oversight

The Housing Authority of the City of Prichard, Alabama's Controls over the Sale of Affordable Housing Units, Use of Sales Proceeds, and Expenditure of Low-Income Funds Were Inadequate

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-01-11.

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

                                                                 Issue Date
                                                                          January 11, 2006
                                                                  Audit Case Number
                                                                              2006-AT-1002




TO:         Dominique Blom, Acting Deputy Assistant Secretary for Public Housing
               Investments, PIU
            R. Edmond Sprayberry, Director, Office of Public Housing, 4CPH


FROM:
            James D. McKay
            Regional Inspector General for Audit, 4AGA

SUBJECT: The Housing Authority of the City of Prichard, Alabama’s
         Controls over the Sale of Affordable Housing Units, Use of Sales Proceeds, and
         Expenditure of Low-Income Funds Were Inadequate



                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Housing Authority of the City of Prichard’s (Authority)
             administration of its nonprofit activities and homeownership programs. The
             Office of Public Housing, Alabama State Office, requested the audit. The Office
             of Public Housing expressed concerns regarding the nonprofit’s ventures into
             areas other than housing, such as the purchase of a shopping center and the
             Authority’s use of the proceeds from the sale of its public housing units.

             Our audit objectives were to determine whether the Authority used low-income
             housing funds to pay for unauthorized nonprofit entity activities and whether the
             Authority used the proceeds from the sale of single-family homes in a manner
             consistent with its homeownership programs.




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 What We Found


           Although we noted that the Authority did not use low-income housing funds to
           pay for unauthorized nonprofit entity activities, we noted deficiencies in the
           Authority’s homeownership activities.

           The Authority’s homeownership programs to make affordable homes available to
           low- and moderate-income persons were inadequate. Although the Authority
           continually receives applications for its homeownership programs and maintains a
           waiting list of more than 250 potential homebuyers, as of June 1, 2005, the
           Authority had 139 homes available for sale. Many of the homes have been for
           sale for more than four years. The Authority’s failure to sell these homes
           jeopardizes its ability to meet its and HUD’s goal of promoting adequate and
           affordable housing. Although the Authority was not selling the homes in its
           inventory, it plans to seek approval to use $3,811,668 in HUD grant funds to build
           additional homes. Building additional homes would not be a reasonable use of
           these funds.

           The Authority did not include sale proceeds of $6,619,859 and estimated sale
           proceeds of $5,013,000 from its homeownership programs in its five-year public
           housing authority plan. As a result, HUD was not informed of the amount of
           funds available and the Authority’s plan to use these funds. The funds have
           remained idle since 2002.

           The Authority’s controls over the expenditure of public housing funds were
           inadequate. As a result, the Authority inappropriately advanced $806,502 in
           public housing funds to pay for other programs’ expenses. Therefore, the low-
           income housing program was deprived of funds that could have been used to
           provide services to the Authority’s public housing tenants.

 What We Recommend


           We recommend that the director of the Office of Public Housing require the
           Authority to provide a revised marketing strategy. The director should require the
           Authority to aggressively market the Section 5(h) and HOPE 1 homes as
           affordable housing to assure the HUD funds provided for the construction of these
           homes are used as intended and the homes are not allowed to deteriorate. The
           director should require the Authority to review its current lease/purchase program,
           determine why the participants are not moving toward homeownership, and
           provide additional counseling or remove the participants who are not progressing.
           We also recommend that HUD’s acting deputy assistant secretary for Public
           Housing Investments require the Authority to demonstrate it has the capability to


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            sell its remaining units before requesting the remaining $3,811,668 in HOPE VI
            grant funds to build additional homes.

            Further, we recommend that the director of the Office of Public Housing require
            the Authority to include the $11,632,859 in sales proceeds and how it plans to use
            the funds in its plan. The Office of Public Housing should review the Authority’s
            planned use to assure it meets the homeownership program requirements and that
            it is specific and timely or require the Authority to return the funds to HUD.

            Finally, the director of the Office of Public Housing should require the Authority
            to establish controls to assure its public housing program funds are expended and
            accounted for in accordance with its HUD contract.

            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 discussed our review results with Authority and HUD officials during the
            audit. We provided a copy of the draft report to Authority officials on December
            6, 2005, for their comments and discussed the report with the officials at the exit
            conference on December 15, 2005. The Authority provided written comments on
            December 22, 2005.

            The complete text of the auditee’s response, along with our evaluation of that
            response, can be found in appendix B of this report.




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                            TABLE OF CONTENTS

Background and Objectives                                                             5

Results of Audit
      Finding 1: The Authority’s Sale of Affordable Homes Was Inadequate              6

      Finding 2: Proceeds from the Sale and Estimated Sale of Affordable Homes        11
                 Were Not Included in the Authority’s Public Housing Authority Plan

      Finding 3: The Authority’s Controls over the Expenditure of Low-Income          13
                 Program Funds Were Inadequate

Scope and Methodology                                                                 14

Internal Controls                                                                     15

Followup on Prior Audits                                                              17

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                  18
   B. Auditee Comments and OIG’s Evaluation                                           19




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                      BACKGROUND AND OBJECTIVES

The Housing Authority of the City of Prichard (Authority) was organized in 1940 pursuant to the
Housing Act of 1937 and the laws of the State of Alabama. Its primary objective is to provide
low-income housing to the citizens of Prichard, Alabama, and surrounding areas in compliance
with its annual contributions contract (contract) with the U.S. Department of Housing and Urban
Development (HUD).

A five-member board of commissioners governs the authority with members appointed by the
mayor of Prichard, Alabama. Each member is appointed for a five-year term. Reverend Michael
Howard is the board chairman, and Charles Pharr is the executive director.

The Authority’s programs include the management of 65 conventional low-income units, 2,596
Section 8 units, a HOPE VI program, and Section 5(h) and Section 32 homeownership programs.
The homeownership programs are designed to assist Authority residents, Section 8, and low- and
moderate-income families to become homebuyers.

The Authority formed Prichard Housing Corporation, a not-for-profit corporation, on January 19,
1979, to develop and operate a 120-unit elderly project known as Ridge Manor I and II. The
Section 8 project-based development is managed by the Authority. The Authority and the
Prichard Housing Corporation have the same board of directors.

The Authority formed Prichard Housing Corporation II, a not-for-profit corporation, on August
8, 1988. Prichard Housing Corporation II owns a shopping center, a 40-unit multifamily project
known as Driftwood Apartments, and a 102-unit multifamily project known as St. Stephen
Woods Apartments and is a general partner in a limited partnership apartment project named
Chancery Square Ltd. The Authority and Prichard Housing Corporation II have separate boards
of directors.

HUD’s Alabama State Office of Public Housing is located in Birmingham, Alabama, and is
responsible for overseeing the Authority.

Our audit objectives were to determine whether the Authority used low-income housing funds to
pay for unauthorized nonprofit entity activities and whether the Authority used the proceeds from
the sale of single-family homes in a manner consistent with its homeownership programs.




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                                                 5
                                RESULTS OF AUDIT


Finding 1: The Authority’s Sale of Affordable Homes Was Inadequate
The Authority’s homeownership programs to make affordable homes available to low- and
moderate-income persons were inadequate. Although the Authority continually receives
applications for its homeownership programs and maintains a waiting list of more than 250
potential homebuyers, as of June 1, 2005, the Authority had 139 homes available for sale. Many
of the homes have been for sale for more than four years. These conditions exist because the
Authority did not (1) efficiently process its homebuyer applications, (2) consider other financing
options, (3) aggressively market the homes, and (4) administer its homebuyer program to assure
participants were moving toward homeownership. The Authority’s failure to sell these homes
jeopardizes its ability to meet its and HUD’s goal of promoting adequate and affordable housing.
Although the Authority was not selling the homes in its inventory, it plans to seek approval to
use $3,811,668 in HUD grant funds to build additional homes. Building additional homes would
not be a reasonable use of these funds.



 139 Homes Available for Sale


               The Authority’s inventory of single-family homes included three homes
               remaining to sell under its HOPE 1 program, 79 homes to sell under its Section
               5(h) program, and 57 homes to sell under its HOPE VI program.

               Of the 79 homes under its 5(h) program, the Authority had leased 40 of the homes
               to potential buyers; two of the homes were being used as sales offices; and 37
               homes were vacant and beginning to deteriorate.

               The 57 HOPE VI homes became available for sale April 30, 2005. As of that
               date, there were 16 loan applications for the HOPE VI homes and one loan
               application for a Section 5(h) home pending with the banks. According to the
               homeownership director, there were no other applicants who met the minimum
               loan requirements.




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 Applicants Not Screened or
 Prioritized


             The Authority’s homeownership program staff included a director and two
             counselors. The staff received and processed homeownership applications and
             provided counseling and assistance to the prospective homeowners. Currently,
             the staff receives 6 to 10 applications per week and has more than 250 applicants
             on file. As of October 1, 2005, the Authority had not screened the 250
             applications to determine which applicants met the minimum program
             requirements and had not prioritized the list to identify the applicants who had the
             best chance of becoming homeowners. The affordable housing director told us
             she was working with all 250 applicants. By not screening and prioritizing the
             applications, the limited staff could not concentrate its efforts on the most viable
             applicants and process the applications efficiently.

             The Authority maintains another waiting list of 113 applicants, who the affordable
             housing director said did not currently qualify for homeownership but may
             qualify during the next 12 to 24 months. The Authority did not prioritize the
             additional 113 applications.

 Other Financing Options Not
 Considered

             Although the Authority provides a 25 percent soft-second mortgage and many of
             the homebuyers can qualify for downpayment assistance of up to $10,000, the
             bank’s underwriting standards made it difficult for the low-income homebuyers to
             qualify for a loan. Also, the Authority, which controls the submission of the loan
             applications to the banks, does not submit the applications until it is sure the
             banks will accept the loan. The Authority did not consider using other lending
             institutions to obtain financing for the applicants or financing the HOPE 1 and
             Section 5(h) homes itself, since the homes were debt free. The Authority did not
             consider allowing the low-income homebuyers to seek their own financing. Other
             financing options, especially Authority financing, could make many of these
             homes available to applicants who do not meet the banks’ standards.




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                                              7
 Section 5(h) Homes Not
 Aggressively Marketed


            The Authority did not aggressively market its Heritage Estates Section 5(h)
            affordable housing development. The development included 17 sold homes, 31
            vacant homes, 34 homes that were leased, and one that was used as an office. The
            development was constructed in 2000 using HUD development grant funds.

            Sales for Heritage Estates since 2000 only averaged 3.4 homes yearly. The
            vacant units were not used for rental under the low-income program; thus, the
            vacant units were not receiving operating subsidies and were not producing rental
            income. Since HUD funds were used to construct the development, the Authority
            did not have any project debt to amortize, and, therefore, the sale of the units was
            a low priority.

            There was only one sign at the on-site office showing the homes were for sale by
            the Authority and were affordable. The office was located well into the project.
            The lawns were not maintained, and the homes were mildewed and beginning to
            deteriorate. The homes were built in an area that was isolated, were surrounded
            by blight, and included blighted structures on the property that did not appear to
            meet local codes. The Authority built a privacy fence around the property to
            curtail vandalism. Authority staff told us that people did not want to live in this
            area, much less purchase a house. There were no loans pending on the homes.

            The Section 5(h) homes were not being aggressively marketed because the
            Authority had to sell its 57 HOPE VI homes that were recently completed. The
            proceeds from the sale of the HOPE VI homes were needed to pay part of the
            construction costs of the HOPE VI units. In contrast to the Section 5(h)
            development, the Authority had 16 loan applications ready when the HOPE VI
            units became available.


Applicants in the Lease/
Purchase Program Not Moving
Toward Homeownership

            The Authority executed lease/purchase agreements with 32 applicants, allowing
            them to occupy the affordable homes for five years and to work toward qualifying
            for a home loan. During this period, the affordable housing staff provided
            counseling to the participants to help them get their debt ratios and credit scores to
            a point at which the banks would accept their application for a loan. The program
            participants paid rent based on 30 percent of their income.

            We reviewed 31 of the 32 participants’ files to determine their credit scores and
            debt ratios. The review showed that the participants had leased their units for an


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            average of 2.5 years and 19 of the 31 participants were in their units for three to
            four years. As of April 30, 2005, 15 of the participants had debt-to-income ratios
            of less than 43 percent (the maximum the banks will accept); however, only 1 of
            the 15 participants had a credit score above 600 (the minimum score most banks
            will accept), which would allow the applicant to apply for a loan. We also noted
            that 12 of the 31 applicants were late with their rent payments. Although the
            affordable housing staff was updating the applicants’ credit reports and
            recomputing their credit scores, there was nothing in the file to show the
            Authority was taking action when the applicants were not showing progress.


Additional Homes to Be Built


            Although the Authority is not selling the homes it has now, it plans to build an
            additional 103 units of affordable housing under phases IV and V of its HOPE VI
            program, using $5,827,146 in HUD grant funds. HUD allowed the Authority to
            contract for construction of 36 homes in phase IV, using $2,015,478 in HUD
            grant funds. The Authority plans to request HUD’s approval to construct the 63
            homes remaining under phase V at a grant cost of $3,811,668.

            To supplement its proposal to develop phase IV, the Authority stated to HUD that
            a study performed by a consultant showed there was a demand for “164 additional
            units intended for first time homebuyers requiring some form of financial
            assistance.” The Authority also provided a schedule showing its plans to sell the
            existing 57 HOPE VI homes by April 2006. The schedule showed how many
            houses it would sell on a monthly basis. When we requested the affordable
            housing staff to provide specific information about the homebuyers, they told us
            they did not have specific homebuyers identified and the schedule was an
            estimate. Based on the number of units to be sold and the Authority’s current
            marketing process, it does not appear the Authority will sell the 57 units as stated.
            Construction of any additional units at this time may be unnecessary.

Recommendations

            We recommend that the director of the Office of Public Housing

            1A. Require the Authority to provide a marketing strategy that will result in a
                more efficient system of processing the applications to identify and rank
                homebuyers that are most likely to qualify for a loan and provide alternate
                financing to make the loans more obtainable for low-income applicants.

            1B. Require the Authority to aggressively market the Section 5(h) and HOPE 1
                homes as affordable housing to assure the HUD funds provided for the


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               construction of these homes are used as intended and the homes built with
               these funds are not allowed to deteriorate.

          1C. Require the Authority to review its current lease/purchase program and
              determine why the participants are not moving toward homeownership.
              Participants who are not progressing should receive additional counseling or
              be removed from the program.

          We also recommend that the acting deputy assistant secretary for Public Housing
          Investments

          1D. Require the Authority to demonstrate it has the capability to sell its
              remaining units before requesting the remaining $3,811,668 in HOPE VI
              grant funds to build an additional 63 affordable homes.




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Finding 2: Proceeds from the Sale and Estimated Sale of Affordable
           Homes Were Not Included in the Authority’s Public
           Housing Authority Plan
The Authority did not include sales proceeds of $6,619,859 and estimated sale proceeds of
$5,013,000 from its homeownership programs in its five-year public housing authority plan. As
a result, HUD was not informed of the amount of funds available and the Authority’s plan to use
these funds. The funds have remained idle since 2002.




 Proceeds Not Included in the
 Authority’s Plan


              By June 30, 2005, the Authority had sold 145 houses under its HOPE 1 and
              Section 5(h) homeownership programs. Proceeds from these sales and interest
              earned from their investment totaled $6,619,859. The Authority had three homes
              remaining to sell under the HOPE 1 program and 79 homes to sell under the
              Section 5(h) program. The Authority estimates the proceeds from the sale of
              these homes to be $5,013,000. Although the HOPE 1 grant agreement and the
              Section 5(h) implementation agreements allow the Authority to use the sale
              proceeds for various homeownership activities that would improve its program,
              the Authority did not use the proceeds to fund these activities, and the funds have
              remained idle.

              The Authority’s HOPE VI plan shows the Authority plans to use $1 million of the
              funds to finance later phases of the HOPE VI program, however, neither these
              funds nor the remaining funds have been included in the Authority’s five-year
              public housing authority plan as required by 24 CFR [Code of Federal
              Regulations] 906.31.

              The executive director stated that the Authority plans to use the funds to build
              more affordable housing. The executive director, however, could not provide
              specific details to support the plan.

              The Authority has not developed specific plans to build additional units because it
              is having difficulty selling the units it has in its inventory. The Authority was not
              aware of the requirement to include the homeownership proceeds in its plan.




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Recommendations

          We recommend that the director of the Office of Public Housing

          2A. Require the Authority to include the $11,632,859 generated from the sale of
              Section 5(h) and HOPE 1 homes and its planned use in its public housing
              authority plan.

          2B. Review the Authority’s planned use to assure it meets the homeownership
              program requirements.




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Finding 3: The Authority’s Controls over the Expenditure of Public
           Housing Funds Were Inadequate
The Authority’s controls over the expenditure of public housing funds were inadequate. As a
result, the Authority inappropriately advanced $806,502 in public housing funds to pay for other
programs’ expenses. The programs were to repay funds to the public housing accounts when
they obtained the anticipated funding. However, the Authority did not properly account for the
transactions, and they remain unpaid. Therefore, the low-income housing program was deprived
of funds that could have been used to provide services to its public housing tenants.


 Improperly Advanced Public
 Housing Funds


              As of December 31, 2004, public housing advanced $806,502 to other programs it
              operated in excess of the funds each program had on deposit with the low-income
              program. This is a violation of the Authority’s contract with HUD. These
              advances included payments on behalf of the Authority’s HOME, HOPE VI, and
              Public Housing Capital Fund programs. The advances were subsequently repaid.


 Inadequate Controls and
 Accounting for Advances


              The Authority did not have controls in place to prevent the improper advances to
              the other programs and did not establish receivable accounts in its public housing
              records to control the timely repayment of the funds. Thus, the Authority’s books
              and records as of December 31, 2004, were not complete and accurate, and the
              advances remained unpaid. The Authority’s contract with HUD requires it to
              maintain complete and accurate records.


 Recommendations

              We recommend that the director of the Office of Public Housing

              3A. Require the Authority to establish controls to prevent improper advances
                  from its public housing program and establish accounts to assure timely
                  repayment of advances.




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                                               13
                         SCOPE AND METHODOLOGY

To accomplish our audit objective we reviewed the following:

•    Applicable, laws, regulations, and other HUD program requirements;

•    The Authority’s contracts; and

•    HUD’s and the Authority’s program files.

We reviewed various documents including financial statements, general ledgers, bank
statements, minutes from board meetings, check vouchers, invoices, loan documents, related
guarantee agreements, management agreements, and reports from the independent public
accountant. In addition, we obtained an understanding of the Authority’s accounting system as it
related to our review objective.

We also interviewed the HUD Alabama State Office of Public Housing program officials and the
Authority’s management and staff.

We performed our audit work at the Authority’s offices from April through September 2005.
Our audit covered the period from July 1, 2002, through December 31, 2004, but we extended
the period as necessary.

We performed our review in accordance with generally accepted government auditing standards.




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                                                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:

                  •   Compliance with laws and regulations - policies and procedures that
                      management has implemented to reasonably ensure resource use is
                      consistent with laws and regulations.

                  •   Safeguarding of resources - policies and procedures that management has
                      implemented to reasonably ensure resources are safeguarded against waste,
                      loss, and misuse.

              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 items are significant weaknesses:


                  •   The Authority’s controls over the sale of its affordable homes did not
                      provide assurance that the Authority would meet its and HUD’s objectives to
                      make affordable housing available for low- and moderate-income persons
                      (see finding 1),


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          •   The Authority’s controls over the planning and use of the proceeds from the
              sale of its affordable housing did not assure that the funds would be used as
              intended (see finding 2), and

          •   The Authority did not have adequate controls to assure low-income
              expenditures were used in accordance with its HUD contract (see finding 3).




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                                        16
                    FOLLOWUP ON PRIOR AUDITS


Fiscal Year 2004 Audited
Financial Statements of the
Authority

            Yeager & Boyd, L.L.C., completed the most recent audit of the Authority’s financial
            statements for the 12-month period ending June 30, 2004. The financial statement
            report contained an unqualified opinion.

            None of the findings or recommendations in the report affected our audit objectives.




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                                             17
                                      APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS
                AND FUNDS TO BE PUT TO BETTER USE

                                                     Funds to be put
                              Recommendation         to better use 1/
                                     1D                  $ 3,811,688
                                     2A                  11,632,859

                                    Total                $15,444,527



1/     “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
       OIG recommendation is implemented, resulting in reduced expenditures later 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.




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                                                18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




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                         19
Comment 1




Comment 2




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Comment 3




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                       OIG Evaluation of Auditee Comments




Comment 1   The Authority stated that the number of homeownership sales from 2000 to
            2005 averaged 10.16 sales per year. The Authority’s average included sales
            from all of its homeownership programs; however, we only included sales for
            Heritage Estates development. According to Exhibit B provided by the
            Authority, 18 Heritage Estates units were sold since 2000. Our 3.4 yearly
            average home sales were based on the 17 Heritage Estate units, which were
            sold from 2000 to our audit completion date.

Comment 2   The Authority did not address its planned use of the estimated $5,013,000 sale
            proceeds of Section 5 (h) and HOPE 1 homes. However, the Authority stated
            it has requested HUD to allow all unsold homes to be placed under the annual
            contributions contract.

Comment 3   The Authority provided us documentation at the exit conference to support the
            payment of the advances. We revised the report accordingly and eliminated
            recommendation 3B regarding repayment of the advances.




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