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ABC Special Report
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Fraud in Houston Housing
Monday, 04 April 2005

Audit slams housing agency
A report finds potential fraud, other problems widespread in city department
For more than a decade, Houston's Housing and Community Development Department chose projects based on its directors' whims, allowed for massive defaults on loans and created opportunities for conflicts of interest and fraud, an independent review of the department concludes.

Houston Chronicle
Audit slams housing agency

A report finds potential fraud, other problems widespread in city department
Copyright 2005 Houston Chronicle


 Highlights of Jefferson Wells' recommendations to improve the city housing department: •Identify agency's mission, goals and strategies and establish a system that ensures accountability for achieving them.
•Revise department's organizational structure to align with program and activity needs.
•Establish a project evaluation team to choose projects for funding and a project review committee, including representation by independent community and industry experts.
•Establish formal employee training, backup and successor planning; implement merit-based hiring and promotion system.

For more than a decade, Houston's Housing and Community Development Department chose projects based on its directors' whims, allowed for massive defaults on loans and created opportunities for conflicts of interest and fraud, an independent review of the department concludes.

The report, prepared for the city by the Jefferson Wells consulting firm, identifies fundamental deficiencies in virtually every area of the department — from a secretive, retaliatory management culture to a shoddy system for checking on contractors' performance and ensuring repayment of loans.

Sound business practices were routinely disregarded, the report says, citing one instance when an assistant director changed the interest rate on a loan for an apartment project — without modifying the loan agreement or securing City Council approval — to correct an erroneous calculation in a repayment schedule.

Under its previous two directors, Margie Bingham and Daisy Stiner, the department failed to fill vital positions, delegated much of its work to outside agencies without properly monitoring their performance, and created an atmosphere that bred waste, inefficiency and poor morale, the report says.

The department "has exhibited a culture of autocratic leadership in which departmental information was concentrated in a few select individuals at the top level," the report states. "Information became the currency of power and secrecy was equated with job security."

Bingham, contacted Friday, said she could not comment on the report because she had not seen it. She declined to comment based on a reporter's summary of its major findings. Stiner could not be reached.

Bingham, who headed the department from 1992 to 2002, is now a private housing consultant. She recently received $500,000 from the city to subsidize an apartment development, and she has participated in projects that received low-income-housing tax credits from the state housing agency, of which she is a former board chairwoman.

City wants funds restored

The Jefferson Wells report is emerging while the city housing department, which is charged with preserving and revitalizing low- and moderate-income neighborhoods, is struggling to persuade federal officials to restore one of its major sources of funding, which totals about $60 million a year in mostly federal funds. In December, the U.S. Department of Housing and Urban Development froze $14.7 million of this year's funding, as well as $33.3 million accumulated in previous years, because of mismanagement.

The report, completed March 10, was delivered Friday to Mayor Bill White, city Controller Annise Parker and Katie Worsham, an official in HUD's regional office in Fort Worth.

Parker, who was often critical of the department when she served on the City Council, said the report demonstrates the need for a wholesale restructuring of the city's housing services.

"This is the most devastating audit I have ever seen," Parker said. "Everyone over there should have to reapply for their position."

In a letter accompanying the report, Milton Wilson Jr., whom White appointed in December to replace Stiner, and John Walsh, White's deputy chief of staff for neighborhoods and housing, promised to use the report as the basis for widespread reforms. "Your new HCDD management team embraces Jefferson Wells' conclusions and endorses their recommendations," the letter states.

Funding seems 'arbitrary'

Among the report's findings:

•The department lacked a clearly defined mission and a system to ensure that projects were selected to fulfill that mission. Instead, "funding appears to have been arbitrary and primarily at senior management or the director's discretion."
•A lack of internal controls and weak oversight of spending by contractors "could lead to potential fraud."
•Most employees did not receive adequate training, managers often took credit for achievements of those who worked for them, promotions were often based on cronyism rather than merit, and employees were hesitant to relay bad news to Bingham because they feared retaliation.
•The department's organization lacked safeguards to prevent conflicts of interest. As a result, an assistant director who oversaw a program to provide housing for people with AIDS was instrumental in hiring, as the manager of that program, a personal friend of the president of an agency that received funding through the program.
•Managers sometimes blocked their subordinates' efforts to collect delinquent loans for apartment projects, and a deputy director mistakenly believed the department's policy was to forgive delinquent payments, especially if they were supported by negative cash-flow statements. Owners' negative cash-flow statements usually were not audited, and some showed "such large magnitude of continuously negative cash flow ... that they call into question the entity's financial and commercial viability."
•The department's down payment assistance and home repair programs lacked safeguards to prevent abuse. The auditors found evidence that some homeowners had obtained multiple repairs within the same five-year period, and some appeared to have received assistance for more than one home.
•Record-keeping was haphazard and disorganized, and legal instruments such as loan agreements were riddled with gaps and inaccuracies that could make them unenforceable. Security for records was poor.
In their letter accompanying the report, Walsh and Wilson said they would ensure that the department's management becomes "transparent, inclusive and fair"; create a project review team to analyze funding applications; reorganize the department in keeping with the report's recommendations; and establish better oversight and accountability procedures.

"The scale of current problems is large and resolution will involve numerous projects, extensive management and staff attention, and financial resources," the letter states, predicting that the changes will take six months to a year.

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