Arizona Audit Reports

Issue Date: May 29, 2007
Audit Report No.: 2007-LA-1011
File Size: 4.73MB

Title: Suburban Mortgage Company Did Not Comply with HUD Requirements in the Origination of FHA-Insured Single-Family Mortgages

We audited Suburban Mortgage, Inc. (Suburban), a U.S. Department of Housing and Urban Development (HUD)-approved direct endorsement lender located in Phoenix, Arizona. Our audit objectives were to determine whether Suburban acted in a prudent manner and complied with HUD requirements in the origination of the FHA-insured single-family mortgages selected for review. Based upon the results of our initial survey, special emphasis was placed on the adequateness of Suburban's review of appraisals related to FHA-insured mortgages on individual units in two condominium complexes.

Suburban did not adequately review selected condominium appraisals and did not comply with HUD requirements in the origination of FHA-insured single-family mortgages. As a result, HUD insured mortgages on 38 properties that were overvalued by approximately 40 percent and some of which did not have occupancy authorization from the City of Phoenix. The property overvaluations resulted in a corresponding overinsurance of the FHA-insured mortgages and an increased risk to HUD. Additionally seven of forty eight mortgages we reviewed had significant underwriting deficiencies that should have precluded their approval and submission to HUD for insurance.

We recommend that HUD's assistant secretary for housing - federal housing commissioner initiate settlement negotiations with Suburban, requesting reimbursement and/or indemnification for HUD's actual and potential losses on the 34 active and 4 foreclosed loans involving the overvalued condominiums and the seven loans that had significant underwriting deficiencies. Additionally, we recommend that Suburban be required to obtain new appraisals on other FHA-insured mortgages that it originated, involving the two appraisers and the seller involved with the condominium projects we reviewed. We also recommend that appropriate administrative action be taken against the two appraisers for their failure to follow HUD appraisal requirements.


Issue Date: April 9, 2007
Audit Report No.: 2007-LA-1008

File Size: 560.69KB

Title: The Navajo Housing Authority Should Discontinue Its Use of Subgrantees for Development Projects or Implement Additional Program Controls

We audited the Navajo Housing Authority's (Authority) use of subgrantees for housing development projects after staff from HUD's Southwest Office of Native American Programs notified the Office of Inspector General (OIG) of its concerns about apparent abuses in the use of Native American Housing and Self-Determination Act (NAHASDA) grant funds by a particular Authority subgrantee. The objective of the audit was to determine whether the Authority's procedures for selecting and monitoring subgrantees were adequate to ensure compliance with NAHASDA program requirements. We found the Authority's procedures for selecting and monitoring subgrantees failed to ensure that NAHASDA funds were used in accordance with program requirements and that housing production goals were achieved. As a result, the Authority failed to prevent recurring problems, including extended project delays, unnecessary project expenses, and misuse of NAHASDA grant funds by subgrantees and/or their construction contractors. These failures resulted in increased costs, inefficient housing production, and, ultimately, significantly fewer housing opportunities for the intended program beneficiaries, Navajo citizens. In this regard, we identified at least 14 housing projects, for which more than $53 million has already been allocated, yet the projects were either not started or not finished, funds were misused by subgrantees and/or their contractors, or construction or management problems threaten the long-term viability of the housing projects. These problems were caused by the Authority's failure to implement adequate controls over the process for initially selecting subgrantees to ensure that they had the capacity to effectively administer the funded activities and failure to implement adequate controls to monitor subgrantee activities to ensure that the entities complied with NAHASDA requirements and completed their projects as planned.


Issue Date: December 12, 2006
Audit Report No.: 2007-LA-1002
File Size: 490.50KB

Title: First Magnus Financial Corporation Did Not Comply with HUD Guidelines When Operating and Managing Net Branches

We audited First Magnus Financial Corporation's (First Magnus) branch office operations, primarily the branch doing business as Great Southwest Mortgage. The objective of the audit was to determine whether First Magnus operated its net branches in accordance with U.S. Department of Housing and Urban Development (HUD) requirements. Our audit found First Magnus did not follow HUD requirements when operating and managing its Great Southwest Mortgage "net branches." First Magnus violated HUD requirements by allowing officers to enact noncompete clauses, requiring net branch managers to indemnify branch-related losses, allowing nonexclusive employment and failing to execute office lease agreements and equipment lease agreements in First Magnus' name. As a result of this noncompliance, HUD's insurance funds and the public were exposed to an increased risk because First Magnus did not provide close supervisory control of all of its branch offices and employees as required by HUD.

We recommended the assistant secretary for housing-federal housing commissioner impose civil money penalties against First Magnus for Federal Housing Administration-insured loans originated by its net branches that were being operated in violation of HUD requirements and require First Magnus to either discontinue operations of all net branches that are being operated in a manner that violates HUD requirements or bring these branches into compliance with such requirements.


Issue Date: July 26, 2006
Audit Report No.: 2006-LA-1018
File Size: 662.76

Title: First Magnus Financial Corporation Did Not Comply with HUD Guidelines When Underwriting Six Federal Housing Administration-Insured Loans

We audited First Magnus Financial Corporation's (First Magnus) loan origination and business practices at the First Magnus corporate office, in Tucson, Arizona, to determine whether the lender originated and processed Federal Housing Administration-insured loans in accordance with applicable U.S. Department of Housing and Urban Development (HUD) rules and regulations. The audit covered the period of January 1, 2003 through December 31, 2005. Our audit found First Magnus did not follow HUD requirements when underwriting the six Federal Housing Administration-insured loans.

We attributed this to the lender disregarding HUD requirements when it originated and processed the Federal Housing Administration-insured loans. As a result, First Magnus' practices exposed HUD's insurance fund to unnecessary risks because the lender approved borrowers for Federal Housing Administration-insured loans for which borrowers may not be able to make the monthly mortgage payments.

We recommend the Assistant Secretary for Housing-Federal Housing Commissioner require First Magnus to:

• Indemnify HUD $95,151 for estimated losses on three loans processed and originated outside of HUD rules and regulations.

• Pay civil money penalties for four loans that were originated and processed using the incorrect branch lender identification number.


Issue Date: December 13, 2005
Audit Report No. 2006-LA-1007
File Size: 91.71KB

Title: The Villas at Augusta Ranch, Mesa, Arizona, Used Project Funds Totaling $965,316 for Ineligible or Undocumented Costs

We reviewed the books and records of the Villas at Augusta Ranch (project), a 238-unit multifamily housing project located in Mesa, Arizona. We initiated the review in response to a request from the Phoenix Multifamily Housing Hub of the U.S. Department of Housing and Urban Development (HUD) due to its concerns about the owner's use of project funds. Our objective was to determine whether the owner and its identity-of-interest management agent used project funds only for reasonable operating expenses and necessary repairs as required by the regulatory agreement. The owner, Tegan Communities, Inc., and American West Communities, LLC, the project's identity-of-interest management agent, inappropriately used $965,316 in project funds for nonproject (ineligible) purposes in violation of its regulatory agreement. The ineligible uses included $366,980 in wire transfers to unknown entities, $136,531 for payments on an unauthorized line of credit, and $8,593 for payment of project construction costs. Additional improper uses consisted of $78,460 paid to management agent supervisory personnel and corporate officers and net payments of $72,040 to other identity-of-interest projects. Tegan Communities, Inc., and/or American West Communities, LLC, lacked documentation to support additional disbursements of $246,277 for credit card expenses, legal expenses, and other costs. Further, the project did not obtain required HUD approval of its management agents and inappropriately paid $56,435 in management fees. Subsequent to the completion of our audit, the project was sold and the HUD-insured mortgage was paid in full, canceling HUD's insurance liability on the project. Accordingly, we did not recommend repayment of the ineligible costs detailed in our report but did recommend HUD pursue double damages remedies under the equity skimming statutes for the misuse of project funds.


Issue Date: December 13, 2005
Audit Report No.: 2006-LA-1006
File Size: 96.46KB

Title: The Villas at Camelbck Crossing Phase II, Glendale, Arizona, Used Project Funds Totaling $1,008,215 for Ineligible or Undocumented Costs

We reviewed the books and records of the Villas at Camelback Crossing Phase II (project), a 240-unit multifamily housing project located in Glendale, Arizona. We initiated the review in response to a request from the Phoenix Multifamily Housing Hub of the U.S. Department of Housing and Urban Development (HUD) due to its concerns about the owner's use of project funds. Our objective was to determine whether the owner and its identity-of-interest management agent used project funds only for reasonable operating expenses and necessary repairs as required by the regulatory agreement. The owner, Camelback Crossings II Limited Partnership, and American West Communities, LLC (American West), the project's general partner and identity-of-interest management agent, inappropriately used $1,008,215 in project funds for nonproject (ineligible) purposes during a period when the project did not have surplus cash available for distribution and/or was in default on its HUD-insured mortgage. The ineligible uses included $262,100 in international wire transfers to unknown entities, $101,984 for payments on unauthorized loans, $100,000 to an unknown certificate of deposit account, and $79,389 for payment of project construction costs. Additional improper uses consisted of $151,146 paid to corporate officers and management agent supervisory personnel and net payments of $119,000 to other identity-of-interest projects. Camelback Crossings II Limited Partnership and/or American West also lacked documentation to support additional disbursements of $182,595 for credit card expenses, real estate taxes, and other costs. Further, the owner did not obtain required HUD approval for American West to serve as the project's management agent and allowed another identity-of-interest project to retain $12,001 in project revenue. We recommended that HUD ensure that the owner reimburses the project's operating account for the ineligible disbursements and provides documentation for the unsupported payments or reimburses those amounts that cannot be supported to the project's operating account.


Issue Date: December 13, 2005
Audit Report No.: 2006-LA-1005
File Size: 94.77

Title: The Villas at Camelback Crossing Phase I, Glendale, Arizona, Used Project Funds Totaling $1,039,034 for Ineligible or Undocumented Costs

We reviewed the books and records of the Villas at Camelback Crossing Phase I (project), a 264-unit multifamily housing project located in Glendale, Arizona. We initiated the review in response to a request from the Phoenix Multifamily Housing Hub of the U.S. Department of Housing and Urban Development (HUD) due to its concerns about the owner's use of project funds. Our objective was to determine whether the owner and its identity-of-interest management agent used project funds only for reasonable operating expenses and necessary repairs, as required by the regulatory agreement. The owner, Millenium Communities, Inc., and American West Communities, LLC, the project's identity-of-interest management agent, inappropriately used $1,039,034 in project funds for nonproject (ineligible) purposes in violation of its regulatory agreement. The ineligible uses included $301,200 in international wire transfers to unknown entities; $26,638 for payments on unauthorized loans; and $180,315 for payment of project construction costs. Additional improper uses consisted of $80,860 paid to management agent supervisory personnel and corporate officers; net payments of $65,020 to other identity-of-interest projects; and payments of $116,313 for unallocated payroll, health insurance, and other expenses of the identity-of-interest Camelback II project. Millenium Communities, Inc., and/or American West Communities, LLC, lacked documentation to support additional disbursements of $165,051 for credit card expenses, legal expenses, insurance expenses, and other costs. Further, the project did not obtain required HUD approval of its management agents and inappropriately paid $103,637 in management fees. We recommended that HUD ensure that the owner reimburses the project's operating account for inappropriate expenses and provides documentation for the unsupported payments or reimburses those amounts that cannot be supported to the project's operating account.


Issue Date: October 31, 2005
Audit Report No.: 2006-LA-1001
File Size: 3.83MB

Title: Ryland Mortgage Company, Tempe, Arizona, Did Not Follow HUD Requirements in the Origination of Insured Loans

In response to a recommendation from the Department of Housing and Urban Development's (HUD) Santa Ana Homeownership Center Quality Assurance Division, we audited Ryland Mortgage Company's (Ryland) loan origination activities for its Tempe, Arizona, branch office. Our objectives were to determine whether Ryland acted in a prudent manner and complied with HUD regulations, procedures, and instructions in its approval of Federal Housing Administration-insured mortgages and whether it adequately implemented its quality control plan. We found that Ryland did not originate 23 of the 24 loans in our sample in compliance with HUD requirements and regulations. All 23 loans involved multiple origination deficiencies that should have precluded their approval. In addition, Ryland did not adequately implement its quality control plan. We attribute these problems to Ryland's failure to fully implement its quality control plan and its aggressive position on approving loans over more prudent lending practices. As a result, Ryland placed HUD's single-family insurance fund at risk for 23 unacceptable loans with original mortgages totaling $3,085,094. HUD remains at risk of losses totaling $2,730,099 relating to 20 of the 24 loans.

We recommend that HUD take appropriate administrative action against Ryland by seeking recovery for 14 of the loans totaling $85,741 in partial claims, loan modification, special forbearance, and inflated sales prices; indemnification of $2,730,099 against future losses on 20 loans; and requiring Ryland to reimburse a borrower for $4,000 in unallowable fees.


Issue Date: September 26, 2005
Audit Report No.: 2005-LA-1011
File Size: 5.11MB

Title: KB Mortgage Company Did Not Follow HUD Requirements When Originating Insured Loans, Phoenix, Arizonia

We audited KB Home Mortgage Company (KB) insured loan originations in the Phoenix, Arizona metropolitan area due to high default and claim rates. Our objective was to determine whether KB originated U.S. Department of Housing and Urban Development (HUD)-insured loans in accordance with prudent lending practices and HUD requirements. We found that KB did not originate the 19 loans in our sample in compliance with HUD requirements or prudent lending practices. All 19 loans involved origination deficiencies that should have precluded their approval. The deficiencies included false employment data, overstated income, understated liabilities, unacceptable credit histories, improper treatment of downpayment gifts and/or interest rate buydowns resulting in overinsured mortgages, inaccurate or excessive qualifying ratios without compen+sating factors, and borrower overcharges for unsupported or unallowable fees. We attribute the problems to an inadequate internal control environment and, according to former KB underwriting staff, KB's emphasis on production over prudent lending practices. As a result, KB placed HUD's single family insurance fund at risk for 19 unacceptable loans with original mortgages totaling $2,509,576, and borrowers were overcharged $9,400. HUD remains at risk and/or has incurred losses totaling $1,218,681 related to 15 of the 19 loans.

We recommend that HUD take appropriate administrative action against KB under the Mortgagee Review Board and/or other authority. At a minimum, this should include seeking appropriate monetary sanctions for 15 of the loans totaling $1,218,681 and requiring KB to reimburse the borrowers or HUD for $9,400 in unearned, unallowable, or excessive fees.


Issue Date: July 28, 2005
Audit Report No. 2005-LA-1006
File Size: 272.44KB

Title: Maricopa HOME Consortium/City of Mesa HOME Program Maricopa Revitalization

We conducted a limited review of the Maricopa HOME Consortium (Consortium)/City of Mesa's (City) use of $570,000 in HOME grant funds to assist in the rehabilitation of 35 single-family scattered site public housing units, located within the jurisdiction of the City and Maricopa County. Our objective was to determine whether the use of HOME funds to rehabilitate these public housing units was an eligible HOME activity. We determined that this Consortium/City grant activity was not an eligible use of HOME funds as the units were, and remain, under an annual contributions contract between the U.S. Department of Housing and Urban Development and the Housing Authority of Maricopa County and are receiving operating subsidy (including capital grant funding). This is an ineligible activity, according to the HOME regulations set out in 24 CFR [Code of Federal Regulations] 92.214, which prohibits the use of HOME funds to assist housing units receiving assistance under section 9 of the 1937 Housing Act (public housing capital and operating funds). The report recommends that the Consortium be required to reimburse the $570,000 in HOME funds to its local HOME investment trust fund.


Issue Date: March 14, 2005
Audit Report No.: 2005-LA-1002
File Size: 242.42KB

Title: Housing Authority of Maricopa County - Mixed Finance Development Activities, Phoenix, AZ

We completed an audit of the Housing Authority of Maricopa County's (Authority) mixed finance development activities. The objective of our review was to determine whether the Authority adhered to HUD regulations and requirements in the development of its mixed finance projects and related property disposition activities. We found that even though the Authority never obtained HUD approval for its two projects, it went forward with them and invested more than $7.2 million of its Federal assets in the projects. The failure to follow HUD's development requirements has put this $7.2 million investment at risk. Additionally, because the Authority did not amend its Annual Contribution Contract to reflect the changes resulting from the two projects, it has received more than $500,000 of operating subsidy and capital grant funds to which it is not legally entitled. The report recommends the Authority work with HUD to ensure the project/units meet the legal and compliance requirements of the mixed-finance development program, including contributions contract and Declaration of Trust amendments. If the projects cannot be brought into compliance, the Authority should be required to refund the questioned costs to its low-income public housing program using nonfederal funds.


Issue Date: November 22, 2004
Audit Memorandum No.: 2005-LA-1803
File Size: 205KB

Title: Wachovia Mortgage Corporation, Direct Endorsement Mortgagee, 4343 North Scottsdale Rd., Scottsdale, Arizona

We completed a limited review of Wachovia Mortgage Corporation (Wachovia), a Direct Endorsement mortgagee. The review was performed on one of the mortgagee's branch offices in Scottsdale, Arizona. We selected this branch office for review based on the results of a previous OIG audit that identified the use of false credit and employment documents by Keystone Mortgage, a loan correspondent of Wachovia. The review objective was to determine whether there were fraud indicators in a sample of 27 Keystone Mortgage loan files underwritten by Wachovia, and if so, whether these indicators were identified and resolved during Wachovia's underwriting process.

We found Wachovia failed to identify and/or follow-up on indicators of false credit and/or employment documents during the underwriting process for all 27 loans we reviewed, totaling approximately $2.9 million. As a result, loans were approved based on false information, causing FHA/HUD to assume unnecessary insurance risks. The report recommends Wachovia should be required to indemnify HUD for any past or future losses on 25 of these 27 loans.


Issue Date: September 22, 2004
Audit Report No.: 2004-LA-1007
File Size: 989.5KB

Title: Housing Authority of Maricopa County, Phoenix, Arizona

We completed an audit of the Housing Choice Voucher Program operated by the Housing Authority of Maricopa County. The objective of our audit was to determine whether the housing authority managed its Housing Choice Voucher Program effectively and efficiently and in accordance with Federal requirements. We noted significant problems with the housing authority's management of its program. Specifically, the housing authority had not established the management or quality control procedures necessary to ensure compliance with requirements relating to rent reasonableness determinations, utility allowance schedules, housing inspections, and determinations of adjusted incomes and tenant rents; made at least $87,000 in improper housing assistance payments; incorrectly determined assistance payment amounts for an estimated one-third of the 605 case files processed during the period December 1, 2003, through March 24, 2004; and did not have a cost allocation plan to equitably charge the Voucher Program for its share of administrative costs that benefited all of its operations.


Date Issued: August 10, 2004
Audit Report No.: 2004-LA-1006
File Size: 205KB

Title: National City Mortgage, Direct Endorsement Mortgagee, 7500 Dreamy Draw Drive, Suite 245
Phoenix, Arizona

We completed a limited review of National City Mortgage Company (National City), a Direct Endorsement mortgagee. The review was performed on one of the mortgagee's branch offices in Phoenix, Arizona. We selected this branch office for review based on the results of a previous OIG audit that identified the use of false credit and employment documents by Keystone Mortgage, a loan correspondent of National City. The review objective was to determine if National City failed to appropriately identify and follow up on indicators of fraudulent credit and employment documents within a sample of nine FHA loans.

National City failed to follow up on questionable credit and/or employment documents during the underwriting process for all nine loans included in our review. As a result, false employment and credit information used as a basis for approval of the nine loans was not identified. This report recommends that National City indemnify HUD for $622,814 for any past or future losses on these nine loans.


Date Issued: March 24, 2004
Audit Report No.: 2004-LA-1001
File Size: 1.35MB

Title: Keystone Mortgage & Investment Company, Phoenix, Arizona

We completed an audit of Keystone Mortgage and Investment Company, a non-supervised loan correspondent mortgagee located in Phoenix, Arizona. We found forty-eight of the sixty-five loans we reviewed (74%) contained false or altered borrower credit and/or employment documents. We identified a pattern of apparent mortgagee complicity in the loan origination process that allowed false documents to be used, and a serious lack of due professional care by mortgagee personnel. Further, we found the mortgagees failed to implement a quality control plan, and this allowed the pervasive use of falsified loan origination documents to continue over a period of at least 3 years.

We also found the mortgagee improperly originated FHA loans at its home office in Phoenix after HUD terminated this office's origination approval under the Credit Watch program.

We recommended that HUD take appropriate action against Keystone for not adhering to HUD's program requirements, and require Keystone to indemnify HUD/FHA against past and future losses on the 48 loans found containing false documents.


Date Issued: September 30, 2002
Audit Memorandum No.: 2002-SF-1007
File Size: 337KB

Title: Congressionally Requested Audit of the Outreach and Training Assistance Grant Awarded to the Southern Arizona People's Law Center, Tucson, Arizona Grant Number FFOT00003AZ

In response to a Congressional request, we audited the Southern Arizona People's Law Center (SAPLC) Outreach and Training Assistance Grant (OTAG) with particular emphasis on identifying ineligible lobbying activities. Although SAPLC staff participated in conference calls and attended conferences, both of which included topics that could be construed as lobbying, there was no objective way to identify or separate costs associated with the possible lobbying activities from other eligible OTAG business conducted during the conference calls or at the conferences. However, SAPLC does not have adequate management controls and failed to properly document and allocate employee salary and other costs in accordance with Office of Management and Budget (OMB) requirements. Of the $109,319 in OTAG funding SAPLC received though June 30, 2002, we determined that claims totaling $79,854 were ineligible and $19,686 were unsupported. We made four recommendations including recovery of ineligible and unsupportable costs, and suspension funding authorization until adequate controls are installed.


Issue Date: December 18, 1996
Audit-Related Memorandum 97-SF-207-1802
File Size: 26KB

Title: Hualapai HA, Peach Springs, AZ

We concluded that the HHA's controls over investments, travel, inventory and procurement were inadequate. Further, its controls over general accounting were so deficient that it was impossible to determine the status of its programs. In general, the HHA had adopted policies but not implemented procedures that provided adequate controls in these areas. We have recommended that the HHA implement strengthened controls over these areas in order to protect its assets and improve its administrative and budgetary controls.


Issue Date: October 16, 1996
Memorandum No. 97-FW-222-1802
File Size: 16KB

Title: Golden Feather Realty Services, Inc./REAM Inc., Fort Worth, TX, San Antonio, TX, and Phoenix, AZ

The Office of Inspector General received a Hotline Complaint alleging that: (1) Golden Feather Realty Services, Inc., a San Antonio-based company, subcontracted work to a company that it owned and (2) a HUD employee provided contracting information to Golden Feather relative to their bid for the Fort Worth HUD Office Real Estate Asset Management (REAM) contract. The anonymous complainant also noted that Golden Feather currently had REAM contracts with HUD in the Fort Worth, San Antonio, Phoenix, and New Orleans Offices.

HUD Property Disposition staff in New Orleans stated that neither company had REAM contracts for their area. Neither the HUD Property Disposition staff nor the third parties could provide any information that would substantiate the allegations. Therefore, we plan no further review of the allegations.


Issue Date: September 20, 1996
Audit-Related Memorandum 96-SF-209-1808
File Size: 23KB

Title: PY Neighborhood Association, Inc., Tucson, AZ

We concluded that the PYNA had not developed the administrative capability, including development of appropriate policies and procedures, necessary to carry out its activities or a work plan and strategies for achieving the goals/tasks set out in its TOP grant application. Additionally, PYNA had not implemented procedures to properly account for TOP grant funds. If fact, they could not locate documentation to fully support any of the $19,973 in TOP grant funds expended by PYNA. Due to the seriousness of the problems noted we are recommending that you continue the current suspension of PYNA's TOP grant draw down authority continue until adequate administrative and financial procedures are established.


Issue Date: February 13, 1996
Audit Report Number 96-SF-207-1002
File Size: 280KB

Title: Pascua Yaqui HA, Tucson, AZ

Findings:

1. Management Problems Are Seriously Affecting The PYHA's Housing and Grant Programs Administration

2. The PYHA Did Not Properly Implement Its Comprehensive Grant Program

3. Procurement And Contract Administration Need Improvement

4. Accounting Procedures And Practices Were Inadequate

5. Maintenance And Renovation Procedures And Practices Require Improvement

6. The PYHA Needs to Improve Its Administrative Management Functions

7. Tenant And Homebuyer Occupancy Functions Were Poorly Managed

8. Audits Were Not Obtained For Ten Completed Development Projects

9. The PYHA Mismanaged Homebuyers' Monthly Equity Payment Accounts

10. Ineffective Drug Elimination Programs Need To Be Closed Out

11. The Adequacy Of Resident Utility Allowances Is Questionable

 

 
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