Issue Date
April 8, 2009
Audit Report Number
2009-CH-1006
TO: Lucia M. Clausen, Director of Public Housing Hub, 5KPH
FROM: Heath Wolfe, Regional Inspector General for Audit, 5AGA
SUBJECT: The Housing Authority of the City of Milwaukee, Wisconsin, Needs to Improve
Its Procedures and Controls regarding Its Homeownership Programs
HIGHLIGHTS
What We Audited and Why
We audited the Housing Authority of the City of Milwaukee’s (Authority) 5(h)
and Section 32 homeownership programs (programs). We selected the Authority
based on a risk analysis showing that it had high-risk program indicators. Our
objectives were to determine whether the Authority properly accounted for and
used its programs’ proceeds in accordance with the U.S. Department of Housing
and Urban Development’s (HUD) requirements and properly administered its
programs in accordance with the Authority’s plans.
What We Found
The Authority did not adequately administer its programs with regard to whether
program units were used by purchasers as their residences, sold to eligible
purchasers, sold at their appraised value, and met HUD’s recapture requirements.
It also did not ensure that outstanding mortgage notes owed to it were recaptured.
The Authority lacked adequate procedures and controls to ensure that HUD’s
regulations and its plans were followed in regard to the use of its 5(h) program
units by purchasers as their residences and the recapture of outstanding mortgage
notes owed to it. It failed to recover $68,366 for two units that it sold that were
not used by the purchasers as their residences. Further, the Authority did not
recover two outstanding mortgage amounts owed to it totaling $23,399.
The Authority improperly sold a Section 32 program unit for $114,500 to an
individual who, five months before the sale, acquired a non-Authority property. It
also sold six Section 32 program units for a total of $150,000 below their
appraised values. Further, the Authority did not require the appropriate
restrictions and/or covenants for any of its 21 Section 32 program units sold.
We informed the Authority’s executive director and the Director of HUD’s
Minneapolis Office of Public Housing of minor deficiency through a
memorandum, dated March 31, 2009.
What We Recommend
We recommend that the Director of HUD’s Minneapolis Office of Public Housing
require the Authority to reimburse its applicable homeownership program from
nonfederal funds for the improper use of more than $356,000 in program funds
and implement adequate procedures and controls to address the findings cited in
this audit report to properly secure its interest in program units.
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 our review results and supporting schedules to the Director of
HUD’s Minneapolis Office of Public Housing, the Coordinator of HUD’s
Milwaukee Office of Public Housing Program Center, and the Authority’s
executive director during the audit. We provided our discussion draft audit report
to the Authority’s executive director, its board chairman, and HUD’s staff during
the audit. We held an exit conference with the Authority’s executive director on
March 20, 2009.
We asked the executive director to provide written comments on our discussion
draft audit report by March 26, 2009. The executive director provided written
comments, dated March 26, 2009, and he agreed with our findings. The complete
text of the auditee’s response, along with our evaluation of that response, can be
found in appendix B of this report except for 18 pages of documentation that was
not necessary for understanding the Authority’s comments. A complete copy of
the Authority’s comments plus the documentation was provided to the Director of
HUD’s Minneapolis Office of Public Housing.
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TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: The Authority Lacked Adequate Procedures and Controls regarding
Its 5(h) Program 5
Finding 2: The Authority Lacked Adequate Procedures and Controls regarding
Its Section 32 Homeownership Program 8
Scope and Methodology 12
Internal Controls 13
Appendixes
A. Schedule of Questioned Costs 15
B. Auditee Comments and OIG’s Evaluation 16
C. Federal Requirements and the Authority’s Program Implementing Agreements 23
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BACKGROUND AND OBJECTIVES
The Housing Authority of the City of Milwaukee (Authority) was chartered in 1944 under Section
66 of the Wisconsin State Statutes. It is responsible for the construction, management, and
provision of safe, affordable, and quality housing with services that enhance residents’ self-
sufficiency. The Authority is governed by a seven-member board of commissioners, which is
appointed by the mayor and confirmed by the common council. The commissioners are appointed
to staggered five-year terms. The Authority’s executive director, appointed by the board of
commissioners, is responsible for carrying out the mission and vision of the Authority and ensuring
that the Authority’s programs comply with the applicable federal, state, and local regulations,
ordinances, and policies adopted by the board of commissioners. As of December 31, 2008, the
Authority managed 4,364 public housing units and had 5,182 Section 8 vouchers.
The Authority sold 161 public housing units from June 1994 through June 2008 totaling more than
$9.4 million in net proceeds. Fifty-two of the units were acquired or constructed in conjunction
with two of the Authority’s HOPE VI redevelopment grants. These units contributed more than $4
million in net proceeds. One hundred and nine of the units were the Authority’s public housing
scattered sites inventory. These units contributed more than $5.3 million in net proceeds. All of the
161 public housing units were sold under the Authority’s 5(h) or Section 32 homeownership
program plans.
The Section 5(h) homeownership program offers housing authorities a flexible way to sell public
housing units to low-income families. The 5(h) program helps low-income families purchase
homes through an arrangement that benefits both the buyer and the public housing authority that
sells the unit. It gives the buyer access to an affordable homeownership opportunity and the
many tangible and intangible advantages of homeownership. Homeownership can be an
important part of self-sufficiency for low-income families, providing a way of building wealth as
well as increasing self-esteem and security. The program was authorized by Section 5(h) of the
United States Housing Act of 1937. The Section 32 homeownership program replaced the 5(h)
program and was established by the Quality Housing and Work Responsibility Act of 1998. It
was patterned largely after the U.S. Department of Housing and Urban Development’s (HUD)
regulations that implemented the 5(h) program.
Our objectives were to determine whether the Authority properly accounted for and used its 5(h)
and Section 32 homeownership programs’ proceeds in accordance with HUD’s requirements and
properly administered its programs in accordance with the Authority’s plans. Its programs’
proceeds were properly accounted for and used in accordance with HUD’s requirements.
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RESULTS OF AUDIT
Finding 1: The Authority Lacked Adequate Procedures and Controls
regarding Its 5(h) Program
The Authority failed to recover $68,366 for two units that it sold that were not used by the
purchasers as their residences. It also did not recover two outstanding mortgage balances owed
to it totaling $23,399. These problems occurred because the Authority lacked adequate
procedures and controls to ensure that HUD’s regulations and its 5(h) homeownership program
plan (see appendix C of this audit report) were followed with regard to the use of program units
by purchasers as their residences and the recapture of outstanding mortgage notes owed to it. As
a result, $91,765 in program proceeds was not used to provide housing assistance to low-income
families.
Two 5(h) Units Were Not Used
as Purchasers’ Residences
Section D.3.b in Part I of the Authority’s 5(h) program plan for 2000 requires that
purchasers agree to reside in the dwelling units for a period of at least five years
from the date of conveyance. The Authority lacked adequate procedures and
controls to verify that the residency requirements detailed in its plan were met.
Additionally, its title company neglected to have each purchaser sign the residency
agreement at the respective property’s closing.
Using data mining software, we determined that there was a high probability that
six of the Authority’s 50 5(h) program units sold between December 2002 and
July 2005 were not used by the homeowners as their residences. We were able to
contact the purchasers and verified that two had not used program units as their
residences as of November 2008. The two purchasers were leasing the units as of
November 2008. One of the owners had received more than $25,000 in housing
assistance payments from Milwaukee County’s Department of Health and Human
Services-Housing Division’s Section 8 Housing Choice Voucher program for
leasing the 5(h) homeownership program unit since October 2004.
The Authority received more than $122,000 in net proceeds for the two units sold on
December 20, 2002, and July 15, 2004, respectively. Based upon its 5(h) program’s
five-year residency requirement, HUD should require that the Authority reimburse
its 5(h) program $68,366 for the net proceeds. The reimbursement amount was
determined by calculating the percentage of time that each purchaser did not reside
in the unit during the 5(h) program’s required five-year residency requirement times
the net sale proceeds received by the Authority, as shown in the following table.
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Reimbursement
Period amount
purchaser (reimbursement
Net sale did not reside Number of Reimbursement factor times net
Sale date proceeds in unit months factor sale proceeds)
August 2006 17 months/60
to December 17 months months (28.33
December 20, 2002 $63,286 2007 percent) $17,931
October 2004 51 months/60
to December months (85
July 15, 2004 59,335 2008 51 months percent) 50,435
Totals $122,621 $68,366
According to the Authority’s homeownership program manager, the Authority
had not examined whether purchasers used units as their residences due to staff
turnover and workload. The program manager said that he planned to discuss the
recovery of the funds from the purchasers with the City of Milwaukee’s attorney.
Mortgages Were Not Collected
Between December 27, 1995, and January 2, 2004, the Authority granted 83
noncash mortgages for purchasers of 5(h) program units. The 30-year mortgages,
of up to $25,000, were offered to households in cases where there was a gap
between the bank approved mortgage amount and the appraised value of the
program unit. For the purchasers who were granted the 30-year noncash
mortgages, the Authority received net proceeds that were less than the appraised
values of the units. The difference between the net proceeds and the appraised
value of these units was covered by the 30-year noncash mortgages. The noncash
mortgages were due when the units were resold.
According to HUD’s regulations at 24 CFR (Code of Federal Regulations)
906.14(b), when the potential for windfall profit exists because the dwelling unit
is sold to the initial purchaser for less than fair market value, without a
commensurate limited or shared equity restriction, the initial purchaser will
execute a promissory note payable to the public housing agency, along with a
mortgage securing the obligation of the note. The mortgages signed by the
purchasers indicated that the borrower would not transfer, sell, or convey any
legal or equitable interest in the property without the prior written consent of the
lender unless either the indebtedness secured by the mortgage was first paid in
full or the interest conveyed was a mortgage or other security interest in the
property, subordinate to the lien of the mortgage.
Ten of the purchasers who were granted mortgages resold their units, and the
Authority collected the outstanding balances for eight mortgages. The two
mortgages that the Authority did not collect had outstanding balances totaling
$23,399 at the time the units were resold. The Authority sold the two program
units on December 27, 1995, and July 8, 1996, for $76,000 and $46,500 while
6
holding second and/or third mortgages for $28,500 and $9,405, respectively. The
units were resold by the purchasers on April 28, 2005, and May 22, 2006, for
$152,900 and $109,000, respectively.
According to the Authority’s homeownership program manager, the Authority
secured the mortgages by registering limited warranty deeds and mortgage notes
with the Milwaukee County (County) Registrar’s office. When the borrower
attempted to resell the program unit, the limited warranty deed and mortgage note
would show up as items of record that would need to be satisfied before the title
was transferred. The borrower’s title company would notify the Authority of the
sale and inquire as to the amount owed on the mortgage. At the time the two
program units in question were sold by the Authority, the City of Milwaukee’s
(City) attorney was responsible for processing property closings. The attorney did
not register the limited warranty deeds and mortgage notes with the County’s
office. Therefore, the Authority was not notified when the program units were
resold. The Authority’s homeownership program manager said that he planned to
discuss the collection of the outstanding mortgages with the City attorney.
Conclusion
The Authority did not ensure that program units were used by purchasers as their
residences and failed to recapture outstanding mortgages owed to it. As previously
mentioned, two program units were not used by purchasers as their residences, and
the Authority did not recover $23,399 in funds owed to it.
Recommendations
We recommend that the Director of HUD’s Minneapolis Office of Public Housing
require the Authority to
1A. Reimburse its 5(h) homeownership program $68,366 from nonfederal
funds for two program units cited in this finding that were not used as the
purchasers’ residence.
1B. Reimburse its 5(h) homeownership program $23,399 from nonfederal
funds for the two unrecovered mortgage notes cited in this finding.
1C. Implement adequate procedures and controls to ensure that that its 5(h)
homeownership plan’s requirements and HUD’s regulations are followed
to include determining whether purchasers are residing in the program
units and outstanding mortgage notes are recovered when due.
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Finding 2: The Authority Lacked Adequate Procedures and Controls
regarding Its Section 32 Homeownership Program
The Authority improperly sold a program unit for $114,500 to an individual who, five months
before the sale, acquired a non-Authority property. It also sold six program units for a total of
$150,000 below their appraised values. Further, the Authority did not require the appropriate
deed restrictions and/or covenants for any of its 21 Section 32 program units sold. The problems
occurred because the Authority lacked adequate procedures and controls to ensure that its
Section 32 program units were sold to program-eligible purchasers, were sold at their appraised
value, and met HUD’s recapture requirements. As a result, these sales did not fully achieve all
of the intended benefits of the Authority’s program.
Prior Homeownership Checks
Were Not Documented
The Authority sold 21 Section 32 program units from August 17, 2006, to June 3,
2008, and received net proceeds of nearly $1.4 million.
The Authority’s Section 32 program plan requires that program eligibility be limited
to first-time homebuyers or those who have not owned a home in the past three
years. The Authority did not maintain documentation to support that the purchasers
of its 21 Section 32 program units met this requirement. On January 30, 2008, it
sold a program unit for $114,500 to a purchaser who had acquired a non-Authority
property located in Milwaukee in August 2007.
The Authority’s homeownership program manager said that the Authority conducted
checks to determine whether program applicants had previously owned property.
The Authority used the City’s Department of Neighborhood Services’ Website to
check the property ownership status of program applicants. However, it only
documented the checks if an applicant had previously owned a property. The
homeownership program manager said that the Authority performed a check on the
individual who acquired a non-Authority property before the program unit purchase.
At the time the check was performed, this individual had not yet acquired the non-
Authority property. However, the Authority could not provide documentation to
support that the individual was eligible for the program.
Units Were Sold Below Their
Appraised Values
The Authority sold 6 of its 21 Section 32 program units at sale prices totaling
$150,000 below their appraised values contrary to its plan requirements. The
appraisals were performed by an independent appraisal company and noted any
adverse conditions during the inspection of the properties and that these conditions
8
were considered in the analysis of the property values. All of the units were vacant
and boarded up at the time of the appraisal and were in varying degrees of disrepair.
This disrepair included minor damage to tile floors, peeling interior paint, damaged
windows, and damaged and/or missing siding.
According to the Authority’s homeownership program manager, the Authority
considered rehabilitating the six units and then selling them. However, it determined
that it was not economically feasible to rehabilitate the units. Therefore, the
Authority offered the six units to the clients of nonprofit organizations. The decision
not to rehabilitate the units was based on costs, appraised value, location, and the
real estate market. The Authority performed informal scopes of work to estimate the
rehabilitation costs for the six units. Since the estimated rehabilitation cost exceeded
the appraised value, the Authority decided to sell the units at a discount below their
appraised value. However, the Authority’s plan required the units to be sold at their
appraised value. The following table shows the sale date, appraised value, sale
price, and loss to the Authority’s Section 32 homeownership program for the six
units.
Appraised Loss to
Date of sale value Sale price program
March 1, 2007 $50,000 $2,000 $48,000
March 1, 2007 35,000 1,000 34,000
February 29, 2008 66,000 40,000 26,000
March 14, 2008 36,000 30,000 6,000
March 28, 2008 64,000 48,000 16,000
May 21, 2008 26,000 6,000 20,000
Totals $277,000 $127,000 $150,000
The six program units were sold to individuals who were referred to the Authority
by two nonprofit organizations. The organizations assisted the individuals in
rehabilitating the units.
In August 2008, HUD’s Milwaukee Office of Public Housing Program Center
became aware of the Authority’s practice of selling Section 32 homeownership
program units below their appraised value and directed it to no longer engage in this
practice. The Authority sold no additional units below their appraised value after
receiving HUD’s directive.
No Deed Restrictions or
Covenants Were Secured
Section M of the Authority’s Section 32 homeownership program plan describes the
antispeculation provisions, which ensure that it will reclaim 100 percent of any
appreciation if a program unit is sold within the first year of ownership. That
percentage will be reduced by 20 percent each year so that the owner can realize full
9
appreciation after five years of ownership provided that the outstanding mortgage
has been satisfied, if applicable. The cost of any market improvements that resulted
in an increased appraised value will be deducted from the appreciated amount and
retained by the seller. HUD’s regulations at 24 CFR 906.39(n) state that a
homeownership program must include a deed restriction or covenant running with
the property that will assure to HUD’s satisfaction that the recapture requirements at
24 CFR 906.27 have been met.
The Authority did not properly secure the 21 program units sold with deed
restrictions or covenants to ensure that HUD’s requirements were met. It granted
noncash mortgages for 10 program units, and limited warranty deeds were
established. However, the deeds did not address the Authority’s antispeculation
provisions. For the remaining 11 program units, no deed restrictions or covenants
were issued. HUD approved the Authority’s plan to sell a total of 50 units using the
Section 32 program.
According to the Authority’s homeownership program manager, the Authority
established a recapture policy because it was required by HUD’s regulations.
However, it did not implement the policy because if homeownership units were sold
within five years, the market appreciation would have been minimal once the value
of the home improvements was deducted. Also, the Authority did not want to
prevent the homeowners from using any gains based upon market appreciation to
purchase a larger and nicer home.
Conclusion
As previously mentioned, the Authority sold a program unit for a sale price of
$114,500 to a purchaser who concurrently owned a non-Authority property, six
program units were sold for a total of $150,000 below their appraised values, and
the Authority did not properly secure the 21 program units sold with deed
restrictions or covenants to ensure that its plan was followed and HUD’s
requirements were met.
Recommendations
We recommend that the Director of HUD’s Minneapolis Office of Public Housing
require the Authority to
2A. Provide documentation to support that the individual was program eligible
at the time its Section 32 homeownership program unit was sold. If
documentation cannot be provided, the Authority should reimburse its
program $114,500 from nonfederal funds for the sale of a program unit to
an ineligible purchaser.
10
2B. Reimburse its Section 32 homeownership program $150,000 from
nonfederal funds for the program sale proceeds lost due to the sale of six
units for less than their appraised market value.
2C. Implement adequate procedures and controls to ensure compliance with its
plan and HUD’s requirements for program applicants including the
assurance that program applicants do not currently own or have not owned
a home for the previous three years.
2D. Implement adequate procedures and controls regarding its Section 32
homeownership program units to ensure that they are properly secured to
meet HUD’s requirements and comply with the Authority’s recapture
provision identified in its program plan.
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SCOPE AND METHODOLOGY
To accomplish our objectives, we reviewed
• Applicable laws and regulations, HUD’s program requirements at 24 CFR Part 906, and the
Authority’s annual contributions contract with HUD.
• The Authority’s 5(h) and Section 32 homeownership plans and implementing agreements;
bank statements, check register; annual audited financial statements for 2005, 2006, and 2007;
general ledgers; and homeownership files.
• HUD’s files for the Authority.
We also interviewed HUD’s staff, the Authority’s employees, and staff members of the
Dominican Center and Allied Churches Teaching Self-Empowerment.
Finding 2
We reviewed all 21 program units sold under the Authority’s Section 32 program from August
17, 2006, to June 3, 2008. The sales of the program units were reviewed to determine whether
the Authority properly secured the units according to its plan and HUD’s requirements. We
determined that the Authority did not properly secure the 21 units (100 percent) with the required
deed restrictions or conveyances. It is authorized by its approved plan to sell a total of 50 units.
Therefore, there were 29 units remaining to be sold.
We performed the audit work at the Authority’s offices located at 809 North Broadway Avenue
and 2363 North 50th Street, Milwaukee, Wisconsin, and HUD’s Chicago regional and Milwaukee
field offices. The audit covered the period January 1, 2007, through May 31, 2008. The period
was adjusted as determined necessary.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
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INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls are achieved:
• Program operations,
• Relevance and reliability of information,
• Compliance with applicable laws and regulations, and
• Safeguarding of assets and resources.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit
objectives:
• Program operations – Policies and procedures that management has
implemented to reasonably ensure that a program meets its objectives.
• Validity and reliability of data – Policies and procedures that management
has implemented to reasonably ensure that valid and reliable data are
obtained, maintained, and fairly disclosed in reports.
• Compliance with laws and regulations – Policies and procedures that
management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
• Safeguarding resources – Policies and procedures that management has
implemented to reasonably ensure that 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 an organization’s objectives.
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Significant Weakness
Based on our review, we believe that the following item is a significant weakness:
• The Authority lacked adequate procedures and controls to ensure that its
programs were administered in accordance with its 5(h) and Section 32
program plans and HUD’s requirements (see findings 1 and 2).
Separate Communication of
Minor Deficiency
We informed the Authority’s executive director and the Director of HUD’s
Minneapolis Office of Public Housing of minor deficiency through a
memorandum, dated March 31, 2009.
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APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation
number Ineligible 1/ Unsupported 2/
1A $68,366
1B 23,399
2A $114,500
2B 150,000
Totals $241,765 $114,500
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/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
or activity when we cannot determine eligibility at the time of the audit. Unsupported
costs require a decision by HUD program officials. This decision, in addition to
obtaining supporting documentation, might involve a legal interpretation or clarification
of departmental policies and procedures.
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Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Mr. Ronald Farrell
Assistant Regional Inspector General for Audit
U.S. Department of HUD-Office of Inspector General
200 North High Street, Room 334
Columbus, Ohio, 43125
March 26, 2009
Re: DISCUSSION DRAFT AUDIT REPORT ON OIG’S AUDIT OF THE
HOUSING AUTHORITY OF THE CITY OF MILWAUKEE’S 5(h)
AND SECTION 32 HOMEOWNERSHIP PROGRAMS
Dear Mr. Farrell,
Thank you for the opportunity to respond to your March 12, 2009 discussion draft
regarding the Housing Authority’s 5(h) and Section 32 Homeownership Programs.
Over the past 15 years, the Housing Authority has helped 445 families living in
public housing or subsidized housing transition to homeownership.
Fundamentally, the Housing Authority’s homeownership program is an extension
of its efforts to promote self-sufficiency among its residents and has been
instrumental to the Housing Authority’s Hope VI and neighborhood revitalization
acitivities. These homeownership programs benefit the buyer, the Housing
Authority, HUD, and the community.
Enclosed are our responses to your findings. For the reasons stated below, we are
Respectfully asking you to reconsider your recommendation of repayment of
$356,000 in program funds, which you have described as “…funds to be put to
better use.:.”
Comment 1 Your calculation of net proceeds does not take into consideration our staff costs, city
attorney fees, etc. If the Housing Authority’s actual costs were taken into
Consideration, the net proceeds would be lower. Moreover, each homeownership
sale “saves” HUD over $7,500 annually in subsidy and utility costs, while creating
new homeowners who are invested in the community.
Comment 2 The Housing Authority did not benefit from any of these transactions and should
not be penalized for the purchasers’ noncompliance with program regulations. The
Housing Authority can and will be pursuing legal actions where appropriate, and the
homeownership program will be reimbursed with any “proceeds” resulting
from these actions.
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Ref to OIG Evaluation Auditee Comments
We use our limited resources to provide assistance to families. Through the
use of data mining software and additional contact with purchasers, you
determined that two families, less than 2% of the families participating in the
homeownership program, did not use their homes as their principal residences.
The Housing Authority regularly revises or adjusts programs and procedures to
provide the highest level of services to HUD, our families and the community.
To this end, we are trying to balance reasonable oversight with the provision of
services to promote homeownership opportunities in our community.
Two 5(h) Units Were Not Used as Purchasers’ Residence:
The Housing Authority has, and will continue to, reassess and revise its
homeownership policies and procedures to comply with regulatory changes.
Purchasers are aware of the five-year residency requirement, and the Housing
Authority’s closing agent has been directed to include a separate, signed and
Notarized residency agreement to the closing documents with a similar
provision in the limited warranty deed. The Housing Authority will review the
City of Milwaukee’s Assessors database to determine whether there has been
any change in the mailing address for the property tax bill for any purchases
during the past five years in which the Housing Authority provided a second
mortgage. Staff will check the assessor’s database annually for the first five
years of ownership as a means to determine potential changes in ownership.
If there is a violation of residency, the Housing Authority will consider the
legal remedy of calling the second mortgage due or referring to local law
enforcement or HUD OIG for fraud investigation.
Mortgages Were Not Collected:
The audit brought to light that, in the mid-1990s, the City Attorney’s Office
failed to record the second mortgages on the two noted properties, resulting in
subsequent sales without recapture.
In 1997, HACM retained National Title and Closing Services to perform title
Searches and serve as closing agent for all its homeownership sales. Since that
time, the second mortgages have been properly recorded. Nonetheless, we are
in the processing of reviewing all of the 5(h) and Section 32 sales to ensure
that each second and third mortgage was indeed recorded to secure HACM’s
interest.
Effective immediately, no sale file will be closed until sufficient
Documentation is received and included in the file, ensuring that this oversight
will not occur in the future.
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Ref to OIG Evaluation Auditee Comments
In response to your recommendation:
Reimbursement of $91,765 in nonfederal funds would only serve to diminish
HACM’s capacity to serve its current residents, and we respectfully ask for
your reconsideration of this recommendation for reimbursement. It should be
noted that the two units in question are no longer owned by the program
participants. Both of these units were sold over five years ago, one without
Comment 3 subsidy, making the residency requirement inapplicable. The Housing
Authority will implement additional controls, as outlined above, to ensure
compliance with the residency requirement and pursue appropriate action.
Prior Homeownership Checks Were Not Documented:
Although the documentation was not included in the file, staff do standard
background checks for eligibility, obtain signed affidavit from the applicant
and reviews available ownership information through the City of Milwaukee
Assessors’ and Department of Neighborhood Services’ websites for each of
the participants. In these cases, the “no-matches” search results print-out was
not included in the file.
Units Were Sold Below Their Appraised Values:
In considering units for homeownership, HACM takes into account location,
the amount of rehab required, and the homes’ marketability.
The six units referenced in the finding were units that had repairs exceeding
estimated appraised value and units for which there was no buyer interest.
Because a Community Based Organization (CBO) was able to combine its
funding resources and the buyers’ sweat equity, the rehab and sale of the
Comment 4 homes became economically feasible under the CBO’s programming. HACM
decided to sell these units under appraised value, and before repairs were
made, in order to save the houses from demolition and as a contribution for the
benefit of the neighborhood which the CBO represented. The buyers were
eligible under the Section 32 plan, and provided with required counseling
services. The CBO coordinated the rehab work, and the units were code
compliant before they were occupied.
18
Ref to OIG Evaluation Auditee Comments
HACM was remiss in that it didn’t plan for this type of community partnership
in its homeownership proposal. However, this has been discussed with the
Field Office, and it is understood that future sales of this nature will be done
through approved disposition and public bid.
No Deed Restriction or Covenants Were Secured
HACM agrees with and fully supports the anti-speculation intentions outlined
in HUD’s Section 32 program guidelines. Over the past two decades, too many
Neighborhoods have seen a rise in property flipping and inflated housing
prices, adding to the current distressed economic climate. It was with the goal
of promoting long-term homeownership, neighborhood stability, and fair
housing prices that HACM designed its anti-speculation policy for its
homeownership program.
After the approval of the Section 32 program, it became evident that the anti-
speculation policy was, for all practical purposes, superfluous. The homes
sold under the Section 32 program are fully rehabbed before sale, and are sold
at appraised value, eliminating the opportunity to ‘flip’ the property after
buying at depressed prices and making improvements. Eligible buyers are low
to moderate income families, and lack the financial ability to make significant
improvements to properties that would net any substantial appreciation.
Comment 5 The above factors, along with a topped out housing market, proved that
property speculation among eligible buyers did not pose considerable concern;
that the program design itself protects against inflated re-sales of HACMh
houses; and that executing the anti-speculation policy would be onerous and
unproductive.
HACM’s philosophy embraces the promotion of self-sufficiency; one way
being through homeownership. A homeownership unit sale that increases the
program buyer’s wealth through property equity and long term appreciation is
considered a successful outcome.
Responses to Recommendations for Finding 2:
The Housing Authority respectfully requests reconsideration of the
reimbursement of $114,500 from nonfederal funds because staff did check the
Comment 6 applicant’s program eligibility; however, the documentation was not included
in the file. The applicant referenced in the finding applied to the
homeownership program in February 2007. Staff checked for prior ownership,
and found none, but failed to place a copy of the “no matches” print out in the
19
Ref to OIG Evaluation Auditee Comments
File. The fact that no prior ownership information was available can be
substantiated by her credit report, obtained in November, 2007, months after
the purchase of the unreported owned property. Supporting documentation,
including the November 2007 credit report, has been forward for investigation
and is not included in this response. It is the Housing Authority’s position that
due diligence was indeed done on the case cited above and that it was the
buyer who knowingly and deliberately defrauded the program. The City
Attorney will work with HUD OIG to undertake the appropriate legal action.
Housing Authority staff will continue to make reasonable efforts to ensure that
the homes sold under its Section 32 program are sold only to those who meet
the program definition of a first time buyer. Because due diligence was done
in this case, by all parties, the Housing Authority should not be penalized by
reimbursing the program $114,500 from nonfederal funds. Also,
reimbursement or return of the fraudulently obtained unit may well be
accomplished via legal action.
The Housing Authority respectfully requests reconsideration of the
reimbursement of $150,000 from nonfederal funds. Because the units were
sold to advance the goals of the homeownership program, for the benefit of
HUD, the Housing Authority, and the community, and because this constitutes
a first time policy infringement, we believe reimbursement of $150,000 in
nonfederal funds would be punitive and diminish the Housing Authority’s
capacity to serve its current residents.
The Housing Authority will continue to use reasonable efforts to ensure that
the homes sold under its Section 32 program are sold only to applicants who
meet the program definition of first time home buyer.
The Housing Authority will periodically review, assess, and amend its
homeownership programs, policies, and controls to ensure that they meet
HUD’s requirements and comply with the Housing Authority’s approved plan.
As a result of this audit, the Housing Authority will be submitting a revised
homeownership plan for consideration by its Board of Commissioners, and
subsequent review and approval by HUD.
20
Ref to OIG Evaluation Auditee Comments
Over the past 15 years, the Housing Authority has received thousands of
inquiries and applications from Milwaukee families interested in pursuing the
dream of home ownership. Over 700 applications were received in the past
two years alone. Facing debt issues and lack of credit, 161 hopeful
homeowners were able to purchase an affordable, fully rehabbed home
because the Housing Authority, in partnership with HUD, provided counseling
services, professional guidance, and forgivable second mortgage subsidies.
Milwaukee’s homeownership program has helped stabilize neighborhoods,
reduce crime and blight, and promote self-sufficiency.
Comment 7 Although the findings did uncover several administrative lapses during the 15-
year execution of the Section 5(h) and 32 programs, the Housing Authority is
taking corrective action to ensure mortgages are recorded, homebuyers use the
property as their residence, and all activitiy is consistent with our approved
plan. Additionally, we will request amendments to the plan that are in line with
the current market conditions while maintaining the program’s appeal to
potential buyers. The Housing Authority is proud of its accomplishments and
hopes to continue creating new homeowners for another 15 years, or more.
Sincerely,
21
OIG Evaluation of Auditee Comments
Comment 1 We questioned the applicable amounts that the Authority received from the sale
for each respective property cited in the findings and were supported by its
financial records.
Comment 2 Any funds that the Authority may receive through its corrective actions could be
used as a source of nonfederal funds to reimburse its program for the findings in
this report.
Comment 3 Section D.3.b in part I of the Authority’s 5(h) program plan for 2000 requires that
purchasers agree to reside in the dwelling units for a period of at least five years
from the date of conveyance.
Comment 4 The Authority’s Section 32 homeownership plan requires it to sell
homeownership units at the appraised value. When it was not feasible to sell the
units at their appraised value, the Authority had the option to remove the units
from its Section 32 homeownership program and dispose of them using Section
18 of the Housing Act.
Comment 5 HUD’s regulations at 24 CFR 906.39(n) state that a homeownership program
must include a deed restriction or covenant running with the property that will
assure to HUD’s satisfaction that the recapture requirements at 24 CFR 906.27
have been met.
Comment 6 The credit report generated by the applicant’s lender identified the unreported
property as a possible address. Further, section 7.1 of the Authority’s Section 32
Implementing Agreement states that the Authority shall be responsible for the
maintenance of books, accounts, reports, files, records, and other documents
relating to all activities.
Comment 7 The actions taken, in process, and proposed by the Authority, if fully
implemented, should improve its programs operations.
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Appendix C
FEDERAL REQUIREMENTS AND THE AUTHORITY’S
PROGRAM IMPLEMENTING AGREEMENTS
Finding 1
HUD’s regulations at 24 CFR 906.14(a) state that if a dwelling is sold to the initial purchaser for
less than fair market value, the homeownership plan shall provide for appropriate measures to
preclude realization by the initial purchaser of a windfall profit on resale. “Windfall profit”
means all or a portion of the resale proceeds attributable to the purchase price discount (the fair
market value at date of purchase from the public housing agency less the below-market purchase
price), as determined by one of the methods described in paragraphs (b) through (d) of this
section. (b) Promissory note method – where there is potential for a windfall profit because the
dwelling unit is sold to the initial purchaser for less than fair market value, without a
commensurate limited or shared equity restriction, the initial purchaser shall execute a
promissory note, payable to the public housing agency, along with a mortgage securing the
obligation of the note, on the following terms and conditions: (1) The principal amount of
indebtedness shall be the lesser of (i) the purchase price discount, as determined by the definition
in paragraph (a) of this section and stated in the note as a dollar amount, or (ii) the net resale
profit, in an amount to be determined upon resale by a formula stated in the note. That formula
shall define net resale profit as the amount by which the gross resale price exceeds the sum of
(A) the discounted purchase price, (B) reasonable sale costs charged to the initial purchaser upon
resale, and (C) any increase in the value of the property that is attributable to improvements paid
for or performed by the initial purchaser during tenure as homeowner. (2) At the option of the
public housing agency, the note may provide for automatic reduction of the principal amount
over a specified period of ownership while the property is used as the purchaser’s family
residence, resulting in total forgiveness of the indebtedness over a period of not less than five
years from the date of conveyance, in annual increments of not more than 20 percent. This does
not require a public housing agency’s plan to provide for any such reduction at all, or preclude it
from specifying terms that are less generous to the purchaser than those stated in the foregoing
sentence. (3) To preclude collusive resale that would circumvent the intent of this section, the
public housing agency shall (by an appropriate form of title restriction) condition the initial
purchaser’s right to resell upon approval by the public housing agency, to be based solely on the
public housing agency’s determination that the resale price represents fair market value or a
lesser amount that will result in payment to the public housing agency, under the note, of the full
amount of the purchase price discount (subject to any accrued reduction, if provided for by the
homeownership plan pursuant to paragraph (b)(2) of this section). If so determined, the public
housing agency shall be obligated to approve the resale.
HUD’s regulations at 24 CFR 906.3 state that a public housing agency may sell all or a portion
of a public housing development to eligible residents for purposes of homeownership according
to a homeownership plan approved by HUD under this part.
23
HUD’s regulations at 24 CFR 906.13 state that a homeownership plan shall include appropriate
protections against any risks of fraud or abuse that are presented by the particular plan, such as
extended use of the dwelling by the purchaser as rental property.
The Authority’s Section 5(h) homeownership plan requires that the applicants/purchasers agree
to continue to reside in the dwelling unit for a period of at least five years from the date of
conveyance.
Section 6.3 of the Authority’s implementing agreement states that the Authority shall comply
with, implement, and enforce all provisions of the homeownership plan.
Finding 2
HUD’s regulations at 24 CFR 906.1(a) state that a public housing agency may only transfer
public housing units for homeownership under a homeownership program approved by HUD
under this part.
HUD’s regulations at 24 CFR 906.15(b) state that the dwelling unit sold to an eligible family
must be used as the principal residence of the family.
HUD’s regulations at 24 CFR 906.15(d) state that a public housing agency may establish
requirements or limitations for families to purchase housing under a homeownership program,
including but not limited to requirements or limitations regarding (1) employment or
participation in employment counseling or training activities, (2) criminal activity, (3)
participation in homeownership counseling programs, and (4) evidence of regular income.
HUD’s regulations at 24 CFR 906.27(a) state when the family has owned a unit under this part,
the following rules apply: (1) in this section, the term gain from appreciation means the financial
gain on resale attributable solely to the home’s appreciation in value over time, and not
attributable to government-provided assistance or any below-market financing provided under 24
CFR 906.29; (2) in this section, the term net proceeds means the financial gain on resale received
by the seller after satisfying all amounts owing under mortgages, paying closing costs, and
receiving an amount equal to the downpayment (made from the seller’s own funds) and principal
payments on the mortgages; (3) a public housing agency must have a policy that provides for the
recapture of net proceeds in an amount that the public housing agency considers appropriate
under the guidelines of this section; (4) a public housing agency must have a policy that provides
for the recapture of the following amounts, if a family resells a homeownership unit it purchased
under this part during the five-year period beginning upon purchase of the dwelling unit: (i) all or
a portion of the gain from appreciation and (ii) all or a portion of the assistance provided (which
includes below-market financing, but which does not include Section 8(y) assistance used for
mortgage payments under this part) under the homeownership program to the family to the
extent there are net proceeds, considering the factors the public housing agency establishes under
paragraphs (b)(1) to (7) of this section. (b) The public housing agency’s program under this part
may provide for consideration of any factors the public housing agency considers appropriate in
determining how much of the gain from appreciation and assistance to recapture, including but
not limited to the following: (1) the aggregate amount of assistance provided under the
24
homeownership program to the family, (2) the contribution of equity by the purchasing family,
(3) the period of time elapsed between purchase by the homebuyer under the homeownership
program and resale by homebuyer, (4) the reason for resale, (5) any improvements made by the
family purchasing under the homeownership program, (6) any appreciation in the value of the
property, and (7) any other factors that the public housing agency considers appropriate in
making the recapture determination under this section. The public housing agency must enforce
its recapture policy through an appropriate form of title restriction.
HUD regulations at 24 CFR 906.39(n) state that a homeownership program must include a deed
restriction or covenant running with the land that will assure to HUD’s satisfaction that the
requirements of 24 CFR 906.27 and 906.15(b) are met.
Section 15(A) of the Annual Contribution Contract between HUD and the Authority states that
the housing authority must maintain complete and accurate books of account for the projects of
the housing authority in such a manner as to permit the preparation of statements and reports in
accordance with HUD requirements, and to permit timely and effective audit.
The Authority’s Section 32 homeownership plan requires that eligibility be limited to first-time
homebuyers or those who have not owned a home in the past three years.
The plan indicates that antispeculation provisions ensure that the Authority will reclaim 100
percent of any appreciation within the first year of ownership. That percentage will be reduced
by 20 percent each year so that the owner can realize full appreciation after five years of
ownership (provided the outstanding mortgage has been satisfied). The cost of any market
improvements that resulted in increased appraised value will be deducted from the appreciated
amount and retained by the seller.
The plan indicates that the Authority will sell homeownership units at the appraised value to
eligible participants using a fee-simple method of sale. The Authority’s policy is to sell units at
appraised value based on a third-party, independent, professional appraisal obtained at least 30
days before the proposed sale date.
Section 6.1 of the Authority’s implementing agreement states that the Authority covenants and
agrees that after the execution of this agreement, it shall comply with all applicable provisions of
the regulations, including without limitation, those provisions with respect to the physical
condition of the property to be sold and compliance with local code requirements and
requirements for elimination of lead-based paint hazards, under 24 CFR 906.7(a), nonpurchasing
residents under 24 CFR 906.23 and limitations on resale profits under 24 CFR 906.27.
Section 6.2 of the Authority’s implementing agreement states that the Authority shall comply
with the implementing agreement and enforce all provisions of the homeownership plan.
25
The Housing Authority of the City of Milwaukee, Wisconsin, Needs to Improve Its Procedures and Controls Regarding Its Homeownership Programs
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-04-08.
Below is a raw (and likely hideous) rendition of the original report. (PDF)