oversight

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)

                                                                  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.


                                            2
                           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




                                           3
                      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.




                                                  4
                                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.



                                                5
                                                                                     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.




                                              7
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.




                               11
                         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.




                                                12
                              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.




                                               13
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.




                                            14
                                   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.




                                                15
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.



                                                16
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.




                                                17
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.




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