oversight

The Texas Department of Housing and Community Affair's Disaster Recovery Action Plan Needs Improvement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-30.

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

                                                                 Issue Date
                                                                        September 30, 2009
                                                                 Audit Report Number
                                                                         2009-FW-1016




TO:        Scott G. Davis, Director, Disaster Recovery & Special Issues Division, DGBD

           //signed//
FROM:      Gerald R. Kirkland
           Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: The Texas Department of Housing and Community Affair’s Disaster Recovery
         Action Plan Needs Improvement


                                   HIGHLIGHTS

 What We Audited and Why

            We audited the U. S. Department of Housing and Urban Development (HUD)
            Community Development Block Grant (CDBG), Supplemental I and II Disaster
            Recovery program funds, administered by the Texas Department of Housing and
            Community Affairs (TDHCA). Specifically, we wanted to determine whether
            TDHCA administered the floodplain management program as required by federal,
            state, and local policies and whether it protected HUD’s CDBG investments in
            properties reconstructed or rehabilitated with Disaster Recovery program funds
            against future potential losses. The audit was initiated as part of the Office of
            Inspector General’s (OIG) commitment to HUD to implement oversight of the
            Disaster Recovery funds to prevent fraud, waste, and abuse.

 What We Found

             TDHCA generally administered the program funds in accordance with applicable
             federal, state, and local floodplain regulations and policies. However, its action
             plan did not require homeowner’s insurance on properties reconstructed or
             rehabilitated with Supplemental I funds, and its grants required only 3 years of
             homeowner’s insurance for homes reconstructed or rehabilitated with
           Supplemental II funds. Due to the lack of or limited insurance, HUD’s CDBG
           Disaster Recovery funds invested in the homes provided to the disaster victims
           are at risk of loss. Of a sample of 59 Supplemental I funded homes tested, 38
           were later damaged by another hurricane or storm. Of the 38 homes, 23 did not
           have insurance. Based on a projection of the sample results, at least 133 of 453
           reconstructed or rehabilitated homes, or homes awaiting reconstruction, lacked
           insurance and were damaged or are at risk of being damaged by another storm. If
           TDHCA changes and improves its action plan and policies, an estimated $ 60.2
           million of program funds could be saved.

What We Recommend


           We recommend that HUD’s Director of Disaster Recovery Assistance & Special
           Issues Division request TDHCA to (1) modify its action plan to provide
           homeowner’s insurance for a period equitable to the amount of funds invested,
           request the homeowner to obtain homeowner’s insurance as a prerequisite to
           obtaining assistance for a period equitable to the amount of funds invested, or
           prohibit the homeowner from receiving future Disaster Recovery assistance if an
           insurance policy is not maintained on a newly reconstructed or rehabilitated
           home.

Auditee’s Response

           We provided a copy of the draft report to TDHCA on August 21, 2009. We held
           an exit conference with TDHCA and HUD on September 8, 2009. Based on
           TDHCA’s comments, we made tone changes and provided a revised draft on
           September 14, 2009. We requested and received TDHCA’s written comments to
           the revised draft report on September 21, 2009. TDHCA did not agree with the
           finding. The complete text of TDHCA’s response, along with our evaluation of
           that response can be found in appendix B of this report.




                                           2
                            TABLE OF CONTENTS

Background and Objectives                                                  4

Results of Audit
      Finding:   TDHCA’s Disaster Recovery Action Plan Needs Improvement   6

Scope and Methodology                                                      11

Internal Controls                                                          13

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use       14
   B. Auditee Comments and OIG’s Evaluation                                15
   C. Sampling Methodology and Results                                     20




                                            3
                         BACKGROUND AND OBJECTIVES

The 2005 hurricane season was one of the most extreme in recorded history to hit the Gulf Coast
region. Hurricanes Katrina and Rita caused extensive damage to homes from excessive wind
and rain damage. Since the 2005 hurricane season, the region has suffered eight additional
hurricanes or tropical storms, including Hurricane Ike that caused extensive damage costing $30
billion to the eastern Texas coastline.

To aid in the recovery from the 2005 storms, Congress authorized two supplemental funding
appropriations. Supplemental I, Public Law 109-148, authorized $11.5 billion, and
Supplemental II, Public Law 109-234, authorized $5.2 billion in funding. Of the $16.7 billion
authorized, the State of Texas (State) received $503 million through the U. S. Department of
Department of Housing and Urban Development’s (HUD) Community Development Block
Grant program (CDBG) to address areas most impacted by Hurricanes Rita and Katrina.

The Texas governor selected the Texas Department of Housing and Community Affairs
(TDHCA) as the lead agency to administer the CDBG Disaster Recovery funds. TDHCA,
established in 1991, is the State’s primary agency for providing essential public services to and
meeting the housing needs of extremely low- to moderate-income individuals and families.

TDHCA's method of allocation used data from the Federal Emergency Management Agency
(FEMA), the Texas Department of Insurance, census poverty data, and public input. The method
of allocation distributed $261.3 million to the individual assistance program under
Supplementals I and II, which was designed to rehabilitate or reconstruct the homes of the
disaster victims affected by Hurricane Rita. Funds for all homeowners projected to be assisted
with Supplemental I funds have been budgeted and approved. The reconstruction or
rehabilitation of homes using the Supplemental II funds, in earnest, began in 2009. As of March
2009, the contractor had completed a few homes and is required to complete all homes by the
end of the contract in January 2011. The following table provides information regarding projects
and funds used and anticipated to be used for homeowners to recover from Hurricane Rita.

                   Funding source         Type of           Number              Amount of
                                         assistance         Assisted            assistance
                   Supplemental I
                                                Loan                    31     $    2,345,421
                                                Grant                  453         27,286,630
                   Supplemental II
                                                Loan                  329         19,834,415
                                                Grant              2,9641      $178,509,7372

1
    Our estimate of 2,964 grants is derived by dividing Supplemental II funds available of $198,344,152 for
    housing assistance by the average grant amount of $60,235 from Supplemental I and removing the estimated 10
    percent of the projects that will be loans. ($198,344,152/$60,235=3,293projects); (3,293*.10 = 329 loans);
    (3,293 - 329 = 2,964 grants)
2
    Ten percent of the funding is estimated to be loans; thus, it was removed from the total available for grants.
    ($198,344,152 - $19,834,415 = $178,509,737)

                                                        4
TDHCA provides assistance to homeowners with loans or grants to reconstruct or rehabilitate
their homes. A forgivable loan is used to fund the work for a home in a floodplain. The loans
are forgiven if the homeowners maintain residency for 3 years. Additionally, the homeowners
must maintain flood insurance at all times to be assisted in a flood plain. TDHCA will assess
penalties and will be unable to provide federally assisted funding if the homeowners do not meet
the requirements. TDHCA provides grants for homes that are not in a floodplain. Supplemental
I grants do not have additional requirements, such as requiring insurance or residency.
Supplemental II grants contain insurance and are effective up to 3 years based on the completion
date of the improvements.

Our objectives were to determine whether TDHCA administered the floodplain program as
required by federal, state, and local policy and whether it protected HUD’s CDBG investments in
properties reconstructed or rehabilitated with Disaster Recovery program funds against future
potential losses.




                                               5
                                      RESULTS OF AUDIT

Finding: TDHCA’s Disaster Recovery Action Plan Needs Improvement
TDHCA generally administered the program in accordance with applicable federal, state, and
local floodplain management policies. However, its action plans did not require homeowner’s
insurance for Supplemental I and only 3 years insurance was required for Supplemental II for
homes reconstructed or rehabilitated with program funds. Thus, HUD’s CDBG Disaster
Recovery funds invested in the homes provided to the disaster victims are at risk of loss. Of a
sample of 59 Supplemental I homes tested, 38 were later damaged by another hurricane or
storm.3 Of the 38 homes, 23 did not have insurance.4 Projecting the results of the statistical
samples shows that at least 133 of the 453 Supplemental I homes lacked insurance and were
damaged or are at risk of being damaged. This condition occurred because TDHCA designed its
action plan to reconstruct or rehabilitate the maximum number of homes for disaster victims
rather than require insurance for the homes for a period equitable to the amount of funds invested
and the asset life of the home. As a result, an estimated $60.2 million5 in HUD CDBG Disaster
Recovery funds are at risk of loss. TDHCA needs to ensure CDBG funds are protected from
future loss by protecting the homes with homeowner’s insurance.



    Uninsured Homes Were
    Damaged Again by Another
    Hurricane or Storm

                  Site visits at 59 statistically selected reconstructed or rehabilitated Supplemental I
                  funded homes found that 38 of them were damaged again by Hurricane Ike or
                  another storm. Of the 38 homes, 23 were not insured. Projecting this statistical
                  sample shows that of the 453 homes that had been or will be repaired or replaced
                  with Supplemental I funding, at least 249 homes had been damaged again, of which
                  at least 133 were not insured. The estimates are based only on the homes that were
                  damaged by Hurricane Ike or another storm. However, damages could also occur
                  from other causes, such as fire.

                  The average grant awarded to repair or replace the homes was $60,235. Using the
                  average grant amount, we estimate that at a minimum, $8 million is at risk of loss on
                  at least 133 homes that were damaged but uninsured for Supplemental I.

                  For Supplemental I, TDHCA decided to forego providing insurance to homeowners
                  that received a grant to minimize the cost per household. TDHCA based its decision
3
     The 38 homes consist of 26 newly constructed homes and 12 existing homes awaiting reconstruction or
     rehabilitation.
4
     The 23 uninsured homes consist of 15 newly constructed homes, 1 rehabilitation, and 7 existing homes waiting
     for assistance.
5
     Supplemental I ($8,011,255) + Supplemental II ($52,223,745) = $ 60,235,000, rounded to $60.2 million.

                                                        6
                 on the premise that the cost saving would allow it to assist more families on its
                 waiting list. TDHCA had calculated that its waiting list had already surpassed the
                 amount of Disaster Recovery funds available. Further, TDHCA indicated that
                 homeowner’s insurance for grants was not a statutory requirement like mandatory
                 flood insurance.

    One Uninsured Property
    Sustained Severe Damage

                 TDHCA stated it took measures to minimize damage to homes by requiring the
                 contractors to construct homes including the latest design and building techniques to
                 alleviate damage caused by flooding or high winds; however, one homeowner’s
                 manufactured home, which cost more than $47,000 to purchase and install, sustained
                 severe damage caused by a tree blown down by Hurricane Ike in September 2008
                 (See Figures 1 and 2.) As of April 2009, the home was not repaired because the
                 homeowner did not have private homeowner’s insurance or personal funds to repair
                 the damage.




                       Figure 1 Uninsured manufactured home damaged by Hurricane Ike6




6
     Photograph provided by homeowner, Hankamer, Texas.

                                                     7
              Figure 2 Interior view, current condition, shattered joists and rafters

        The homeowner received financial assistance from FEMA for the damaged roof;
        however, according to the homeowner, the funds were not sufficient to repair all
        of the damage. The homeowner requested information on how to apply for
        federal aid to repair the roof damage caused by Hurricane Ike. Aside from the
        damage to this home, the majority of the damage to the other 37 inspected and
        affected homes was not as severe.

TDHCA Required Insurance
for Supplemental II Homes


        TDHCA also administered the CDBG Disaster Recovery program benefits under
        Supplemental II, which included the State’s Homeowner Assistance program.
        That program will fund at least an additional 2,900 home reconstruction or
        rehabilitation projects at a cost of more than $178.5 million. According to
        TDHCA officials, they took action to mitigate the risk for Supplemental II funded
        homes. In February 2009, when TDHCA began executing Supplemental II grant
        agreements, it required hazard or property insurance for reconstructed or
        rehabilitated homes. The grant agreements required homeowners to keep the
        improvements now existing or hereafter erected on the property insured against
        loss. However, the grant agreements did not specify a period for which the
        homeowners had to maintain the insurance. According to Affiliated Computer
        Services, Inc., (ACS) TDHCA’s contractor, the insurance must remain in place
        for "perpetuity."


Supplemental II Funds Will be
at Risk After 3 Years


        Although TDHCA took actions to protect the Supplemental II funds, concerns
        exist as the grant agreements with the homeowners terminate 3 years from the

                                                8
                home reconstruction or rehabilitation completion date. Thus, after 3 years,
                TDHCA will lack a means to ensure the homeowner maintains insurance to
                protect the CDBG investment for the remaining useful asset life of the home or
                for a period equitable to the amount of CDBG funds invested. The potential for
                future damages appears high as information provided by ACS showed that 266
                homes of Supplemental II applicants that requested assistance to rebuild after
                Hurricane Rita, were also damaged by Hurricane Ike. In addition, FEMA has
                paid more than $1.4 million in benefits to these homeowners for damages caused
                by Hurricane Ike. Although all of the $178.5 million of Supplemental II funding
                will be at risk 3 years after the homes’ completion dates, it is more conservative to
                calculate a lower estimate of risk based on the assumption that a percentage of
                Supplemental II homes will continue to be insured, as shown by Supplemental I
                testing, it is more conservative to calculate a lower estimate of risk. Adopting that
                conservative approach and using the error rate from Supplemental I to make the
                estimation means that an estimated $52.2 million in Supplemental II funds will be
                at risk if changes are not made.7

     Disaster Victims Will Continue
     to Seek Aid to Repair Their
     Homes

                Unless TDHCA corrects its Disaster Recovery action plan, disaster victims will
                continue to seek federal aid to repair or replace their homes that were already
                assisted. Uninsured homeowners with Hurricane Ike damage who meet FEMA
                assistance requirements are eligible for FEMA assistance and are allowed to apply
                for additional HUD CDBG Ike assistance. Some of the 23 homeowners that were
                affected by Hurricane Ike have already received FEMA assistance and are
                requesting and/or anticipating further federal aid for Hurricane Ike damage.

                Moreover, as of November 2008, Texas estimated that it needs more than $3
                billion for uninsured housing cost as a result of Hurricane Ike. Based on our
                sample, almost 29 percent of the disaster victims affected by Hurricane Rita were
                hurricane victims again. Local government officials stated that the disaster
                victims that were assisted for Hurricane Rita are requesting information on how to
                apply for funding when it becomes available to repair the damages to their new
                homes caused by Hurricane Ike. TDHCA’s decision not to require homeowner’s
                insurance for Supplemental I or not insuring homes under Supplemental II for a
                period equitable to its cost has put at risk a substantial portion of the funds
                provided under Supplementals I and II and created a condition whereby federal
                tax dollars may again be used to assist the same homeowners. Since the
                Supplemental I funds have been budgeted and expended, any additional assistance
                from HUD will need to be provided from another source of funds.



7
    See Appendix C Sampling Methodology and Results.

                                                   9
Conclusion


             TDHCA generally administered the program funds in accordance with applicable
             federal, state, and local floodplain regulations and policies; however, based on the
             sample tested, several of the Supplemental I homeowners did not have
             homeowner’s insurance to protect their homes from loss. Additionally, homes
             will be at risk after the initial insurance period terminates for homes reconstructed
             and/or rehabilitated with Supplemental II funds. TDHCA needs to ensure that the
             investments in the homes are protected with insurance. Otherwise, a portion of
             the funding is at risk of loss. If TDHCA requires the homes to be insured against
             damages caused by hazards, wind storms, or rain storms, an estimated $60.2
             million could be put to better use and protected from loss.

Recommendation

             We recommend that HUD’s Director of Disaster Recovery Assistance & Special
             Issues Division request TDHCA to

             1A. Modify its action plan to either provide homeowner’s insurance for a
                 reasonable period to all newly reconstructed or repaired homes for a period
                 equitable to the amount of funds invested and the life of the asset, or request
                 the homeowner to obtain homeowner’s insurance as a prerequisite to
                 obtaining assistance for a period equitable to the amount of funds invested
                 and the life of the asset, or prohibit the homeowner from being able to
                 receive future Disaster Recovery assistance if an insurance policy is not
                 maintained on a newly reconstructed or repaired home, which will result in
                 $60.2 million in funds to be put to better use.




                                              10
                            SCOPE AND METHODOLOGY

We performed our audit fieldwork from January through May 2009 at the TDHCA’s office
located in Austin, Texas; the Affiliated Computer Services, Inc. (ACS), office in San Antonio,
Texas; and the Council of Government’s (Councils)8 offices located in Beaumont, Houston, and
Jasper, Texas. The audit generally covered the period January 10, 2007, through April 3, 2009.
To accomplish our objectives, we

        Gained an understanding of the CDBG program requirements by reviewing applicable
        HUD regulations, waivers, notices, and legislation for the Disaster Recovery
        Supplementals I and II provided to Texas.
        Reviewed TDHCA’s annual action plans.
        Reviewed TDHCA’s, Council’s, and ACS’s policies and procedures to gain an
        understanding of the organizations’ floodplain management and environmental
        assessment requirements and homeowner’s insurance coverage.
        Reviewed the Council’s and ACS’s files for homes in flood zones and conducted site
        visits to the homes that were completed.
        Interviewed personnel from TDHCA, the Councils, and ACS.
        Reviewed TDHCA’s Supplemental I data from its Housing Contracting System to obtain
        a statistical sample of applications for homes not in a flood zone.
        Reviewed flood zone maps and other data obtained from FEMA related to Hurricane Ike
        damage to the homes in the sample.
        Conducted file reviews, site visits, and interviews of applicants for the 59 randomly
        selected housing applications and summarized the results.
        Reviewed ACS’s Supplemental II data from its Worltrac System to obtain information on
        the number of applications and the number of homes that were damaged by Hurricane
        Ike.

The universe consisted of the electronic data received from TDHCA’s housing contracting
system that contained 453 approved applications for a total funding of $27,286,630. A file
review conducted on the applications verified that the data obtained from TDHCA was generally
reliable. A representative statistical sampling method was used because each sampling unit is
selected without bias from the universe and the conclusions reached about the universe can be
based on mathematically defensible projections from the sample. Using this method, a random
sample of 59 applications funded by TDHCA’s Supplemental I funds was selected for review

A detailed file review was performed on all 59 applications in the statistical sample to determine
whether the properties were properly identified as not being in a flood zone. The file
documentation supported the Councils’ results that the homes were not located in flood zones. A
site visit was conducted to verify and determine whether any of the 59 applicants’ homes was
damaged by Hurricane Ike or a recent storm and whether the homes were insured. We projected

8
    The Council of Government is a voluntary association of local governments whose purpose is to solve area
    wide problems for their region. Texas is divided into 24 regional councils of which 4 were affected by
    Hurricane Rita.

                                                       11
the results of our sample to the population of 453 homes. We then estimated the risk of loss to
Supplemental I and Supplemental II funds (see Appendix C for the complete sampling
methodology and results).

An electronic database of applications was obtained from ACS. A reliability assessment of the
computer data provided by ACS was limited to the number of homes completed in the flood
plain and was determined to be generally reliable. All additional electronic data was used for
background information, and no assessment of the data’s reliability was conducted. Although no
detailed review of Supplemental II grants was performed,9 it is expected that 2,964 households
will be assisted with $178.5 million in Supplemental II funds. Although all of the $178.5 million
of Supplemental II funding will be at risk 3 years after the homes’ completion dates, to be more
conservative, we calculated a lower estimate of risk based on the assumption that a percentage of
Supplemental II homes will continue be insured, as shown by Supplemental I testing, even
though insurance will not be an enforceable requirement. Adopting that conservative approach
and using the error rate from Supplemental I, we calculated the estimation of risk of loss for
Supplemental II (see Appendix C for the complete sampling methodology and results).

The audit was conducted 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.




9
    At the time of our review, only 4 homes were complete and 28 under construction for Supplemental II.

                                                       12
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives 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. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined that the following internal controls were relevant to our audit
              objectives:

                  Floodplain management policies and procedures,
                  Flood insurance purchase policies,
                  Homeowner’s insurance purchase policies

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.

 Significant Weaknesses


              Based on our review, we believe that the following items are significant weaknesses:

                  TDHCA lacked policies and procedures to ensure that homeowners had
                  insurance to protect federal funding from loss due to future hurricanes, storms,
                  or other hazards (see finding).




                                                13
                                                   APPENDIXES

Appendix A

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

                                     Recommendation            Funds to be put
                                         number                to better use 1/

                                             1A                 $60,235,000




1/   Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if
     an Office of Inspector General (OIG) recommendation is implemented. These amounts include reductions in
     outlays, deobligation of funds, withdrawal of interest, costs not incurred by implementing recommended
     improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that
     are specifically identified. In this instance, the amount represents the estimated costs that HUD can avoid if it
     requires homeowner’s insurance to be maintained on homes that are repaired or replaced with Supplemental I
     and II funds. The estimate does not reflect any offsetting costs that may be incurred in providing homeowner’s
     insurance.




                                                          14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         15
Comment 1




Comment 2




Comment 1




            16
Comment 1




Comment 3




Comment 2




            17
Comment 2




Comment 3




            18
                         OIG Evaluation of Auditee Comments

Comment 1   TDHCA disagreed with the underlying assumptions of the audit and the
            conclusions drawn. It stated that it currently required recipients of benefits to
            execute an agreement in which they commit to maintain insurance to cover
            damage to the premises, including flood insurance if in a flood plain. TDHCA
            indicated it would not change its program until HUD issued additional program
            guidance as it stated that there is no requirement regarding the length of time a
            program recipient must insure their property and that its program was within the
            bounds of CDBG “maximum feasible deference” provisions. We affirm our
            conclusion that without insurance for a period equitable to the amount of funds
            invested or the asset life of the home, the funds will be at risk of loss. TDHCA’s
            response did not clearly address that it did not require insurance for the 453
            homes assisted by Supplemental I nor does it address how it will ensure that
            homes under Supplemental II will be protected when the grant agreements expire
            after 3 years. TDHCA is correct that there is no requirement for insurance to be
            provided and that it has maximum feasible deference to create its program.
            However, according to the Office of Management and Budget’s Circular A-87,
            Cost Principles for State and Local Governments, TDHCA was required to
            establish principles and standards to promote effective program delivery and
            efficiency. The application of the principles in the Circular is based on the
            fundamental premises that governmental units are responsible for the efficient and
            effective administration of Federal awards through the application of sound
            management practices. Thus, we disagree that it does not need to change its
            program.

Comment 2   TDHCA had several concerns with the methodology used to determine the
            estimated amount of funds at risk of loss. TDHCA made several arguments
            including the replacement housing is better built, only one home sustained severe
            damage, the risk of damage was projected from Supplemental I to Supplemental
            II, and the likelihood of damage by a future storm was low. We affirm our
            projection of damaged homes and our conservative estimation of risk. We were
            limited to testing Supplemental I homes and estimating Supplemental II risk as
            only four Supplemental II funded homes located in a flood zone had been
            completed when we started our audit. The basic premise, though, will exist for
            Supplemental II funding after 3 years; homes that do not have insurance are at
            risk of loss from future storms. Further, as the homes we inspected had been
            damaged by Hurricane Rita and then damaged by Hurricane Ike or another storm,
            we disagree with TDHCA’s contention that we did not properly calculate risk or
            that the better built homes will not suffer damage.

Comment 3   TDHCA indicated that providing insurance would be too costly, limit the amount
            of CDBG assistance being provided, and could only be provided for the first year
            with CDBG funds. Our recommendation provided options other than using
            CDBG funds that addressed these concerns, including having the homeowner
            provide the insurance or limiting future assistance if insurance is not obtained.

                                            19
Appendix C

             SAMPLING METHODOLOGY AND RESULTS

Purpose of the sampling

The sampling objective was to determine whether the homes were; located in flood zones,
damaged by Hurricane Ike or a recent storm, and insured. The sample was based on the number
of approved applications not in flood zones and in TDHCA’s housing contract system as of
January 21, 2009. In support of the objectives, an attribute sampling plan was implemented that
allows statistical projections on affected homes and properties.

Definition of the audit population and tests performed

The universe contained 453 applications approved for total funding of $27,286,630, with an
average grant amount of $60,235. The average grant amount was determined by dividing total
funding by the number of applications. ($27,286,630 ÷ 453 = $60,235). Grant amounts ranged
from a high $99,388 to a low of $9,219.

The approved funding was used to finance the reconstruction or rehabilitation of 453 homes that
were not located in a flood zone. Accordingly, we made random selections of these 453 homes
to perform a detailed file review to compare and verify the electronic data and to verify the
home’s non-flood zone status. In addition, a site visit to each of the homes was conducted to
verify if any of the applicant’s homes were damaged by Hurricane Ike or a recent storm and to
determine if the homes were insured. A sampling error was documented for each home that did
not have documentation to support its flood plain designation; and/or showed evidence of
hurricane damage verified by a homeowners’ interview and/or FEMA financial assistance
documentation; and/or did not have homeowner’s insurance verified by homeowner’s interview
and/or FEMA financial assistance documentation.

Sample design

Using attribute sampling methodology, we determined that a sample size of 59 applications was
sufficient using a 90 percent confidence level, expected error rate of 50 percent, and a desired
sampling precision level of 10 percent. Accordingly we randomly sampled 59 applications
funded by the TDHCA’s Supplemental I funds.

Statistical projections of the sampled data

The file documentation supported the Councils’ results that the homes were not located in flood
zones. However, the site visits to each of the 59 homes showed that 38 of 59 (64 percent) homes
were damaged by Hurricane Ike or a recent storm. In addition, 23 of the 38 (61 percent)
applicants did not have homeowner’s insurance to repair the damage.



                                               20
Applying an attribute sampling evaluation methodology to the number of damaged and
uninsured homes, we estimate that at least 133 homes were damaged by a hurricane or storm and
did not have insurance to repair the damage.

Estimated cost savings/loss of Supplemental I and II funds

While our statistical sampling methodology was not designed to estimate the dollar value
associated with items failing our attribute tests, to quantify a conservative and reasonable
estimate for the risk of loss for Supplemental I funds, we used the conservative lower confidence
level projection of 133 and the average grant amount of $60,235 as a basis for calculating a
reasonable dollar estimate. Accordingly, we estimated that at least $8,011,255 (133 X $60,235)
of the Supplemental I funds are at risk of loss.

To similarly quantify a conservative and reasonable estimate for the risk of loss for Supplemental
II funding, we expected that a corresponding number of households to be assisted with $178.5
million in Supplemental II funds will be damaged again and uninsured. The fact that 266
applicants’ homes were damaged again by Hurricane Ike while waiting to be assisted with
Hurricane Rita Supplemental II funds supports our argument. In addition, although all of the
$178.5 million of Supplemental II funding will be at risk 3 years after the homes’ completion
dates, to be more conservative, we calculated a lower estimate of risk based on the assumption
that a percentage of Supplemental II homes will continue be insured, as shown by Supplemental
I testing, even though insurance will not be an enforceable requirement. Therefore, using the
lower confidence level as a conservative estimate for the potential number of errors in
Supplemental II, we estimated that an additional $52,223,745 in extended Disaster Recovery
grant funds is at risk of loss as follows.

       $178,509,737 ÷ $60,235 average grant amount from Supplemental I = 2,964 grants.
       29.27 percent lower confidence level X 2,964 grants = 867 grants at risk.
       867 grants X $60,235 average grant amount from Supplemental I = $52,223,745.

This calculation is not meant to be a statistical projection but is an attempt to provide a
conservative and reasonable dollar estimate for the risk of loss.

In total, we estimated that HUD can save an estimated $ 60,235,000 ($8,011,255 + $52,223,745)
by requiring homeowner’s insurance to be maintained on homes repaired or replaced with
Supplemental funds. The estimate is presented solely to demonstrate the amount of funds that
could be put to better use if HUD implements our recommendations.




                                                 21