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Tags: mortgage | aid | red | cross | billions | mismanaged

Billions in Taxpayer Mortgage Aid Flow Through Nonprofit in Turmoil

Wednesday, 18 March 2015 06:55 AM EDT

Hoping to deliver relief to Americans pounded by the financial crisis, the government has poured billions of dollars into a sort of Red Cross for homeowners.

NeighborWorks America, a nonprofit chartered by Congress, distributes much of that money to counseling groups that dispense mortgage advice and sometimes financial aid.

A close look at the group reveals a house in disorder -- with sweetheart contracts, document fudging and unexplained departures of top officials.

Executives at the group awarded at least two large jobs to insiders without bidding, later justifying one of the contracts with a backdated memo, according to interviews with former employees, tax filings and previously unreported company audits. In the other case, managers signed off on a multimillion-dollar technology deal to a recently formed contractor, which had board members in common with NeighborWorks and used the same law firm. The contractor overcharged by as much as 20 times, one of the audits said.

Then, with little fanfare, four top officials left NeighborWorks over a few months last year, under the watch of a board of directors that includes administrators from the Federal Reserve and the Department of Housing and Urban Development.

Management Shortcomings

The management shortcomings are all the more poignant given the group’s goal of eradicating the wrongs of the mortgage crisis, in part by helping people shore up their finances. The contracting issues, which haven’t received a public airing, spark concerns about whether the group has in fact been a good manager of some $2 billion in congressional appropriations it has received since 2007. Some government inspectors and Republican lawmakers are also asking whether the organization has delivered on its post-crisis mission of keeping Americans in their homes.

The Washington, D.C.-based group, officially the Neighborhood Reinvestment Corp., said it has been a good steward of federal money. It took immediate action to address shortcomings in its procurement process and hired an executive to review contracts, said Douglas Robinson, a spokesman.

Because NeighborWorks is funded by taxpayers, it should be held to a higher standard than other nonprofits, said Doug White, director of Columbia University’s Master of Science in Fundraising Management. Early failures to anticipate demands of the crisis may have been compounded, he said, if there were later efforts to make a quiet fix.

“How could it not have done the high-level work that’s required of a really serious nonprofit to take care of a really serious issue?” White asked.

Under Fire

Questions about the group’s finances emerge as House Republicans said this week they’re seeking ways to cut federal spending by $5.5 trillion over the next nine years. For 2016, the White House’s budget proposal seeks $182 million for Neighborworks, almost 60 percent above pre-crisis levels. Already, the organization’s politics are under fire, with Virginia Representative Bob Goodlatte, a Republican, using a hearing last month to brand the group “left-wing community organizers.”

NeighborWorks may be in line for still more funds. It’s named as a beneficiary in settlements that the U.S. Justice Department struck with Citigroup Inc. and JPMorgan Chase & Co. over subprime-mortgage securities. Should those banks fail to deliver $6.5 billion in relief to homeowners in coming years, as required, the nonprofit will be tapped to distribute the remainder. Bank of America Corp.’s settlement lists NeighborWorks as one of two such beneficiaries.

‘Fast and Furious’

Justice Department negotiators weren’t aware of any contracting issues or turnover at the group as they worked out the bank settlements through August 2014, said two people familiar with the deals. It wasn’t immediately apparent whether anyone at the department knew about such issues, said Patrick Rodenbush, a spokesman.

At the crisis’s height, the government upped the flow of cash to NeighborWorks by hundreds of millions of dollars, and gave it a mandate to rush money to counselors. In that environment, some executives cut corners, said two people familiar with the group, including Michael Forster, the organization’s former chief financial officer. Executives also sparred over how many federal programs the group was equipped to take on, Forster said.

“We had a lot activities and a lot of partners coming at us fast and furious,” Forster said. “I won’t say that’s an excuse. But that is absolutely a contributor.”

‘Who Is This?’

Forster was preparing Internal Revenue Service filings for the group about three years ago, he said, when a line in some procurement documents caught his eye. A company he hadn’t heard of, Quantum, was listed as receiving more than $900,000 in fees in just one year, making it one of NeighborWorks’ highest-paid consultants, he said.

“I asked ’Who is this, and what the heck are we spending the money on?’” Forster said.

The contractor had been paid in dozens of installments too small to trigger the need for board approval or bidding, according to Forster and a report by the group’s longtime auditor. Quantum’s address was a one-bedroom apartment north of the National Zoo in Washington, owned by a former NeighborWorks software developer.

Under federal rules, recipients of government funds must put jobs worth more than $25,000 up for competition, or justify why they can’t do so, according to the audit.

Backdated Memo

Two executives signed a backdated memorandum explaining why they didn’t seek bids for the job -- building new counselor- training software -- according to the audit. The officers who signed the memo were NeighborWorks’ chief executive officer, Eileen Fitzgerald, and its acting chief operating officer, Paul Kealey, Forster said when contacted by Bloomberg News.

Forster, formerly of Arthur Andersen LLP, said he chose to leave NeighborWorks for a new job in March 2014.

In late 2013, word of the Quantum Consulting contract reached the group’s board. The board ordered up inquiries, by groups that included NeighborWorks’ longtime auditor. These revealed procurement irregularities but no fraud. Starting in April, the directors oversaw the departures of Fitzgerald, Kealey and at least two other senior officials. Kealey and Fitzgerald began jobs at housing-related nonprofits shortly afterward.

Kealey referred questions to NeighborWorks, which declined to talk about him or make executives available for interviews.

‘Stepped Up’

Fitzgerald declined to be interviewed. In an e-mail, the former CEO said the group “stepped up” when called upon. “I am especially proud of its response to the foreclosure crisis during unprecedented economic challenges in our country and how well NeighborWorks responded to the Congressional expansion of its activities,” she wrote.

Robinson, the spokesman, declined to comment on the resignations, saying he couldn’t discuss personnel issues. The contracting issues, he said, weren’t signs of broader problems throughout the organization.

“We continuously enhance our internal control environment and address any weaknesses, including those identified by our auditors, in order to excel in the work that we do as trainers, administrators and grant makers,” Chuck Wehrwein, who was acting CEO through Jan. 19, said in an e-mail.

U.S. Comptroller of the Currency Thomas Curry, the chairman of NeighborWorks’ board, said he oversaw changes at the group. That included recruiting and selecting a chief executive who started earlier this year, he said by e-mail. “It was appropriate to take strong corrective actions” that will bolster the group’s effectiveness and reputation, he wrote.

Little Oversight

NeighborWorks and its housing-aid partners measure success based on how many people their counselors have talked to -- more than 1.8 million homeowners since 2007, the group says.

There’s little oversight over whether funds targeted for saving homes are actually doing that, said Christy Romero, the Special Inspector General for the Troubled Asset Recovery Program.

Romero’s office said the Treasury Department failed to closely monitor the outcome when it hired NeighborWorks for a 2013 project to help borrowers get loan modifications. The agency knew how many counseling sessions it had paid for, but not the sessions’ results, Romero said in an interview. Of the nearly 10,000 homeowners counseled, fewer than one-third completed applications for assistance, her office found.

“How did Treasury know that the housing counselors that NeighborWorks contracted with actually gave the right counseling?” Romero said.

Hard to Reach

The department released data this week showing that 1,169 borrowers had received trial mortgage modifications when the program ended in December. The project’s goal was to use skilled local counseling agencies to contact hard-to-reach borrowers and help the eligible ones apply for help, Mark McArdle, Treasury Chief of the Homeownership Preservation Office, said in an e- mail.

NeighborWorks has also commissioned such tallies. It hired The Urban Institute, a Washington-based nonprofit policy research group, to track the impact on a sampling of borrowers who received aid through its main foreclosure-prevention counseling program. Homeowners who went through counseling were more likely than others to get loan modifications that helped them keep their properties, the researchers found. But foreclosure rates were similar among homeowners who went through counseling and those who didn’t, they found.

Default Wave

Established by lawmakers in 1978, NeighborWorks became one of dozens of congressionally chartered charities and patriotic organizations such as the Boy Scouts of America and the American Red Cross. Unlike those, though, it depends on Congress for funding. It ran urban revitalization programs, branched into promoting homeownership to stabilize distressed areas, and now funds programs to promote energy-efficiency and community gardens.

By the middle of the 2000s, it was receiving about $116 million in federal funds each year.

Then came waves of mortgage defaults. Congress nearly tripled NeighborWorks’ federal funding, much of it for loan- counseling programs. The statute authorizing one big expenditure -- part of the government’s National Foreclosure Mitigation Counseling program of 2007 -- gave NeighborWorks 60 days to get the first $50 million out the door.

Biggest Job

One of NeighborWorks’ biggest jobs came in 2010, when HUD hired it to administer the $1 billion Emergency Homeowners Loan Program. The effort, authorized that year under the Dodd-Frank law, was designed to give as much as $50,000 apiece to homeowners unable to meet their mortgage payments.

NeighborWorks would need help processing applications. It signed a contract for technology services with Hope LoanPort Inc., a non-profit that had ties to both its own leadership and HUD.

The contract paid Hope LoanPort many times the going rate for some services, a 2014 internal audit found. Hope LoanPort, a 16-person company with managers from the housing industry, subcontracted the technology work to for-profit companies.

NeighborWorks paid Hope LoanPort about $20,000 per month for web hosting, according to the audit, which said the subcontractor charged other clients $2,000 to $2,700 for the same level of service. Other fees were eight to 22 times the rate the subcontractors billed others, it found.

‘Inordinate’ Costs

Hope LoanPort, which is still under contract to NeighborWorks, eventually billed more than $3 million over two years -- including costs that “would probably be considered inordinate,” wrote its internal auditor, Frederick Udochi. In an e-mail, Udochi declined to comment.

Hope LoanPort, in a written response to Udochi’s audit, called its fees reasonable given “the size and scale” of the loan program and its budget.

Camillo Melchiorre, president and CEO of Hope LoanPort, said the group’s job was to manage sophisticated data for the entire housing industry. He said he was “extremely troubled” that Udochi compared the group to a web provider hosting a small group of loan documents.

“It would be like comparing a Mercedes to a Volkswagen,” Melchiorre said in an interview.

NeighborWorks, in a follow-up study completed within the past month, found some of the hosting costs “could be lower” and is implementing changes that could reduce the bill, Robinson said in an e-mail.

HUD Officials

Udochi’s audit also questioned why the Hope LoanPort contract hadn’t been put up for bidding. NeighborWorks had justified the selection by saying said it didn’t have enough time to seek other vendors, he wrote. But NeighborWorks and HUD had been discussing using Hope LoanPort for the job eight months before the contract was signed, according to the audit.

Forster, who approved the memorandum justifying the no-bid contract, said HUD officials orchestrated the deal to benefit Hope LoanPort. “In some ways the whole project came with Hope LoanPort attached to it,” Forster said.

Hope LoanPort and NeighborWorks were governed by some of the same people, IRS filings show.

Kenneth Wade, NeighborWorks’ chief executive officer throughout 2010, was an original member of Hope LoanPort’s board. David Stevens, an assistant secretary of housing at HUD, sat on NeighborWorks’ board until he left government in early 2011. As part of his subsequent job, as president and CEO of the Mortgage Bankers Association, Stevens gained a seat on Hope LoanPort’s board.

Best Choice

Stevens said in an e-mail that he wasn’t involved in the Hope LoanPort contract process and has “no knowledge of how the contract came about.”

Wade said decisions about the contract were made at the staff level. “I wasn’t involved in any discussions with HUD or Hope LoanPort on this matter,” he said in an e-mail. NeighborWorks is confident that Hope LoanPort was the best choice, said Robinson, the Neighborworks spokesman.

The billion-dollar emergency loan program that Hope LoanPort’s services supported, which is scheduled to end this month, fell short of expectations. HUD initially said the program would allow it to extend interest-free loans to as many as 30,000 homeowners. Udochi’s audit placed the number served at fewer than 3,000.

The disappointing results were a result of delays at HUD and the failure of applicants to qualify under the program’s strict rules, a HUD audit found. The Treasury Department eventually clawed back about half of the $1 billion as unspent funds. HUD spokesman Brian Sullivan declined to comment.

Offices in NoMa

As NeighborWorks’ funding and mission expanded, it invested in infrastructure. The group, employing more than 350 people, moved its headquarters to a rented 65,000 square-foot office in Washington’s trendy NoMa neighborhood.

It also spent millions to upgrade and replace software programs. Among its plans was to develop a web application to help train housing counselors for the next decade.

Instead of putting that job out for bidding, two employees approved multiple payments to a consultant in 2011, according to an external audit of the group conducted by BDO USA LLP. Forster said those employees were managers in NeighborWorks’ information-technology department. They gave the contract to Quantum, also known as Quantum 365, a company owned by a former NeighborWorks software developer named Teddy Wondwosen, he said.

NeighborWorks ultimately paid Wondwosen’s firm more than $2.1 million, Robinson said. Forster froze the project around late summer 2013 and ordered a review by outside accountants. The deal also drew the attention of the board, which ordered two more reviews.

Already Frozen

Those probes were in full swing in March 2014 when NeighborWorks sent Congress its annual budget request, which included $6.3 million for professional services -- a category that, according to the group’s budget justification, included the already-frozen Quantum project. The request said the project would be finalized in fiscal 2015, making no mention of any of the investigations.

Forster said a reviewer he hired found Quantum’s work to be of market value, so he didn’t hire a fraud investigator. That evaluation also satisfied BDO, which cited it as reason for concluding there were no “questioned costs.” BDO declined to comment.

In late spring 2014, law firm Venable LLP delivered an oral account to the board: They found no evidence of fraud from the no-bid deal, according to the person familiar with the group, who asked not to be named because details of the investigation aren’t public.

‘Larger Issue’

“We were expecting the contract to be reinstated and then I guess there turned out to be a larger issue with processes at the organization,” the contractor, Wondwosen, said in an interview. Wondwosen, who isn’t accused of wrongdoing, moved to California this past summer to take a job at a large Web-search company.

Jeffrey Tenenbaum, a Venable partner who also represents Hope LoanPort, declined to the comment on the audit. He said the firm didn’t represent Hope LoanPort in dealings with NeighborWorks.

In April 2014, NeighborWorks’ board accepted Fitzgerald’s resignation. On a Friday afternoon in May, it issued a press release noting that NeighborWorks’ chief operating officer had been named acting president and chief executive. The five- paragraph release gave no reason for Fitzgerald’s departure.

Forster, the former CFO, attributes the contracting problems to an organization that was unequipped to handle the surge in work, not to mention the politics, that came with the housing crisis’s cleanup.

“I don’t know that we were built or designed to move that fast,” he said. ’’You’re constantly trying to dance and the speed of the music was accelerating.’’

© Copyright 2022 Bloomberg News. All rights reserved.

Hoping to deliver relief to Americans pounded by the financial crisis, the government has poured billions of dollars into a sort of Red Cross for homeowners.NeighborWorks America, a nonprofit chartered by Congress, distributes much of that money to counseling groups that...
mortgage, aid, red, cross, billions, mismanaged
Wednesday, 18 March 2015 06:55 AM
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