Property Disposition: HUD's Illinois State Office Incurred Unnecessary
Management Expenses (Letter Report, 04/22/96, GAO/RCED-96-52).

GAO provided information on the unnecessary management expenses being
incurred by the Department of Housing and Urban Development's (HUD)
Illinois State Office in its property disposition program.

GAO found that: (1) there were two practices at the Illinois State
Office that unnecessarily increased HUD management costs; (2) the office
incurred $22,000 in unnecessary expenses when it continued to pay for
water and sewer services for 60 vacant properties that were held in
inventory for months before these properties were sold; (3) because the
office did not pay property taxes on time, it lost three properties and
incurred $62,000 in unnecessary expenses to recover the properties and
pay the penalties and interest on the delinquent taxes; (4) the office's
expenses to recover these properties were substantially higher than the
amount it would have paid had it timely acted; and (5) the office could
avoid having future tax liens and losing properties if it better tracked
its unpaid taxes.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-96-52
     TITLE:  Property Disposition: HUD's Illinois State Office Incurred 
             Unnecessary Management Expenses
      DATE:  04/22/96
   SUBJECT:  Property disposal
             Federal aid for housing
             Public utilities
             Property taxes
             Real estate sales
             Foreclosures
             Fines (penalties)
             Sewage disposal
             Delinquent taxes
             Administrative costs
IDENTIFIER:  HUD Single Family Accounting Management System II
             HUD Single Family Property Disposition Program
             Illinois
             
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Cover
================================================================ COVER


Report to the Secretary of Housing and Urban Development

April 1996

PROPERTY DISPOSITION - HUD'S
ILLINOIS STATE OFFICE INCURRED
UNNECESSARY MANAGEMENT EXPENSES

GAO/RCED-96-52

Property Management at HUD's Illinois Office

(385608)


Abbreviations
=============================================================== ABBREV

  HUD -
  SFPD -
  REAM -
  SAMS -

Letter
=============================================================== LETTER


B-270938

April 22, 1996

The Honorable Henry G.  Cisneros
The Secretary of Housing and
 Urban Development

Dear Mr.  Secretary: 

We recently reported on the costs that the Department of Housing and
Urban Development (HUD) has incurred in acquiring, managing, and
selling foreclosed single-family properties.\1 Although HUD cannot
control all of the costs of acquiring or selling properties, it can
avoid or minimize some of the costs of managing them.  For properties
sold in fiscal years 1992 through 1994, these management costs
totaled about $691 million, or 5 percent of the overall costs of
HUD's Single-Family Property Disposition (SFPD) program. 

This report presents information on unnecessary management expenses
being incurred by HUD's Illinois State Office (formerly the Chicago
Field Office) in its property disposition program.  We are alerting
you to these expenses because of the opportunity to reduce them in
the future and because other HUD field offices may be incurring
similar management expenses. 


--------------------
\1 Property Disposition:  Information on HUD's Acquisition and
Disposition of Single-Family Properties (GAO/RCED-95-144FS, July 24,
1995). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

During our review of HUD's Single-Family Property Disposition Program
in the Illinois State Office, we noted two practices that
unnecessarily increase HUD's management costs.  First, that office
continues to pay for water and sewer services for vacant properties
that are held for months in inventory before they are sold.  We
estimate that for the 138 properties held in inventory for at least 6
months as of August 1994, the office unnecessarily paid water and
sewer bills on 60 properties, at an expense of about $22,000. 
Second, the Illinois State Office did not pay property taxes on time,
which resulted in HUD's unnecessarily incurring a $62,000 expense to
recover two properties lost for unpaid delinquent property taxes,
penalties, and interest expense (tax liens).  Furthermore, the
expense incurred to recover these properties was substantially higher
than the amount the office would have paid had it acted sooner. 


   BACKGROUND
------------------------------------------------------------ Letter :2

HUD has issued guidelines to its field offices for managing and
selling properties in its inventory.  These guidelines\2 require that
when a Federal Housing Administration lender forecloses on a loan and
HUD takes possession of a property that the field office contract
with an experienced real estate asset manager (REAM) to manage it. 
Although HUD's guidelines for managing properties require field
offices to meet certain standards, they state that variations in
requirements among field offices may be necessary as regional
climates and other conditions differ.  HUD's Illinois State Office
requires its REAMs to notify all local utilities in writing to cancel
water and sewer services when HUD takes possession of properties. 
According to field office officials, this requirement is intended
primarily to avoid utility payments on vacant properties and to avoid
excessive costs from broken pipes and water damage during periods of
freezing temperatures. 

HUD's guidelines also require field offices to evaluate unpaid
property taxes and other liens, such as homeowners associations'
fees, and to promptly pay unpaid property taxes to avoid fines,
penalties, and assessments.  These requirements were established to
protect HUD's interest in its properties and avoid tax sales by
taxing authorities to satisfy tax liens. 

In Illinois, if taxes on a HUD property remain unpaid for more than a
year, the local taxing authority has the right to sell that property
to recoup the tax liens.  The price paid at a tax sale for a HUD
property is usually significantly below fair-market value.  However,
HUD retains the right to redeem the property within 2 years from the
date of the tax sale for the purchase price paid at the tax sale plus
accrued interest.  If HUD does not redeem the property within 2
years, the tax sale purchaser can apply for a tax deed to obtain
title after giving notice to the delinquent taxpayer.  When the title
is transferred to the tax sale purchaser, HUD must then negotiate a
price with the purchaser if it chooses to recover the title.  This
price is usually substantially higher than the cost of the unpaid tax
liens and accrued interest. 

The Illinois State Office is primarily responsible for managing and
selling the properties that HUD acquires in Illinois, most of which
are concentrated in the Chicago metropolitan area.  Through its
contracts with and oversight of REAMs, the field office is
responsible for efficiently managing the properties under its
jurisdiction and for ensuring the appropriateness and accuracy of the
costs incurred to protect and preserve them.  These responsibilities
require adequate internal controls to prevent fraud, waste, and abuse
in the SFPD program. 


--------------------
\2 See HUD's Property Disposition Handbook--One to Four Family
Properties, Rev-2 (Apr.  1994). 


   HUD'S ILLINOIS STATE OFFICE
   PAID FOR WATER AND SEWER
   SERVICES ON VACANT PROPERTIES
------------------------------------------------------------ Letter :3

Despite the Illinois State Office's requirement to cancel water and
sewer services when taking possession of a property, the office
continued to pay such expenses for many properties.  As figure 1
shows, we estimate that for 43 percent (or 60) of the 138 properties
held in inventory for 6 months or longer as of August 1994, the field
office incurred water and sewer expenses.  The field office spent a
total of about $22,000 in water and sewer expenses for these
properties, or an average of $367 per property.\3 We also estimate
that for 45 percent (or 62) of these properties, the field office
incurred no water and sewer expenses; cost data were unavailable for
the remaining 16 properties.\4

   Figure 1:  Estimated Percent of
   Vacant Properties With Water
   and Sewer Expenses (Properties
   held in inventory 6 months or
   longer as of August 1994)

   (See figure in printed
   edition.)

The Illinois State Office paid water and sewer bills on vacant
properties because REAMs either did not (1) notify the appropriate
utilities to turn off the services when HUD took possession of the
properties or (2) follow up to ensure that these services were
discontinued.  Moreover, our review of property files and discussions
with officials indicated that the field office did not monitor the
extent to which REAMs had notified the appropriate utilities to
discontinue water and sewer services on vacant properties.  In
Chicago, where a substantial portion of the Illinois State Office's
inventory is located, properties not equipped with water meters are
billed a flat rate biannually for unmetered water and sewer services. 
Consequently, even if the water supply to a property is turned off at
the curb, the city continues to bill for water and sewer services
unless it is notified in writing to discontinue the services.  To
illustrate, in 1994 the Illinois State Office was billed and paid
$465 for water and sewer services on a vacant property that remained
unsold after 20 months in the inventory. 

We discussed the payment of utility expenses on vacant properties
with officials at the Illinois State Office and HUD headquarters. 
Field office officials told us that the REAMs should have notified
the appropriate utilities to discontinue water and sewer services and
done the necessary follow-up to guarantee that such action did occur. 
They also said that they could not provide a valid reason for why
these services would need to remain in operation on vacant
properties.  Officials at HUD headquarters told us that property
management activities were generally handled at the field office
level. 


--------------------
\3 For this analysis, we randomly selected 60 properties from the
universe of 138 properties that were held in inventory for at least 6
months as of August 1994.  (The similarity between the number of
properties in our sample and our estimate of the number of properties
in the universe with expenses is coincidental.) At the 95-percent
confidence level, we estimate that between 45 and 75 properties had
costs that ranged in total between $15,000 and $29,000. 

\4 We based our analysis on billing information provided by local
utilities.  We noted instances in which HUD had incurred water and
sewer costs on some properties, but because data were not available
to permit us to distinguish between costs that were incurred before
and after HUD took possession of the properties, we did not include
these amounts in our analysis.  However, our estimate of the amount
HUD paid in unnecessary water and sewer expenses includes penalties
that were based on unpaid billings accumulated before the Department
acquired the properties. 


   UNPAID TAX LIENS RESULTED IN
   LOST PROPERTIES
------------------------------------------------------------ Letter :4

HUD's Illinois State Office lost the title to three properties in its
inventory because it did not (1) pay the tax liens that had been
placed on the properties and (2) act promptly to recover the
properties within the required 2-year period.  The office later paid
$62,000\5

to recover two of the three properties.  The office did not pursue
recovering the third property, thus avoiding further expenses,
because it had been scheduled for demolition. 

The field office lost these properties despite HUD's requirement for
the prompt payment of tax liens.  Moreover, even when local taxing
authorities notified the office that these properties had been sold
for unpaid taxes and that redemption was required within 2 years of
the tax sale, the office did not recover the properties within the
time frame allowed.  Consequently, the field office subsequently paid
substantially higher prices to recover two of the three properties
from the new owners because it forfeited the right to recover them
for an amount equal to only the back taxes and accrued interest. 

Specifically, we found that when the field office took no action to
recover one property within the required 2 years, the taxing
authority transferred the property title to the tax sale purchaser. 
About 2 years later, after having sold the property when it had lost
the title to it, the field office paid $42,000 to recover the
property.  The office paid that amount instead of only the $1,190 in
back taxes plus accrued interest (up to a maximum of 18 percent every
6 months) that it could have paid if it had acted in time. 

The second lost property was sold at a tax sale for unpaid taxes,
estimated at under $600.  Unaware that a tax sale purchaser acquired
the title to the property following the 2-year redemption period,
HUD's Illinois State Office sold the property to other purchasers. 
To recover the property, the field office paid the tax sale purchaser
$20,000, roughly $14,000 more than it would have paid before the
redemption period expired. 

The field office did not recover the third property within the 2-year
redemption period, or pursue doing so afterwards, even though it had
spent about $54,000\6 to acquire the property.  According to the
field office officials responsible for the area where the property is
located, no efforts were made to recover the property because the
property had been scheduled for demolition.  The Illinois State
Office, however, needlessly spent additional money on this property 1
month after the redemption period had expired and HUD had no
ownership in the property by paying $500 for back taxes and penalties
for the property. 

According to officials at HUD's Illinois State Office, inadequate
links between the automated systems for handling HUD's loan
management and property management programs were a primary cause of
losing properties.  They indicated that under HUD's current automated
systems, tax liabilities are difficult to monitor for all HUD field
offices when properties with delinquent taxes are transferred from a
loan management program to the SFPD program. 

The Illinois State Office has taken steps to remedy the problem
through a contract for tax services to be awarded in the near future. 
The contractor will be responsible for (1) preparing a magnetic tape
for the office's payment of annual real estate taxes, (2) researching
and identifying delinquent taxes, and (3) redeeming properties to
avoid tax sales. 

Officials at HUD headquarters believe on the basis of their
experience that the problem with tax liens and lost properties that
we observed in Illinois is not systemic across all HUD field offices. 
According to the SFPD Director, HUD headquarters will work with the
field offices that encountered this problem to institute corrective
action and alert other HUD field offices to this situation. 


--------------------
\5 The total does not include (1) the holding costs HUD incurred for
the two properties, (2) attorneys' fees, (3) court recording fees,
and (4) costs for various administrative services because field
office personnel could not locate these data in HUD's new automated
Single-Family Accounting Management System (SAMS) II. 

\6 Under law, when HUD acquires a property that has gone through
foreclosure, the agency reimburses the lender for the unpaid
principal balance of the loan, covers a portion of the costs
associated with the foreclosure, and makes interest payments to
compensate the lender for the interest lost after the borrower
defaulted on the loan. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

HUD's Illinois State Office's incurred thousands of dollars in
unnecessary expenses for water and sewer services, as well as for tax
penalties, lost properties, and increased costs to recover properties
from the new owners.  Nationwide, HUD could be wasting significant
amounts of money. 

We support the Illinois State Office's efforts to better track unpaid
taxes.  We believe this will help the office avoid having future tax
liens and losing properties. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

We recommend that the Secretary of HUD direct the Assistant Secretary
for Housing to (1) require that the Illinois State Office ensure that
REAMs discontinue water and sewer services when HUD takes possession
of properties and (2) advise other HUD field offices of this
situation to reduce the likelihood that this problem can occur
elsewhere. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We provided a draft of this report for comment to the HUD Director
for Housing, who also serves as the Commissioner of the Federal
Housing Administration.  We met with officials at HUD headquarters,
including the Director of Single-Family Property Disposition, Office
of Insured Single-Family Housing, to obtain their comments on the
draft. 

The officials agreed with the report's findings, conclusions, and
recommendations.  The SFPD Director said that she will issue a
Department-wide memorandum to inform field offices about the
unnecessary costs that HUD incurs when it pays water and sewer bills
on vacant properties.  The memorandum would also alert field offices
to the issue of properties lost because of unpaid property taxes. 
The HUD officials also suggested several technical revisions, and we
have incorporated these comments into our final report as
appropriate. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To determine the extent to which HUD paid for water and sewer
services on vacant properties that were held in its inventory, we
randomly selected 60 of the 138 properties that the Illinois State
Office had held in its inventory for 6 months or longer as of August
1994. 

To obtain the total dollar amount billed for each of the properties
in our sample, we contacted the various municipalities and utility
companies that billed HUD for these services.  We also reviewed HUD's
SFPD handbook and discussed with field office officials their
procedures for handling water and sewer services for vacant
properties.  We discussed this matter with the field office's
Director of the SFPD program and its Chief and Assistant Chief of the
Single-Family Housing Division. 

In examining properties the Illinois State Office lost because of
unpaid tax liens, we reviewed available records and information
obtained from HUD's automated tracking systems.  Furthermore, we
interviewed the field office's Director of Single-Family Housing and
Chief of the SFPD program to obtain the rationale for the field
office's nonpayment of delinquent property taxes and failure to
recover properties within the statutory 2-year redemption period. 

We performed our work in accordance with generally accepted
government auditing standards from May 1994 through December 1995. 
However, we did not independently verify the accuracy of the utility
bills for water and sewer services or HUD's records of the total
costs to recover properties lost through tax sales. 


---------------------------------------------------------- Letter :8.1

As you know, 31 U.S.C.  720 requires the head of a federal agency to
submit a written statement of the actions taken on our
recommendations to the Senate Committee on Governmental Affairs and
the House Committee on Government Reform and Oversight Operations not
later than 60 days after the date of this letter and to the House and
Senate Committees on Appropriations with the agency's first request
for appropriations made more than 60 days after the date of this
letter. 

Major contributors to this report are listed in appendix I.  Please
contact me at (202) 512-5167 if you or your staff have any questions
or want additional information. 

Sincerely yours,

Judy A.  England-Joseph
Director, Housing and
 Community Development Issues


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I

Glenn G.  Davis, Assistant Director
Jimmie Gilbert, Evaluator-in-Charge
John A.  Wanska, Senior Evaluator


*** End of document. ***