Single-Family Housing: Improvements Needed in HUD's Oversight of Property
Management Contractors (Letter Report, 03/27/98, GAO/RCED-98-65).

Pursuant to a congressional request, GAO reviewed: (1) whether the
Department of Housing and Urban Development (HUD) is ensuring that real
estate asset management contractors meet their contractual obligations;
and (2) what actions HUD has planned or under way to change its handling
and disposition of the single-family properties in inventory.

GAO noted that: (1) HUD does not have an adequate system in place to
assess oversight of real estate asset management contractors, and the
three HUD field offices that GAO visited varied greatly in their efforts
to monitor these contractors' performance; (2) none of the offices
adequately performed all of the functions needed to ensure that the
contractors meet their contractual obligations to maintain and protect
HUD-owned properties; (3) GAO's physical inspection of properties for
which the contractors in each location were responsible identified
serious problems, including vandalism, maintenance problems, and safety
hazards; (4) these included such things as broken windows, graffiti,
leaking roofs, and broken steps; (5) these conditions may decrease the
marketability of HUD's properties; decrease the value of surrounding
homes; increase HUD's holding costs; and, in some cases, threaten the
health and safety of neighbors and potential buyers; (6) in connection
with HUD's plans to reduce staff by about 29 percent by the year 2002,
HUD's single-family property disposition operations, including the real
estate asset management function, are in a period of transition; (7)
these changes are closely linked to HUD's agencywide 2020 Management
Reform Plan; (8) they include: (a) a reduction in property disposition
staff and the consolidation of all field offices' single-family housing
operations into four homeownership centers; (b) plans to sell the rights
to properties before they are assigned to HUD's property disposition
inventory so that they can be quickly disposed of once they become
available; and (c) to some degree, the use of contracts similar to a
pilot program started in September 1996 to test the approach of
contracting out all marketing and management functions associated with
acquired properties; and (9) while HUD envisions that these changes will
eventually limit the need for real estate asset management contractors'
services, there will continue to be properties in need of such services
for the foreseeable future, even if on a smaller scale.

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

 REPORTNUM:  RCED-98-65
     TITLE:  Single-Family Housing: Improvements Needed in HUD's 
             Oversight of Property Management Contractors
      DATE:  03/27/98
   SUBJECT:  Housing programs
             Federal property management
             Federal agency reorganization
             Contract administration
             Contractor performance
             Privatization
             Property disposal
             Reductions in force
             Mortgage programs
IDENTIFIER:  HUD 2020 Management Reform Plan
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Committees

March 1998

SINGLE-FAMILY HOUSING -
IMPROVEMENTS NEEDED IN HUD'S
OVERSIGHT OF PROPERTY MANAGEMENT
CONTRACTORS

GAO/RCED-98-65

HUD's Property Management Needs Improvement

(385686)


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

  FHA - Federal Housing Administration
  GAO - General Accounting Office
  HOC - homeownership center
  HUD - Department of Housing and Urban Development
  IG - Inspector General
  REAM - real estate asset management
  REO - Real Estate Owned

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


B-278827

March 27, 1998

Congressional Requesters

Each year thousands of single-family mortgages insured by the
Department of Housing and Urban Development (HUD) go into default.\1
In many cases, HUD takes ownership of and subsequently sells these
properties.  HUD is also responsible for preserving and maintaining
some abandoned single-family properties awaiting foreclosure.  To
safeguard and maintain the approximately 30,000 properties HUD has in
its inventory at any given time, the Department obtains the services
of real estate asset management (REAM) contractors.  These
contractors are to secure and inspect the properties, report their
condition to HUD, notify interested parties of HUD's ownership,
perform exterior maintenance, and ensure that the properties are free
of debris and hazardous conditions.  REAM contractors are therefore
essential to HUD's achieving its goal of returning these properties
to private ownership as soon as possible while obtaining a maximum
sale price for HUD.  In connection with its downsizing efforts, HUD
is currently planning changes in the way it handles the disposition
of single-family properties that would, among other things, affect
the role of REAM contractors. 

Concerned about identified instances of poor contract administration
and the ability of HUD's shrinking workforce to adequately oversee
the property management services being provided by the Department's
contractors, you asked us to evaluate (1) whether HUD is ensuring
that REAM contractors meet their contractual obligations and (2) what
actions HUD has planned or under way to change its handling and
disposition of the single-family properties in inventory.  To meet
these objectives, we performed audit work at the Illinois State
Office in Chicago, the Massachusetts State Office in Boston, and the
Texas State Office in Fort Worth.  We selected the Chicago and Fort
Worth offices on the basis of their geographic locations and
relatively large inventories of single-family properties and the
Boston office because of the problems it has experienced with
oversight of REAM contracts in the past. 


--------------------
\1 HUD defines a single-family property as a residential dwelling of
one to four units. 


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

HUD does not have an adequate system in place to assess oversight of
real estate asset management contractors, and the three HUD field
offices we visited varied greatly in their efforts to monitor these
contractors' performance.  None of the offices adequately performed
all of the functions needed to ensure that the contractors meet their
contractual obligations to maintain and protect HUD-owned properties. 
Our physical inspection of properties for which the contractors in
each location were responsible identified serious problems, including
vandalism, maintenance problems, and safety hazards.  These included
such things as broken windows, graffiti, leaking roofs, and broken
steps.  These conditions may decrease the marketability of HUD's
properties; decrease the value of surrounding homes; increase HUD's
holding costs; and, in some cases, threaten the health and safety of
neighbors and potential buyers. 

In connection with HUD's plans to reduce staff by about 29 percent
(from 10,500 to 7,500) by the year 2002, HUD's single-family property
disposition operations, including the real estate asset management
function, are in a period of transition:  Substantial changes are
either planned or under way.  These changes are closely linked to
HUD's agencywide 2020 Management Reform Plan.\2 They include a
reduction in property disposition staff and the consolidation of all
field offices' single-family housing operations into four
homeownership centers; plans to sell the rights to properties before
they are assigned to HUD's property disposition inventory so that
they can be quickly disposed of once they become available; and, to
some degree, the use of contracts similar to a pilot program started
in September 1996 to test the approach of contracting out all
marketing and management functions associated with acquired
properties.  While HUD envisions that these changes will eventually
limit the need for real estate asset management contractors'
services, there will continue to be properties in need of such
services for the foreseeable future, even if on a smaller scale.  As
a result, HUD's oversight of such contractors will remain an
important function. 


--------------------
\2 In June 1997, HUD issued the "HUD 2020 Management Reform Plan" to
address weaknesses that make the agency high-risk and to downsize to
7,500 staff by the year 2002. 


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

When borrowers default on single-family mortgages insured by HUD, the
Department encourages lenders to work with the borrowers to bring
their mortgage payments up to date.  If that is not possible, the
homes may be sold to third parties, voluntarily conveyed to the
lenders, or surrendered to the lenders through foreclosure.  When
lenders obtain properties, they generally convey them to HUD in
exchange for payment of an insurance claim.\3 HUD also takes
possession of abandoned properties secured by HUD-held mortgages and
protects and maintains these properties, referred to as "custodial"
properties, pending acquisition of title.  HUD has the largest real
estate portfolio and operation in the nation, selling approximately
55,000 properties each year.  The Department estimates that at any
given time, its inventory averages about 30,000 properties.  The
properties remain in HUD's inventory an average of approximately 6
months.  As of September 30, 1997, HUD owned 29,898 single-family
properties.  The inventory included 1,784 custodial properties as of
December 12, 1997.  Custodial properties remain in inventory an
average of 2-1/2 years, but some have been in HUD's inventory for
more than 8 years. 

HUD manages and sells properties in inventory under its Real Estate
Owned program.\4

Each of HUD's 73 field offices\5 currently managing single-family
properties may use one REAM contractor to manage its entire inventory
or allocate the properties in its inventory among multiple REAM
contractors.  Of the three field offices we visited, both the
Massachusetts and Texas state offices have one REAM contractor,
whereas the Illinois State Office divides its inventory into
geographic regions and issues separate contracts for each region; at
the time of our review, Illinois had nine REAM contractors with 23
contracts. 

REAM contracts are awarded by HUD contracting staff in three
administrative service centers, using a standard format provided by
HUD headquarters.  Provisions or clauses may be added to that format
to meet the needs of a particular geographic region, but requirements
may not be deleted.\6 The standard base contract term is 1 year, plus
two 1-year options that HUD can use to extend the contract. 
Contractors are paid a flat fee for maintaining and managing each
property in HUD's inventory or custody.\7 HUD pays this fee in two
installments; the standard contract fee is 30 percent when the
property is listed for sale, and the remaining 70 percent is paid
when the property is sold.  However, some field offices have deviated
from these standard terms.  For example, the Fort Worth office's
contract term is 1 year with three 1-year options, and 60 percent of
the maintenance and management fee is paid when the property is
listed for sale, and the remaining 40 percent is paid when the
property is sold.  Paying the fee in installments is designed to
encourage contractors to maintain the properties well and expedite
property sales. 

HUD's field office staff are responsible for overseeing REAM
contractors.  Day-to-day contract administration is performed by the
staff member in the Single-Family Housing Division who is designated
as the government's technical representative on the contract.  At the
beginning of fiscal year 1997, the total value of HUD's active REAM
contracts was approximately $165 million.  In addition, in September
1996, HUD entered into pilot contracts with one corporation to test
the approach of contracting out all management and marketing
functions associated with HUD's inventory of acquired single-family
properties at three field offices--the Maryland and Louisiana state
offices and the Sacramento Area Office--that, according to HUD's
Single-Family Property Disposition Director, were already
understaffed in relation to the sizes of their inventories.\8 The
property disposition pilot contracts were worth an additional $22.4
million.\9

Since 1991, HUD's Inspector General (IG) has repeatedly identified
problems with the administration of property management contracts in
some field offices.\10 Among other problems, the IG identified
instances in which (1) HUD was being billed and was paying for
services that contractors and subcontractors never provided; (2)
field staff were not making routine inspections of acquired
properties; (3) field staff were deviating from procurement policies
and procedures; and (4) HUD's files were so poorly maintained that it
was impossible to document or evaluate contractors' performance.\11


--------------------
\3 In most cases, HUD pays the lender's claim.  However, in some
cases, for example, if the property was damaged while in the lender's
possession, HUD may refuse to accept the property until the lender
has repaired the damage. 

\4 In HUD's Illinois and Texas state offices, the branch of the
Single-Family Housing Division responsible for management and sales
of properties in inventory is called the Real Estate Owned Branch. 
In HUD's Massachusetts State Office, this branch is called the Real
Estate Owned/Asset Management Branch. 

\5 Although there are 81 offices with single-family housing
operations, as of September 1997 only 73 were managing an inventory
of foreclosed properties. 

\6 Revisions necessary to comply with changes to the Federal
Acquisition Regulations are allowed. 

\7 The flat fee varies according to the terms of each individual
contract.  For example, under the Illinois contracts in effect at the
time of our review, the flat fees for the base contract years ranged
from $642 to $1,763 per property. 

\8 HUD initially intended to issue a national contract similar to the
pilot for the management and marketing of all acquired single-family
properties; however, it is no longer pursuing the national contract
concept. 

\9 This amount is the value of the contract through the current
modification only and does not reflect the potential value if all
options are exercised. 

\10 HUD currently calls its property management contracts REAM
contracts, but HUD's IG also found problems with the field offices'
administration of area management broker contracts, which were used
prior to REAM contracts. 

\11 In our 1992 report entitled HUD Reforms:  Progress Made Since the
HUD Scandals, but Much Work Remains (GAO/RCED-92-46, Jan.  31, 1992),
we reported that HUD's IG, our office, and others had identified
problems in the disposition of single-family properties, including
inadequate oversight of property management. 


   WEAKNESSES EXIST IN HUD'S
   OVERSIGHT OF REAM CONTRACTS
------------------------------------------------------------ Letter :3

We found that HUD does not have a system in place for monitoring its
field offices' administration of REAM contracts.  In addition, HUD's
field office staff are not consistently providing adequate oversight
of the REAM contractors.  Key oversight responsibilities that were
not always performed by staff at the three HUD field offices we
visited included (1) conducting periodic risk-based monitoring and
carrying out performance evaluations before extending REAM contracts;
(2) maintaining fully documented files on REAM contractors'
performance; (3) inspecting a percentage of properties in the
contractors' inventory; (4) ensuring that the contractors submit
appropriate property inspection reports to HUD; and (5) ensuring the
preservation and protection of custodial properties. 


      HUD DOES NOT HAVE A SYSTEM
      FOR MONITORING
      ADMINISTRATION OF REAM
      CONTRACTS
---------------------------------------------------------- Letter :3.1

HUD's property disposition handbook\12 gives headquarters staff the
ultimate responsibility for overseeing the administration of REAM
contracts.  Specifically, the handbook requires regional offices to
ensure that field offices are consistently and uniformly monitoring
REAM contractors.  To ensure that this task is being performed, the
guidance requires headquarters staff to review regional offices'
oversight actions through regional reviews.  We found, however, that
headquarters staff have not been conducting these reviews since HUD
reorganized its field office structure in 1995 and eliminated the
regional offices.  According to HUD Single-Family Property
Disposition officials, the regional offices' oversight function was
never absorbed into headquarters after the regional offices were
eliminated.  Also, after the reorganization, HUD's guidance was not
updated to ensure that REAM contract administration was monitored by
headquarters. 


--------------------
\12 HUD Handbook 4310.5 REV-2, "Property Disposition Handbook," May
1994. 


      HUD DOES NOT ALWAYS PERFORM
      REQUIRED RISK-BASED
      MONITORING AND PERFORMANCE
      EVALUATIONS
---------------------------------------------------------- Letter :3.2

HUD requires field offices to perform an assessment of a contractor's
risk of unsatisfactory performance, on the basis of such factors as
the timeliness with which the contractor carries out duties under the
contract, the frequency of complaints about the condition of
properties managed by the contractor, and the contractor's fiscal and
subcontracting procedures.  At the conclusion of this review, staff
are to assign the contractor a risk designation of low, moderate, or
high, which determines the frequency of HUD's future monitoring
activities, ranging from monthly for high-risk contractors to
semiannually for low-risk contractors. 

We found that compliance with this requirement varied among the three
field offices we reviewed.  Specifically, the Fort Worth office has
conducted risk assessment reviews and on-site monitoring as required. 
On the other hand, the Boston office has not been doing the risk
assessment reviews.  As a result, Boston officials (1) lack
information about whether the contractor's accounting, recordkeeping,
and subcontracting practices comply with the terms of its contract
and (2) have no basis for determining the appropriate frequency of
future on-site monitoring.  According to a 1996 report by HUD's
IG,\13 the Boston office also did not conduct risk assessments for
the prior REAM.  Also, although the Chicago office has carried out
the risk assessment reviews, it has not completed them as often as
required, nor monitored the REAM contractors as frequently as their
risk assessments indicate that they should be.  Specifically, each of
the nine REAM contractors under contract with the Chicago office at
the time of our review should have had an on-site monitoring review
at least every 6 months because the minimum frequency of reviews
required by HUD is semiannual (REAM contractors designated moderate-
or high-risk are to be reviewed more frequently).  However, at the
time of our review, five of the nine REAM contractors had not had an
on-site monitoring review in over 8 months, and one of these had not
had an on-site review in 16 months.  The other four REAM contractors
had on-site reviews within a week before we began our file review. 
However, for two of those contractors, there was no evidence that HUD
had ever completed an on-site review prior to that time; for the
other two contractors, the next most recent reviews had been
completed more than 8 months earlier. 

HUD also requires field office staff to prepare an evaluation of a
contractor's performance every year in the month prior to the
contract's anniversary date, using a standard monitoring guide issued
by headquarters.  This annual evaluation is ultimately used to make
decisions on contract extensions and, if necessary, to act on
inadequate performance.  However, we found that these evaluations are
not always conducted or are not always completed in time to provide
useful information for contract renewal decisions.  For example,
Boston's field office has evaluated the REAM contractor's performance
only once since the contract was awarded on June 30, 1995, and that
evaluation was conducted several weeks after the contract had already
been extended beyond the base year.  Officials in HUD's Boston field
office told us that performance evaluations were not performed
because they did not have the staff resources or travel funds to
visit the contractor's office, located about 37 miles from HUD's
field office.  In the one evaluation conducted, HUD cited the
contractor for sometimes failing to meet contractual time
requirements for removing debris from properties.  Furthermore,
contrary to HUD's guidance, Boston field office staff did not send
the contractor a copy of the assessment report.  According to a
Boston HUD official, the staff simply neglected to send the results
to the REAM contractor.  As illustrated in figure 1, our August 1997
inspection of 24 Massachusetts properties revealed that the debris
removal problem still exists.  We found that 17 of the 24 properties
contained either interior or exterior debris that had not been
removed within the contractual time frame; consequently, prospective
buyers were sometimes viewing properties littered with household
trash, personal belongings, and other debris.\14

   Figure 1:  Debris Found at One
   Massachusetts Property We
   Visited

   (See figure in printed
   edition.)

Our work in HUD's Fort Worth and Chicago offices also found instances
of contracts' being renewed without a current evaluation of the REAM
contractor's performance to justify the extension.  In the Fort Worth
office, the evaluation of the contractor was conducted in August
1997, after the REAM contract had been extended in July 1997.  As a
result of the August 1997 evaluation, HUD staff increased the risk of
nonperformance associated with the contractor from low to moderate. 
According to a HUD official in Fort Worth, the office did not
complete the required annual evaluation of the contractor before
extending the contract because HUD headquarters had limited the field
office's travel funds.  Also, at the time of our review, the Chicago
office had extended 21 of its 23 REAM contracts without having
evaluated them with headquarters' standard monitoring guide in the
month prior to their extensions.  For example, the Chicago office
extended the contract for one of its contractors in March 1997 but
did not conduct the annual evaluation until July 1997.  At that time,
Chicago staff rated the contractor as being high-risk.  Had the
evaluation been completed earlier, HUD would have been in a better
position to determine whether or not the contract should have been
extended.  As in Boston and Fort Worth, HUD officials in the Chicago
office attributed their untimely evaluations to resource constraints. 


--------------------
\13 Controls Over Real Estate Asset Manager Contracts, Massachusetts
State Office, HUD, Office of the Inspector General (96-BO-123-0001,
June 1996). 

\14 Because locks on one property had been changed, denying us access
with HUD's keys, we were unable to determine whether the contractor
had removed interior debris. 


      HUD DOES NOT ALWAYS MAINTAIN
      FILES ON CONTRACTORS'
      PERFORMANCE
---------------------------------------------------------- Letter :3.3

In addition to the risk-based monitoring and the performance
evaluations, HUD property disposition staff in the field offices are
required to maintain a file containing any correspondence between HUD
and a REAM contractor.  This file should contain any instructions
given to the contractor, including oral instructions; documentation
of any contractor monitoring conducted; and any other documentation
that reflects the contractor's performance.  However, we found that
the Boston field office does not maintain a REAM file.  Boston
officials told us that they did not need a separate REAM file because
they did not have any performance-related correspondence with the
contractor.  However, an internal memorandum maintained by HUD's
contracting office indicated significant problems with late or
missing inspection reports shortly after the contract was awarded. 
In addition, immediately following our August 1997 site inspection of
properties, HUD and the REAM contractor corresponded about the
deficiencies in property conditions we identified.  Without fully
documented files on contractors' performance, HUD may have difficulty
supporting contract extension decisions and acting on inadequate
performance.  As a result of our review, the Boston field office
established a REAM file that contains information related to the
contractor's performance. 

Although the Chicago field office maintains files for each of its
REAM contracts, we found that the files did not always include the
documentation necessary to support that staff had been completing
monitoring requirements as directed by HUD's guidance.  For example,
on-site monitoring reviews for four of the nine REAM contractors,
accounting for 12 of the 23 contracts, were not contained in the REAM
files maintained by the Real Estate Owned Branch.  Rather, they were
provided to us by Real Estate Owned staff subsequent to our file
review.  For two of the REAM contractors that had multiple contracts
with HUD, the reviews provided by Real Estate Owned staff pertained
to only one contract area for each of these two contractors; there
was no evidence that Real Estate Owned staff had conducted on-site
office reviews relating to the contractors' activities in their other
contract areas.\15

Like the Chicago office, the Fort Worth field office maintains a REAM
file, but the file did not contain all of the information required by
HUD's guidance.  For example, the file did not contain time frames
for correcting performance deficiencies.  If time frames are not
properly documented, it may be difficult for HUD to take appropriate
actions to ensure that the deficiencies are corrected. 


--------------------
\15 At the time of our review, one of these REAM contractors had
separate contracts to provide service in six areas, and the other had
contracts to provide service in three areas. 


      HUD DOES NOT REQUIRE
      PHYSICAL INSPECTIONS OF
      PROPERTIES MANAGED BY REAM
      CONTRACTORS
---------------------------------------------------------- Letter :3.4

HUD's guidance does not require field office staff to physically
inspect properties managed by REAM contractors.  However, HUD
recognizes that physical inspections are the best method for
monitoring the contractors' work, and HUD's guidance suggests that
field office staff conduct monthly physical inspections of at least
10 percent of the properties assigned to each contractor in each
stage of processing.\16 The guidance also allows the field offices to
use contractors, such as fee inspectors and REAM contract monitors,
for property inspection services.  The guidance suggests increasing
the number of physical inspections, as necessary, for high-risk REAM
contractors or contractors whose performance is deemed to be
unsatisfactory.  In addition, the guidance requires that HUD staff
prepare a monthly log to reflect the inspections made by field office
staff, fee inspectors, or REAM contract monitors in the previous
month.\17

Without adequate on-site inspections, HUD cannot be assured that it
is receiving the services for which it has paid.  On the basis of our
review of approximately 50 property files in each location, we found
that Boston field office staff had not inspected any properties in
their inventory.  Boston field office staff told us they do not get
out to inspect properties because they do not have the travel funds
or staff resources to do so. 

The Boston field office's lack of property inspections and inadequate
staffing resources were also discussed in a June 1996 HUD IG
report\18 that prompted field staff to conduct such inspections in
the fall of 1996.  However, the Single-Family Housing Director in the
Boston office noted that in the middle of fiscal year 1997, the
Single-Family Housing Division was forced to combine its asset
management and Real Estate Owned functions to accommodate a
50-percent reduction in staff, leaving a small, inexperienced staff
to manage the inventory.  According to the Boston office
Single-Family Housing Director, the staff focused on meeting HUD's
management plan's goal of selling properties, which did not leave
enough resources to conduct property inspections.  Therefore, in
April 1997 the Single-Family Housing Division contacted HUD's
Administrative Service Center to solicit proposals for contracting
out property inspection services.  Subsequent to our visit, in
December 1997, the Boston field office started using contractors to
make property inspections. 

Chicago officials reported that they inspect 10 percent of their
entire inventory every month.  However, it was difficult for us to
verify that this many inspections are completed because Chicago staff
neither file inspection reports in a separate property inspection
file for each REAM contractor nor prepare the required report
documenting inspections made by field office staff each month.  While
staff in the Fort Worth office did not prepare the required report of
monthly inspections either, the Real Estate Owned Property Management
Supervisor in that office maintains a file containing reports on each
of the monthly inspections.  According to a HUD official in Fort
Worth, the staff have a performance standard requiring them or a fee
inspector to inspect a minimum of 10 percent of the properties in
their individual inventories.  For the Chicago and Fort Worth
offices, our review of 50 property files maintained by each location
indicated that field office staff had, at some time, inspected
approximately 22 percent and 10 percent, respectively, of those
properties. 


--------------------
\16 A property goes through 10 stages from the time it is conveyed to
HUD to the sale of the property. 

\17 HUD's guidance states that the report is to be submitted to the
Regional Director of Housing for review.  However, in September 1995,
HUD reorganized its field structure and eliminated its 10 regional
offices.  Since HUD reorganized from a regional to a field office
structure, it is unclear who is now responsible for this review
function. 

\18 Controls Over Real Estate Asset Manager Contracts, Massachusetts
State Office, HUD, Office of the Inspector General (96-BO-123-0001,
June 1996). 


      HUD DOES NOT ROUTINELY
      ENSURE THAT REAM CONTRACTORS
      ARE SUBMITTING INSPECTION
      REPORTS
---------------------------------------------------------- Letter :3.5

The REAM contractor's submission of initial and routine inspection
reports is essential for HUD to determine its marketing strategy for
the properties and to mitigate potential losses on the properties. 
For example, the initial inspection reports, along with appraisals,
are the primary tools for determining what repairs must be made and
whether a property meets certain standards that would allow it to be
sold with Federal Housing Administration-insured financing.  HUD's
guidance requires a REAM contractor to submit initial inspection
reports to the field office within 5 working days of being notified
that a property has been assigned, but there is no specific guidance
on the submission of routine inspection reports.  We found
considerable differences among the three field offices we reviewed
both in terms of the requirements they placed on REAM contractors for
submitting inspection reports and the extent to which the reports
were actually submitted to the field offices. 

For example, the Boston field office has not placed a contractual
requirement on its REAM contractor for when initial inspection
reports must be submitted to the field office.\19 Of the 42 property
files we reviewed in Boston, 18 (43 percent) did not have an initial
inspection report.\20 The Chicago field office requires REAM
contractors to submit initial inspection reports within 10 calendar
days of the assignment of properties to the contractors, but 20
percent of the files that we reviewed in Chicago did not have an
initial inspection report.  The Fort Worth field office requires REAM
contractors to submit initial inspection reports within 10 working
days of the notification that a property has been assigned, and all
of the property files that we reviewed in Fort Worth contained an
initial inspection report. 

The three field offices we visited also had varying requirements for
the submission of routine inspection reports and oftentimes did not
know if the routine inspections had been conducted as required.  The
Massachusetts REAM contract requires that the contractor perform and
document routine inspections every 30 days after the initial
inspection.  Although the contract does not specifically require the
contractor to send the inspection reports to HUD, field office staff
expect the contractor to submit the inspection reports.  According to
the contractor, it strives to submit routine inspection reports to
HUD no later than 5 days into the month after they are performed. 
However, of the 31 files we reviewed in Boston for properties that
had been in inventory long enough to have received a routine monthly
inspection, 17 (55 percent) did not contain the required monthly
inspection reports.  Furthermore, inspection reports that were in the
files were not always complete, including some which stated that a
property had problems or damage but did not describe what it was. 
The Chicago office requires the contractor to inspect properties
every 10 calendar days but to submit only those routine inspection
reports that contain negative findings.  The Fort Worth office
requires contractors to inspect properties on a biweekly schedule but
does not require them to submit the inspection reports at all--the
routine inspection reports are maintained by the contractors.  Since
neither the Chicago nor the Fort Worth field office requires the
contractors to submit all routine inspection reports, HUD is unable
to readily determine whether the contractors are conducting
inspections as required. 


--------------------
\19 The Boston field office requests the REAM contractor to send
initial inspection reports to HUD within 5 days after the inspection
is completed, but this time frame is not a contractual requirement. 

\20 We planned to review 50 files in each location, but in
Massachusetts several of the properties listed in inventory were
under sales agreement when we began our review.  The files for these
properties had been sent to a closing attorney and were unavailable
to us. 


      INADEQUATE PERFORMANCE BY
      REAM CONTRACTORS AND
      WEAKNESSES IN HUD'S
      OVERSIGHT CONTRIBUTE TO POOR
      PROPERTY CONDITIONS
---------------------------------------------------------- Letter :3.6

We found instances in all three locations of properties that were not
maintained as required by the REAM contracts.  During our inspection
of approximately 20 properties in each location, we identified
properties that (1) were not properly secured, (2) had physical
conditions that did not match those that the REAM contractor had
reported to HUD, (3) were not properly identified as HUD homes, or
(4) had imminent hazards. 

For instance, of the 66 properties we visited in all three locations,
we found that 26, or approximately 39 percent, were not sufficiently
secured so as to prevent access.  Failure to properly secure
properties can lead to trespassing, vandalism, and properties'
deterioration.  For example, in Massachusetts three of the eight
unsecured properties had exposed walls in the bathrooms where copper
piping had been ripped out, and seven had broken windows; three
properties had graffiti, and one contained a syringe.  Figure 2
illustrates vandalism at one unsecured property in Massachusetts.  In
addition, we found that one Massachusetts property had been poorly
secured by nailing a large piece of plywood to the door, which
prevented the door from closing, and then propping a thin piece of
wood against the door from the inside, effectively leaving the house
wide open.  Moreover, two of the Massachusetts properties were
inaccessible to us and the REAM contractor because in one, the locks
had been changed and in the other, someone had nailed the door shut. 
Both conditions were noted in the contractor's inspection reports
prior to our visit. 

   Figure 2:  Copper Piping Ripped
   Out of Wall at an Improperly
   Secured Property

   (See figure in printed
   edition.)

In addition, we found physical conditions that did not match those
that the REAM contractor had reported to the three HUD field offices. 
Some of the examples we found included (1) a property containing
personal possessions, animal feces, and fur, while the contractor's
inspection report indicated that the house was free of debris; (2) a
property that had roof leaks and extensive water damage, although the
contractor had certified to HUD that the roof had been repaired; (3)
a contractor's inspection report claiming that a property had
extensive defective paint surfaces that would cost $2,000 to treat,
although the property had almost no painted surfaces because the
exterior was aluminum siding and the interior was primarily paneling
and tile; (4) a property that had suffered a major fire, although the
inspection report did not indicate the problem; and (5) a property
that had both extensive water damage in several rooms, some of which
apparently resulted from a broken skylight secured by taping a
plastic trash bag over it, and bathroom walls that were torn apart by
vandals to obtain valuable copper piping, none of which was reported
to HUD.  Figure 3 illustrates the conditions at two of these
properties. 

   Figure 3:  Physical Conditions
   at Two Properties That Did Not
   Match Those Reported to HUD

   (See figure in printed
   edition.)

If contractors do not accurately report on the condition of
properties, HUD may lack vital information on which to make
disposition decisions and to address safety hazards.  As a result,
the government may sell properties for less than they are worth or
incur unnecessary holding and maintenance costs because the
properties are not marketable. 

Furthermore, we found that about 38 percent of the properties we
visited in Massachusetts had either no HUD signs or signs that were
difficult to read.  The REAM contract requires contractors to post
HUD signs on properties in a conspicuous location.  Failure to post
appropriate signs can make it difficult for neighbors to determine
whom to contact when problems concerning a HUD-owned property arise. 

We also found that almost 71 percent of the properties we visited in
Massachusetts and about 37 percent in Illinois contained imminent
hazards.  Failure to address imminent hazards endangers would-be
buyers as well as neighbors and puts the government at risk of
litigation.  As illustrated in figure 4, hazards that we observed
included broken or rotting stairs, a refrigerator on a back porch
with the door intact, a broken cellar bulkhead door, household waste,
food and soiled diapers, and numerous properties with paint and
solvents in the basement that had not been removed by the contractor. 

   Figure 4:  Hazardous Conditions
   We Observed at Two Properties

   (See figure in printed
   edition.)

In some cases, the problems that we saw at these properties had been
reported to HUD by the contractor, but HUD did not act promptly to
address them.  The files and properties that we reviewed in Illinois
and Texas did not reveal contractor-reported conditions to which HUD
had not responded.  However, in Massachusetts, we found four
instances in which HUD had not acted on problems.  In two cases,
inspection reports submitted to HUD noted that the front steps to the
properties were dangerous, a condition warranting immediate repair by
the contractor.  Nonetheless, when we inspected the properties about
3 months after the contractor initially reported the problems, the
stairs still had not been repaired.  We also found the initial
inspection report for a Massachusetts property conveyed to HUD in May
1997 which indicated that the property had suffered heavy water
damage as the result of frozen pipes, yet the insurance form from the
lender reported that the property was conveyed undamaged.  Although
these documents were in the property file, according to Boston's
Single-Family Housing Director, the property would have been
reconveyed to the lender if the HUD staff had been cognizant of the
property's condition before it went under sales agreement. 

We recognize that some of the problems we found may have occurred
after a contractor's last routine inspection.  However, we believe
that it is unlikely that all of them could have occurred during the
time between inspections.  In fact, in one instance, a routine
inspection report completed by the contractor for one of the Illinois
properties indicated that all of the exterior doors were secure, the
interior was free of debris, and no emergency repairs were needed. 
However, we had inspected the property on the previous day and found
that it had hazardous stairs, debris in the basement, and an
unsecured cellar door through which the entire house was accessible. 

Also, we found in our review of files and properties in the three
locations that the properties were generally in better condition in
the locations that monitored the contractors' performance.  For
example, in HUD's Fort Worth office, where field office staff
generally perform oversight as suggested by HUD's guidance, the
properties that we visited had few deficiencies.  In contrast, in
Boston, where many of the key oversight functions were not conducted
properly, the general condition of the properties was far worse than
that of the properties managed by the Chicago and Fort Worth field
offices.  We recognize, however, that the condition of the properties
is not totally attributable to HUD's oversight of the contractors. 
Other factors can contribute to the condition of the properties,
including the overall quality of the contractors' work and the
susceptibility of the neighborhood to crime and vandalism. 


      HUD DOES NOT ALWAYS ENSURE
      THE PRESERVATION AND
      PROTECTION OF CUSTODIAL
      PROPERTIES
---------------------------------------------------------- Letter :3.7

Also among the properties that HUD's field offices assign to REAM
contractors are those in custodial status.  A custodial property is a
vacant or abandoned property secured by a HUD-held mortgage; HUD
takes possession of such properties for the sole purpose of
preserving and protecting them until HUD acquires title.  REAM
contractors receive a monthly fee for each custodial property
assigned to them for preservation and protection.  Because HUD does
not yet own properties that are in custodial status, the contractors
are not required to perform all of the services that they must
perform on other properties in HUD's inventory.  As with other
properties in HUD's inventory, the responsibilities of a REAM
contractor with respect to custodial properties are generally
governed by the individual REAM contract.  However, HUD's guidance
requires contractors to inspect custodial properties, post a HUD
warning sign within 48 hours after being assigned the properties, and
initiate action to remove imminent hazards from custodial properties
no later than 24 hours after discovering them, although contractors
may not remove any personal property. 

We conducted a limited review of custodial properties in Illinois
because it has a high number of properties in custodial status; of
the 61 field offices with custodial properties in inventory as of
December 1997, the Chicago field office had 167 custodials, or 9
percent of the total inventory of custodials, more than any other
field office.  Under the Illinois contract format, REAM contractors
are required to perform services at custodial properties such as
securing them, completing initial inspections within 10 days of being
assigned custodial properties, and conducting routine inspections
every 10 days thereafter.  If damage is discovered during the initial
inspection of a custodial property, the REAM contractor is required
to provide photographs of the damage and submit them with the
inspection report to HUD.  For routine inspections, the contractor is
to submit a copy of each negative inspection report to HUD within 24
hours after the inspection is performed, including a narrative
description of any damage or condition that could create a health
hazard. 

Our review of nine custodial properties in Illinois revealed that six
had been in that status for at least 3 years.  We visited these nine
properties and found six of them to have seriously deteriorated
and/or hazardous conditions.  However, for five of these six cases,
we found no evidence in the Real Estate Owned files that the
contractor responsible for preserving and protecting the properties
had notified HUD of their condition, as required by the contract, nor
any evidence that a HUD Realty Specialist maintained a file of
current information about the properties.  For example, one of the
properties we visited was completely burned out and too dangerous to
enter, but the only inspection report in the Real Estate Owned file
for this property was dated in 1994 and did not note any major
structural or fire damage.  The Real Estate Owned Branch's file for
another of the properties, which had significant water damage,
contained no inspection reports and no documentation to show that HUD
was aware of the property's condition.  Inside another property, we
found the potential health hazard of dead and rotting pigeons along
with bird droppings.  The most recent inspection report in the Real
Estate Owned Branch's files on this property was dated in 1995. 
Another property had old meat and dead maggots in the refrigerator;
the most recent inspection report in the Real Estate Owned file for
this property was dated over 5 months earlier and did not identify
the potential health hazard of the spoiling food.  Figure 5
illustrates the conditions at two of these properties. 

   Figure 5:  Conditions We Found
   at Two Custodial Properties

   (See figure in printed
   edition.)


   HUD'S PLANNED AND ONGOING
   EFFORTS TO CHANGE PROPERTY
   DISPOSITION
------------------------------------------------------------ Letter :4

HUD is in the process of changing its handling and disposition of
single-family properties.  These changes are motivated primarily by
HUD's larger effort to downsize the agency and to substantially
reform management practices agencywide.  HUD envisions that these
changes, when implemented, will limit the need for REAM contractors'
services.  Nevertheless, it appears that HUD's property disposition
operations will continue to rely on contractors' services to some
extent for the foreseeable future.  In addition, there is still
uncertainty about how HUD will implement some of the reforms it is
planning and the extent to which the reforms will produce a feasible
and effective alternative for achieving the goals of HUD's property
disposition process. 


      PROPOSALS TO REVISE
      SINGLE-FAMILY PROPERTY
      DISPOSITION ACTIVITIES
---------------------------------------------------------- Letter :4.1

HUD has been considering changes to its property disposition process
as a part of its broader effort to fundamentally revise the agency's
organization and management under the HUD 2020 Management Reform
Plan.\21 An integral part of the 2020 Plan is the downsizing of HUD's
workforce from approximately 10,500 to 7,500 employees by the year
2002.  Many of these staff reductions will come from single-family
housing operations, including Real Estate Owned functions.  According
to HUD's Single-Family Property Disposition Director, as of December
1997, approximately 475 staff members were supporting Real Estate
Owned operations, but by the year 2002, this number will have been
reduced to 66 employees. 

In addition to downsizing, the 2020 Management Reform Plan also
identifies and seeks to address flaws in HUD's current structure for
single-family housing operations, including poorly controlled and
monitored disposition of properties.  As a part of the solution under
the 2020 Plan, HUD is consolidating all single-family housing
operations from 81 locations across the nation into four
single-family homeownership centers (HOC).  The HOCs will carry out
the work traditionally performed in HUD's field offices, including
oversight and management of contractors and sales of remaining
inventory.  According to Single-Family Property Disposition
officials, the 66 staff devoted to Real Estate Owned operations under
the 2020 Plan will be located in these HOCs.  According to these
officials, as of December 1997, some single-family housing functions
had been transferred to some of the HOC locations, but the transition
was still in process and no target date had been set for completing
the consolidation.  However, these officials said that a Real Estate
Owned presence will be maintained in HUD's field offices as long as
necessary to carry out property disposition functions, up until the
year 2002, when the Real Estate Owned portion of the downsizing plan
is expected to be complete.  This presence will be made up of staff
who are not among the 66 assigned to Real Estate Owned positions at
the HOCs and who choose to remain in their current positions while
the changes to property disposition are being implemented. 

As part of its restructuring of single-family housing operations, HUD
is also considering alternative methods for disposing of the Real
Estate Owned inventory.  According to Single-Family Property
Disposition officials, the pursuit of alternative methods is
motivated primarily by the significant decrease in Real Estate Owned
staff resources, as well as by the increased number of properties in
HUD's inventory.\22 In a June 1997 advanced notice of proposed
rulemaking in the Federal Register, HUD stated its intent to develop
innovative methods for disposing of HUD-owned single-family
properties.  Specifically, according to the Deputy Assistant
Secretary for Single-Family Housing, the Department plans to sell the
rights to properties before they enter inventory, thus enabling them
to be quickly disposed of once they become available.\23 According to
the Single-Family Property Disposition Director, as a result of these
sales, HUD anticipates having only a minimal inventory of properties
in the future and, therefore, only a limited need for REAM
contractors' services. 

In September 1997, HUD issued a request for proposals soliciting a
financial adviser to help design a specific structure for these
sales, which HUD refers to as "privatization sales." Although the
details of the privatization sales concept remain to be developed by
the financial adviser, Single-Family Property Disposition officials
envision that properties would be pooled on a regional basis and
purchased by entities that could use their existing structures to
sell the properties in the same way that HUD currently does, through
competitive sales to individuals.  Rather than taking possession of a
large number of properties at one time, buyers would receive a
"pipeline" of newly acquired properties as they come into inventory,
at a rate of about 3 or 4 per day. 

While HUD further develops the privatization sales concept, staff
reductions and the transfer of functions to the HOCs are already in
progress.  According to Single-Family Property Disposition officials,
field office staff are still responsible for managing and disposing
of the existing inventory of properties, which numbered about 30,000
as of September 1997.  According to these officials, until the
privatization sales program is successfully implemented, Real Estate
Owned staff will be responsible for disposing of the current
inventory and any new properties coming into the inventory by using
property management and marketing contracts similar to those issued
under a recent pilot program, which tests the approach of contracting
out all property management and marketing services.\24 Furthermore,
even after the privatization sales approach is implemented, there
will likely continue to be a relatively small number of properties
that HUD does not dispose of through privatization sales.  For
instance, HUD is considering retaining a percentage of foreclosed
properties in inventory to sell to nonprofits and state or local
governments.  Such properties would be managed and disposed of using
contracts similar to those used in the pilot. 

Under the pilot contracts, a contractor performs both the marketing
functions traditionally carried out by HUD staff and the property
management functions traditionally obtained through REAM contracts. 
Although the pilot program allows many of the tasks traditionally
performed by HUD staff to be carried out by a contractor, according
to a HUD official in one of the pilot locations, Real Estate Owned
staff must still monitor the contractor's performance.  According to
Single-Family Property Disposition officials, as operations are
transferred to the four HOCs, these locations will be responsible for
obtaining contracts similar to those under the pilot and for
overseeing those contracts.  The headquarters Single-Family Property
Disposition Division is recommending to the HOCs that they acquire
services similar to the pilot program to supplement existing staff in
field offices with few remaining Real Estate Owned employees.  HOCs
would have the option of choosing which specific services to obtain
under contract, depending on the needs of the field offices in their
jurisdictions.  Although the HOCs will have ultimate responsibility
for overseeing property disposition contractors, staff will likely be
designated in the field offices to monitor the contractors and report
to the HOCs, to the extent that any Real Estate Owned staff remain in
the field office locations. 


--------------------
\21 In June 1997, HUD issued its "HUD 2020 Management Reform Plan,"
intended to fundamentally redesign HUD's mission, programs, and
organization. 

\22 According to Single-Family Property Disposition officials, the
inventory of HUD-owned properties is increasing because of (1) the
termination of HUD's Mortgage Assignment Program, which has resulted
in thousands of properties that would formerly have entered the
Mortgage Assignment Program being conveyed to HUD, and (2) downturns
in some local economies and housing markets. 

\23 In addition, as part of its budget request for fiscal year 1999,
HUD is proposing new legislation to allow the Department to take back
a note when a claim is paid, rather than requiring lenders to
foreclose and convey properties.  HUD would then transfer the note to
a third party for servicing and disposition.  Although the
legislation is proposed for enactment in 1999, the program would not
take effect until 2002, to allow HUD time to issue regulations and
mortgage lenders time to adjust to the new procedures. 

\24 According to Single-Family Property Disposition officials, field
offices with fewer than 10 remaining Real Estate Owned staff will use
contracts similar to those issued under the pilot, but field offices
with 10 or more Real Estate Owned staff will continue to use
REAM-type contracts. 


      UNCERTAINTIES EXIST ABOUT
      HUD'S EFFORTS TO REVISE
      PROPERTY DISPOSITION
      ACTIVITIES
---------------------------------------------------------- Letter :4.2

While HUD deserves credit for seeking improvements to its
single-family property disposition process, it is not yet clear
precisely how the reforms that HUD is pursuing will take shape and to
what extent, if at all, they will be better than the existing process
at meeting HUD's property disposition goals of ensuring the highest
return to the government on acquired properties, promoting
homeownership, and strengthening communities.  Furthermore, if the
reforms do not work as HUD envisions, the Department will have a
difficult time reverting to its current property disposition approach
because the downsizing and consolidation of single-family operations
is already under way. 

As discussed above, the details of HUD's plans to carry out
privatization sales have not yet been formulated.  As a result, it is
difficult to assess the impact of the reforms on HUD's property
disposition goals.  According to HUD staff, the reforms can improve
on the current process by reducing HUD's property disposition costs. 
They said that this view is supported by a study prepared in
September 1997 by Hamilton Securities Advisory Services, Inc., a
former HUD contractor.  This study analyzed the costs of the current
property disposition system and identified several alternatives to
the current system.  The study noted that although the revenue that
HUD obtains on sales of single-family properties has been similar to
housing industry standards, its property disposition costs have been
"a little higher." Accordingly, the study evaluated options, such as
bulk sales of properties or awarding the right to sell properties to
contractors, that could allow HUD to lower its property disposition
costs and associated administrative costs.\25 However, as the study
noted, to the extent that alternative approaches result in lower
returns to HUD because of purchasers' increased risk and financing
costs, savings in property disposition costs could be offset to some
degree.\26 Considering these factors, the study projected that bulk
sales of properties or awarding the right to sell properties to
contractors could achieve annual savings of $43 million or $183
million, respectively, over HUD's current property disposition
process.  The study did not assess the potential effects of the
reform options on HUD's ability to promote homeownership or
strengthen communities through the single-family property disposition
process. 

Another uncertainty about HUD's revised process is that it may take
longer than anticipated to complete the transition to the
privatization sales approach.  According to Single-Family Property
Disposition officials, HUD expects to publish a proposed rule
amending the current property disposition regulations in about March
1998, have a financial adviser hired by April 1998, conduct the first
privatization sale in the summer of 1998, and publish the final rule
amending the current regulations by September 1998.  The first sale
would offer the rights to properties that HUD will acquire in fiscal
year 1999.  According to these officials, if the sale is national in
scope, then new properties would stop coming into HUD's inventory at
the end of fiscal year 1998, and about 6 months into fiscal year
1999, only a relatively small inventory would remain.\27 However,
most of the details of the privatization sale concept have yet to be
determined; for example, HUD does not yet know who will be the
potential purchasers for these sales, or the scope of the first sale. 
Even if the first sale is on a national basis and HUD is able to meet
its target dates, a sizable inventory of properties will continue to
need management and marketing services until at least the middle of
fiscal year 1999.  If the first privatization sale is delayed, only
partial in scope, or does not work according to plan, HUD's sizable
inventory will need property management and marketing services even
farther into the future. 

In any case, contractors are likely to still be involved in the
property disposition process to some degree for the foreseeable
future, to assist the decreasing field office staff in handling the
current inventory and any future inventory of properties not sold
through privatization sales.  Furthermore, if the privatization sale
concept does not operate as well as hoped, according to Single-Family
Property Disposition officials, HUD will rely heavily on contracts
similar to those issued under the pilot.  In light of this situation,
it will continue to be important for HUD to ensure adequate controls
over contractors' activities.\28 HUD's single-family housing
officials recognize that a system for monitoring contractors'
performance will be needed under the new approach; according to these
officials, the function of the Real Estate Owned divisions within the
HOCs will be almost exclusively to monitor contracts.  Although these
officials anticipate that a monitoring guide developed in connection
with the three pilot contracts will be largely transferrable to the
HOCs' monitoring operations, as of February 1998, they had not yet
developed specific guidance for the HOCs to use in their monitoring
role. 


--------------------
\25 Commenters on the advanced notice of rulemaking raised concerns
about HUD's proposals, especially any attempts to use bulk sales. 
The concerns were that such an approach would potentially reduce the
returns that HUD receives on property sales, could interfere with
homeownership goals, could depress the value of properties in the
neighborhoods in which HUD's properties are located, and could be
subject to fraud and abuse.  According to the Single-Family Property
Disposition Director, these comments refer to "bulk sales," wherein a
large number of hard-to-sell properties are disposed of all at one
time; the privatization sales concept would provide for purchasers to
receive a "pipeline" of newly acquired properties that have just been
foreclosed, at a rate of about 3 or 4 per day. 

\26 Furthermore, to the extent that lower property disposition costs
achieved by the private sector relate to differences in the
properties they dispose of and the neighborhoods in which the
properties are located, as opposed to differences in the processes
they use, HUD will experience difficulty in lowering its disposition
costs to private-sector levels. 

\27 According to Single-Family Property Disposition officials,
because 6 months is the average turnover time for properties in
inventory, field offices can be expected to have disposed of much of
their existing inventories about 6 months after HUD stops taking
possession of newly acquired properties. 

\28 In addition to the weaknesses that we identified in HUD's
oversight of REAM contracts, in our February 1997 report entitled
High-Risk Series:  Department of Housing and Urban Development
(GAO/HR-97-12), we identified monitoring as a weakness in HUD's
current operations.  In connection with that work, in August 1996, we
surveyed 155 persons serving as the directors of major program areas
at HUD's 40 largest field offices, including Single-Family Housing
Directors.  Sixty-nine percent of the Single-Family Housing Directors
responding said that HUD should increase the amount of contractor
monitoring, and 57 percent said that HUD headquarters should place
greater emphasis on completing essential program monitoring. 


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

Because HUD headquarters has no mechanism for routinely monitoring
field offices' oversight of REAM contractors, it has no assurance
that its field offices are consistently and effectively applying
HUD's guidance for overseeing contractors' performance.  Although
HUD's guidance suggests and, in some instances, requires various
methods for monitoring REAM contractors' performance, such as
conducting monthly on-site property inspections, maintaining files on
contractors' performance, and providing contractors with written
results of performance evaluations, for the three field offices we
reviewed, we found that these activities have not consistently been
used in a way that assures HUD that REAM contractors are meeting
their contractual obligations.  As a result, field offices may extend
contracts without current information on the quality of the REAM
contractors' past performance; do not consistently receive the timely
information they need to make informed marketing decisions for the
properties in inventory; and may compensate contractors for services
that were not provided in accordance with contract requirements.  In
addition, we believe that oversight weaknesses at the three locations
we visited have contributed to poor conditions at some of the
properties in HUD's inventory, including custodial properties,
potentially decreasing the value of these properties and negatively
affecting the surrounding neighborhoods. 

Although this is a transitional period for HUD's Single-Family
Property Disposition operations, with major changes being planned and
implemented, there will continue to be a need for contractors to
perform property management and/or marketing services into the
foreseeable future.  Furthermore, whereas property management
services currently obtained under both the pilot and REAM contracts
are overseen by field offices located in the same general area for
which the contractors have responsibility, HUD staff in the future
will be responsible for monitoring contractors' activities throughout
the nation from only four locations.  Because of this situation, it
will, if anything, be even more critical for HUD to ensure that it
has effective systems in place to oversee property disposition
contractors' activities. 

As Single-Family Property Disposition officials have acknowledged,
the uncertainty about the potential impacts of privatization sales on
HUD's property disposition goals will require HUD to carefully
monitor the effects of the new process as it is implemented and
assess these effects in relation to the results under other possible
alternatives, such as, for example, issuing management and marketing
contracts similar to those under the pilot program.\29 It will be
difficult for HUD to revert back to its current property disposition
approach if its planned reforms do not work as HUD envisions because
of the substantial downsizing and consolidation of operations that is
already under way. 


--------------------
\29 As of December 1997, HUD's Single-Family Property Disposition
officials said that staff were in the process of evaluating the
results of the pilot program's first year. 


   RECOMMENDATION
------------------------------------------------------------ Letter :6

We recommend that, so long as contractors are involved in providing
asset management services for properties in HUD's single-family
inventory, the Secretary of Housing and Urban Development establish a
process for monitoring the administration of such contracts at field
offices and homeownership centers.  This process should include
controls sufficient to ensure that these field locations consistently
implement HUD's guidance and effectively oversee contractors'
performance.  Specifically, these controls should require that (1)
field locations complete performance evaluations of contractors
(using the standard monitoring guide in HUD's Property Disposition
Handbook) prior to renewing contracts and communicate the results of
these evaluations to the contractors in writing in a timely manner;
(2) field location program offices maintain files on contractors'
performance; (3) HUD staff or contractors hired to perform monitoring
duties conduct monthly on-site inspections of a sample of properties
in inventory; (4) contracts contain clear and consistent requirements
on when contractors' routine inspection reports must be submitted to
HUD for review; (5) HUD staff ensure that real estate asset
management contractors notify HUD of deteriorated or hazardous
conditions at custodial properties; and (6) HUD headquarters obtain
sufficient information to monitor homeownership centers' and field
offices' administration of the contracts. 


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

We provided a draft copy of this report to HUD for its review and
comment.  HUD's Acting General Deputy Assistant Secretary for Housing
told us that HUD takes the findings in our report very seriously and
will take steps to ensure that properties identified as hazardous to
buyers and neighborhood residents will be made safe.  He noted that
our report was based on a review of properties in three locations, a
small sampling of the approximately 30,000 homes in HUD's inventory. 
Nevertheless, the Department is reviewing its internal procedures for
managing REAM contracts under the new homeownership centers to
identify immediate corrective steps and to ensure that any management
weaknesses that existed under the previous field structure will not
recur in the new organization.  As discussed in our report, the
Department is also currently assessing alternative contract vehicles
and other initiatives for managing and disposing of its inventory. 
HUD believes that these changes should strengthen management control
over the property management and disposition process, result in a
substantially reduced real estate inventory, and limit the use of
REAM contracts. 


---------------------------------------------------------- Letter :7.1

We conducted our review from July 1997 through February 1998 in
accordance with generally accepted government auditing standards. 
(See app.  I for a discussion of our scope and methodology, including
the statistical methodology we used for evaluating oversight of REAM
contracts.)

As agreed with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days from the date of this letter.  At that time, we will
send copies of this report to the Secretary of Housing and Urban
Development.  We will make copies available to others on request. 

Please call me at (202) 512-7631 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
II. 

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


B-278827

List of Requesters

The Honorable Rick A.  Lazio
Chairman, Subcommittee on Housing
 and Community Opportunity
Committee on Banking
 and Financial Services
House of Representatives

The Honorable Christopher S.  Bond
Chairman, Subcommittee on VA, HUD,
 and Independent Agencies
Committee on Appropriations
United States Senate

The Honorable Lauch Faircloth
Chairman, Subcommittee on Financial
 Institutions and Regulatory Relief
Committee on Banking, Housing,
  and Urban Affairs
United States Senate


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

As requested by the Chairman, Subcommittee on Housing and Community
Opportunity, House Committee on Banking and Financial Services; the
Chairman, Subcommittee on VA, HUD, and Independent Agencies, Senate
Committee on Appropriations; and the Chairman, Subcommittee on
Financial Institutions and Regulatory Relief, Senate Committee on
Banking, Housing and Urban Affairs,we evaluated (1) whether the
Department of Housing and Urban Development (HUD) is ensuring that
real estate asset management (REAM) contractors meet their
contractual obligations and (2) what actions HUD has planned or under
way to change its handling and disposition of the single-family
properties in its inventory. 

We obtained most of the information used to determine whether HUD is
ensuring that REAM contractors meet their contractual obligations
from HUD field offices since they are responsible for administering
REAM contracts.  Specifically, we performed audit work at the
Massachusetts, Texas, and Illinois state offices.  We selected
Massachusetts because of past problems it has experienced with
oversight of REAM contracts.  We chose Texas and Illinois on the
basis of their geographic locations and relatively large inventories
of single-family properties (nationally ranking third and fourth,
respectively, in the number of properties). 

To obtain information on HUD's policies and procedures for monitoring
REAM contracts, we reviewed the HUD Property Disposition Handbook and
other relevant documentation.  We discussed the implementation of
these policies and procedures with single-family housing officials in
both headquarters and the three field offices we visited.  We also
interviewed Administrative Service Center officials, who are
responsible for awarding contracts, about contract administration
issues. 

In the selected field offices, we reviewed property files and REAM
contract files maintained by the Single-Family Housing Real Estate
Owned Branch and other documentation related to oversight of
contractors' performance.  We gathered information on oversight of
REAM contracts by using an automated data collection tool to compile
standardized information from the single-family property files.  The
sampling methodology we used to select case files for review and an
explanation of the statistical precision of the samples we used is
described below. 

To determine how well REAM contractors' services were being provided,
we inspected approximately 20 properties in each location.  Using
HUD's inventory listing and information from property inspection
reports, for each field office we judgmentally chose two
geographically dispersed clusters of properties for inspection.  One
group of properties was located relatively close to the HUD office,
while the second group was located several hours away from the
office.  In addition, we made site visits to REAM contractors'
offices in each field location to review their property and
subcontractor files.  We also discussed contract obligations and
contractors' policies and procedures with REAM representatives. 

To identify what actions HUD has planned or under way to change its
handling and disposition of the single-family properties in its
inventory, we gathered information on HUD's planned and ongoing
efforts from HUD documents and discussions with the Director,
Single-Family Property Disposition, other single-family housing
officials, and HUD's Office of Inspector General. 


   STATISTICAL METHODOLOGY FOR
   EVALUATING OVERSIGHT OF REAM
   CONTRACTS
--------------------------------------------------------- Appendix I:1

This section describes the sampling methodology and statistical
precision of the estimates we used in our review of single-family
property files. 


      SAMPLING METHODOLOGY
------------------------------------------------------- Appendix I:1.1

To review documentation on oversight of REAM contracts, we used an
automated data collection tool to compile standardized information
from a sample of single-family property files at HUD's Illinois,
Massachusetts, and Texas state offices.  The data collected included
dates of property assignments to REAM contractors and dates of
property inspections by the contractors, HUD staff, or someone hired
by HUD to conduct the inspections. 

We obtained a property inventory from the Single-Family Accounting
Management System for the HUD field office in each location to
identify the universe of properties listed for sale.\30 Table I.1
displays the total inventory and properties listed for sale in each
location.  On the basis of the total number of properties listed for
sale and the amount of time needed to review individual property
files, we decided to review a minimum of 50 randomly selected files
in each location.  Although as of July 28, 1997, the Massachusetts
State Office's inventory listing showed 57 properties listed for
sale, 15 of them were under sales agreements as we conducted our
property file review in July and August 1997.  Therefore, we reviewed
only 42 property files in the Massachusetts State Office because the
files for the properties under agreement had been sent to a closing
attorney and were unavailable to us. 


--------------------
\30 HUD refers to properties listed for sale as step-6 properties. 


      SAMPLING ERRORS AND
      CONFIDENCE INTERVALS OF
      ESTIMATES
------------------------------------------------------- Appendix I:1.2

Since we used a sample (called a probability sample) of property
files to develop our estimates from the automated data collection
instruments, each estimate has a measurable precision, or sampling
error, which may be expressed as a plus/minus figure.  A sampling
error indicates how closely we can reproduce from a sample the
results that we would obtain if we were to take a complete count of
the universe using the same measurement methods.  By adding the
sampling error to and subtracting it from the estimate, we can
develop upper and lower bounds for each estimate.  This range is
called a confidence interval.  Sampling errors and confidence
intervals are stated at a certain confidence level--in this case, 95
percent.  For example, a confidence interval at the 95 percent
confidence level means that in 95 out of 100 instances, the sampling
procedure we used would produce a confidence interval containing the
universe value we are estimating.  Table I.2 provides the estimates
and confidence intervals from single-family property file reviews in
the Illinois and Texas state offices.  Since we reviewed the files
for all the properties listed for sale in the Massachusetts State
Office, there were no sampling errors. 



                               Table I.1
                
                       Inventory and Sample Size

                                      Illinois  Massachuse       Texas
Description (as of our review            State   tts State       State
date)                                   Office      Office    Office\a
----------------------------------  ----------  ----------  ----------
Number of properties in inventory        1,441         215       1,519
Number of properties listed for            255          57         191
 sale
Number of files reviewed for                51          42          50
 properties listed for sale
----------------------------------------------------------------------
\a Includes inventory for the Texas State Office in Fort Worth but
does not include inventory for the Dallas, Houston, Lubbock, or San
Antonio area offices. 



                                         Table I.2
                          
                            Estimates and Sampling Errors of the
                           Estimates From Single-Family Property
                           File Reviews in the Illinois and Texas
                                       State Offices

                                            95-percent confidence   95-percent confidence
                           Estimate         interval--lower limit   interval--upper limit
                    ----------------------  ----------------------  ----------------------
Description           Illinois       Texas    Illinois       Texas    Illinois       Texas
------------------  ----------  ----------  ----------  ----------  ----------  ----------
Average no. of             3.2        11.7         1.5         5.1         4.9        18.3
 days between
 property
 assignment to
 initial
 inspection
Missing initial           19.6           0         9.8           0        29.4         5.2
 inspection
 reports\a
 (percent)
Average no. of            16.6         3.6         3.4         3.0        29.8         4.2
 days between
 initial
 inspection
 completed and
 report received
 by HUD
Number of property         7.8           4         1.2           1        14.4          11
 files with
 inspection
 reports from REAM
 monitors\a
 (percent)
Number of property        21.6          10        11.4         2.8        31.8        17.2
 files with
 inspection
 reports from HUD
 Realty
 Specialists
 (percent)
------------------------------------------------------------------------------------------
\a The 95-percent confidence intervals for the percentage of missing
inspection reports and the percentage inspected by REAM monitors in
Fort Worth were computed using the hypergeometric distribution. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

HOUSING AND COMMUNITY DEVELOPMENT
ISSUE AREA

Janet G.  Boswell
Richard A.  Hale
Joan T.  Mahagan
Sally S.  Moino
Richard B.  Smith
Leigh K.  Ward

DESIGN, METHODOLOGY, AND TECHNICAL
ASSISTANCE GROUP

Allan Rogers

OFFICE OF THE GENERAL COUNSEL

John T.  McGrail


*** End of document. ***