In response to requests from HUD and a United States senator, HUD OIG audited the property owner’s application and the loan processing and underwriting of the HUD-insured mortgage loan to Greystone Apartments, Inc., for Cypress Ridge Apartments in Oklahoma City, OK. Harry Mortgage Company, the lender, processed and recommended loan approval under the multifamily accelerated processing (MAP) program. The audit objective was to determine whether the lender satisfied HUD requirements for processing and underwriting the $5.87 million mortgage loan to rehabilitate Cypress Ridge Apartments.
The MAP lender’s underwriting analysis did not assess, as required, the financial wherewithal of the owner and general contractor, which are related entities, or the construction capabilities of the general contractor. As a result, the MAP lender did not identify risk and take necessary corrective action before recommending the loan for approval. Based on the lender’s recommendation, HUD approved the project and general contractor. The project failed, resulting in a $3.7 million loss on the mortgage loan insured by the Federal Housing Administration (FHA).
OIG recommended that HUD request that the Mortgagee Review Board take action against Harry Mortgage Company for negligence that resulted in a default and a resulting FHA insurance claim on Cypress Ridge Apartments. (Audit Report: 2009-FW-1010)
HUD OIG audited Cypress Ridge Apartments in Oklahoma City, OK, regarding its use of HUD-insured mortgage loan proceeds and property operating funds governed by a regulatory agreement, to determine whether the project’s management agent, William Commercial Property Management, used project and operating funds consistent with the regulatory agreement and HUD regulations. Specifically, OIG wanted to determine whether the management agent (1) used loan proceeds for other than reasonable project expenses,
(2) used operating funds to pay for other than reasonable operating expenses and necessary repairs, and (3) paid distributions from other than surplus cash.
The management agent obtained and used funds contrary to the regulatory agreement. It received loan proceeds totaling more than $356,000 without construction cost documentation to support the release of proceeds. From the operating account, it paid related entities and others more than $386,000 without required justification for payments. As a result, the management agent drew and paid out funds without assurances that it used the funds for legitimate expenditures. The owner later defaulted on the loan with a resulting loss of $3.75 million to FHA.
OIG recommended that HUD (1) require the owner to either support or repay HUD for loan proceeds it received and funds it paid out of the operating account and (2) take appropriate actions against the owner and management agent for violating the project’s regulatory agreement. (Audit Report: 2009-FW-1014)
HUD OIG audited the John C. Cannon Retirement and Assisted Living Residence in Seattle, WA, to determine whether the project owner used project funds in accordance with its regulatory agreement with HUD.
The project owner failed to get HUD approval for leases costing $189,000, used project funds to obtain unneeded equipment costing nearly $11,000, and failed to keep adequate documentation to support expenditures of $317,000.
OIG recommended that HUD (1) require the owner to repay the amount spent for the unapproved leases and unnecessary equipment and provide documentation supporting expenses paid for with project funds and (2) pursue double damage remedies, civil money penalties, and/or administrative sanctions, as appropriate, against the former administrator and the board of directors. (Audit Report: 2009-SE-1002)
HUD OIG audited Park Lee Apartments in Phoenix, AZ, to determine whether it complied with the HUD’s regulatory agreement and other Federal requirements.
Park Lee Apartments did not use its project funds in compliance with HUD and other Federal requirements. Specifically, the owner and/or management agents violated the regulatory agreement with HUD by paying nearly $513,000 in questioned costs from the project’s operating account when the project was in a non-surplus- cash position. The questioned costs included the payment of development expenses from operating funds, ineligible and unsupported disbursements, and a wire transfer of project revenue to the owner. In addition, the owner maintained the project in poor physical condition and submitted annual audits of the financial statements that did not meet HUD requirements.
OIG recommended that HUD (1) require the project’s owner to repay or support the questioned costs, (2) pursue double damages remedies, and (3) pursue civil money penalties and administrative sanctions as appropriate. (Audit Report: 2009-LA-1019)
HUD OIG audited the Casa Otonal multifamily housing project in New Haven, CT, to determine whether the project owner managed and operated the project in accordance with HUD regulations and the project’s regulatory agreement. OIG also wanted to (1) determine the extent of unauthorized distributions made while the project was in a non-surplus-cash position, (2) determine whether goods and services were properly procured, and (3) ensure that the project’s cost allocation plan adequately prorated staff time and shared office space.
The project owner did not always use project funds in accordance with HUD regulations or the regulatory agreement. OIG identified questioned costs totaling more than $265,000 while the project was in a non-surplus- cash position. Specifically, the owner (1) made more than $236,000 in unauthorized loans/distributions to an affiliate, Casa Otonal, Inc.; (2) did not follow proper procurement procedures; (3) incurred more than $18,000 in ineligible, nearly $9,000 in unsupported, and more than $2,000 in unreasonable costs; and (4) did not prepare a formal written cost allocation plan to appropriately allocate staff time spent on nonproject activity or the use of office space by nonproject personnel.
OIG recommended that HUD (1) require the project owner to (a) reimburse the project for the ineligible and unreasonable disbursements and (b) provide documentation to support the unsupported disbursements or reimburse the project; (2) require the project owner to establish a written procurement policy that follows Federal procurement regulations and an adequate cost allocation plan to appropriately allocate staff time at the project; and (3) pursue (a) double damages remedies against the responsible parties for the ineligible/ inappropriate, unsupported disbursements that were used in violation of the project’s regulatory agreement and (b) civil money penalties and administrative sanctions, as appropriate, against the responsible parties for their part in the regulatory violations. (Audit Report: 2009-BO-1009)
HUD OIG audited Milestone Management Services, Inc., in Topeka, KS, to determine whether Milestone complied with HUD’s cash management requirements for management agents.
Milestone’s management controls were not adequate in three respects. Milestone did not (1) adequately segregate duties of on-site staff or provide proper oversight of these employees, (2) have a system for tracking significant rehabilitation and related costs for individual units, or (3) practice proper budgetary controls. In addition, Milestone did not provide its properties with adequate fidelity bond coverage, and it overpaid itself management fees.
OIG recommended that HUD (1) ensure that Milestone/property owners implement an adequate system of management controls and provide technical assistance and guidance as needed, (2) require Milestone/ property owners to implement procedures to periodically assess the adequacy of fidelity bond coverage and adjust the coverage for each property when needed, (3) ensure that Milestone/property owners use a reliable process to calculate and pay management fees and that Milestone immediately repays overpaid management fees to the overcharged properties, and (4) take appropriate administrative actions against Milestone/property owners if Milestone is unable or unwilling to comply with HUD requirements. (Audit Report: 2009-KC-1009)