FHFA's Oversight of the Federal Home Loan Banks' Affordable Housing Programs

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-04-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

          Federal Housing Finance Agency
              Office of Inspector General

    FHFA’s Oversight of the
   Federal Home Loan Banks’
  Affordable Housing Programs

Evaluation Report  EVL–2013–04  April 30, 2013
                 FHFA’s Oversight of the Federal Home Loan Banks’
                 Affordable Housing Programs
                 Why OIG Did This Report
                 The Affordable Housing Program (AHP) is the largest private source of grant funds
                 for affordable housing in the United States. It is funded by the Federal Home Loan
                 Bank System (FHLBank System), a government-sponsored enterprise (GSE)
Synopsis         consisting of 12 Federal Home Loan Banks (FHLBanks), whose primary mission is to
                 support housing finance.
                 As part of AHP, the FHLBanks are legally required to contribute at least 10% of their
April 30, 2013   previous year’s net income to subsidize low-income rental or owner-occupied
                 housing. Since the inception of the program in 1990, the FHLBank System has
                 awarded over $4 billion in subsidies through AHP. In general, these subsidies
                 supplement the total cost of housing projects, which are funded primarily by other
                 government or private sector entities.
                 The Federal Housing Finance Agency (FHFA or Agency) oversees the FHLBanks.
                 Such oversight should include ensuring that AHP dollars are spent on eligible housing
                 projects that are completed on time and within budget. Therefore, the FHFA Office of
                 Inspector General (OIG) initiated this evaluation to examine FHFA oversight of AHP.

                 What OIG Found
                 FHFA conducts annual examinations and collects data regarding each FHLBank’s
                 AHP. At the project level, however, it generally relies on the FHLBanks, their
                 member institutions, and various private and public entities to monitor housing
                 projects supported by AHP. It also depends on other funders to carry out their
                 respective oversight duties. Thus, the success of AHP projects is at risk to the extent
                 that oversight by government entities or funding organizations is weak.
                 FHFA’s oversight could be improved through implementation of a policy regarding
                 site visits and dissemination to the FHLBanks of cross-cutting feedback or trend
                 analyses. The FHLBanks’ oversight of AHP projects primarily is paper-based.
                 Although some FHLBanks visit projects during construction, others only visit projects
                 that receive a certain level of funding or are placed on watch lists because of problems
                 with the projects. However, site visits can detect obvious fraud or misrepresentations
                 in applications and status reports, and may be a useful control.
                 Additionally, as the regulator, FHFA is well-positioned to provide cross-cutting
                 feedback and analyses to FHLBanks to improve oversight of their programs, but it
                 typically has not published such data. The FHLBanks work together to share best
                 practices, but unbiased analyses from the Agency could better inform policy and
                 administrative decisions regarding these programs.
                 What OIG Recommends
                 OIG recommends that FHFA: (1) develop a policy for FHLBank site visits of AHP
                 projects that includes guidance on their frequency, scope, and administration; (2)
                 conduct and report cross-cutting analyses of common issues and themes across the
                 FHLBanks, using analytically rigorous methods; and (3) analyze staffing levels
                 needed to perform additional cross-cutting analyses and oversee housing project site
                 visits by FHLBanks, and take appropriate actions to meet those staffing targets.

April 30, 2013
TABLE OF CONTENTS ................................................................

TABLE OF CONTENTS ........................................................................................................................4

ABBREVIATIONS ................................................................................................................................5

PREFACE ...............................................................................................................................................6

CONTEXT ..............................................................................................................................................7
      Background of the FHLBank System ..............................................................................................7
      Background of the Affordable Housing Program ............................................................................7
              Competitive Application Program ...........................................................................................8
              Homeownership Set-Aside Program .....................................................................................11
              Member Institutions ...............................................................................................................13
              FHLBanks ..............................................................................................................................14
              FHFA .....................................................................................................................................19

FINDINGS ............................................................................................................................................25
      1.     Site visits of AHP projects are needed to supplement paper-based reviews .........................25
      2.     FHFA is well positioned to provide cross-cutting feedback and analyses to
             FHLBanks to improve oversight of their affordable housing programs ................................26

CONCLUSION .....................................................................................................................................29

RECOMMENDATIONS ......................................................................................................................29

SCOPE AND METHODOLOGY ........................................................................................................30

APPENDIX A .......................................................................................................................................31
      FHFA’s Comments on Findings and Recommendation ................................................................31

ADDITIONAL INFORMATION AND COPIES ................................................................................33

                                              OIG  EVL–2013–04  April 30, 2013                                                                  4
ABBREVIATIONS .......................................................................

AHP                Affordable Housing Program

CICA               Community Investment Cash Advance

CIO                Community Investment Officer

CIP                Community Investment Program

FHFA or Agency     Federal Housing Finance Agency

FHFB               Federal Housing Finance Board

FHLBank            Federal Home Loan Bank

FHLBank Act        Federal Home Loan Bank Act of 1932

FIRREA             Financial Institutions Reform, Recovery, and Enforcement Act of 1989

GSE                Government-Sponsored Enterprise

HERA               Housing and Economic Recovery Act of 2008

HUD                Department of Housing and Urban Development

OIG                Federal Housing Finance Agency Office of Inspector General

                           OIG  EVL–2013–04  April 30, 2013                             5
PREFACE ...................................................................................

OIG was established by the Housing and Economic Recovery Act of 2008 (HERA), which
amended the Inspector General Act of 1978. OIG is authorized to conduct audits,
investigations, and other studies of the programs and operations of FHFA; to recommend
policies that promote economy and efficiency in the administration of such programs and
operations; and to prevent and detect fraud and abuse in them.

HERA also established FHFA as the federal safety and soundness and mission regulator of
the FHLBank System. The FHLBank System promotes affordable housing and community
investment through programs including AHP. This report evaluates FHFA’s oversight of
the FHLBanks’ administration and management of AHP.

This report was prepared by Angela Choy, Director of Fraud Prevention and Program
Management; David M. Frost, Assistant Inspector General for Evaluations; and Adrienne
Freeman, Program Analyst. OIG appreciates the assistance of FHFA and FHLBank staff in
completing this report. It has been distributed to Congress, the Office of Management and
Budget, and others and will be posted on OIG’s website, www.fhfaoig.gov.

George F. Grob
Deputy Inspector General for Evaluations

                              OIG  EVL–2013–04  April 30, 2013                            6
CONTEXT ..................................................................................

Background of the FHLBank System

The Federal Home Loan Bank Act of 1932 (FHLBank Act) created the FHLBank System to
reinvigorate a housing market devastated by the Great Depression. The FHLBank System
facilitates homeownership by increasing liquidity in the housing market. It is comprised of
12 regional FHLBanks that are owned by their more than 8,000 member financial

The FHLBanks increase liquidity in the housing market primarily by making secured loans,
called advances, to member institutions such as commercial banks, credit unions, and
insurance companies. Member institutions, in turn, can use the money to originate
mortgages and fund economic development projects at the local level.

Background of the Affordable Housing Program

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
required each FHLBank to establish its own program under AHP.1 Each FHLBank awards
subsidies in the form of grants or reduced interest rates on advances.2 By law, AHP
subsidies must be used to finance: (1) homeownership by households with low or moderate
incomes (at or below 80% of area median income); or (2) the purchase, construction, or
rehabilitation of rental housing in which at least 20% of the units will be occupied by
households with very low incomes (at or below 50% of area median income).3 Further, each
FHLBank must contribute at least 10% of its previous year’s net income to AHP, with a
combined minimum contribution of $100 million from all of the FHLBanks. The
FHLBanks make these subsidies available through two programs: the competitive
application program and the homeownership set-aside program (see Figure 1).4 Since the

  AHP is one of three FHLBank community investment programs. FIRREA also requires each FHLBank to
establish a Community Investment Program (CIP) to provide funding to member institutions for community-
oriented mortgage lending. CIP provides funding in the form of advances to member institutions with a
discounted interest rate for the purchase, construction, rehabilitation, or refinancing of affordable owner-
occupied and rental housing for families. CIP also provides financing for commercial and economic
development activities that benefit low and moderate income families or activities that are located in low and
moderate income neighborhoods, such as roads, bridges, and retail stores. In addition, the FHLBanks may
offer Community Investment Cash Advance (CICA) programs, which provide advances and grants for
FHLBank member institutions to finance projects that are targeted to certain economic development activities,
including social services projects and public facilities.
    12 U.S.C. § 1430(i)(1).
    12 U.S.C. § 1430(j)(2).
    12 C.F.R. § 1291.2(a)-(b).

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inception of AHP, the FHLBanks have helped fund the development of more than 783,000
housing units, including over 477,000 units for very low income residents.5


    Competitive Application Program

The FHLBanks award most AHP funds through their competitive application programs,
which weight scoring criteria according to specialized need—such as housing for elderly
people—and other community priorities. Project sponsors (e.g., local housing organizations,
nonprofit corporations, and for-profit developers) partner with member institutions to
develop projects and apply for AHP funding.6 Member institutions submit applications for

 FHFA, Federal Home Loan Bank System Affordable Housing Program (AHP) Competitive Application and
Homeownership Set-Aside Program Data (June 30, 2012) (online at
0of%209-13-120.pdf) (accessed on January 16, 2013).
 Ordinarily, the member institution will have an ongoing relationship with the project sponsor for which it is
submitting the application. AHP regulations define a sponsor as “a not-for-profit or for-profit organization or
public entity that:

                                     OIG  EVL–2013–04  April 30, 2013                                           8
AHP funding on behalf of one or more sponsors of eligible housing projects. Figure 2
illustrates the application and funding process.

                              FIGURE 2. APPLICATION AND FUNDING PROCESS

From the inception of AHP in 1990 until June 30, 2012, the FHLBank System awarded over
$4.6 billion in AHP funding under the competitive application programs. This funding
assisted over 17,400 projects.7 In 2011, the FHLBanks awarded a total of more than $226
million in competitive application funds. Figure 3 shows the $226 million in 2011 AHP
awards by region.

Rather than being the sole source of funding for projects, AHP supplements other funding
sources. Generally, AHP subsidies account for 5%–10% of total development costs.8
Figure 4 shows the number of projects awarded AHP funding in 2011 by region.

        (1) Has an ownership interest (including any partnership interest), as defined by the Bank in
        its AHP Implementation Plan, in a rental project;
        (2) Is integrally involved, as defined by the Bank in its AHP Implementation Plan, in an
        owner-occupied project, such as by exercising control over the planning, development, or
        management of the project, or by qualifying borrowers and providing or arranging
        financing for the owners of the units;
        (3) Operates a loan pool; or
        (4) Is a revolving loan fund.”
12 C.F.R. § 1291.1.
 AHP regulations define an AHP project as “a single-family or multifamily housing project for owner-
occupied or rental housing that has been awarded or has received AHP subsidy under the competitive
application program.” 12 C.F.R. § 1291.1.
  For example, AHP can be a source of subsidies for projects receiving low income housing tax credits or
funding under the HOME Investment Partnerships Program of the U.S. Department of Housing and Urban
Development (HUD). More than $22.5 billion was disbursed under HOME from fiscal years 1992 to 2008.
The low income housing tax credit program gives state and local housing finance agencies the equivalent of

                                     OIG  EVL–2013–04  April 30, 2013                                      9

Atlanta         56           Cincinnati      54            Indianapolis      24          San Francisco          104
Boston          32           Dallas          53            New York          57          Seattle                 9
Chicago         79           Des Moines      45            Pittsburgh        14          Topeka                 31

A project must meet specific regulatory requirements9 and be evaluated in light of nine
scoring criteria10 in order to be eligible for AHP funding. Although AHP regulations require

nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new
construction of rental housing targeted to lower income households. HUD, Low-Income Housing Tax Credits
(online at http://www.huduser.org/portal/datasets/lihtc.html) (accessed on December 19, 2012). Other sources
of federal funding for AHP projects include: HUD’s Community Development Block Grant program and U.S.
Department of Agriculture’s Section 515 program. On rare occasions, AHP may be the sole source of funding
for a project. For example, an FHLBank may be the sole funder of a small owner-occupied renovation project.
    The specific requirements are:
           (1) AHP funding must be used for owner-occupied or rental affordable housing;
           (2) AHP projects must be financially feasible and must need the AHP subsidy to be

                                      OIG  EVL–2013–04  April 30, 2013                                          10
the FHLBanks to score applications for subsidies based on these criteria, they allow each
FHLBank to determine how the criteria are weighted. For example, if an FHLBank
identifies a need in a particular district for affordable housing for the elderly, it may allocate
more points to AHP applications committed to developing homes or rental units for use by
the elderly. Additionally, several FHLBanks also stated that they award extra points to
projects already underway or projects with other funding in place to minimize the likelihood
of problems. Each FHLBank’s community investment department reviews the submitted
applications for feasibility and scoring, and its Board of Directors approves the award

For rental projects, a project’s sponsor must have an ownership interest in the project
(including any leasehold, partnership, or controlling interest). For homeowner-occupied
projects, the sponsor must be involved in planning, developing, or managing the project.

                Homeownership Set-Aside Program

The FHLBanks also award AHP funds through their Homeownership Set-aside Programs,
which were authorized by the Federal Housing Finance Board (FHFB), the regulator of the
FHLBank System in 1995. For its own Homeownership Set-aside Program, each FHLBank
may set aside up to $4.5 million or 35% of its AHP contribution (whichever is greater) each

        (3) The project must begin to use AHP funds within 12 months;
        (4) The project must not use the subsidy for prepayment, cancellation, or processing fees;
        (5) The AHP subsidy must be used for eligible costs;
        (6) The affordable housing units financed with the subsidy must be subject to a retention
        agreement of 5 years for owner-occupied units and 15 years for rental units;
        (7) AHP project sponsors and developers must meet AHP program qualifications; and
        (8) The project must comply with applicable fair housing laws and regulations.
See 12 C.F.R. § 1291.5(c).
     The nine scoring criteria are:
        (1) Use of donated or conveyed government-owned or other properties;
        (2) Sponsorship by a not-for-profit organization or government entity;
        (3) Income targeting;
        (4) Housing for homeless households;
        (5) Promotion of empowerment;
        (6) First District Priority (one or more of the following): (a) special needs; (b) community
        development; (c) first-time homebuyers; (d) member financial participation; (e) disaster
        areas; (f) rural; (g) urban; (h) economic diversity; (i) fair housing remedy; (j) community
        involvement; (k) lender consortia; (l) in-district projects;
        (7) Second District Priority (a housing need identified by the FHLBank);
        (8) AHP subsidy per unit; and
        (9) Community stability.
See 12 C.F.R. § 1291.5(d).

                                      OIG  EVL–2013–04  April 30, 2013                               11
year. Member lenders obtain AHP homeownership set-aside funds from their FHLBank and
then use them to give grants directly to eligible households. The FHLBanks must make at
least one-third of the allocations available to assist first-time homebuyers. Set-aside funds
may be used for down payment assistance, closing cost assistance, or counseling costs in
connection with the purchase or rehabilitation of owner-occupied units. The maximum
grant amount may not exceed $15,000 per household. The FHLBanks have awarded over
$568 million through their set-aside programs since 1995.


FHFA is responsible for ensuring that the FHLBank System fulfills its affordable housing
objectives. However, the Agency’s oversight of AHP involves multiple parties, including
stakeholders external to the program. In addition to the FHLBanks, their member
institutions, and the sponsors of projects funded through AHP, many stakeholders are
engaged in financing, construction, rehabilitation, development, or oversight of AHP
projects. These include other funders, other government agencies, contractors, and nonprofit
and for-profit entities.

FHFA and the FHLBanks rely on these multiple third parties to carry out their respective
oversight functions. FHFA focuses on the activities of the FHLBanks. The FHLBanks and
member institutions monitor projects to ensure they are constructed or rehabilitated in a
timely manner, AHP funds are spent as intended, and projects meet eligibility criteria. And,
various third parties, such as state and local government agencies, oversee other aspects of
project development, such as compliance with building codes.11

FHFA, the FHLBanks, member institutions, and other funding organizations use a variety of
methods to oversee AHP. Figure 5 lists select oversight activities of these entities.

  For example, the mission of the New York State Housing Finance Agency is “to create and preserve high
quality affordable multifamily rental housing….” New York State Housing Finance Agency, Mission (online at
www.nyshcr.org/Agencies/HFA/) (accessed on March 21, 2013). The mission of the Maine State Housing
Authority “is to assist Maine people to obtain and maintain decent, safe, affordable housing and services....”
Maine State Housing Authority, About MaineHousing (online at www.mainehousing.org/ABOUT) (accessed
on March 21, 2013). Similarly, monitoring compliance of HUD’s HOME-funded construction projects
includes a review to ensure that inspection procedures are in place so that all properties are free of health and
safety defects before the properties are occupied. See 24 C.F.R. § 92.251.

                                     OIG  EVL–2013–04  April 30, 2013                                             12
                                  FIGURE 5. OVERSIGHT OF AHP
 Responsible Entity                                 Oversight Activities
 Member Institutions    Review and submission to the FHLBank of sponsor applications
                        Review of financial and other information at each subsidy disbursement
                        Review of progress reports submitted to the FHLBanks
                        Submission of information for reviews by the FHLBanks after project
                        Submission of certifications and maintenance of required documentation
                         under the Homeownership Set-aside Program
                        Recapture of funds from sponsors on behalf of the FHLBanks
 FHLBanks               Review of sponsor applications
                        Long-term monitoring of completed projects to ensure compliance with AHP
                         requirements (such as 15-year affordable-housing status for rental projects)
                        Paper-based review of certifications and progress reports from sponsors and
                         member institutions
                        Paper-based review of certifications from member institutions regarding use
                         of homeownership set-aside funds
                        Site visits of some projects
                        Internal audits
                        Creation of watch lists of problem projects
                        Recapture of AHP funds
                        Withdrawal of AHP grant or de-obligation of funds awarded
                        Reporting fraud to FHFA
                        Suspension and debarment of member banks or project sponsors or owners
                         from participation in AHP
 FHFA                     Annual examinations
                          Data collection for AHP database
                          Occasional site visits to AHP funded projects
                          Enforcement, such as requiring an FHLBank to replenish AHP funds
 Other Major Funding    State and local government oversight of quality and safety of housing
 Sources                 projects
                        Eligibility monitoring by state or local housing authorities for AHP projects
                         receiving low income housing tax credits

            Member Institutions

Once an FHLBank approves an application for funding, the member institution and project
sponsor or owner must sign an agreement that details the program terms and establishes
each party’s duties and obligations with respect to AHP. The AHP regulations also require
the FHLBank to have in place an agreement with the member institution regarding the use of
AHP subsidies and the member’s obligations in the program.

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Responsibilities of the member institution include:

          Reviewing funding disbursement requests by sponsors—the member institution can
           reject a funding request if it determines that the sponsor has not provided adequate
          Submitting to the FHLBank semiannual progress reports;
          Submitting information for review once a project is completed; and
          Submitting certifications and maintaining required documentation under the
           Homeownership Set-aside Program.
An FHLBank can hold a member institution accountable for problems with an AHP project
if it determines that the member institution did not adequately oversee the project. In the
event of a problem, the FHLBank can, among other things, require that the member
institution repay to the FHLBank the full amount that had been awarded to the sponsor.


FHLBanks monitor AHP projects from the moment member institutions file applications
through the number of years their projects are required to be maintained as affordable
housing. AHP regulations require the FHLBanks to establish policies and procedures for
monitoring projects before and after their completion.12 The monitoring requirement is
meant to ensure that AHP subsidies are used for eligible purposes and in accordance with
AHP regulations. The FHLBanks also monitor the projects to ensure satisfactory progress
toward completion and occupancy by eligible households. However, the AHP regulations
do not require the FHLBanks to perform on-site reviews, and as a result their practices with
respect to this important monitoring tool vary.

Monitoring During Application and Funding. AHP regulations require each FHLBank to
have in place an AHP Implementation Plan, which guides the operation of each FHLBank’s
AHP and reflects its priorities and objectives. Regulations set forth the elements that are
required in the Implementation Plan, including how AHP funds will be awarded, disbursed,
monitored, and repaid. FHFA examiners review these plans during annual examinations of
each FHLBank’s affordable housing program to ensure that they are consistent with
regulatory requirements and responsive to community needs. Specifically, the examiners
assess whether each plan adequately describes the requirements of AHP and the FHLBank’s
expectations for its program.

The FHLBanks’ community investment staff review AHP applications to ensure that they
are complete and accurate. After an application is approved for an AHP award, the

     12 C.F.R. § 1291.7.

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FHLBank reviews semiannual monitoring reports concerning the project. It also may
review a new set of financial information to check for inconsistencies with information
submitted during the application process. The FHLBank also receives new financial and
other information at each disbursement. In addition, an FHLBank may require
documentation of progress on the project or documentation that non-AHP funds have been
committed to the project prior to disbursal of AHP funds.

Each FHLBank’s board of directors and senior managers are responsible for ensuring that
the FHLBank’s affordable housing program has sufficient resources to operate in
compliance with the AHP statute and regulations. Affordable housing programs are types of
community investment programs, and the FHLBanks hire staff to administer and manage
these programs. Each FHLBank has a community investment officer (CIO) who administers
the FHLBank’s community investment programs.

Initial Monitoring. The FHLBanks conduct initial monitoring to confirm that projects
are making progress toward completion, consistent with the project proposal, and in
compliance with AHP regulations. Once a project is physically complete and ready for
occupancy, an FHLBank performs a review. During that review, the FHLBank analyzes
required documentation and certifications to verify compliance.

The FHLBanks conduct initial monitoring primarily through remote, paper-based
monitoring, including photo documentation of housing projects, with follow-up by email
and telephone communications with member institutions or project sponsors. Some
FHLBanks supplement that monitoring by visiting the project site. They may also rely on
member institutions to conduct site visits.

For owner-occupied projects under both the competitive and set-aside programs, the
member institutions must ensure that the units are subject to five-year retention agreements,
which require notification of the FHLBank in the event that the properties are sold or
refinanced. The FHLBank also must monitor to ensure that households receiving subsidies
are eligible.

Long-term Monitoring. The AHP regulations require that FHLBanks conduct long-term
monitoring of AHP rental projects. Rental projects must remain affordable for low income
households and in compliance with AHP regulations for 15 years from the date of project
completion. A project sponsor must submit annual long-term monitoring reports including
annual certifications that its project continues to meet income eligibility and affordability
commitments until the end of the project’s retention period. During the retention period,
projects are considered active. As of June 2012, 2,232 AHP projects were active.

The FHLBanks generally rely on documentation from member institutions and project
sponsors or owners to demonstrate that the tenants meet the eligibility requirements.

                               OIG  EVL–2013–04  April 30, 2013                               15
However, they may rely on monitoring performed by other entities under certain
circumstances. For example, the FHLBanks may rely on state housing finance agencies
when projects receive low income housing tax credits.

AHP regulations require that an FHLBank’s written monitoring policies must account for
risk factors such as the amount of the AHP subsidy awarded; the size of the project; the
sponsor’s experience; and any monitoring that is provided by a federal, state, or local
government entity. Like initial monitoring, long-term monitoring is largely paper-based.

Some FHLBanks supplement their remote monitoring with site visits of AHP projects.
For example, the FHLBank of Boston conducts site visits of all projects.13 According to a
representative, the FHLBank of Boston staff examine the housing projects and meet with
tenants and developers to ensure that the projects physically exist and that the services the
sponsors committed to provide in their application are, in fact, being provided.

For rental projects, an FHLBank may use a risk-based written sampling plan to select
the projects to be monitored.14 For example, according to the FHLBank of Cincinnati’s
Monitoring Plan, the FHLBank periodically audits projects based on their risk. When an
AHP project is approved, the FHLBank assigns the project a risk level, which it may adjust
as needed. Minimal-risk projects are not subject to an audit, while low-risk projects are
subject to an in-house audit every six years, moderate-risk projects to an in-house audit
every four years, and high-risk projects to an on-site audit every two years. The FHLBank
assigns risk levels based on several factors, including whether there is long-term
governmental monitoring, the amount of AHP subsidy in the project, and the percentage of
total project costs represented by the AHP subsidy. For projects subject to an audit, the
FHLBank requests supporting documentation for a random sample of the project’s newly
occupied units, based on a sampling plan: 25% of the units if there are fewer than 60 units
in the project; 20% if there are 61-100 units; 15% if there are 101-200 units; and 10% if
there are more than 200 units.

Tracking Problem Projects. In the course of monitoring, the FHLBanks may identify
problem projects. If so, they place them on watch lists and track them. Problem projects
may be identified based on information provided by member institutions, sponsors, or third
parties. The problems can range from minor issues, such as late or incomplete submissions
of documentation, to serious concerns, such as repeated failure to take corrective actions
required by the FHLBanks, projects in financial distress or at risk of foreclosure, and

  OIG recognizes that the FHLBank of Boston’s district is relatively small, which may make site visits less
cumbersome. However, OIG notes that the districts of several other FHLBanks are not substantially larger
than that of the FHLBank of Boston.
 Similarly, the FHLBank may use a sampling plan to select set-side awards to be monitored during initial

                                     OIG  EVL–2013–04  April 30, 2013                                       16
potential fraud. If a project sponsor does not or cannot remedy a cited problem, the
FHLBank may try to recapture the AHP funds directly or through the member institution.

For example, one FHLBank investigated allegations of the improper use of funds in 2008 for
a project awarded an AHP grant in 2007. The FHLBank conducted an on-site file review
and inspection and concluded that some of the funds were misused. However, after
reviewing the project sponsor’s financial statements in 2009, the FHLBank concluded that
the possibility of recovering the funds would be small. In lieu of recovering the grant funds,
the FHLBank permanently disbarred the sponsor from participating in AHP and cancelled
another project of the sponsor. The latter project had been approved for funding but had not
yet received AHP funds.

The FHLBanks have adopted varying approaches to tracking problems. Some maintain two
or three watch lists based on the seriousness of the problems identified, while others assign
risk levels to the projects placed on a single watch list. Each FHLBank determines which
problem projects are placed on its watch list(s). The FHLBank then provides status reports
on problem projects and corrective actions to its board of directors and makes the reports
available to FHFA examiners, usually as part of document submissions incident to annual

Significant delays or other problems can occur before, during, or after developing an
affordable housing project without any fault on the part of the sponsor or owner. For
example, the project sponsor could experience financial distress, a major funder or investor
may withdraw from the project, or the developer might have unanticipated capacity
constraints. Nevertheless, an FHLBank may place a project that remains incomplete for four
or more years after an AHP award approval on its watch list and seek recovery of the funds.
For example, an FHLBank placed a project that was awarded AHP funds in 2004 on its
watch list in August 2008. The project had been funded to develop four units but after four
years, one unit remained unsold. The FHLBank requested the return of $9,000 in AHP
funds for that fourth unit. However, the sponsor stated that it did not have the funds and
would continue to try to sell the property. Because it was only one unit, the FHLBank
decided to stay with the project and monitor progress. The unit remained unsold as of
March 2011, and the FHLBank decided to explore modification options so that the project
would remain eligible for AHP.

Enforcement Tools. To ensure that AHP projects are completed as proposed and in a
timely manner, the FHLBanks can use different tools to enforce the AHP agreements they
sign with member institutions and project sponsors. An FHLBank typically works with the
member institutions, sponsors, or project owners to address any problems that arise.
However, an FHLBank can place projects on hold until problems with them are resolved. In
addition, it can restrict a member or sponsor from receiving subsidy disbursements until the

                               OIG  EVL–2013–04  April 30, 2013                                17
entity resolves an identified compliance problem. Restricting disbursements reduces
monetary loss and mitigates risk to the FHLBank.

If problems cannot be resolved, an FHLBank can recapture all of the AHP funds disbursed
to the sponsor—if the sponsor or member is deemed at fault—or settle with the parties.
According to data that the FHLBanks report to FHFA, about $5 million a year has been
recaptured or repaid since 2010 across the FHLBank System (see Figure 6).

The decision to recapture depends               FIGURE 6. AHP FUNDS RECAPTURED BY OR REPAID TO THE
on the circumstances of the case.                     FHLBANKS, JANUARY 2010-DECEMBER 2012*
AHP regulations require an
FHLBank to recover from the                      FHLBank              2010               2011              2012
responsible party the amount of               Atlanta                  $514,000          $106,000          $216,000
AHP subsidies not used in                     Boston                   $286,000          $419,000          $147,000
compliance with the terms
                                              Chicago                   $72,000          $205,000          $167,000
of the approved application or
                                              Cincinnati               $910,000        $1,337,000          $790,000
AHP regulations if the misuse
                                              Dallas                    $32,000           $51,000           $17,000
of subsidies is the result of
actions or inactions of the                   Des Moines               $721,000          $362,000          $307,000
member institution, project                   Indianapolis             $300,000           $22,000          $580,000
sponsor, or project owner.                    New York                  $49,000          $147,000          $137,000
However, an FHLBank is not                    Pittsburgh               $660,000           $61,000          $123,000
required to seek recapture if a               San Francisco            $579,000        $3,001,000        $1,786,000
member or project sponsor is
                                              Seattle                   $69,000          $384,000          $203,000
able to address a problem
                                              Topeka                   $251,000          $538,000          $755,000
within a reasonable timeframe
                                              Total                 $4,443,000         $6,635,000        $5,227,000
or a member or sponsor is no
longer in noncompliance due to                *Totals may not add due to rounding. In addition, funds
a project modification.                        recaptured in a given year may apply to projects that were
                                               awarded AHP grants in previous years.
If after making reasonable efforts an FHLBank is unable to recapture all questioned funds,
the FHLBank may settle a claim for the AHP subsidies against the member institution,
project sponsor, or project owner for less than the full amount.15 However, the Agency can
order an FHLBank to reimburse its AHP fund if the FHLBank is required to recapture AHP
subsidies from a member institution or project sponsor or owner but fails to do so.

  When a project ends up in foreclosure or bankruptcy, an FHLBank may not consider the project a total loss
even if the sponsor or owner fails to meet its 5-year or 15-year retention period and the FHLBank is not able to
recover any funds. FHFA noted that many projects are structured as independent, nonprofit corporations that
are self-sustaining and not dependent on the project sponsor. Thus, a project sponsor going out of business, for
example, would not necessarily translate into a loss for the project or the FHLBank’s affordable housing

                                     OIG  EVL–2013–04  April 30, 2013                                            18
In addition to funds recapture, if the member, sponsor, or project owner engages in improper
conduct, including serious and repeated noncompliance with AHP requirements, an
FHLBank may suspend or debar that person or entity from future AHP participation. Each
FHLBank maintains a list of the individuals and entities that have been suspended or
debarred, which FHFA examiners can request for review. FHFA also can order an
FHLBank to suspend or debar individuals or entities from the program.

Further, if funds have not been drawn down by a sponsor of a problem project, an FHLBank
may de-obligate or withdraw the funds so that they are no longer available to the sponsor.
The FHLBanks can then use the de-obligated funds to support other AHP projects. Figure 7
shows the amounts de-obligated by each FHLBank from January 2010 through December

With respect to owner-occupied
                                                 FIGURE 7. AHP FUNDS DE-OBLIGATED BY THE FHLBANKS,
AHP housing, the properties
                                                            JANUARY 2010-DECEMBER 2012*
must be retained as affordable
housing for five years after                    FHLBank               2010               2011          2012
closing. If a property is sold to            Atlanta               $24,412,000        $15,702,000    $10,521,000
another buyer whose income
                                             Boston                 $1,701,000         $1,308,000     $2,523,000
does not exceed 80% of the area
                                             Chicago                $1,301,000           $971,000     $2,396,000
median income, the homeowner
is not required to repay the AHP             Cincinnati             $6,139,000         $4,112,000     $8,135,000
subsidy. However, if the buyer’s             Dallas                 $2,496,000         $4,962,000     $4,411,000
income exceeds 80%, then the                 Des Moines             $1,674,000         $3,114,000     $3,527,000
seller/grantee must repay a                  Indianapolis           $2,782,000         $1,465,000     $1,635,000
prorated share of the AHP                    New York               $6,930,000         $6,575,000     $9,845,000
subsidy, which is reduced for                Pittsburgh               $832,000         $1,623,000     $1,123,000
each month that the
                                             San Francisco         $17,636,000        $23,390,000    $13,404,000
seller/grantee owned the unit.16
                                             Seattle                $3,062,000           $432,000     $1,194,000
That share is limited to the
amount of any net gain from the              Topeka                 $1,708,000         $1,834,000     $3,264,000
sale or refinancing that occurs              Total                 $70,673,000        $65,488,000    $61,979,000
during the retention period.                 *Totals may not add due to rounding.


FHFA conducts various types of oversight, e.g., targeted annual examinations, data analysis,
and horizontal reviews. The Agency’s targeted annual examinations and routine data

  One-sixtieth of the AHP subsidy is forgiven and not subject to recovery for every month that the
seller/grantee owned and occupied the dwelling in accordance with AHP requirements.

                                     OIG  EVL–2013–04  April 30, 2013                                       19
analysis identify issues that are reported to the subject FHLBanks, and FHFA’s horizontal
reviews—system-wide reviews that focuses on specific activities, functions, or programs—
are more widely distributed. To date, FHFA has not conducted a horizontal review
concerning AHP, but its targeted annual examinations and routine data analyses also reveal
trends among the FHLBanks. However, this cross-cutting information is typically not
disseminated among the FHLBanks.

Targeted Annual Examinations. FHFA oversees AHP primarily through targeted, annual
examinations of the FHLBanks. FHFA’s Division of Federal Home Loan Bank Regulation
assesses the effectiveness of the FHLBanks’ affordable housing programs, plans, and
activities to ensure that they meet the requirements and goals set forth in the FHLBank Act
and AHP regulations. Results of the AHP examinations are incorporated into the Agency’s
annual safety and soundness ratings for each FHLBank.17

Each year, the Division of Federal Home Loan Bank Regulation’s AHP Branch develops an
AHP examination work program, which governs the scope of its examinations for the
following year. The work program lists the questions to be addressed and documents to be
reviewed. Among other matters, AHP examiners consider issues and concerns arising
during the previous year’s examinations when developing a new work program.

OIG reviewed the AHP examination work programs from 2007 through 2011; they show
that over the period FHFA refined its oversight methodology and procedures. For example,
FHFA’s 2010 and 2011 work programs provide more detailed guidance about issues and
questions the examiners should consider and documents that they must review when they
evaluate an FHLBank’s affordable housing program.

When OIG initiated its review, FHFA recently had modified its 2011 AHP examination
schedule to coincide with the safety and soundness examinations for each FHLBank. This
change in schedule meant that the AHP examination team—comprised of 11 field examiners
at the time—visited four FHLBanks each quarter instead of three. As a result of the change
to the schedule, the AHP examination of the FHLBank of Des Moines was not incorporated
into the 2011 Report of Examination for that FHLBank. FHFA informed the FHLBank of
the results of that examination a few months later. Since then, FHFA has reorganized and
returned to its original AHP examination schedule so that examiners visit fewer FHLBanks
each quarter.

The AHP Branch is comprised of 14 employees. The examination team consists of nine
field examiners who work in teams of three or four for each examination, two examination
managers who participate in some examinations, and a lead examiner who transitioned to a
  The AHP examination team also conducts examinations of the two other FHLBank community development
programs—CIP and CICA.

                                 OIG  EVL–2013–04  April 30, 2013                                    20
new role on the AHP Examination Team and now leads fewer examinations. Additionally,
the Associate Director leads the team with support from an examination specialist.

The FHFA official overseeing AHP examinations stated that the 2012 examination work
program required the examiners to examine more closely the FHLBanks’ process for
monitoring and managing projects to ensure that all problem projects were captured on the
watch lists. In addition, the work program required examiners to determine whether all
problem projects were brought to the attention of the boards of directors of the FHLBanks.
Notifying the boards allows them to take appropriate action before projects are at risk of
funds recapture or foreclosure.

When AHP examiners conduct annual examinations, they review documents, interview
members of the FHLBanks’ boards of directors and affordable housing advisory
committees, evaluate policies and procedures, and test for compliance with applicable
policies and procedures. For example, they may test some projects where initial monitoring
was completed and evaluate whether the projects achieved their application commitments.
The examiners also review the FHLBanks’ watch lists and follow up on the actions taken
with respect to problem projects. Additionally, the examiners may pull a sample of project
files to assess the problems identified and determine how promptly and rigorously an
FHLBank resolved them. They also may examine the FHLBanks’ decisions not to pursue
recapture and to settle claims against member institutions or project sponsors for less than
the full amount that had been disbursed.

Between examinations, FHFA maintains communication with CIOs, obtains quarterly
updates, and conducts additional site visits to the FHLBanks as needed, particularly those
with significant AHP compliance issues. The purpose of the communication is to monitor
the status of an FHLBank’s response to examination findings. The examiners document the
updates, which are stored in the Agency’s files for each FHLBank. The frequency of
communication between FHFA examiners and an FHLBank depends on the seriousness of
the issues at that FHLBank.

OIG reviewed the 2008 through 2011 examination findings for each FHLBank’s affordable
housing program. FHFA examiners found various issues at multiple FHLBanks that
required corrective action. The issues identified by FHFA examiners included:

      Deficiencies in application review, such as inadequate analysis and support for
       project costs and subsidy need and inconsistent eligibility determination processes;
      Delayed monitoring and quality control reviews;
      Reliance on antiquated management information systems;
      Lack of vigilance in identification and management of problem projects;

                               OIG  EVL–2013–04  April 30, 2013                              21
        Delayed recycling of funds into the AHP subsidy pool;
        Lack of audit trail of activities taken by staff in connection with approving
         applications, disbursing funds, and monitoring projects;
        Inaccurate and untimely data reporting to FHFA; and
        Approval of ineligible applications for subsidies in violation of AHP regulations.
OIG’s review of the reports of subsequent examinations indicates that the FHLBanks have
improved their affordable housing programs because of FHFA’s earlier examination
findings and suggestions. In general, the FHLBanks took corrective actions as directed by
FHFA within the next two examination periods after FHFA examiners identified problems.
FHFA examiners track the status of these corrective actions and follow up during each
examination to determine whether previously reported issues have been resolved. However,
according to FHFA, when there are competing budget needs for other FHLBank operations,
it typically has not been a priority to address deficiencies in information systems in a timely
fashion. For example, FHFB recommended in 2005 that the FHLBanks upgrade
information systems for effective management and oversight of their affordable housing
programs, including monitoring the status of funded projects and problems with members
and sponsors.18 Eight years later, this recommendation has not been implemented fully by
all of the FHLBanks. Although the lack of upgraded information systems is of concern to
the AHP examiners, such concern is unlikely to affect the FHLBanks’ annual safety and
soundness ratings because the FHLBanks’ affordable housing programs are relatively small
parts of their overall operations.

Semiannual Data Reporting. FHFA also monitors project status by requiring the
FHLBanks to submit project-level data semiannually. The Agency’s Office of Housing and
Community Investment19 maintains the AHP database, which includes 125 data elements
that are used to produce information on each FHLBank and the FHLBank System as a
whole. It also reviews the data submissions and conducts site visits at the FHLBanks to
evaluate the integrity of the data they submit. FHFA uses the reports generated from this
database to monitor program performance and support AHP examinations. For example,
FHFA stated that the number of requests for project modifications and extensions along with
the age of projects, number of units completed, and disbursement rates provide the Agency
with insights on the number and types of projects that may face future completion

  Specifically, in 2005 FHFB stated in its review of AHP that the information system “should be able to alert
program staff to potentially ineligible recipients, track problematic sponsors and member institutions over time,
and provide aggregated statistics that would better enable the Bank to determine the effectiveness of the AHP.”
  The Office of Housing and Community Investment is a subdivision of FHFA’s Division of Federal Home
Loan Bank Regulation.

                                     OIG  EVL–2013–04  April 30, 2013                                             22
FHFB developed the original AHP database in 1998. During FHFB’s 2005 review,20 it
found serious flaws with the database, including that it was difficult to query and that it
failed to collect important program information. FHFB redesigned the AHP database in
August 2006. Since then, the Agency has continued to update the required data elements.
For example, in version two of FHFA’s data reporting manual, the Agency required the
FHLBanks to report several new data elements, such as a project’s “physical completion
date”21 and whether a household has completed a homeowner counseling program. The
FHLBanks also report data such as the number of projects and amount of funds awarded,
estimated and actual project costs, performance (e.g., number of housing units completed),
project completion dates, and withdrawal dates.22 FHFA uses the data to generate reports
for FHFA, Congress, and the public.

FHFA staff told OIG that after FHFB launched the new database in 2006, some FHLBanks
failed to report their data on time and that there were discrepancies in how the FHLBanks
interpreted some of the data elements. Thus, FHFA started to conduct on-site data integrity
reviews at the FHLBanks to improve communications and ensure that complete and accurate
data are submitted to FHFA. FHFA officials stated that on-site reviews have resulted in
more accurate reporting by the FHLBanks.

Horizontal Reviews. A horizontal review is another tool used to examine specific issues or
aspects of a program across the 12 FHLBanks and then make recommendations to the
FHLBanks to address identified deficiencies. It allows the FHLBanks to capitalize on
FHFA’s findings regarding common problems and effective practices.

In 2005, FHFB conducted a horizontal review to “highlight effective practices in Affordable
Housing Program governance and operations and to identify areas for improvement that
could help the Federal Home Loan Banks leverage more affordable housing from a given
investment.”23 Although a senior FHFA official stated that the review did not consider the

  FHFB, Report of the Horizontal Review of the Affordable Housing Programs of the Federal Home Loan
Banks (March 15, 2005) (online at http://www.fhfa.gov/webfiles/2981/AHP_HR_Report_Master3-15-05_--
_FINAL[1].pdf) (accessed on January 16, 2013).
  According to FHFA’s data reporting manual, for rental projects, the physical completion date is the date on
the certificate of occupancy. For non-rehabilitation owner-occupied projects, the date is the “closing date” of
the last completed AHP assisted unit.
  Although each FHLBank documents the dollar amounts it withdraws, de-obligates, or recaptures from
awarded projects, FHFA does not track the FHLBank decisions not to recapture funds with respect to
withdrawn projects. For projects awarded after December 31, 2005, the Agency can determine the amount of
project funding that an FHLBank could not recapture by calculating the difference between funds that were
disbursed to projects that were subsequently withdrawn and funds that were recaptured.
  FHFB, Report of the Horizontal Review of the Affordable Housing Programs of the Federal Home Loan
Banks (Mar. 15, 2005) (online at http://www.fhfa.gov/webfiles/2981/AHP_HR_Report_Master3-15-05_--
_FINAL[1].pdf) (accessed on January 16, 2013).

                                     OIG  EVL–2013–04  April 30, 2013                                           23
depth of the deficiencies, FHFA believes that the review yielded valuable findings and
recommendations to improve AHP. For example, FHFB recommended that the FHLBanks
update their management information systems and that boards of directors become more
involved to ensure that each FHLBank’s AHP activities get the resources and attention they
need to maximize their effectiveness.

FHFA has not conducted a horizontal review of AHP since it became responsible for
oversight of the FHLBanks in 2008.24

   Although FHFA reviewed how the FHLBanks identify and prioritize district needs in 2009 and characterized
it as a horizontal review, the head of the AHP Examination Team informed OIG that there were flaws in the
design and administration of that review. Thus, the official considers the 2005 review conducted by FHFB to
be the last horizontal review. Another senior official also explained that the 2009 review was a test case for
developing the current examination work programs that govern AHP examinations.

                                    OIG  EVL–2013–04  April 30, 2013                                           24
FINDINGS .................................................................................

1. Site visits of AHP projects are needed to supplement paper-based reviews

Site visits are a component of grant management typically required by grant-giving federal
agencies.25 However, FHFA has not established and implemented uniform standards for site
visits, and the 12 FHLBanks have varying practices regarding site visits of AHP projects. 26
Some FHLBanks conduct site visits while projects are being constructed to ensure that they
are being completed. Others may visit only projects that receive a certain level of funding or
that are on watch lists.

FHFA stated that the substantial remote monitoring by the FHLBanks and their reliance on
contractual safeguards, such as retention agreements, helped ensure compliance with
program requirements. Furthermore, FHFA, the FHLBanks, and their member institutions
necessarily rely on local government officials to ensure that the housing projects they
support meet building codes and other safety standards. They also depend on the other
funding organizations to carry out their respective oversight responsibilities. However,
these entities are not accountable to FHFA. Consequently, AHP projects are at risk of fraud,
waste, abuse, or other problems in development and implementation to the extent that
oversight by government entities or funding organizations is weak.

Site visits can help the FHLBanks and FHFA determine whether representations made on
paper by member institutions, project sponsors, or third parties reflect actual implementation
of the sponsor’s AHP proposal. They can also help identify potential fraud. For example,
representatives from one FHLBank stated that site visits helped it identify problem projects
that might have otherwise been undetected. Thus, site visits can serve as a useful adjunct to
current remote monitoring activities to ensure that sponsors make progress on their projects
as reported, to ascertain whether projects provide the services as agreed to in the AHP
application, and to detect obvious fraud or misrepresentations. As noted above, there are

   See, e.g., HUD, In-depth Monitoring & On-site Reviews (online at
heckup/monitoring/indepthmonitoring) (accessed on December 19, 2012) (requiring on-site visits to monitor
HOME Program grants); U.S. Department of Justice, OJP Grant Process (online at
http://www.ojp.usdoj.gov/funding/grant_process.htm) (accessed on December 19, 2012) (requiring on-site
visits to monitor OJP grants); U.S. Department of Health and Human Services, HHS Grant Process (February
6, 2009) (online at http://www.hhs.gov/asfr/ogapa/grantinformation/grantprocess.html) (accessed on December
19, 2012) (requiring on-site visits to monitor HHS grants).
  The FHLBanks are not “grant-giving federal agencies,” but these criteria are instructive because—with
respect to AHP—the FHLBanks serve in an analogous role. Specifically, they are government-sponsored
enterprises that administer a housing program mandated by federal statute.

                                    OIG  EVL–2013–04  April 30, 2013                                        25
different approaches to conducting site visits. For example, sites can be chosen from
projects that have been placed on watch lists. Other approaches include surprise visits of
randomly selected projects or projects at risk because of their size, complexity, or sponsor.

In its response to a draft of this evaluation report, FHFA noted that OIG had not identified
instances of mismanagement or fraud that site visits would necessarily address. However,
OIG’s objective was not to identify instances of fraud or misrepresentation, but rather to
evaluate FHFA’s oversight. As a result, OIG did not conduct a detailed review or testing of
the thousands of AHP projects subject to the Agency’s oversight. Rather, OIG identified
areas for improvement—such as site visit guidance—to address the risk of fraud in the
FHLBanks’ programs and the inherent risk associated with FHFA’s reliance on multiple
third parties to carry out direct oversight of housing projects subsidized by AHP.

2. FHFA is well positioned to provide cross-cutting feedback and analyses to FHLBanks
   to improve oversight of their affordable housing programs

Although FHFA synthesizes some cross-cutting information through available sources—
such as targeted examinations and its AHP database—it does not have a systematic approach
for sharing with the FHLBanks feedback about emerging trends and problems confronting

Through its targeted annual examinations, FHFA collects some data that allow for an across-
the-board or system-wide assessment of the FHLBanks’ affordable housing programs.
When the AHP examination teams conduct their annual examinations, they review the same
topics at each FHLBank. Because the same topics are examined by FHFA, common issues
and concerns about AHP necessarily are identified.27 Occasionally, FHFA shares this
information with the FHLBanks through guidance or at FHLBank meetings, but it does not
systematically disseminate it among the FHLBanks.

OIG’s review of the 2008 through 2011 reports of examinations for all 12 FHLBanks found
multiple common areas in the affordable housing programs in need of improvement,
including timeliness of project monitoring (failure to conduct timely monitoring can delay
identification and resolution of problem projects), antiquated management information
systems, and data reporting errors. However, each FHLBank receives only its own
examination reports, which are confidential (i.e., FHFA emphasized that its examination
findings concerning particular FHLBanks are confidential).

  Although FHFA deems information about individual FHLBanks to be confidential, trend data—like other
data that FHFA discloses in its annual reports to Congress—can be “sanitized” to remove identifiers and
facilitate its release among the FHLBanks.

                                   OIG  EVL–2013–04  April 30, 2013                                     26
Additionally, in 2012, FHFA reorganized to facilitate communication and coordination
between the AHP examiners and the policy staff overseeing the AHP database. Both
functions are now within the Division of Federal Home Loan Bank Regulation. As
mentioned earlier, the Division’s Office of Housing and Community Investment separately
collects and maintains data from the FHLBanks regarding AHP. Queries of this database
could provide FHFA with performance indicators for AHP across the board. For example,
the AHP database shows how many projects were withdrawn, how often funds were
recaptured, and how many projects did not meet their proposed completion dates.

Moreover, cross-cutting analyses, such as horizontal reviews or other studies that look
across a program or areas of interest, would supplement the Agency’s efforts to identify
effective practices and common issues affecting all FHLBanks. They also would inform
their efforts to improve the administration and management of their affordable housing
programs. Conducting and then sharing the results of these cross-cutting analyses with the
FHLBanks would allow each of them to learn from the experiences of the others.

The FHLBanks are interested in learning from each other. For example, they have taken the
initiative to work together to share best practices for advancing AHP. The CIOs of the 12
FHLBanks meet and communicate regularly to share information on issues that arise in their
respective affordable housing programs. The FHLBanks also host webinars. One such
webinar discussed the reasonable costs of construction.

Yet, such ad hoc coordination is not a substitute for formal FHFA feedback. Indeed,
representatives from some FHLBanks stated that they would welcome more horizontal
reviews by FHFA. Additionally, although the FHLBanks are willing to share practices that
are successful, they may be less willing to discuss areas in which they are not doing as well.
Only FHFA can perform a formal, unbiased review across the FHLBanks to identify not
only the effective practices but also any poor practices or inadequate policies that need to be
addressed. The FHLBanks can benefit from a thorough understanding of problems that their
peers are confronting.

Senior FHFA officials acknowledged the usefulness of horizontal reviews, but stated that
with limited resources and staffing, the Agency does not anticipate conducting horizontal
reviews in the near future. However, horizontal reviews are only one type of cross-cutting
analysis. Alternatively, using the experience, expertise, and work product of its cadre of
examiners, access to files of completed examinations and the work papers underlying them,
and an enriched data system, FHFA is well positioned to perform or facilitate analyses of
common issues such as those discussed in the previous paragraphs. Furthermore, it could
consolidate and analyze data more efficiently and rigorously than any one FHLBank. For
example, FHFA can draw random samples of data from site visits or from management
reports relating to targeted categories of construction, rehabilitation, or rental projects.

                               OIG  EVL–2013–04  April 30, 2013                                 27
Conversely it can assemble descriptive statistics about purposively selected AHP projects
of special interest. These analytics, combined with random or purposively selected sites
or projects, can provide more scientifically reliable results than can be obtained from
FHLBanks or their members working in isolation.

In its response to a draft of this evaluation report, FHFA agreed that cross-cutting analyses
would enhance its supervision, but stated that OIG had not acknowledged the comparative
analysis inherent in its supervision. We are encouraged that FHFA appreciates the
importance of identifying emerging trends among the FHLBanks. However, it is not useful
to identify trends and problems, if the information about them is not shared with the
FHLBanks. The Agency needs to apprise them of problems that their peers are confronting
so that they can take action to avoid similar problems.

                               OIG  EVL–2013–04  April 30, 2013                               28
CONCLUSION ............................................................................

FHFA relies primarily on targeted annual examinations to oversee AHP. The unique nature
of AHP—e.g., involvement of multiple stakeholders, lack of direct oversight of AHP
projects, and the importance of achieving affordable housing objectives—warrants
additional or enhanced oversight techniques. To that end, the Agency established an AHP
database that it uses to monitor program performance, support examinations, and perform
special analyses. However, there are additional opportunities for improvement. For
example, systematic site visits of AHP projects by the FHLBanks and cross-cutting reviews
of their programs could strengthen FHFA’s oversight of AHP.

OIG appreciates FHFA’s comments on the report, which is attached in its entirety at
Appendix A. OIG’s analysis of FHFA’s comments on our findings is set forth at the end of
each finding. The Agency agreed with our recommendations and set forth a plan for
implementation by December 15, 2013.

RECOMMENDATIONS ...............................................................

OIG recommends that FHFA:

   1. Develop a policy for FHLBank site visits of AHP projects that includes guidance on
      their frequency, scope, and administration;

   2. Conduct and report cross-cutting analyses of common issues and themes across the
      FHLBanks, using appropriate and analytically rigorous methods; and

   3. Analyze staffing levels needed to perform additional cross-cutting analyses and
      oversee FHLBank site visits of AHP projects, and take appropriate actions to meet
      those staffing targets.

                              OIG  EVL–2013–04  April 30, 2013                            29
SCOPE AND METHODOLOGY ....................................................

To determine how FHFA identifies and documents AHP-related issues, concerns, and
shortcomings and how the FHLBanks monitor and manage AHP projects, OIG reviewed:

      FHFA written materials, such as program policies and procedures, examination work
       programs, working documents, findings memoranda, and reports of examinations;
      AHP document and data submissions from the FHLBanks; and
      FHLBanks’ project monitoring policies, internal audits of AHP, and watch lists.
To obtain information about the AHP examination process and FHFA’s data collection
efforts, OIG interviewed Agency officials, in particular FHFA managers and staff from the
AHP Branch and the Office of Housing and Community Investment. Interviews with
Agency officials also provided information on how FHFA monitors and oversees the
administration and management of AHP.

OIG also interviewed representatives of each of the 12 FHLBanks, including CIOs, to
discuss their oversight roles and responsibilities with respect to AHP, in particular their
project monitoring processes and practices.

OIG did not independently test the reliability of FHFA’s or the FHLBanks’ reports and data.
Nor did OIG verify the physical condition of projects or the quality of their construction or
rehabilitation; this was beyond the scope of the evaluation.

This evaluation was conducted under the authority of the Inspector General Act and is in
accordance with the Quality Standards for Inspection and Evaluation (January 2012), which
was promulgated by the Council of the Inspectors General on Integrity and Efficiency.
These standards require OIG to plan and perform an evaluation that obtains evidence
sufficient to provide reasonable bases to support the findings and recommendations made
herein. OIG believes that the findings and recommendations discussed in this report meet
these standards.

The performance period for this evaluation was from September 2011 to October 2012.

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APPENDIX A .............................................................................
FHFA’s Comments on Findings and Recommendation

                            OIG  EVL–2013–04  April 30, 2013                         31
OIG  EVL–2013–04  April 30, 2013   32
ADDITIONAL INFORMATION AND COPIES .................................

For additional copies of this report:

      Call the Office of Inspector General: 202-730-0880
      Fax your request: 202-318-0239
      Visit OIG’s website: www.fhfaoig.gov

To report alleged fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

      Call our Hotline: 1-800-793-7724
      Fax your written complaint: 202-318-0358
      Email us: oighotline@fhfaoig.gov
      Write to us:
                   FHFA Office of Inspector General
                   Attn: Office of Investigation – Hotline
                   400 Seventh Street, S.W.
                   Washington, DC 20024

                                OIG  EVL–2013–04  April 30, 2013                       33