Federal programs to help Olathe neighborhoods hit by foreclosure have been mismanaged by the city, a joint federal and county audit has found.
At one point, according to the audit, a subsidized home was sold to a city employee’s daughter, while in another case, applicants were skipped over on a waiting list to approve a city employee’s son and two other people not on the list for a rental property.
The audit, initiated after officials received a hotline complaint, also found the city did not keep adequate records of time sheets for administrative costs, did not use all the money allocated and lost out on $91,650 it could have recouped when homes changed hands before the time period for residency in the homes was up.
The findings —particularly those involving city employee families and the wait list —damaged the public’s trust by giving the appearance of preferential treatment, the audit report said.
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County commissioners heard the audit results recently, presented by County Auditor Ken Kleffner.
In its official response, Olathe disagreed with many of the findings but also acknowledged that there are problems it has been working to correct.
Michael Meadors, head of the city’s Department of Parks and Recreation, which oversees the city housing authority, said the city takes the audit seriously and has already made changes that will prevent future problems. Meadors, formerly director of the Johnson County Park and Recreation District, has worked for Olathe since 2014.
The audit looked at how the city handled housing programs from 2011 through 2015. The programs involved money from the federal Department of Housing and Urban Development to rehabilitate and stabilize neighborhoods beset by foreclosures and declining property values. Auditors studied grants from the Neighborhood Stabilization Program, Community Development Block Grants and HOME investment Partnerships Program.
The Neighborhood Stabilization Program figured most prominently in the audit. That program was begun in 2008 to provide relief for places hit hard by the recession.
In the Neighborhood Stabilization Program, cities and states get federal grants to buy foreclosed or abandoned homes, rehab and sell them to keep neighborhood home values from spiraling downward spiral.
Olathe sold three homes and maintains eight rental properties under this program.
In February 2010, one of those homes was purchased by the daughter of an employee in the city housing department. The woman took out an $118,000 mortgage and signed an additional three-year promissory note to pay $39,500 on a foreclosed house bought for $158,000.
The city officials did not think it was a conflict of interest because the employee handled clerical duties and was not directly involved in the applications or sales transaction, according to the audit. The city employee got involved in some of the repair requests, but the audit said only the daughter should have been asking about repairs on the property.
Meadors said the city has already begun conflict-of-interest training for its employees so that will not happen in the future.
Another finding was critical of the way the city handled its waiting list for rentals in the same program. The city created a waiting list in February 2010 and last modified it in April 2010. On that list were the names of eligible applicants who had applied before June of the same year.
But when the city chose tenants for the eight rental properties, it picked three applicants who were not on the waiting list, the audit said. One of those was another city employee’s son. The auditors interviewed the last applicant on the wait list, who had applied in April of that year and was eligible. He said he would have accepted the home but did not get notification that he was eligible.
Olathe officials responded that at the time they thought a wait list was unnecessary because the number of applicants was below the number of available homes. However the city has since begun updating those policies.
Olathe also let grant money trickle away through other mismanagement, the audit said.
For example, it forgave the promissory notes much sooner than federal rules required. Under the stabilization program, the city looks at an applicant’s income and decides what an affordable mortgage payment would be, then gives a reduced sales price or a second mortgage at favorable terms.
To avoid abuse by buyers who might take advantage of those terms to flip the houses for profit, the rules require applicants to live in the homes for 5, 10 or 15 years, depending on the loan amount. After that time, the loan can be forgiven, but if the house is sold before that, the city can get the loan amount back.
However, Olathe erroneously signed agreements to forgive the notes on its three homes in just three years. When housing officials discovered in 2011 that was the wrong length of time, they tried to renegotiate the notes, but were only able to get one homeowner to change to the correct time period. City officials said they used the shorter time period because they were relying on wrong information provided by the state of Kansas.
The audit also found that Olathe missed out on more than $420,000 for housing restoration under the HOME program of interest-free loans that it was entitled to. Instead, that money reverted back to Johnson County.
Olathe had $868,500 coming into the program from grants and loan paybacks from 2011 to 2015, the audit said, but only distributed about 38 percent of that. The city acknowledged problems with that program for a number of reasons, including program income, employee turnover and poor employee performance, but has taken steps to correct that, Meadors said.
The city has changed its forgiveness period and started an outreach campaign to reach more potential users. All of the money allocated for 2015 has been committed, he said.
Commissioner John Toplikar said he was troubled by the report.
“This report does not sound good to me at all and I wondered if there was a shakeup in Olathe public housing department and if any heads rolled,” he said.
Meadors replied that the staff directly involved during the time have left.
Olathe is the only Johnson County city that administers the HOME program, with the county handling the rest. But administrators are studying whether to eventually merge, Meadors said.