U.S. Department of Housing and Urban Development
Office of Inspector General for Audit, Region V
Ralph H. Metcalfe Federal Building
77 West Jackson Boulevard, Suite 2646
Chicago, Illinois 60604-3507
Phone (312) 353-7832 Fax (312) 353-8866
Internet http://www.hud.gov/offices/oig/
MEMORANDUM NO:
2009-CH-0801
September 14, 2009
MEMORANDUM FOR: Anthony P. Scardino, Acting Deputy Chief Financial Officer, F
FROM: Heath Wolfe, Regional Inspector General for Audit, 5AGA
SUBJECT: Evaluation of the Final Front-End Risk Assessment of the Green Retrofit
Program for Multifamily Housing
INTRODUCTION
We reviewed the front-end risk assessment (assessment) of the Green Retrofit Program
(program) for Multifamily Housing for the U.S. Department of Housing and Urban Development
(HUD). Our objective was to determine whether the assessment complied with the Office of
Management and Budget’s guidance for the American Recovery and Reinvestment Act of 2009
(Recovery Act); the Recovery Act’s Updated Implementing Guidance; and HUD’s streamlined
assessment process. There are no recommendations in this memorandum.
METHODOLOGY AND SCOPE
Using the Office of Management and Budget’s Implementation Guidance for the Recovery Act
and HUD’s Recovery Act streamlined assessment process and its Department Management Control
Program handbook, we evaluated the following factors against the final assessment for the program
to ensure that the following major program objectives were sufficiently emphasized:
• Legislative,
• Organizational structure and staffing,
• Program objectives and performance measures,
• Program structure and administration,
• Coverage by written and other procedures,
• Systems,
• Funding/funds control and organizational checks and balances,
• Management attitude,
• Reporting and documentation,
• Monitoring, and
• Special concerns and impacts.
We performed our review from June through August 2009 at our Columbus, Ohio, audit office. For
this memorandum, our review was not conducted in accordance with generally accepted
government auditing standards. Under the Recovery Act, inspectors general are expected to be
proactive and focus on prevention; thus, this memorandum is significantly reduced in scope.
BACKGROUND
The Recovery Act appropriated $250 million to the program. Competitive grants and loans will
be administered by HUD’s Office of Affordable Housing Preservation (Office) for eligible
property owners (owner) of properties receiving project-based assistance pursuant to Section 202
of the Housing Act of 1959 (12 U.S.C. (United States Code) 17012), Section 811 of the
Cranston-Gonzalez National Affordable Housing Act (42 U.S.C. 8013), or Section 8 of the
United States Housing Act of 1937 as amended (42 U.S.C. 1437f). The purpose of the grants
and loans is (1) for owners to make green retrofit investments in the property, (2) to ensure the
maintenance and preservation of the property, (3) the continued operation and maintenance of
energy efficiency technologies, and (4) the timely expenditure of funds. Physical and financial
analyses of the properties will be conducted to determine the amount of each grant or loan. The
terms of the grants or loans will include continued affordability agreements. Grant and loan
funds must be spent by the receiving owner within two years.
The Office is the successor organization to the Office of Multifamily Housing Assistance
Restructuring. It was established by Congress in 1997 to restructure the debt on the aging
portfolio of privately owned affordable housing stock with Federal Housing Administration
(FHA)-insured mortgages and subsidized rents in a program called the Mark-to-Market program.
The same organizational team that has led efforts in the Mark-to-Market program will provide
the staffing for the program.
The new funding under the Recovery Act will require an ongoing evaluation and analysis of risk
and continued monitoring to work toward achieving the goals of the legislation. In applying the
Recovery Act implementing guidance regarding risk management, HUD will incorporate
elements of its assessment process. The streamlined assessment process will build upon the
analysis and work that is underway to implement the Recovery Act provisions, maximizing the
use of documents and materials available and supplementing, as needed, to ensure that internal
controls are in place.
RESULTS OF REVIEW
Our review of the final assessment for the program determined that it generally complied with
the Office of Management and Budget’s guidance for the Recovery Act, the Recovery Act’s
Updated Implementing Guidance, and HUD’s streamlined assessment process. Of the 11 factors
evaluated in the assessment, none was found to be high risk, four were assessed as medium risk,
and seven were assessed as low risk. The assessment’s risk assessment chart adequately
addressed planned actions for the four factors assessed as medium risk. Overall, the factors
identified above had the major program objectives sufficiently emphasized in the assessment and
resulted in the following:
• Legislative: HUD was given legislative authority through Title XII of the Recovery Act
that included authority for HUD to make loans, make grants, and take a variety of other
actions to facilitate utility-saving investments and other investments that produce
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environmental benefits in certain existing HUD-assisted multifamily housing, subject to
agreement between HUD and the owner. The legislative timelines are clearly defined as
the HUD Secretary must take steps necessary to ensure that owners receiving funding for
energy and green retrofit investments under this heading shall expend such funding
within two years of the date they receive the funding. To ensure that owners complete
the agreed-upon retrofits and expend funds as scheduled, the Office will use
rehabilitation escrow administrators to monitor and track owners’ progress toward
completion of the scheduled work for each property. In addition, the Office will offer
time-based incentives for owners to complete all of the scheduled physical rehabilitation
and retrofits successfully and in a timely manner.
Risk rating: Low
• Organizational structure and staffing: The same organizational team that has led efforts
in the Mark-to-Market program will provide the staffing for the program. The principal
change is in the increased staffing for participating administrative entities’ coordination
and its reporting directly to the Associate Deputy Assistant Secretary. It is not likely that
there will be procurement activity for this contract since the financial advisory contractor
is already in place as are the three participating administrative entity contracts. If
external postclosing portfolio management services are ultimately determined to be
needed, the Office will look to existing contractors on the HUD small procurement
schedule for such services. As the Mark-to-Market program nears its conclusion,
transaction flow has declined significantly. As a result, Office staff has sufficient
capacity to effectively manage the program concurrently with the Mark-to-Market
program activities.
Risk rating: Low
• Program objectives and performance measures: The program objectives as outlined in
the Recovery Act are stated in precise, measurable terms. The Office is specifically
directed
• “To make competitive grants or loans;
• To owners receiving project-based assistance under:
i. Section 202 of the Housing Act of 1959 (12 U.S.C. 17012),
ii. Section 811 of the Cranston-Gonzales National Affordable Housing Act
(42 U.S.C. 8013); or
iii. Section 8 of the United States Housing Act of 1937 as amended (42
U.S.C.1437f);
• For utility-saving retrofits and other retrofits that produce environmental benefits;
• With funds to be expended within two years of the date funding was received.”
In addition to experience gained through the Mark-to-Market Green Initiative, the Office
is well positioned to evaluate green performance measures as a result of specialized
training completed by its staff and contractors. Due to this training, the Office staff and
contractors are highly educated in matters of energy retrofits and green investments and
will use their knowledge to evaluate green products, components, and activities for their
appropriateness as “energy retrofit and green investment” compliant and for the
likelihood that each can be delivered and installed on site within the required timeframes.
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Specific performance metrics that will be collected and reported include
• The number of affordable housing units rehabilitated through the program,
• The number of units receiving energy conservation/green improvements, and
• Tracking the number of green jobs created or retained each quarter through
program activity.
HUD will collect quarterly recipient reports from grantees to measure results. The Office
will provide grantees with reporting instructions. A methodology has been established to
define green jobs using already defined green standards from Leadership in Energy and
Environmental Design and other organizations and Energy Star certification for reporting
correctly. The measurement data collected will be made available on the
HUD.gov/Recovery Web site.
Risk rating: Low
• Program structure and program administration: HUD established four major
activities that must be performed to attain the objectives of the program. They are
• Acceptance and processing of applications,
• Underwriting and determination of grants and/or loans to owners,
• Rehabilitation escrow administration with incremental disbursement of funds after
completion of green retrofit items, and
• Final closeout of each account.
Under the program, owners of eligible projects may be offered either a program grant or
loan of up to $15,000 per unit for an individual eligible project to be used to finance
green retrofits that will reduce ongoing utility consumption, benefit resident health,
and/or benefit the environment. Program grants and loans are expected to average
$10,000 per unit across all eligible projects that are funded. Program grants and loans
will be placed into rehabilitation escrow deposit accounts, and funds will be released only
upon receipt of appropriate on-site inspections, documentation, and owner certifications.
The Recovery Act mandates that the grants or loans under the program be provided
through the policies, procedures, contracts, and transactional infrastructure of the
authorized programs administered by the Office. The Office has recent experience in
underwriting green retrofits that are incorporated into Mark-to-Market restructurings
through the Mark-to-Market Green Initiative. The Office launched the Green Initiative in
2007 to assist projects going through the Mark-to-Market process in undertaking
rehabilitation in a way that promotes energy savings and efficiency and provides an
improved, healthier environment for tenants. In 2008, the Office’s senior management
and key staff received Leadership in Energy and Environmental Design professional
accreditation, which consisted of training in new construction and major renovation of
buildings that are energy efficient and which provide an improved environment for
inhabitants.
Risk rating: Low
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• Coverage by written and other procedures: HUD’s Housing Notice H 09-02, issued
on May 13, 2009, provides detailed, specific, and comprehensive written instructions for
procedures to be followed by grant applicants, recipients, and beneficiaries as well as
Office staff. As the need for clarification or further guidance arises, the Office may
publish and communicate to all stakeholders in any or all of the following ways:
• The Internet: The program Web site will provide guidance to grant applicants,
recipients, and beneficiaries as well as Office staff and other stakeholders.
• Training seminars: The Office plans to convene a two-day training seminar in the
summer of 2009 for Office staff, participating administrative entities, and other
stakeholders. The training will cover specific program requirements related to
underwriting, approval guidelines, and the closing process. The Office will
conduct other training seminars as needed and upon request from participating
administrative entities or HUD staff.
• Conference calls: A standing time slot will be maintained for conference calls,
which will be held biweekly for the first six months of the program. The calls
will include Office staff, participating administrative entities, and other HUD staff
to discuss policy, procedural issues, and questions arising from the specific
circumstances of individual assets going through the Green Retrofit Program.
Conference calls will continue on an as-needed basis after the first six months.
• Monthly production meetings: Monthly production meetings are held with
participating administrative entities and the Office to discuss the status of each
asset and identify any weakness and/or roadblock to performance. These
meetings are already in place for Mark-to-Market and the Mark-to-Market Green
Initiative process. The discussion of program assets can be incorporated into
these preexisting meetings with little to no difficulty.
Risk rating: Low
• Systems: The Office’s management information system, referred to as the “MIS
System,” officially identified as “HUD System F24B (Mark-to-Market),” located within
HUD’s secure systems Web application suite, will be used to track and document
significant milestones from receipt of the owner’s application through closing of the
transaction. The existing rehabilitation escrow database will be used to track the creation
of each program rehabilitation escrow account from inception through completion of
work. These systems will work with the Office’s infrastructure to provide the necessary
information to report on the recovery.gov Web site as well as any other reporting
required by the Office of Management and Budget.
Relatively minor enhancements will be needed to tailor the management information
system, used for tracking and managing the Mark-to-Market transaction progress and
process, to the program-specific milestones and transactional outcomes. Raw data
elements, milestone tracking, and reporting requirements for the program will be similar
to Mark-to-Market use. The logic behind both program and Mark-to-Market data
collection and reporting will be similar, since both are used to track a real estate
underwriting and closing process.
The Office is working with various groups within HUD to develop a system to track,
monitor, and control the disbursement of Recovery Act funds. The planned phase I
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changes to the Mark-to-Market system have been completed. The Office is beginning
phase II to determine and plan changes that are needed for program activities. Meetings
are scheduled to take place beginning in June 2009 to facilitate this coordination. The
goal is to have all system changes in place for the next Multifamily Housing Systems
scheduled release, anticipated to occur by October 30, 2009.
Risk rating: Medium
• Funding/funds control and organizational checks and balances: The Recovery Act
appropriated $250 million for grants or loans for energy retrofit and green investments
for eligible assisted housing to be administered by the Office. The Office’s program shall
be collectively known as the Green Retrofit Program. The Office will have three separate
program funds control plans reflecting the distinct commitment and funding processes for
each type of funding.
• The participating administrative entities’ funds control plan, 5 percent of program
funding, has been approved by HUD. This plan was drafted and approved first
because the participating administrative entities’ funds will be committed and
obligated by HUD much earlier in the program. The participating administrative
entities’ funds will be used by HUD to contract for the necessary underwriting
analyses required for HUD to determine whether and in what amount to fund
program grants or loans.
• Funding for staffing, training, technical assistance, technology, research, and
evaluation activities, 1 percent of program funding, will be addressed in the
Office of Housing’s salaries and expenses funds control plan and HUD’s working
capital plan.
• Plans for the balance of the funds, going for grants and loans, are being
developed. No grants or loans will be committed or obligated before approval of
appropriate funds control plans.
Risk rating: Medium
• Management attitude: Office management has taken steps to establish a control
environment that sets a positive and supportive attitude toward internal control
consciousness. The Office’s Green Retrofit Program Quality Control Team, including
one management-level staff member and four experienced line staff members, was
recently selected and assigned the task of reviewing HUD’s Housing Notice H 09-02 and
ensuring that all written guidance and programmatic decisions established for the
program are consistent both with the notice and across the documentation. This will be
an ongoing responsibility as additional or supplemental guidance is published.
Based on the controls that have been developed by Office staff, management
demonstrates a clear grasp of the importance of and commitment to the establishment of
the program and its goals. Office management is committed to conducting business with
the highest standard of ethics. Office staff maintains ethics educational requirements as
established by HUD.
Consistent communication between management and staff is a key factor in ensuring that
established policies and procedures are followed on a regular basis. Regular calls and
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meetings also provide a mechanism whereby departures from established policies and
procedures can be discussed. Changes in established policies and procedures may be
initiated by a need to consider an exception or a waiver or when considering new ideas or
initiatives. The Office has reports generated by various tracking systems (examples
include multiple reports from HUD System F24B, REMS (multiple reports), closing
reports, production management reports, postclosing portfolio management reports,
rehabilitation escrow aging reports, and assumption/subordination reports) that managers
use to track work progress of subordinate staff and the underlying transactions in
conjunction with regularly scheduled work tracking meetings. Additionally, the Office
has a regular series of calls and meetings as well as ad hoc calls and meetings to monitor
progress and discuss ongoing and new issues.
Risk rating: Low
• Reporting and documentation: HUD’s Housing Notice H 09-02 for the program
provides participants with information about program policies, procedures, and reporting
requirements. The Office will be able to distribute additional guidance electronically to
all program participants as needed through the resource desk, a Web-based clearinghouse
for information. Program-specific information, documents, directives, and alerts are
communicated in this manner for Mark-to-Market issues, and the resource desk will be
able to serve a similar function for the program. In addition, the resource desk is an
avenue by which stakeholders can raise questions regarding program policies and
processes. Office systems are also being modified to produce reports that will track the
use of program funds according to the statutory requirements for loans and grants (94
percent of the total appropriated); appropriate underwriting and oversight (5 percent of
the total appropriated); and training, technical assistance, technology, monitoring,
research, and evaluation activities (1 percent of the total appropriated). Office systems
also are being developed to track the applications for funding by category as established
in HUD’s Housing Notice H 09-02. The Office will need to track applicants by project
category (for example, Section 202 projects and Section 811 projects) and by HUD
region.
While documentation and reporting will build on current Office systems, the need to
expand the capabilities of some of these systems to provide separate reporting for the
program and the need to create applications unique to the program make this activity a
medium-risk activity. This risk is mitigated by the planned action of creating the systems
to track and provide management with reports on activities and on compliance with all
program requirements. Managers and staff will be accountable for meeting program
goals, and this accountability will become part of the performance review process. The
Office uses reports generated by tracking systems for managers to review work progress
in conjunction with regularly scheduled workload tracking meetings. Additionally, the
Office conducts regular calls and meetings and ad hoc calls and meetings to monitor
progress and discuss ongoing and new issues.
Risk rating: Medium
• Monitoring: Oversight and monitoring for the program use the Office data systems,
which are being expanded to include program activities. Approximately 300 properties
are expected to participate in the program. This program size will allow monitoring
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systems to track all participants and provide regular reporting and exceptions reporting to
Office staff for all properties on an ongoing basis. To address the accountability
objective of ensuring that funds are used for authorized purposes and to mitigate the risk
of fraud, waste, error and abuse, the Office will use its contract with its participating
administrative entities to provide ongoing monitoring of the quality of work submitted by
each participating administrative entity and of program outcomes generated by each
participating administrative entity. Also, the rehabilitation escrow deposit agreement
(agreement) provides for periodic monitoring of the work performed by the owner.
Funds will not be released from the rehabilitation escrow until after the rehabilitation
escrow administrator has received and accepted the report from an on-site inspection,
confirming that each respective improvement was completed as specified in the
agreement, and has reviewed the funds reimbursement request and all required owner
documentation and certifications. Several practices have been established to assist the
Office in monitoring participating administrative entities’ performance. The office will
expand the monitoring of the participating administrative entities to include monitoring
the progress of properties participating in the program.
Risk rating: Medium
• Special concerns and impacts: The program is going to receive scrutiny based on its
origin as a part of the Recovery Act, a much debated and high-profile effort by the
administration to revive the American economy. The statute underlines the urgency of
the task by creating extremely tight timeframes for delivering money to participants that
can be quickly turned into jobs. The Office is singularly well suited among HUD offices
to oversee this program based on its performance in the Mark-to-Market program.
HUD stated that The Mark-to-Market program and the Office have withstood many
reviews of its program and outcomes by HUD’s Office of Inspector General, The U. S.
Government Accountability Office, and voluntary internal audits. The Office has
routinely engaged a third-party audit firm to confirm compliance with the documentation
requirements of the Mark-to-Market Operating Procedures Guide. These audits have
always shown that participating administrative entities are in substantial compliance.
Risk rating: Low
RECOMMENDATION
Based on the results of this review, this memorandum report contains no recommendations.
AUDITEE’S RESPONSE
We provided our discussion draft audit memorandum to HUD’s Acting Deputy Chief Financial
Officer on September 2, 2009. HUD declined our offer for an exit conference and to provide
written comments on the discussion draft audit memorandum.
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Evaluation of the Final Front-End Risk Assessment of the American Recovery and Reinvestment Act of 2009's Green Retrofit Program for Multifamily Housing
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-14.
Below is a raw (and likely hideous) rendition of the original report. (PDF)