Issue Date September 16, 2005 Audit Report Number 2005-SE-1008 TO: Renee′ Greenman, Director, Multifamily Housing Hub, 0AH FROM: Joan S. Hobbs, Regional Inspector General for Audit, Region X, 0AGA SUBJECT: Idaho Housing and Finance Association, Boise, Idaho, Made Improper Section 8 Subsidy Payments and Improperly Distributed $7.2 Million of Bond Refund Proceeds Under its Non-insured, Subsidized Multifamily Projects Program HIGHLIGHTS What We Audited and Why At the request of the Region X Multifamily Hub, we audited Idaho Housing and Finance Association (Idaho Housing) due to concerns that it (1) may have improperly allowed owners to prepay the mortgages of subsidized projects without the U.S. Department of Housing and Urban Development’s (HUD) approval and (2) may not have properly implemented the conditions of HUD’s approval of its proposed bond refunding in 1994 and that the bonds may not have been refunded. Our overall audit objectives were to determine whether Idaho Housing followed federal regulations and HUD guidelines when it (1) allowed project owners to prepay project mortgages and (2) refunded bonds in 1994. What We Found Idaho Housing did not properly follow federal regulations and HUD guidelines when it allowed 10 project owners to prepay project mortgages. Prepayment caused the housing assistance payments contracts (contracts) to terminate, at which time the Section 8 subsidy amount should have been renegotiated with HUD. However, Idaho Housing continued to make subsidy payments to the projects after the contracts were terminated. This occurred because Idaho Housing misinterpreted the language in the contracts. As a result, HUD paid more than $8.5 million in subsidies in excess of fair market rents for these projects. In addition, we found that Idaho Housing did not properly follow federal regulations and HUD guidelines when it refunded bonds in 1994 as part of a loan- restructuring plan for subsidized projects. It (1) did not return HUD’s 50 percent share of the savings of $6,195,107 generated from the bond refunding for 30 McKinney Act projects, and (2) it did not use $997,523 of its 50 percent of the McKinney Act savings appropriately. This occurred because Idaho Housing believed that HUD’s approval of the loan-restructuring plan allowed the agency to distribute the proceeds to the owners without regard to the McKinney Act provisions. In addition, Idaho Housing lacks the management controls to ensure that project owners receive only those distributions to which they are entitled. As a result, the McKinney Act savings were not available for HUD programs including those administered by Idaho Housing. What We Recommend We recommend that Idaho Housing be required to reimburse HUD and its federal programs from nonfederal funds for excessive subsidy payments on the terminated contracts and for inappropriately distributed bond proceeds. In addition, we recommend that HUD require Idaho Housing to keep HUD apprised whenever a project owner prepays the mortgage on a project subject to the old regulations and that HUD renegotiate the terminated contracts. Further, we recommend that HUD require Idaho Housing to implement procedures to ensure the proper identification of old regulation and new regulation projects with respect to the applicable regulations and guidance. For each recommendation without a management decision, please respond and provide status reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued because of the audit. Auditee’s Response We provided Idaho Housing Finance Association a draft report on July 28, 2005, and held an exit conference on August 17, 2005. Idaho Housing provided written 2 comments on September 7, 2005. Idaho Housing Finance Association disagreed with most of the report. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. 3 TABLE OF CONTENTS Background and Objectives 5 Results of Audit Finding 1: Idaho Housing Continued to Make Subsidy Payments to 10 Projects 7 after the Contracts Were Terminated Finding 2: Idaho Housing Did Not Follow Federal Requirements Regarding the 11 Distribution of $7.2 Million in Bond-Refunding Proceeds Scope and Methodology 14 Internal Controls 15 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 17 B. Auditee Comments and OIG’s Evaluation 18 C. Ineligible Costs – HUD’s Portion of McKinney Act Savings 40 D. Fifty Percent – Excess Distributions 41 4 BACKGROUND AND OBJECTIVES Idaho Housing and Finance Association (Idaho Housing) is Idaho’s housing finance agency. Idaho Housing does not receive state-appropriated funds for its operations. Its mission is to provide funding for affordable housing opportunities in Idaho communities where they are most needed and when it is economically feasible. Idaho Housing participates in the development, finance, management, and tenant support for 59 projects under an annual contributions contract with the U.S. Department of Housing and Urban Development (HUD). Under this agreement, it functions as the agent for HUD in performing tasks in these areas as the Section 8 subsidy contract administrator. Idaho Housing’s subsidy contract administration responsibilities include program compliance functions, to ensure that HUD- subsidized projects are serving eligible families at the correct level of assistance, and asset management functions, to ensure the physical and financial health of the projects. It processes the monthly housing assistance payments and is responsible for asset management functions, housing assistance payment contract (contract) compliance, and monitoring functions. It performs compliance reviews on these developments, including physical inspections and occupancy reviews. It holds and administers the replacement reserve, residual receipts, and all other appropriate escrow accounts for these projects and all other appropriate escrow accounts for these projects. It also processes the monthly housing assistance payments. The monthly housing assistance payments are based on contracts between the owner and Idaho Housing. These contracts are categorized as either old regulation or new regulation. New regulation projects are those with a signed agreement to enter into a contract on February 29, 1980, or later. Owners of old regulation projects are not limited as to the amount of distributions they may receive from the project, except that the distribution may only be made after funds have been set aside for or payment has been made for all project expenses. In addition, the contract for old regulation projects states that it terminates on the date of the last payment of principal due on the permanent financing. Pipeline projects are treated like old regulation projects with respect to distributions. Although these projects are technically new regulation projects because the date of submission of the initial application was during a time of transition for HUD regulations, HUD allowed the projects to opt out of the limitation on distributions. Therefore, these projects, like old regulation projects, are not limited with regard to distributions. New regulation projects are of two types: nonprofit and profit-motivated. Owners of new regulation nonprofit ownership projects are not entitled to distributions. Owners of profit- motivated new regulation limited distribution projects may only receive 6 percent (projects with elderly tenants) or 10 percent (family projects) of owner equity determined when the project was constructed. Owners of profit-motivated projects that are family projects with 50 or fewer units are exempt from the limitations on distributions. In this way, these projects are treated like old 5 regulation projects. Additionally, the contract for new regulation projects states that the contract will remain in effect for at least 20 years, regardless of whether the mortgage is prepaid. Our overall audit objective was to determine whether Idaho Housing followed federal regulations and HUD guidelines when it allowed project owners to prepay project mortgages and when it refunded bonds in 1994. We wanted to quantify any excess housing assistance payments made to prepaid projects because of contract termination. We also wanted to quantify any inappropriate equity takeouts on projects subject to the McKinney Act as well as other projects with limited distributions. 6 RESULTS OF AUDIT Finding 1: Idaho Housing Continued to Make Subsidy Payments to 10 Projects after the Contracts Were Terminated Idaho Housing made excessive subsidy payments to 10 old regulation projects after the contracts terminated with the payoff of the projects’ permanent financing. Upon prepayment, the Section 8 subsidy should have been renegotiated with HUD. However, Idaho Housing continued to make subsidy payments to these projects, even after the contracts were terminated. This occurred because Idaho Housing misinterpreted the contracts to mean that as long as the project maintained financing or was responsible for debt service (e.g., through a refinance with Idaho Housing or another financial institution), the contracts remained in effect. As a result, the projects received more than $8.5 million of HUD Section 8 rent subsidies in excess of fair market rents, thus denying funds to subsidize other low-income individuals and families. Contracts Terminated as a Result of Prepayment We identified 10 old regulation projects in which the owners paid off the permanent financing provided by Idaho Housing. In accordance with Idaho Housing’s contracts, the subsidized rents for the 10 old regulation projects were increased yearly, using an annual adjustment factor published in the Federal Register. The annual adjustment factor increases continued until HUD issued Notice H 95-12 in March 1995, enacting a rent freeze for projects with rents in excess of fair market rents. This freeze remains in effect until such time as the projects are able to submit a comparison showing that market rents for unassisted housing in the same market area of similar age, type, and quality are more than 105 percent of the current contract rent level for that unit type. The annual adjustment factor increases resulted in subsidized rents that were significantly higher than applicable fair market rents as follows: 7 Percentage of actual subsidized rents over applicable fair market rents since July 1, 1994, or date of prepayment (if later) Project Rent paid Fair market rent Percentage of overpaid subsidies Greenbriar $ 4,515,699 $ 3,174,590 142% Howard Place 3,217,132 2,652,458 121% Market Lake 84,589 54,970 154% Townhouses Oakridge 3,439,875 1,984,761 173% Portneuf Towers 533,544 279,360 191% Ridgeview 3,007,910 1,897,824 158% Sandcreek 6,663,683 4,455,796 150% Shoreline Plaza 2,931,151 1,816,723 161% Tamarack 7,676 4,848 158% Treehouse 1,711,323 1,236,726 138% When the Idaho Housing loans were paid off, their housing assistance payment contracts were required to be automatically terminated as the contracts for old regulation projects state that the contract term shall not exceed “…a period terminating on the date of the last payment of principal due on the permanent financing.” Thus, the subsidy payments should have ceased until the contracts were renewed, extended, or renegotiated with HUD. This would have provided HUD the opportunity to lower the subsidies to be more in line with fair market rents. However, Idaho Housing did not always inform HUD of the prepayments and continued to make subsidy payments to each of the projects as though the existing contracts were still in effect. Further, federal regulations at 24 Code of Federal Regulations 883.307(b)(2) state that when financing documents are to be substantially changed and those changes affect the Section 8 program, the housing agency must submit the revised documents for review. Accordingly, whenever a project’s owner proposed to prepay or refinance the mortgage loan, Idaho Housing was required to submit the new financing documents to HUD for review because the prepayment terminated the project’s contract. Idaho Housing Has Paid More Than $8.5 Million in Excess of Fair Market Rents We calculated the difference in the subsidy HUD paid for these projects and what the projects would have received at fair market rents. To make this calculation, we requested subsidy payment data from HUD. However, HUD was unable to provide us subsidy data earlier than the 1994-1995 fiscal year. Therefore, we calculated subsidies paid in excess of fair market rents from fiscal year 1995 8 forward for those projects that were prepaid before that time and from the time of prepayment for projects prepaid since 1995. As shown below, HUD has unnecessarily made $8,554,527 in subsidy payments in excess of fair market rents to Idaho Housing for the 10 prepaid projects. Project Month/year Amount Fair market Year end Overpayment mortgage paid 1 rent adjustment 2 (a)-(b)-(c) was paid off (a) (b) (c) Greenbriar 3 July 1993 $4,555,048 $3,174,590 $ 39,349 $1,341,109 Howard Place April 1995 3,235,384 2,652,458 18,252 564,674 Market Lake Townhouses November 2003 84,589 54,970 -- 29,619 Oakridge 3 July 1993 3,467,118 1,984,761 27,242 1,455,115 Portneuf Towers March 2004 533,544 279,360 -- 254,184 Ridgeview 3 July 1993 3,029,055 1,897,824 21,145 1,110,086 Sandcreek March 1994 6,699,584 4,455,796 35,901 2,207,887 Shoreline Plaza December 2000 2,999,071 1,816,723 67,920 1,114,428 Tamarack December 2004 7,676 4,848 -- 2,828 Treehouse January 1998 1,721,330 1,236,726 10,007 474,597 Totals $26,332,399 $17,558,056 $219,816 $8,554,527 Idaho Housing Misinterpreted Contract Language Idaho Housing staff told us that the language in the contract was not sufficiently clear on the subject of prepayment and the term of the contract. Consequently, they misinterpreted the contract to mean that the projects were only required to maintain permanent financing or have debt service. 1 This is the total subsidy amount paid plus tenant rent since the mortgage was paid off. 2 Subsidy returned to HUD by Idaho Housing after adjusting for actual occupancy rate. 3 These projects were actually paid off some time before July 31, 1993, but Idaho Housing no longer had the actual dates. 9 Recommendations We recommend that the director of multifamily housing 1A. Require Idaho Housing to reimburse HUD $8,554,527 for excess subsidy payments made for projects that did not have a valid contract. 1B. Require Idaho Housing to inform the local HUD office of future prepayments to ensure HUD has the opportunity to renegotiate the contract. 1C. Renegotiate the terminated contracts with the owners and Idaho Housing, taking into consideration the condition of the projects and fair market rents to allow funds to be put to better use in the amount of $1,339,881 over the next year. 10 Finding 2: Idaho Housing Did Not Follow Federal Requirements Regarding the Distribution of $7.2 Million in Bond-Refunding Proceeds Idaho Housing did not return 50 percent of McKinney Act savings to HUD for 30 new and old regulation projects. The savings were generated from a 1994 bond-refunding and loan- restructuring program for the Section 8 new construction projects financed by Idaho Housing. Further, Idaho Housing did not always use its share of the savings in accordance with the requirements of the 1992 amendments to the McKinney Act. This occurred because Idaho Housing believed that HUD’s approval of the loan-restructuring plan allowed the agency to distribute the proceeds to the owners without regard to the McKinney Act provisions. Consequently, HUD did not receive its $6,195,107 share of the loan-restructuring savings, and $997,523 of Idaho Housing’s share of the savings was unavailable for its low-income housing programs. Idaho Housing and Finance Association Did Not Return $6,195,107 in McKinney Act Savings to HUD According to the 1992 amendments to section 1012 of the Stewart B. McKinney Homeless Assistance Amendments Act of 1988, HUD is required to return 50 percent of the amounts recaptured by projects from bond refinancing to the state housing finance agency. This implies that the remaining savings belong to HUD. The returned funds must be used to provide housing for low-income persons under an approved McKinney Act refunding agreement and housing plan or to pay allowable owner distributions. Although the housing finance agency may use its 50 percent of the savings to pay allowable owner distributions, the U.S. Department of the Treasury share (HUD’s 50 percent of the savings) must be held harmless. HUD may not waive its portion of the savings. In May 1994, Idaho Housing received approval from HUD for its overall proposal to conduct a loan-restructuring program for the Section 8 new construction projects that it financed. Under the loan-restructuring program, Idaho Housing refunded the bonds from which the original loans to the projects were made, restructured the loans, and used the savings to reduce the interest on the project loans. This enabled Idaho Housing to increase the projects’ total loan principal amounts without raising the monthly payment amounts significantly and allowed owners to draw equity out of the projects without an increase in the subsidized rents. 11 Thirty of the projects that went through the loan restructuring are regulated under the 1992 McKinney Act amendments. The bond-refunding savings for these 30 projects totaled $12,390,213. However, Idaho Housing did not inform HUD that the projects were McKinney Act projects in its loan-restructuring proposal and did not submit McKinney Act refunding agreements and housing plans. If Idaho Housing’s proposal had disclosed to HUD that the 30 projects were subject to the McKinney Act, HUD would have required the savings to be used to reduce the subsidized rents or to be deposited into trustee sweep accounts. Funds in the trustee sweep accounts would then be split between HUD and Idaho Housing in accordance with approved McKinney Act refunding agreements and housing plans. Unlimited Distribution Projects Twenty-four of the McKinney Act projects do not have restrictions on owner distributions. These projects are treated as old regulation projects and are not limited with regard to owner distributions after all project expenses have been paid. We determined it was appropriate for Idaho Housing to allow the distribution to the owners but only from its portion of the savings. However, $5,163,130 of the owner distributions of savings from the loan restructuring for these 24 projects should have been available to HUD in the trustee sweep accounts (see Appendix C). Limited Distribution Projects As a condition of HUD approval of the bond refund, Idaho Housing certified that it would comply with federal regulations at 24 Code of Federal Regulations 883.306 with respect to limitations on distributions for any new regulation project within the bond refund pool. Five of the McKinney Act projects are new regulation limited distribution projects. According to federal regulations at 24 Code of Federal Regulations 883.306, the owners of these projects are limited as to the distributions they may receive from the projects. Because these projects serve elderly tenants, the owners of the projects are limited to distributions of 6 percent on equity. One of the McKinney Act projects was originally an old regulation project. However, in 1988, the owner of this project elected to amend the contract to adopt subpart G of 24 Code of Federal Regulations 883, which incorporates a limitation on distributions. The owner sold the project to The Housing Company, a nonprofit company, in 1992. The Housing Company assumed the existing mortgage and the contract, including amendments. As a nonprofit owner, The Housing Company is not entitled to distributions of project assets under the 1988 contract amendment. 12 Contrary to the McKinney Act amendments, Idaho Housing distributed HUD’s $1,031,976 share of the McKinney Act savings and allowed $997,523 in excessive loan-restructuring program distributions to the owners of six projects (see Appendix D). Idaho Housing staff told us that since it has a mixed portfolio of both old and new regulation projects, employees must have mistaken new regulation projects for old regulation projects during the bond refund. As a result, some new regulation limited distribution projects received equity takeouts to which they were not entitled. HUD Should Have Received a Total of $6,195,007 in McKinney Act Savings Total McKinney Act savings of $6,195,007 that should have been returned to HUD include the $5,163,130 distributed to the owners of the projects that do not have limitations on distributions and the $1,031,977 distributed to owners that should not have received any distributions or should have received only limited distributions. These savings should have either been used to reduce Section 8 subsidy payments to the projects or made available to HUD in a trustee sweep account. Recommendations We recommend that the director of multifamily housing require Idaho Housing to 2A. Reimburse HUD from nonfederal funds $6,195,107 for its share of the McKinney Act savings resulting from the 1994 bond refund. 2B. Reimburse its federal programs accounts from nonfederal funds the $997,522 for its portion of the McKinney Act savings that was not appropriately expended. 2C. Implement procedures to ensure the proper identification of old regulation, new regulation, and McKinney Act projects to prevent the further misclassification of projects, leading to excess (ineligible) distributions. 13 SCOPE AND METHODOLOGY To achieve our audit objectives, we reviewed applicable federal regulations, HUD Handbooks, Idaho Housing written policies and procedures, and project files for the 59 projects under the annual contributions contract between Idaho Housing and HUD. In addition, we interviewed local HUD staff and Idaho Housing staff. We performed audit work at Idaho Housing’s offices in Boise, Idaho, and at the HUD Multifamily office in Seattle, Washington, from November 2004 through June 2005. Our audit generally covered the period January 1, 2001, through December 31, 2004, and was expanded as needed. We performed our review in accordance with generally accepted government auditing standards. 14 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: • Effectiveness and efficiency of operations, • Reliability of financial reporting, and • Compliance with applicable laws and regulations. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined the following internal controls were relevant to our audit objectives: • Program operations – Policies and procedures that Idaho Housing has implemented to reasonably ensure that a program meets its objectives and that unintended actions do not result. • Compliance with laws and regulations – Policies and procedures that Idaho Housing has implemented to reasonably ensure that resources used are consistent with laws and regulations. • Safeguarding resources – Policies and procedures that Idaho Housing has implemented to reasonably prevent or promptly detect unauthorized acquisition, use, or disposition of resources. We assessed the relevant controls identified above. A significant weakness exists if management controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet the organization’s objectives. Significant Weaknesses Based on our review, we believe the following item is a significant weakness: 15 • Idaho Housing does not have controls in place to reasonably ensure that project funds are used consistent with federal regulations at 24 Code of Federal Regulations 883.306. Nor do management controls reasonably prevent or promptly detect the improper use of project resources (see finding 2). 16 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Funds to be put number to better use 2/ 1A $8,554,527 1C $1,339,881 2A 6,195,107 2B 997,522 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or federal, state, or local policies or regulations. 2/ “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an Office of Inspector General (OIG) recommendation is implemented, resulting in reduced expenditures at a later time for the activities in question. This includes costs not incurred, deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures, loans and guarantees not made, and other savings. 17 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 18 19 Comment 1 Comment 2 Comment 3 20 Comment 4 Comment 5 Comment 6 Comment 7 21 Comment 5 Comment 8 Comment 6 Comment 9 22 Comment 10 23 Comment 11 Comment 12 Comment 13 Comment 14 24 Comment 15 25 Comment 16 Comment 14 Comment 13 Comment 14 26 Comment 14 Comment 16 27 Comment 17 Comment 13 Comment 18 28 Comment 18 Comment 19 Comment 12 Comment 20 Comment 21 29 Comment 21 Comment 22 Comment 23 Comment 12 Comment 24 Comment 23 30 Comment 12 Comment 25 Comment 25 Comment 26 31 Comment 27 Comment 28 Comment 29 32 33 OIG Evaluation of Auditee Comments Comment 1 The findings were discussed in detail with Idaho Housing and HUD during the course of the audit. Idaho Housing had the same time afforded to all other auditees to formulate its response. We provided Idaho Housing with written finding outlines in early July 2005 and sent our draft report to them on July 28, 2005. We considered all of Idaho Housing’s positions raised at the exit conference and actually provided Idaho Housing a one week extension to their original due date to provide it more time to respond by September 7, 2005. Comment 2 Our audit finding was not based upon HUD General Counsel’s June 23, 2002 opinion. As noted in the report, the finding is based upon the requirements of the HAP contracts and federal regulations at 24 Code of Federal Regulations 883.307(b)(2). Idaho Housing’s annual contributions contract with HUD states that it must comply and require owners to comply with the U.S. Housing Act of 1937 and all applicable regulations and requirements. Comment 3 Although HUD never issued a formal notice stating that prepayment of old regulation project mortgages would terminate the contract, this should have been known by all owners as well as Idaho Housing. Within the contract itself, there is a provision that the contract terminates upon prepayment. Specifically, the contract states that the term of the contract ends on the date of the last payment of principal due on the permanent financing. Therefore, when a project is prepaid, the contract terminates. Comment 4 Although the proposal to which Idaho Housing refers was discussed in Senate Testimony, it has not been formalized as a written HUD policy. Comment 5 Our audit scope included only one of the ten projects to which Idaho Housing refers. We did not interfere with the sale and transfer of this project even though the prepayment would terminate the contract. This project was part of a package of nine other projects and it was our understanding that the deal would not go through without the inclusion of the project. Comment 6 In order for HUD to stop funding the contracts due to contract termination, it would have to know that the projects were subject to the old regulations and that the projects were prepaid. However, as stated in the report, Idaho Housing did not always inform HUD of the prepayments and continued to make subsidy payments to each of the projects as though the existing contracts were still in effect. Comment 7 We did not state that it was Idaho Housing or HUD’s obligation to renegotiate the rents with owners whose mortgages were prepaid. However, in the interest of maximizing the effectiveness of the Section 8 program, we are recommending rents be renegotiated because we believe this should have 34 been done. Lowering the Section 8 payments to market rates would have saved $8.5 million in subsidy payments that could have been used to provide rental assistance to additional low income persons. Comment 8 We had no intention of questioning the entire amount of subsidy payments made after the contracts were terminated due to the refinancing. Subsequent to the termination of the HAP contracts, rental assistance was provided for the low income tenants of these projects. It would be unreasonable to recommend that Idaho Housing return the subsidies used to provide assistance at market rent rates. Consequently we are only recommending return of the subsidy paid in excess of fair market rents. These funds can then be used to provide rental assistance to other low income persons. Comment 9 Idaho Housing should have known at the inception of the projects that the old regulation contracts terminate upon prepayment as this information is included in the project contracts. Further, Idaho Housing has had specific knowledge for nearly a year, since the HUD review in 2004, that old regulation contracts terminate upon prepayment. In spite of this knowledge, it has done nothing to rectify the situation. It has continued to make subsidy payments to each of the projects as though the existing contracts were still in effect. Therefore, we continue to recommend that Idaho Housing reimburse HUD for excessive subsidy payments made since the contracts terminated. Comment 10 HUD Notice 95-7 also states that other HUD objectives in encouraging owners and housing finance agencies to refund bonds include reducing subsidy costs, recovering surpluses to which it is entitled, and improving projects’ physical condition. Further, Idaho Housing implies the owners of these projects would otherwise opt out of the Section 8 program if they were not allowed to refinance with an equity take-out. However, we found that out of the projects that were part of the bond refunding, only one has current total rent levels below fair market rents. Therefore, it does not seem likely that the owners would opt out of the program since they were unlikely to generate the level of income received from the Section 8 subsidy. Comment 11 Idaho Housing staff told us that the equity take-out to the owners was determined by calculating the amount of debt service the project could support at the current level of subsidy provided by HUD. If this equity take-out had not been provided to the owners, the debt service on the loans could have been reduced by the amount of savings we reported. Comment 12 We agree that Idaho Housing did not receive funds from the bond refunding. However, the equity take-out funds were not returned to the Section 8 projects as implied by Idaho Housing’s response. These funds were given to the property owners as an incentive to refinance. 35 Comment 13 The HUD approval referred to by Idaho Housing did not indicate in any way, that Idaho Housing did not have to abide by the provisions in the McKinney Act. In addition, when asked, Idaho Housing could not provide any documentation showing that it informed HUD that the projects referred to in its proposal were McKinney Act projects. It also could not provide us any documentation that HUD knew what specific projects were to be part of the refunding. Thus, it appears HUD’s approval was most likely based upon incomplete information from Idaho Housing. Comment 14 The Housing and Community Development Act of 1992 addresses Section 1012 of the McKinney Act and it states that projects qualified for sharing savings from a bond refunding include any State financed projects, constructed or substantially rehabilitated under a Section 8 contract during any of the calendar years 1979 through 1984, and that are being refinanced. This section applies to both Financial Adjustment Factor and non- Financial Adjustment Factor projects. Comment 15 We agree that Section 1012 of the McKinney Act encouraged, but did not require State Agencies to refund bonds. However, when the State Agencies refund bonds, the McKinney Act provides that one half of the savings belong to HUD. HUD clarified its policies in its Notice 95-7 stating that local issuers (like State agencies) could share in the savings upon the refunding of bonds as long as they enter into a McKinney Act Refunding Agreement and Housing Plan to identify how the savings would be used to provide housing for persons of very low income. Idaho Housing neither submitted refunding agreements and housing plans, nor did it use all the savings for allowable purposes. Although HUD disagreed with the GAO report in 1999, Federal regulations and, HUD's guidance, prior to this report, at 24 Code of Federal Regulations 811.110(e) and HUD Notice 95-7 both require HUD and the housing finance agency to share in McKinney Act savings generated on bond refunds for non- financial adjustment factor as well as financial adjustment factor projects. Also, during the audit, we contacted HUD Headquarters program staff regarding McKinney Act projects and were told that Idaho Housing would have been required to set up a trustee sweep account and HUD would receive 50 percent of the savings and Idaho Housing would receive the other 50 percent or the rents would have to be reduced at the projects. Comment 16 We agree that Section 1012 does not place an explicit requirement on the agency to refinance projects. However, this section states, “The Secretary shall make available to the State housing finance agency in the State in which a qualified project is located, or the local government or local housing agency initiating the refinancing of the qualified project, as applicable, an amount equal to 50 percent of the amounts recaptured from the project (as determined by the Secretary on a project-by-project basis).” Since 50 percent will be 36 made available to the housing finance agency, it is implied that the other 50 percent should be returned to HUD. Comment 17 Idaho Housing could not produce documentation supporting extensive discussions with HUD documentation when requested (see also Comment 13). Comment 18 Idaho Housing states in one sentence that HUD intended that it should receive half of all savings from applicable refundings such as the refunding initiated by Idaho Housing and then says that HUD was reluctant to state clearly that the McKinney Act applied to these transactions. However, if one looks outside HUD Notice 95-7, and into the McKinney Act itself, one will see that the McKinney Act applies to these projects (see Comment 14). Comment 19 In our opinion, the 1994 bond refunding represents an exceptional circumstance. Idaho Housing did not share the savings resulting from the bond refund with HUD and $6,195,107 was not available to provide rental assistance to additional low-income persons. Comment 20 On May 12, 2004, HUD’s Office of Asset Management responded to Idaho Housing’s request for approval by restating the proposed terms of the refunding and loan restructuring, then referring Idaho Housing to the HUD Seattle office. Idaho Housing then wrote to the HUD Seattle office requesting written approval of the Modification Agreement and the Mortgage Loan and Refunding Commitment. The HUD Seattle office informed Idaho Housing that it was not willing to approve these documents due to several concerns including issues dealing with (1) McKinney Act savings, (2) renegotiation of subsidies upon the termination of the housing assistance payments contract, (3) distributions to owners of limited distribution projects, and (4) subsidies in excess of fair market rents. HUD’s Seattle office said it would entertain a revised proposal considering all of HUD’s concerns. There has been no further correspondence regarding this refunding. Comment 21 The housing assistance payments contracts do not prohibit HUD from recapturing savings resulting from bond refunds as implied by Idaho Housing. In fact, the housing assistance payments contracts in question are silent on the issue. However, the annual contributions contract between Idaho Housing and HUD states that Idaho Housing must comply and require owners to comply with the U.S. Housing Act of 1937 and all applicable regulations and requirements. The McKinney Act is one such requirement (see Comment 14). Comment 22 The GAO reported that some agencies shared savings from the bond refunding of non-Finance Adjustment Factor projects. Comment 23 McKinney Act violations are a HUD program violation. As such, there is no general statute of limitations that applies broadly to claims brought pursuant to program violations. 37 Comment 24 Idaho Housing mischaracterizes OIG’s intent with respect to this audit report. We are not working to punish or penalize program participants, but to ensure funds provided for low-income housing assistance are used effectively and free up funds to provide rental assistance to additional low income persons. Comment 25 Idaho Housing staff told us that it calculated the amount of equity the owners could take out of the projects by determining the amount of debt service the projects could reasonably handle with the current level of HUD subsidy. The senior compliance manager said they used the cash flow in place and took out the estimated operating cost to determine the available debt service that the project could carry and the executive director said they wanted the debt service to stay the same so the housing assistance payments contracts wouldn’t need to be adjusted. Therefore, if Idaho Housing had refunded the bonds without any equity take-outs, the resulting debt service would have identified savings to HUD as shown in our report. Comment 26 At the exit conference, Idaho Housing staff requested an explanation on how we calculated the questioned amount. We explained at that time that these projects are limited distribution projects that Idaho Housing allowed an equity take-out in excess of that limitation. At that time, Idaho Housing staff disagreed that the equity take-out constituted a distribution and therefore, distributions to owners were not in excess of the limitations. After our exit conference, we provided a schedule to Idaho Housing showing how we calculated the questioned amount. We also provided HUD’s definition of a distribution as “any withdrawal or taking of cash or any asset of the project other than for payment of reasonable expenses necessary to the operation and maintenance of the project.” In addition, in a discussion with Idaho Housing staff on April 19, 2005, we explained that Idaho Housing certified to HUD that it would comply with regulations at 24 Code of Federal Regulations 883.306 with regard to limitations on distributions for any new regulation projects in the bond refunding pool. However, as shown in our report, it did not comply with this certification. Comment 27 Idaho Housing, HUD, and the owner of the project amended the housing assistance payments contract in 1988 to adopt the new regulations at Subpart G of 24 Code of Federal Regulations 883. This subpart incorporates the limitation on distributions at 24 Code of Federal Regulations 883.306. Idaho Housing contends that the projects owners intended to opt out of the limitation on distributions. Further, Idaho Housing stated that there did not need to be any overt action to show that the owners opted out of the limitations. However, because the regulation specifically refers to the limitations and the amendment does not specifically opt out, we believe that this project is subject to the limitation. In addition, when the pipeline projects (old regulation projects that also adopted Subpart G) opted out of the limitations, there was an overt action to show that intent; i.e. the distribution limitation paragraphs were 38 crossed out of the housing assistance payments contracts that were signed by Idaho Housing, HUD, and the owner. Comment 28 HUD Seattle staff explained to us that they told Idaho Housing that they might have to retract the listing of projects as one type or another and that they wanted the OIG to look into the matter further. The Seattle staff also explained that they felt they had to send something to Idaho Housing to stop the current inappropriate activities but made Idaho Housing aware that OIG would review the matter. Also, at the request of Idaho Housing, the OIG added Appendix D to the report to show the excess distributions for each project. Comment 29 Idaho Housing again mischaracterizes OIG’s intentions. This audit and its findings were not undertaken as part of a policy battle with HUD. Contrary to this opinion, we initiated this audit at the request of the Region X Multifamily Hub due to concerns that Idaho Housing may not have properly implemented the conditions of HUD’s approval of the refund. 39 Appendix C INELIGIBLE COSTS – HUD’S PORTION OF MCKINNEY ACT SAVINGS (Recommendation 2A) HUD’s portion of McKinney Act savings McKinney Act projects Total McKinney Act Ineligible savings 1 Treated as old regulation projects Burrell Street Station $854,433 $427,216 Cherrywood Apartments 863,744 431,872 College Park Apartments 213,494 106,747 Franklin Grove 775,868 387,934 Harrison Hills 402,245 201,122 Hazel Park 624,790 312,395 Parkview Center 289,220 144,610 Pioneer Square Apartments 891,479 445,739 Richlin Townhouses 332,443 166,221 Riverwood Apartments 18,178 9,089 Saturn Apartments 973,775 486,887 Shadow Mountain 294,803 147,402 Southside Apartments 91,947 45,974 Tamarack 434,930 217,465 Wildwood 593,014 296,507 Windwood 344,550 172,275 Millcreek Apartments 450,027 225,014 Payette Plaza 218,750 109,375 Van Engelen 183,869 91,935 Adams Lane 235,658 117,829 Meadowbrook 276,298 138,149 Payette Townhouses 157,914 78,957 Southdale Apartments 210,945 105,473 Snow Mountain 593,886 296,943 2 New regulation limited distribution projects Aspenwood 461,267 230,633 C Street Manor 141,973 70,986 Eagle Manor 527,829 263,915 Silver Hills 249,395 124,698 Westside Court 437,102 218,551 3 Nonprofit projects Owyhee Place Apartments 246,387 123,194 Totals $ 12,390,213 $ 6,195,107 40 Appendix D FIFTY PERCENT – EXCESS DISTRIBUTIONS McKinney Allowable Excess Act Savings IHFA's 50% Distribution Distribution Aspenwood $461,267.00 $230,633.50 $6,764.00 $223,869.50 C Street Manor 141,973.00 70,986.50 7,137.00 63,849.50 Eagle Manor 527,829.00 263,914.50 9,101.00 254,813.50 Owhyee Place 246,387.00 123,193.50 - 123,193.50 Silver Hills 249,395.00 124,697.50 5,769.00 118,928.50 Westside Court 437,102.00 218,551.00 5,683.00 212,868.00 $2,063,953.00 $1,031,976.50 $34,454.00 $997,522.50 41
Idaho Housing and Finance Association, Boise, Idaho, Made Improper Section 8 Subsidy Payments and Improperly Distributed $7.2 Million of Bond Refund Proceeds Under its Non-insured, Subsidized Multifamily Projects Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)