental Affairs,
United States Senate, Washington, DC 20515-4305
The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs,
United States Senate, Washington, DC 20515-4305
Ms. Cindy Sprunger, Subcommittee on General Oversight and Investigations,
Room 212, O’Neill House Office Building, Washington, DC 20515
Mr. Pete sessions, Government Reform and Oversight Committee, Congress of the
U.S. House of Representatives, Washington, DC 20510-6250
The Honorable Dan Burton, Chairman, Committee on Government Reform and Oversight,
U.S. House of Representatives, Washington, DC 20515-6143
98-CH-184-1805 Page 10
Section 203(k) Rehabilitation, Grand Rapids, MI
Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-01-14.
This report is unreleased, or missing. Visit its landing page for more detail.