oversight

The State of Indiana's Administrator Lacked Adequate Controls Over the State's HOME Investment Partnerships Program and American Dream Downpayment Initiative-Funded First Home/PLUS Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-01-31.

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

                                                                Issue Date
                                                                         January 31, 2011
                                                                 
                                                                Audit Report Number
                                                                             2011-CH-1004




TO:         Robert F. Poffenberger, Director of Community Planning and Development,
              5HD


FROM:       Ronald Farrell, Acting Regional Inspector General for Audit, 5AGA

SUBJECT: The State of Indiana’s Administrator Lacked Adequate Controls Over the State’s
           HOME Investment Partnerships Program and American Dream
           Downpayment Initiative-Funded First Home/PLUS Program

                                   HIGHLIGHTS

 What We Audited and Why

             We audited the State of Indiana’s (State) HOME Investment Partnerships
             Program (Program). The audit was part of the activities in our fiscal year 2010
             annual audit plan. We selected the State based upon our analysis of risk factors
             relating to Program grantees in Region V’s jurisdiction. Our objectives were to
             determine whether the Indiana Housing and Community Development Authority
             (Authority), the administrator of the State’s Program, complied with the U.S.
             Department of Housing and Urban Development’s (HUD) requirements in its use
             of Program and American Dream Downpayment Initiative (Initiative) funds to
             provide interest-free second mortgage loans to home buyers through the State’s
             First Home/PLUS program and its use of recapture provisions for First
             Home/PLUS activities (activity).

 What We Found

             The Authority did not comply with HUD’s requirements in its use of Program and
             Initiative funds to provide interest-free second mortgage loans to home buyers
             through the State’s First Home/PLUS program and its use of recapture provisions
             for activities. It (1) lacked sufficient documentation to support that homes
         purchased under the First Home/PLUS program met HUD’s property standards
         requirements, (2) did not implement appropriate recapture provisions for all of the
         activities reviewed, (3) did not ensure that the State’s Program was reimbursed for
         Program or Initiative funds used for activities in which the ownership of homes
         was later transferred through foreclosures, and (4) did not reimburse the State’s
         treasury account for Program funds used for activities that were later terminated.
         As a result, (1) it was unable to support its use of more than $803,000 in Program
         or Initiative funds, (2) its Program was not reimbursed more than $130,000 in
         Program or Initiative funds used for 32 activities in which the ownership of the
         homes was later transferred through foreclosures, and (3) its treasury account was
         not reimbursed more than $8,000 in Program funds used for activities that were
         terminated. Further, the Authority is at risk of being required to reimburse the
         State’s Program additional non-Federal funds if the ownership of additional
         homes acquired under the First Home/PLUS program is transferred through
         foreclosures.

What We Recommend


         We recommend that the Director of HUD’s Indianapolis Office of Community
         Planning and Development require the State to (1) provide sufficient supporting
         documentation or reimburse its Program more than $803,000 from non-Federal
         funds, (2) reimburse its Program more than $130,000 from non-Federal funds for
         activities in which ownership of the homes was transferred through foreclosures,
         (3) reimburse its treasury account more than $8,000 from non-Federal funds for
         the activities that were terminated, (4) revise its consolidated plan and action plan
         to include the recapture provisions the Authority uses for the First Home/PLUS
         program or require the Authority to revise the recapture provisions it uses for the
         First Home/Plus program to comply with the recapture provisions in the State’s
         consolidated plan and action plan, and (5) implement adequate procedures and
         controls to address the findings cited in this audit report. These procedures and
         controls should help to ensure that over the next year, the State appropriately
         recaptures Program and/or Initiative funds and/or reimburses its Program from
         non-Federal funds for nearly $124,000 in Program and/or Initiative funds used for
         homes acquired under its First Home/PLUS program in which ownership would
         be transferred due to foreclosures.

         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.




                                           2
Auditee’s Response

           We provided our discussion draft audit report and/or supporting schedules to the
           executive director of the Authority, the chairman of the board, and/or HUD’s staff
           during the audit. We held an exit conference with the Authority’s executive
           director on January 6, 2011.

           We asked the Authority’s executive director to provide comments on our
           discussion draft audit report by January 10, 2011. The executive director
           provided written comments, dated January 7, 2011. The executive director
           generally disagreed with our findings, but partially agreed with our
           recommendations. The complete text of the written comments, along with our
           evaluation of that response can be found in appendix B of this audit report.




                                            3
                             TABLE OF CONTENTS

Background and Objectives                                                             5

Results of Audit
        Finding 1: The Authority Lacked Adequate Controls Over the First Home/PLUS
                   Program to Ensure That Activities Met HUD’s Property Standards
                   Requirements                                                       7

        Finding 2: The Authority Lacked Adequate Controls Over the First Home/PLUS
                   Program To Ensure That Appropriate Recapture Provisions Were
                   Used for Activities                                               11

Scope and Methodology                                                                17

Internal Controls                                                                    20

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use                 22
   B. Auditee Comments and OIG’s Evaluation                                          23
   C. HUD’s Requirements and the State’s and the Authority’s Policies                37
   D. Schedule of Activities With Insufficient Documentation To Support That
      Homes Met HUD’s Property Standards Requirements                                41
   E. Schedule of Activities in Which Ownership of Homes Was Transferred
      Through the Foreclosure Process                                                42




                                            4
                      BACKGROUND AND OBJECTIVES

The Program. Authorized under Title II of the Cranston-Gonzalez National Affordable Housing
Act (Act), as amended, the HOME Investment Partnerships Program (Program) is funded for the
purpose of increasing the supply of affordable standard rental housing; improving substandard
housing for existing homeowners; assisting new home buyers through acquisition, construction,
and rehabilitation of housing; and providing tenant-based rental assistance. The American
Dream Downpayment Assistance Act established a separate funding formula for the American
Dream Downpayment Initiative (Initiative) under the Program to provide downpayment
assistance, closing costs, and rehabilitation assistance to eligible first-time home buyers.

The State. The Indiana Housing and Community Development Authority (Authority)
administers the State of Indiana’s (State) Program. The Authority was created in 1978 by the
Indiana General Assembly and is a quasi-public financially self-sufficient statewide government
agency. It is governed by a seven-member board of commissioners (board) consisting of the
State’s lieutenant governor, the State’s treasurer, and the Indiana Finance Authority’s public
finance director. The board includes four other members appointed to 4-year terms by the
State’s governor. Its mission is for every resident of the State to have the opportunity to live in
safe, affordable, good-quality housing in economically stable communities. The Authority’s
Program and Initiative records are located at 30 South Meridian Street, Indianapolis, IN.

The following table shows the amount of Program and Initiative funds the U.S. Department of
Housing and Urban Development (HUD) awarded the State for program years 2006 through
2010.

                           Program          Program           Initiative
                             year             funds             funds
                             2006           $15,482,872         $335,426
                             2007            15,519,476          316,513
                            2008*            15,012,167          127,867
                             2009            16,710,924
                             2010            16,699,875
                            Totals          $79,425,314         $779, 806
                         * Program year 2008 was the last year HUD awarded
                           Initiative funds to the State.

The First Home/PLUS Program. As of September 25, 2009, the State's First Home/PLUS
program provides qualified households an interest-free loan for 6 percent (10 percent for
disabled households) of the purchase price or appraised value of the property, whichever is less,
not to exceed $7,500 ($14,999 for disabled households), for downpayment assistance and closing
costs. The Authority uses Program or Initiative funds to pay for the downpayment assistance and
closing costs and secures the interest-free loan through a second mortgage. The interest-free
loan for downpayment assistance and closing costs can only be provided in conjunction with a
government-insured first mortgage through the State’s First Home program. A participating
lender performs a preliminary review to determine whether a household and a property meet


                                                  5
HUD’s requirements and qualify for the First Home and First Home/PLUS programs. A
participating lender then submits the information to the Authority for approval. The Authority
reviews the information and assigns a reservation number and date for an approved loan. The
reservation date assigned to a loan is the date the participating lender submitted the information
to the Authority. U.S. Bank National Association (U.S. Bank), the master servicer for the
Authority’s First Home Program, purchases the government-insured first mortgage from the
participating lender within 30 days of the loan’s closing.

Our objectives were to determine whether the Authority complied with HUD’s requirements in
its use of Program and Initiative funds to provide interest-free second mortgage loans to home
buyers through its First Home/PLUS program and its use of recapture provisions for First
Home/PLUS activities (activity).




                                                 6
                               RESULTS OF AUDIT

Finding 1: The Authority Lacked Adequate Controls Over the First
 Home/PLUS Program To Ensure That Activities Met HUD’s Property
                       Standards Requirements
The Authority did not comply with HUD’s requirements in its use of Program and Initiative
funds to provide interest-free second mortgage loans to home buyers through the State’s First
Home/PLUS program. It lacked sufficient documentation to support that homes purchased under
the First Home/PLUS program met HUD’s property standards requirements. This weakness
occurred because the Authority lacked adequate procedures and controls over the State’s First
Home/PLUS program to ensure that it appropriately followed HUD’s requirements. As a result,
it was unable to support its use of more than $803,000 in Program or Initiative funds for
activities without sufficient documentation to demonstrate that homes met HUD’s property
standards requirements.



 The Authority Lacked
 Sufficient Documentation To
 Support Its Use of More Than
 $800,000 in Program and/or
 Initiative Funds

              We reviewed 64 of the 1,106 activities in which the Authority drew down and
              disbursed Program or Initiative funds from July 1, 2008, through March 31, 2010.
              The Authority used $307,262 in Program or Initiative funds for the 64 activities.

              HUD’s regulations at 24 CFR (Code of Federal Regulations) 92.251(a)(2) state
              that housing acquired with Program funds must meet all applicable State and local
              housing quality standards and code requirements. If there are no such housing
              quality standards or code requirements, the housing must meet HUD’s housing
              quality standards. HUD’s regulations at 24 CFR 92.508(a) state that a
              participating jurisdiction must establish and maintain sufficient records to
              demonstrate that each activity meets the property standards of 24 CFR 92.251.
              Section 92.508(c)(4) states that written agreements must be retained for 5 years
              after the agreement terminates. HUD’s regulations at 24 CFR 92.612(b) state that
              housing assisted with Initiative funds must meet the property standards contained
              in 24 CFR 92.251. HUD’s regulations at 24 CFR 92.616(i) state that the record-
              keeping requirements contained in 24 CFR 92.508 apply to activities assisted with
              Initiative funds.

              HUD’s HOMEfires, volume 6, number 2, states that pursuant to 24 CFR
              92.504(a), a participating jurisdiction is responsible for managing the day-to-day


                                               7
           operations of its Program, including compliance with property standards
           applicable to Program units. They must perform inspections of Program units
           purchased with Program or Initiative funds. Participating jurisdictions may not
           rely on independent inspections performed by any party not under contract to the
           participating jurisdiction. Third parties such as consumer inspectors or Federal
           Housing Administration (FHA) appraisers are not contractually obligated to
           perform the participating jurisdictions’ obligations. Their inspections cannot be
           used to determine compliance with Program or Initiative property standards
           requirements.

           Contrary to HUD’s requirements, the Authority lacked sufficient documentation
           to support that homes for 9 of the 64 activities reviewed met HUD’s property
           standards requirements. It used $48,391 in Program or Initiative funds for the
           nine activities. All nine of the activities involved the purchase of new
           construction homes. The Authority’s single family director said that the
           Authority did not have inspections performed on any of the new construction
           homes purchased under the First Home/PLUS program. It relied on FHA
           compliance or occupancy inspections performed by the cities or counties where
           the new construction homes were located. Therefore, we reviewed an additional
           129 activities in which the Authority used Program or Initiative funds from July 1,
           2008, through May 11, 2010, to assist in the purchase of new construction homes
           under the First Home/PLUS program. The Authority also lacked sufficient
           documentation for the additional 129 activities to support that it used $755,054 in
           Program and Initiative funds for homes that met HUD’s property standards
           requirements. The table in appendix D of this report shows the 138 activities for
           which the Authority did not have sufficient documentation to support that homes
           met HUD’s property standards requirements.

           Further, the Authority had inspections for the remaining 55 activities we initially
           selected for review. The inspections were performed by third-party inspectors.
           However, the Authority could not provide contracts with the inspectors that were
           effective at the time that the inspectors inspected 23 of the homes. The Authority
           used $91,086 in Program or Initiative funds for the 23 activities.

The Authority Lacked
Adequate Procedures and
Controls


           The weaknesses regarding the Authority’s lacking sufficient documentation to
           support that activities met HUD’s property standards requirements and contracts
           with inspectors were effective at the time that the inspectors inspected homes
           occurred because the Authority lacked adequate procedures and controls over its
           First Home/PLUS program to ensure that it appropriately followed HUD’s
           requirements.




                                            8
             As previously stated, the Authority did not have inspections performed on any of
             the new construction homes purchased under the First Home/PLUS program
             because it relied on FHA compliance or occupancy inspections performed by the
             cities or counties where the new construction homes were located. Further, the
             Authority’s staff attorney stated that HUD’s regulations at 24 CFR 200.170(a)(1)
             require FHA compliance inspections on all FHA-insured single-family new
             construction. The Authority was not aware that HUD’s HOMEfires, volume 6,
             number 2, prohibited participating jurisdictions from relying on independent
             inspections, such as FHA compliance inspections, performed by any party not
             under contract to the participating jurisdiction.

             The Authority’s single family director stated that once the Authority executed
             current contracts with the inspectors it discarded the prior contacts with the
             inspectors. The assistant single family director and a single family underwriter
             were not aware that HUD’s regulations at 24 CFR 92.508(c)(4) required written
             agreements to be retained for 5 years after the agreements terminated.

Conclusion

             As previously mentioned, the Authority lacked adequate procedures and controls
             over its First Home/PLUS program to ensure that it appropriately followed
             HUD’s requirements. It was unable to support its use of more than $803,000 in
             Program or Initiative funds for the 138 activities without sufficient documentation
             to demonstrate that homes met HUD’s property standards requirements.

Recommendations

             We recommend that the Director of HUD’s Indianapolis Office of Community
             Planning and Development require the State to

             1A.    Provide sufficient supporting documentation or reimburse its Program
                    from non-Federal funds, as appropriate, for the $803,445 in Program or
                    Initiative funds used for the 138 activities for which it did not have
                    sufficient documentation to demonstrate that the homes met HUD’s
                    property standards requirements.

             1B.    Implement adequate procedures and controls to ensure that all homes are
                    inspected by the Authority or a third party contracted by the Authority to
                    ensure that the homes meet HUD’s property standards requirements and it
                    maintains sufficient documentation to support that inspections are
                    conducted in accordance with HUD’s requirements.




                                              9
1C.   Implement adequate procedures and controls to ensure that the Authority
      maintains all contracts with third-party inspectors for at least 5 years after
      the contracts terminate.




                                10
Finding 2: The Authority Lacked Adequate Controls Over the First
Home/PLUS Program To Ensure That Appropriate Recapture Provisions
                      Were Used for Activities
The Authority did not comply with HUD’s requirements in its use of recapture provisions for
activities. It did not implement appropriate recapture provisions for all 64 of the activities
reviewed, did not ensure that the State’s Program was reimbursed for Program or Initiative funds
used for activities in which the ownership of homes was later transferred through foreclosures,
and did not reimburse the State’s treasury account for Program funds used for activities that were
later terminated. These weaknesses occurred because the Authority lacked adequate procedures
and controls over the State’s First Home/PLUS program to ensure that it appropriately followed
HUD’s requirements. As a result, the State’s Program was not reimbursed more than $130,000
in Program or Initiative funds used for 32 activities in which the ownership of homes was later
transferred through foreclosures, and the State’s treasury account was not reimbursed more than
$8,000 in Program funds used for activities that were terminated. Further, the Authority is at risk
of being required to reimburse the State’s Program additional non-Federal funds if the ownership
of additional homes acquired under the First Home/PLUS program is transferred through
foreclosures. Based on our sample, we estimate that over the next year, the State will not
recapture Program and/or Initiative funds and/or reimburse its Program from non-Federal funds
for nearly $124,000 in Program and/or Initiative funds used for homes acquired under its First
Home/PLUS program of which ownership would be transferred due to foreclosures.


 The Authority Did Not
 Implement Appropriate
 Recapture Provisions for Its
 Activities and Did Not
 Reimburse the State’s Program
 From Non-Federal Funds

               We reviewed 64 of the 1,106 activities in which the Authority drew down and
               disbursed Program or Initiative funds from July 1, 2008, through March 31, 2010.
               The Authority used $307,262 in Program or Initiative funds for the 64 activities.

               HUD’s regulations at 24 CFR 91.220 state that if a participating jurisdiction
               intends to use Program funds for home buyers, it must state the guidelines for
               resale or recapture, as required in 24 CFR 92.254, in its action plan. HUD’s
               regulations at 24 CFR 92.254(a)(4) state that Program-assisted housing must meet
               HUD’s affordability requirements. Section 92.254(a)(5) states that to ensure
               affordability, a participating jurisdiction must impose either resale or recapture
               provisions that comply with the standards of section 92.254(a)(5) and include
               those provisions in its consolidated plan. Section 92.254(a)(5)(ii) states that in
               establishing its recapture provisions, the participating jurisdiction is subject to the
               limitation that when the recapture provision is triggered by a voluntary or



                                                 11
involuntary sale of the housing unit and there are no net proceeds or the net
proceeds are insufficient to repay the Program investment due, the participating
jurisdiction can only recapture the net proceeds, if any. HUD’s regulations at 24
CFR 92.612(c) state that housing assisted with Initiative funds must meet the
affordability requirements contained in 24 CFR 92.254(a).

HUD’s HOMEfires, volume 5, number 2, states that for Program-assisted home-
buyer projects with recapture provisions, the amount of Program funds required to
be repaid in the event of foreclosure is the amount that would be subject to
recapture under the terms of the written agreement with the home buyer. If the
recapture agreement requires the entire amount of the Program investment from
the home buyer or an amount reduced pro rata based on the time the homebuyer
has owned and occupied the housing measured against the affordability period,
the amount required by the agreement is the amount that must be recaptured by
the participating jurisdiction for the Program. If the participating jurisdiction is
unable to recapture the funds from the household, it must reimburse its Program
in the amount due pursuant to the recapture provisions in the written agreement
with the home buyer.

The State’s consolidated plan for 2005 through 2009 and action plan for 2009
state that the amount to be recaptured is based on a pro rata shared net sale
proceeds calculation. If there are no proceeds, there is no recapture. Any net sale
proceeds that exist would be shared between the recipient and the beneficiary
based on the number of years of the affordability period that have been fulfilled,
not to exceed the original Program investment.

Contrary to HUD’s requirements and the State’s consolidated plan and action
plan, the Authority did not ensure that it implemented appropriate recapture
provisions for all 64 of the activities reviewed. The Authority’s mortgage
revenue bond program guides, dated March 2007 and January 2010, state that the
First Home/PLUS program offers downpayment assistance in the form of a loan
secured by a second mortgage to certain qualified borrowers. For all loans
reserved after May 2, 2007, there is no loan forgiveness associated with the
second mortgage if the borrower refinances or sells the home. The second
mortgage is due and payable immediately. Further, the promissory notes, which
were secured by second mortgages, between the Authority and the home buyers
required the home buyers to repay the entire amount of downpayment assistance
at or before maturity of the loan. The promissory notes define maturity as the sale
of the property, the payoff or refinancing of the first mortgage on the property, or
the home buyer’s changing his or her principal place of residence from the
property purchased under the First Home/PLUS program. The promissory notes
did not contain language that limited the amount of Program or Initiative funds
the Authority could recapture to the net proceeds from the sale of the property.

U.S. Bank issued foreclosure notices for the homes of 3 of the 64 activities in
which the Authority drew down and disbursed Program or Initiative funds from



                                 12
           July 1, 2008, through March 31, 2010. Ownership for two of the homes had been
           transferred through the foreclosure process as of August 31, 2010. The Authority
           did not receive any net proceeds from the sale of the homes or reimburse the
           State’s Program for the $7,000 in Program funds used for the two homes.
           Therefore, we reviewed an additional 100 activities in which Program or Initiative
           funds were reserved through the State’s First Home/PLUS program after May 2,
           2007, and U.S. Bank had issued foreclosure notices for the homes or referred the
           homes for foreclosure as of August 31, 2010. Ownership for 30 of the homes had
           been transferred through the foreclosure process as of September 30, 2010. The
           Authority did not receive any net proceeds from the sale of the homes or
           reimburse the State’s Program for the $123,326 in Program or Initiative funds
           used for the 30 homes. The table in appendix E of this report shows the activity
           number, the date of closing, the date Program or Initiative funds were drawn
           down for the activity in HUD’s Integrated Disbursement and Information System
           (System), the date the home was transferred through foreclosure, and the amount
           of assistance provided for the 32 homes.

The Authority Did Not
Reimburse the State’s Treasury
Account More Than $8,000 in
Program Funds Disbursed for
Two Terminated Activities

           HUD’s regulations at 24 CFR 92.503(b)(2) state that any Program funds invested
           in a project that is terminated before completion, either voluntarily or otherwise,
           must be repaid by a participating jurisdiction in accordance with section
           92.503(b)(3). Section 92.503(b)(3) states that if the Program funds were
           disbursed from the participating jurisdiction’s treasury account, the funds must be
           repaid to the participating jurisdiction’s HOME investment trust fund treasury
           account (treasury account).

           The Authority disbursed $8,300 in Program funds from its treasury account for
           two activities that were later terminated. However, it did not reimburse its
           treasury account from non-Federal funds for the more than $8,000.

           The Authority disbursed $3,500 in Program funds on July 1, 2009, to Nichols
           Mortgage Services (Nichols Mortgage) for activity number 25061. The activity
           was terminated on July 23, 2009, when Nichols Mortgage informed the Authority
           that it would transfer the $3,500 in Program funds to another lender to provide the
           home buyer with the interest-free loan for downpayment assistance and closing
           costs or would return the funds to the Authority. Nichols Mortgage was dissolved
           on August 7, 2009, and did not inform the Authority that it transferred the $3,500
           in Program funds to another lender or return the funds to the Authority. The
           Authority’s staff attorney stated that a new lender would have had to resubmit the
           household and property information to the Authority for approval and the



                                           13
           Authority would have assigned a new reservation number and date for the
           approved loan. The Authority did not receive household and property information
           from another lender and did not approve an interest-free loan for downpayment
           assistance and closing costs for the household through another lender. However,
           the Authority inappropriately reported activity number 25061 as completed in
           HUD’s System. Further, the Authority provided $4,745 in Program funds to a
           different household for an interest-free loan for downpayment assistance and
           closing costs to purchase the same property under activity number 25562. As of
           December 17, 2010, the Authority had not reimbursed the State’s treasury account
           for the $3,500.

           The Authority disbursed $4,800 in Program funds on November 5, 2009, to Bank
           of America for activity number 25781. The activity was later terminated because
           the loan did not meet the requirements of the First Home/PLUS program and U.S.
           Bank would not purchase it. On March 23, 2010, the Authority sent a letter to
           Bank of America requesting the repayment of the nearly $5,000 by April 9, 2010.
           On July 20, 2010, we asked the Authority whether the Program funds had been
           recaptured for activity number 25781. The Authority’s loan system specialist said
           that the Program funds had not been recaptured. Therefore, on August 11, 2010,
           the Authority sent another letter to Bank of America requesting the repayment of
           the nearly $5,000 by August 23, 2010. On December 13, 2010, the Authority
           received a check, dated November 15, 2010, from Bank of America for the nearly
           $5,000. However, as of December 17, 2010, the Authority had not reimbursed the
           State’s treasury account for the nearly $5,000.

The Authority Lacked
Adequate Procedures and
Controls

           The weaknesses regarding the Authority’s not implementing appropriate recapture
           provisions for its activities, not ensuring that the State’s Program was reimbursed
           for Program or Initiative funds used for activities in which the ownership of the
           homes was later transferred through foreclosures, and not ensuring that the State’s
           treasury account was reimbursed for Program funds used for an activity that was
           later terminated occurred because the Authority lacked adequate procedures and
           controls over the State’s First Home/PLUS program to ensure that it appropriately
           followed HUD’s requirements.

           The Authority’s chief financial officer said that before May 2007, the Authority
           forgave loans under the First Home/PLUS program at 20 percent per year over a
           5-year affordability period as long as the home buyers lived in the homes. In May
           2007, the Authority eliminated the 5-year affordability period and started
           requiring home buyers to repay the entire loan due to (1) home buyer’s
           refinancing the first mortgages on their homes in the fourth or fifth year of the
           affordability period, repaying the Authority a small portion of the loan, and



                                           14
             keeping the remaining equity and (2) the uncertainty of future Program funding
             and the need to build up Program income. However, the Authority did not ensure
             that the State incorporated the revised recapture provisions in its consolidated
             plan or action plan. The chief financial officer said that the Authority
             inadvertently omitted the revised recapture provisions from the consolidated plan
             and action plan.

             The Authority did not track activities to determine whether ownership was
             transferred through foreclosures. U.S. Bank handled this process and reimbursed
             the Authority for net proceeds, if any, from the sale of the homes. Further, the
             Authority did not reimburse the State’s Program for the Program and Initiative
             funds used for the homes. The Authority’s single family director stated that the
             Authority was not aware that the recapture provisions contained in its written
             agreements with the home buyers required it to do so. When the Authority
             changed the recapture provisions in May 2007, requiring the full recapture of
             Program and Initiative funds, it did not intend or foresee that requiring the full
             recapture would trigger an obligation on its part to recapture funds from the
             households or reimburse the State’s Program as a result of a transfer of ownership
             due to foreclosure.

             The Authority’s staff attorney stated that the Authority had not reimbursed the
             State’s treasury account for the nearly $5,000 in Program funds disbursed for
             activity number 25781 since the Authority did not receive Bank of America’s
             repayment for the funds until December 13, 2010, and it takes time to process the
             reimbursement.

Conclusion

             As previously mentioned, the Authority lacked adequate procedures and controls
             over the State’s First Home/PLUS program to ensure that it appropriately
             followed HUD’s requirements. It did not (1) implement appropriate recapture
             provisions for all 64 of the activities reviewed, (2) ensure that the State’s Program
             was reimbursed for the more than $130,000 in Program or Initiative funds used
             for the 32 activities in which the ownership of the homes was later transferred
             through foreclosures, and (3) reimburse the State’s treasury account for the more
             than $8,000 in Program funds disbursed for activity numbers 25061 and 25781
             that were later terminated. Further, the Authority is at risk of being required to
             reimburse the State’s Program additional non-Federal funds if the ownership of
             additional homes acquired under the State’s First Home/PLUS program is
             transferred through foreclosures. If the State implements adequate procedures
             and controls over its First Home/PLUS program to ensure compliance with
             HUD’s requirements regarding homes acquired under the First Home/PLUS
             program in which ownership is transferred due to foreclosures, we estimate that
             over the next year, the State will appropriately recapture Program and/or Initiative
             funds and/or reimburse its Program from non-Federal funds totaling nearly



                                              15
          $124,000. Our methodology for this estimate is explained in the Scope and
          Methodology section of this audit report.

Recommendations

          We recommend that the Director of HUD’s Indianapolis Office of Community
          Planning and Development require the State to

          2A.     Revise its consolidated plan and action plan to include the recapture
                  provisions the Authority uses for the First Home/PLUS program or require
                  the Authority to revise the recapture provisions it uses for the First
                  Home/PLUS program to comply with the recapture provisions in the
                  State’s consolidated plan and action plan. If the State revises its
                  consolidated plan and action plan, it needs to submit the consolidated plan
                  and action plan to HUD for approval.

          2B.     Reimburse its Program $130,326 from non-Federal funds for the 32
                  activities in which ownership of the homes was transferred through
                  foreclosures.

          2C.     Implement adequate procedures and controls to ensure that if the
                  ownership of additional homes acquired under its First Home/PLUS
                  program is transferred through foreclosures, the State recaptures the entire
                  amount of the Program or Initiative funds used for the activities through
                  the receipt of net proceeds from the sales of the homes and/or reimburses
                  its Program for the Program or Initiative funds provided to the home
                  buyers as appropriate. The procedures and controls should include but not
                  be limited to tracking all activities in which Program or Initiative funds
                  were reserved through the State’s First Home/PLUS program after May 2,
                  2007, including the remaining activities for which U.S. Bank issued
                  foreclosure notices for the homes or referred the homes for foreclosure as
                  of August 31, 2010, to determine whether ownership of the homes is
                  transferred through foreclosures and recapturing the entire amount of the
                  Program or Initiative funds used for the activities. This measure will
                  ensure that over the next 12 months, the State will appropriately recapture
                  Program and/or Initiative funds and/or reimburses its Program from non-
                  Federal funds totaling at least $123,768.

          2D.     Reimburse its treasury account from non-Federal funds for the $8,300 in
                  Program funds the Authority inappropriately disbursed for activity
                  numbers 25061 and 25781.




                                           16
                          SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed

           Applicable laws; HUD’s regulations at 24 CFR Parts 35, 85, and 92; HUD’s “Building
            HOME: A Program Primer”; HUD’s HOMEfires, volume 5, numbers 2 and 5, volume
            6, number 2, and volume 9, number 2; and HUD’s Office of Community Planning and
            Development Notice 07-06.

           The State’s data from HUD’s System, consolidated plan for 2005 through 2009, action
            plans for 2008 and 2009, and consolidated annual performance and evaluation report for
            2008.

           The Authority’s accounting records, audited financial statements for 2007 and 2008,
            single audits for 2007 and 2008, Program data, activity files, contracts with inspectors,
            policies and procedures, and organizational chart.

           HUD’s files for the State and data in HUD’s Neighborhood Watch/Early Warning
            System.

We also interviewed the Authority’s employees, U.S. Bank’s employees, Program participants, and
HUD’s staff.

Finding 1

We statistically selected 64 of the 1,106 activities in which the Authority drew down and disbursed
Program or Initiative funds from July 1, 2008, through March 31, 2010, to determine whether the
Authority used Program and Initiative funds for eligible activities. The 64 activities totaled
$307,262 in Program or Initiative funds. Our sampling criteria used a 90 percent confidence level,
50 percent error rate, and precision of plus or minus 10 percent. The Authority lacked sufficient
documentation to support that homes for 9 of the 64 activities reviewed met HUD’s property
standards requirements. All nine of the activities involved the purchase of new construction
homes. Therefore, we reviewed an additional 129 activities in which the Authority used
Program or Initiative funds from July 1, 2008, through May 11, 2010, to assist in the purchase of
new construction homes under the First Home/PLUS program.

Finding 2

We statistically selected 64 of the 1,106 activities in which the Authority drew down and disbursed
Program or Initiative funds from July 1, 2008, through March 31, 2010, to determine whether the
Authority implemented appropriate recapture provisions for its activities. The 64 activities totaled
$307,262 in Program or Initiative funds. Our sampling criteria used a 90 percent confidence level,
50 percent error rate, and precision of plus or minus 10 percent. Ownership for two of the homes
had been transferred through the foreclosure process as of August 31, 2010. The Authority did
not receive any net proceeds from the sale of the homes or reimburse the State’s Program for the


                                                  17
$7,000 in Program funds used for the two homes. Therefore, we reviewed an additional 100
activities in which Program or Initiative funds were reserved through the State’s First
Home/PLUS program after May 2, 2007, and U.S. Bank issued foreclosure notices for the homes
or referred the homes for foreclosure as of August 31, 2010. Ownership for 30 of the homes had
been transferred through the foreclosure process as of September 30, 2010. The Authority did
not receive any net proceeds from the sale of the homes or reimburse the State’s Program for the
$123,326 in Program or Initiative funds used for the 30 homes. Further, the homes for 13 of the
activites had a delinquent, pre-foreclosure acceptance plan, special forbearance, or bankruptcy
court clearance status as of August 31, 2010. In addition, one of the homes involved a
conventional mortgage that was not FHA-insured. The remaining 57 activities totaled $213,597 in
Program or Initiative funds.

To estimate the number of homes in foreclosure that would result in a sale and transfer of
ownership within the next year, we modeled the rates of conversion for homes in foreclosure to
sale and transfer of ownership within the State of Indiana. Loans for the homes in foreclosure
were grouped and modeled by the year of origination as the year of origination has been shown
to affect the length of time in foreclosure before a resale and transfer of ownership. Sale and
transfer of ownership patterns for homes in foreclosure from 2008 were used to model 2009
loans for the homes in foreclosure as these two years showed the same probability distribution
and the data for 2008 was more complete. To model the rates of conversion to sale and transfer
of ownership, we used histories from more than 881 foreclosed Indiana loans from HUD’s FHA
databases to create a declining probability distribution (i.e., a survival curve) for the State of
Indiana. The curve was compared with similar profiles from 26,408 United States loans. This
curve modeled the percentage of homes in foreclosure ( which remained unsold at a given
number of months after going into foreclosure. Using this information, we estimated for each of
the State’s 57 homes in foreclosure as of August 31, 2010, a home’s likelihood of surviving
foreclosure to a certain point in time without going to sale and transfer of ownership. The
probability of going to sale and transfer of ownership was then multiplied times the amount of
Program or Initiative funds disbursed for each of the 57 homes. The total funds at risk were
summed to quantify the total amount of Program funds at risk. To estimate the probability that
an individual home would go to sale and ownership would be transferred, the survival at the time
of observation (S     ) was compared with the survival probability 1 year from August 31, 2010
(S ), and the likelihood of sale and transfer of ownership (P ) was computed as follows:

                                                    S
                                       P        1
                                                    S

Based on our modeling, we estimated that over the next year, the State will not recapture
Program and/or Initiative funds and/or reimburse its Program from non-Federal funds for
$123,768 of the $213,597 in Program or Initiative funds used for the 57 homes acquired under its
First Home/PLUS program of which ownership would be transferred due to foreclosures. This
estimate is presented solely to demonstrate the amount of Program and/or Initiative funds that
could be put to better use over the next year on eligible activities if the State implements our
recommendation.




                                               18
In addition, we relied in part on data maintained by the Authority for its First Home/PLUS down
payment assistance program, data in HUD’s Neighborhood Watch System, and selected data
from HUD’s Single Family Data Warehouse. Although we did not perform detailed assessments
of the reliability of the data, we performed a minimal level of testing and found the data to be
adequately reliable for our purposes.

We performed our onsite audit work from April through July 2010 at the Authority’s office located
at 30 South Meridian Street, Indianapolis, IN. The audit covered the period July 2008 through
March 2010 and was expanded 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.




                                                 19
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about achievement of the organization’s mission,
goals, and objectives with regard to:

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls 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:

                     Effectiveness and efficiency of operations - Policies and procedures that
                      management has implemented to reasonably ensure that a program meets
                      its objectives.

                     Reliability of financial reporting - 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 applicable laws and regulations - Policies and
                      procedures that management has implemented to reasonably ensure that
                      resource use is consistent with laws and regulations.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.




                                                 20
Significant Deficiency

            Based on our review, we believe that the following item is a significant deficiency:

                  The Authority lacked adequate procedures and controls to ensure that (1) it
                   used Program or Initiative funds for activities in accordance with HUD’s
                   requirements, (2) it implemented appropriate recapture provisions for
                   activities, (3) the State’s Program was reimbursed for Program or Initiative
                   funds used for activities in which the ownership of the homes was later
                   transferred through foreclosures, and (4) the State’s treasury account was
                   reimbursed for Program funds used for an activity that was later
                   terminated (see findings 1 and 2).




                                             21
                                   APPENDIXES

Appendix A

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

          Recommendation                                              Funds to be put
              number            Ineligible 1/        Unsupported 2/   to better use 3/
                1A                                        $803,445
                2B                   $130,326
                2C                                                          $123,768
                2D                      8,300
               Totals                $138,626             $803,445          $123,768


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.

3/   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, if the State implements our
     recommendation it will appropriately recapture Program and/or Initiative funds and/or
     reimburse its Program from non-Federal funds.




                                                22
Appendix B

          AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation     Auditee Comments




Comments 1, 2,
 and 3


Comments 1, 2,
 and 3




                           23
Ref to OIG Evaluation   Auditee Comments




Comments 1, 2,
 and 3



Comments 1, 2,
 and 3




                         24
Ref to OIG Evaluation   Auditee Comments




Comments 1, 2,
 and 3
Comments 1, 2,
 and 3




Comments 1, 2,
 and 3




Comments 1, 2,
  and 3




Comment 1




                         25
Ref to OIG Evaluation   Auditee Comments




Comment 1

Comment 4



Comment 4




Comment 4

Comments 1, 2,
 and 3




                         26
Ref to OIG Evaluation   Auditee Comments




Comments 1, 2,
 and 3
Comments 1, 2,
 3, and 5


Comment 6




Comments 1, 2,
 and 3
Comment 4
Comment 5




Comment 5




Comment 7
Comment 1




                         27
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 7




Comment 8



Comment 9




Comments 10
 and 11



Comment 4




                         28
Ref to OIG Evaluation   Auditee Comments




Comment 4


Comment 4

Comments 10
 and 11




Comment 12




Comment 12




                         29
Ref to OIG Evaluation   Auditee Comments




Comments 10
 and 12




Comments 10,
 11, and 12




Comments 13




                         30
Ref to OIG Evaluation   Auditee Comments




Comments 10,
 11, and 12


Comment 14




Comment 13




Comment 15




Comment 16




Comment 17




                         31
Ref to OIG Evaluation   Auditee Comments




                         32
                         OIG Evaluation of Auditee Comments


Comment 1   HUD’s HOMEfires, volume 6, number 2, states that pursuant to 24 CFR
            92.504(a), a participating jurisdiction is responsible for managing the day-to-day
            operations of its Program, including compliance with property standards
            applicable to Program units. They must perform inspections of Program units
            purchased with Program or Initiative funds. Participating jurisdictions may not
            rely on independent inspections performed by any party not under contract to the
            participating jurisdiction. Third parties such as consumer inspectors or FHA
            appraisers are not contractually obligated to perform the participating
            jurisdictions’ obligations. Their inspections cannot be used to determine
            compliance with Program or Initiative property standards requirements.

Comment 2   The Authority did not have inspections performed on any of the new construction
            homes purchased under the First Home/PLUS program. It relied on FHA
            compliance or occupancy inspections performed by the cities or counties where
            the new construction homes were located. Further, the Authority did not monitor
            the inspections to ensure that the new construction homes met HUD’s property
            standards requirements.

Comment 3   Contrary to HUD’s requirements, the Authority lacked sufficient documentation
            to support that new construction homes for 138 activities met HUD’s property
            standards requirements.

Comment 4   HOMEfires is HUD’s official policy newsletter for the Program that answers
            specific policy questions. Its purpose is to clarify and explain how Program
            regulations should be interpreted and applied. Therefore, participating
            jurisdictions are required to follow the requirements contained in HOMEfires.

Comment 5   As a result, the Authority was unable to support its use of more than $803,000 in
            Program or Initiative funds for activities without sufficient documentation to
            demonstrate that homes met HUD’s property standards requirements.

Comment 6   We randomly selected eight activities completed from April 1, through June 30,
            2010. We were only able to conduct walkthroughs of seven of the eight homes.
            Further, only 6 of the new construction homes for the 138 activities were
            completed during this period. However, none of the six new construction homes
            were selected through our random sample.

Comment 7   The Authority did not provide documentation to support that it had third-party
            contracted inspectors inspect all homes purchased under the First Home/PLUS
            program as of July 12, 2010. If the Authority implements this procedure, it
            should improve the Authority’s management of the State’s Program.




                                            33
Comment 8     The Authority’s commitment to training, if fully implemented, should improve its
              retention of all contracts with third-party inspectors for at least 5 years after the
              contracts terminate.

Comment 9     We are not implying that it was the Authority’s policy to discard prior contracts
              with the inspectors. The audit report includes statements from the Authority’s
              single family director that once the Authority executed current contracts with the
              inspectors, it discarded the prior contracts with the inspectors and the assistant
              single family director and a single family underwriter were not aware that HUD’s
              regulations at 24 CFR 92.508(c)(4) required written agreements to be retained for
              5 years after the agreements terminated.

Comment 10 HUD’s HOMEfires, volume 5, number 2, states that for Program-assisted home-
           buyer projects with recapture provisions, the amount of Program funds required to
           be repaid in the event of foreclosure is the amount that would be subject to
           recapture under the terms of the written agreement with the home buyer. If the
           recapture agreement requires the entire amount of the Program investment from
           the home buyer or an amount reduced pro rata based on the time the home buyer
           has owned and occupied the housing measured against the affordability period,
           the amount required by the agreement is the amount that must be recaptured by
           the participating jurisdiction for the Program. If the participating jurisdiction is
           unable to recapture the funds from the household, it must reimburse its Program
           in the amount due pursuant to the recapture provisions in the written agreement
           with the home buyer.

Comment 11 Contrary to HUD’s requirements and the State’s consolidated plan and action
           plan, the Authority did not ensure that it implemented appropriate recapture
           provisions for all 64 of the activities reviewed. U.S. Bank issued foreclosure
           notices for the homes of 3 of the 64 activities in which the Authority drew down
           and disbursed Program or Initiative funds from July 1, 2008, through March 31,
           2010. Ownership for two of the homes had been transferred through the
           foreclosure process as of August 31, 2010. The Authority did not receive any net
           proceeds from the sale of the homes or reimburse the State’s Program for the
           $7,000 in Program funds used for the two homes. Therefore, we reviewed an
           additional 100 activities in which Program or Initiative funds were reserved
           through the State’s First Home/PLUS program after May 2, 2007, and U.S. Bank
           had issued foreclosure notices for the homes or referred the homes for foreclosure
           as of August 31, 2010. Ownership for 30 of the homes had been transferred
           through the foreclosure process as of September 30, 2010. The Authority did not
           receive any net proceeds from the sale of the homes or reimburse the State’s
           Program for the $123,326 in Program or Initiative funds used for the 30 homes.
           As a result, the State’s Program was not reimbursed more than $130,000 in
           Program or Initiative funds used for 32 activities in which the ownership of
           homes was later transferred through foreclosures.




                                               34
Comment 12 The promissory notes, which were secured by second mortgages, between the
           Authority and the home buyers required the home buyers to repay the entire
           amount of downpayment assistance at or before maturity of the loan. The
           promissory notes define maturity as the sale of the property, the payoff or
           refinancing of the first mortgage on the property, or the home buyer’s changing
           his or her principal place of residence from the property purchased under the First
           Home/PLUS program. The promissory notes did not contain language that
           limited the amount of Program or Initiative funds the Authority could recapture to
           the net proceeds from the sale of the property. The 32 homes were sold through
           the foreclosure process. Therefore, the loans reached maturity due to the sale of
           the properties, and the Authority was required to recapture the entire amount of
           Program or Initiative funds used for activities through the receipt of net proceeds
           from the sales of the homes and/or reimburse its Program for the Program or
           Initiative funds provided to the home buyers as appropriate.

Comment 13 The Authority’s commitment to revising the recapture provisions it uses for the
           First Home/PLUS program to comply with the recapture provisions in the State’s
           consolidated plan and action plan, if fully implemented, should improve the
           Authority’s management of the State’s Program.

Comment 14 The Authority’s commitment to revising the recapture provisions it uses for the
           First Home/PLUS program will not be applicable to activities reserved through
           the State’s First Home/PLUS program after May 2, 2007, through the date the
           Authority revises the recapture provisions. Therefore, for these activities in
           which ownership of homes acquired under the Authority’s First Home/PLUS
           program is transferred through foreclosures, the State must recapture the entire
           amount of Program or Initiative funds used for activities through the receipt of net
           proceeds from the sales of the homes and/or reimburse its Program for the
           Program or Initiative funds provided to the home buyers as appropriate.

Comment 15 If the Authority is able to amend its promissory notes with the home buyers for
           those activities reserved through the State’s First Home/PLUS program after May
           2, 2007, through the date the Authority revises the recapture provisions and the
           promissory notes include appropriate language limiting the amount of Program or
           Initiative funds the Authority could recapture to the net proceeds from the sale of
           the properties, the State should not be required to reimburse its Program from
           non-Federal funds for the sale of homes through foreclosure.

Comment 16 We revised the report to state the following:

                 On December 13, 2010, the Authority received a check, dated November 15,
                  2010, from Bank of America for the nearly $5,000. However, as of December
                  17, 2010, the Authority had not reimbursed the State’s treasury account for the
                  nearly $5,000.




                                              35
                 The Authority’s staff attorney stated that the Authority had not reimbursed the
                  State’s treasury account for the nearly $5,000 in Program funds disbursed for
                  activity number 25781 since the Authority did not receive Bank of America’s
                  repayment for the funds until December 13, 2010, and it takes time to process
                  the reimbursement.

              The Authority did not provide documentation to support that it reimbursed the
              State’s local account $4,800 for activity number 25781. Further, the Authority
              drew down the $4,800 in Program funds for activity number 25781 from its
              treasury account. Therefore, the State should reimburse its treasury account for
              the $4,800 in Program funds the Authority inappropriately disbursed for activity
              number 25781.

Comment 17 The State should reimburse its treasury account from non-Federal funds for the
           $3,500 in Program funds the Authority inappropriately disbursed for activity
           number 25061.




                                              36
Appendix C

      HUD’S REQUIREMENTS AND THE STATE’S AND THE
                 AUTHORITY’S POLICIES

Finding 1
HUD’s regulations at 24 CFR 92.251(a)(2) state that housing acquired with Program funds must
meet all applicable State and local housing quality standards and code requirements. If there are
no such housing quality standards or code requirements, the housing must meet HUD’s housing
quality standards.

HUD’s regulations at 24 CFR 92.504(b) state that before disbursing any Program funds to any
entity, the participating jurisdiction must enter into a written agreement with that entity. Before
disbursing any Program funds to any entity, a State recipient, subrecipient, or contractor, which
is administering all or a part of the Program on behalf of the participating jurisdiction, must also
enter into a written agreement with that entity. The written agreement must ensure compliance
with the requirements of 24 CFR Part 92.

HUD’s regulations at 24 CFR 92.508(a) state that a participating jurisdiction must establish and
maintain sufficient records to enable HUD to determine whether it has met the requirements of
24 CFR Part 92. The participating jurisdiction must maintain records demonstrating that each
activity meets the property standards of section 24 CFR 92.251. Section 92.508(c)(4) states that
written agreements must be retained for 5 years after the agreement terminates.

HUD’s regulations at 24 CFR 92.612(b) state that housing assisted with Initiative funds must
meet the property standards contained in 24 CFR 92.251.

HUD’s regulations at 24 CFR 92.616(e) state that the requirements regarding participating
jurisdiction responsibilities and written agreements contained in 24 CFR 92.504 apply to
Initiative funds, with the modification that the written agreement is not required to cover any
Program requirement that is not applicable to Initiative funds.

HUD’s regulations at 24 CFR 92.616(i) state that the record-keeping requirements contained in
24 CFR 92.508 apply to Initiative funds.

HUD’s HOMEfires, volume 6, number 2, states that pursuant to 24 CFR 92.504(a), a
participating jurisdiction is responsible for managing the day-to-day operations of its Program,
including compliance with property standards applicable to Program units. Participating
jurisdictions must perform inspections of Program units purchased with Program or Initiative
funds. Participating jurisdictions may not rely on independent inspections performed by any
party not under contract to the participating jurisdiction. Third parties such as consumer
inspectors or FHA appraisers are not contractually obligated to perform the participating



                                                 37
jurisdictions’ obligations. Their inspections cannot be used to determine compliance with
Program or Initiative property standards requirements.

Finding 2
Section 215(b) of Title II of the Act, as amended, states that housing that is for homeownership
shall qualify as affordable housing under Title II of the Act only if the housing is subject to
resale restrictions that are established by the participating jurisdiction and determined by HUD’s
Secretary to be appropriate to (1) allow for the later purchase of the property only by a low-
income household at a price which will provide the owner a fair return on investment and ensure
that the housing will remain affordable to a reasonable range of low-income home buyers or (2)
recapture the Program investment to assist other persons in accordance with the requirements of
Title II of the Act, except when there are no net proceeds or when the net proceeds are
insufficient to repay the full amount of the assistance.

HUD’s regulations at 24 CFR 91.200(a) state that a complete consolidated plan consists of the
information required in section 91.220.

HUD’s regulations at 24 CFR 91.220(l)(2)(ii) state that the action plan must include the
guidelines for resale or recapture, as required in 24 CFR 92.254, if a participating jurisdiction
intends to use Program funds for home buyers.

HUD’s regulations at 24 CFR 92.254(a)(4) state that Program-assisted housing must meet the
affordability requirements for not less than the applicable period beginning after activity
completion. Home ownership activities that receive less than $15,000 in Program assistance
must remain affordable for at least 5 years. Section 92.254(a)(5) states that to ensure
affordability, the participating jurisdiction must impose either resale or recapture requirements
that comply with the standards of section 92.254(a)(5) and include the provisions in its
consolidated plan. HUD must determine that they are appropriate. Section 92.254(a)(5)(ii)
states that a participating jurisdiction’s recapture provisions must ensure that the participating
jurisdiction recoups all or a portion of the Program assistance to the home buyers if the housing
does not continue to be the principal residence of the household for the duration of the period of
affordability. The participating jurisdiction may structure its recapture provisions based on its
program design and market conditions. In establishing its recapture provisions, the participating
jurisdiction is subject to the limitation that when the recapture provision is triggered by a
voluntary or involuntary sale of the housing unit and there are no net proceeds or the net
proceeds are insufficient to repay the Program investment due, the participating jurisdiction can
only recapture the net proceeds if any. The recaptured funds must be used to carry out Program-
eligible activities in accordance with the requirements of 24 CFR Part 92.

HUD’s regulations at 24 CFR 92.502(c)(3) state that a participating jurisdiction must disburse
Program funds, including Program income and recaptured Program funds, in its HOME
investment trust fund local account (local account) before requesting Program funds from its
treasury account. Section 92.503(c) states that Program funds recaptured in accordance with 24
CFR 92.254(a)(5)(ii) must be deposited in the participating jurisdiction’s local account and used
in accordance with the requirements of 24 CFR Part 92.


                                                 38
HUD’s regulations at 24 CFR 92.503(b)(2) state that any Program funds invested in a project
that is terminated before completion, either voluntarily or otherwise, must be repaid by a
participating jurisdiction in accordance with section 92.503(b)(3). Section 92.503(b)(3) states
that if the Program funds were disbursed from the participating jurisdiction’s treasury account,
the funds must be repaid to the participating jurisdiction’s treasury account. If the Program
funds were disbursed from the participating jurisdiction’s local account, the funds must be repaid
to the participating jurisdiction’s local account.

HUD’s regulations at 24 CFR 92.612(c) state that housing assisted with Initiative funds must
meet the affordability requirements contained in 24 CFR 92.254(a).

HUD’s regulations at 24 CFR 92.616(d) state that the requirements regarding Program income,
repayments, and recaptured funds contained in 24 CFR 92.503 apply to Initiative funds, except
that the Program income and recaptured funds must be deposited into a participating
jurisdiction’s local account and used in accordance with Program requirements.

HUD’s HOMEfires, volume 5, number 2, states that for Program-assisted home-buyer projects
with recapture provisions, the amount of Program funds required to be repaid if the ownership of
the housing is conveyed pursuant to a foreclosure sale is the amount that would be subject to
recapture under the terms of the written agreement with the home buyer. If the recapture
agreement provides for shared net proceeds, the amount subject to recapture is based on the
amount of net proceeds, if any, from the foreclosure sale. If the recapture agreement requires the
entire amount of the Program investment from the home buyer or an amount reduced pro rata
based on the time the home buyer has owned and occupied the housing measured against the
affordability period, the amount required by the agreement is the amount that must be recaptured
by the participating jurisdiction for the Program. If the participating jurisdiction is unable to
recapture the funds from the household, the participating jurisdiction must reimburse its Program
in the amount due pursuant to the recapture provisions in the written agreement with the home
buyer. Regardless of the terms of its written agreements, it is important that the participating
jurisdiction establish mechanisms to ensure that it will be notified of pending foreclosures so that
it can attempt to recoup some or all of the Program subsidy.

HUD’s HOMEfires, volume 5, number 5, requires a participating jurisdiction to select either
resale or recapture provisions for its Program-assisted home-buyer projects. The participating
jurisdiction may select resale or recapture provisions for all of its home-buyer projects or resale
or recapture provisions on a case-by-case basis. However, the participating jurisdiction must
select whether resale or recapture will be imposed for each home-buyer project at the time the
assistance is provided. A participating jurisdiction may adopt any one of four options in
designing its recapture provisions. All of the options the participating jurisdiction will employ
must be identified in its consolidated plan and approved by HUD.

The State’s consolidated plan for 2005 through 2009 and action plan for 2009 state that the
amount of Program funds to be recaptured is based on a pro rata shared net sale proceeds
calculation. If there are no proceeds, there is no recapture. Any net sale proceeds that exist
would be shared between the recipient and the beneficiary based on the number of years of the
affordability period that have been fulfilled, not to exceed the original Program investment.



                                                 39
Page 11-1 of the Authority’s mortgage revenue bond program guides, dated March 2007 and
January 2010, state that the First Home/PLUS program offers downpayment assistance in the
form of a loan secured by a second mortgage to certain qualified borrowers. For all loans
reserved after May 2, 2007, there is no loan forgiveness associated with the second mortgage if
the borrower refinances or sells the home. The second mortgage is due and payable
immediately.




                                               40
Appendix D

   SCHEDULE OF ACTIVITIES WITH INSUFFICIENT
DOCUMENTATION TO SUPPORT THAT HOMES MET HUD’S
      PROPERTY STANDARDS REQUIREMENTS

   Activity   Assistance   Activity   Assistance        Activity   Assistance   Activity   Assistance
   number      amount      number      amount           number      amount      number      amount
    23381         $3,500    24417         $3,500         24770         $3,500    25810         $6,854
    23842          3,500    24418          3,500         24771          3,500    25835          5,000
    23853          3,500    24427         14,999         24772         11,490    25859          5,000
    23891          3,500    24437         11,900         24781          3,500    25860          6,000
    23936          3,500    24439          3,500         24807          3,500    25875          7,500
    23951          3,363    24448          3,500         24902          3,500    25898          5,000
    23957         14,999    24464         13,399         24935          3,500    25912          6,612
    23963          3,500    24471          3,500         24962          3,500    25913          7,500
    23971          3,500    24472          3,500         25012          3,500    25919          7,500
    23982          3,500    24498          3,500         25048          5,000    25970          5,000
    23999          3,500    24520         13,503         25065          3,500    25999          5,000
    24003          3,500    24550          3,500         25090          5,000    26012          7,500
    24037          3,500    24562          3,500         25223          5,000    26025          7,500
    24042          3,500    24563          3,500         25251          5,000    26045          7,350
    24047          3,500    24568          3,500         25413          5,000    26054          5,000
    24062          3,500    24596          3,500         25424          5,000    26071          7,410
    24067         13,500    24601          3,500         25512          5,000    26112          4,300
    24068         11,513    24603          3,500         25515          5,000    26115          7,500
    24069          3,500    24604          3,500         25517          5,000    26169          7,500
    24090          3,500    24617          3,500         25530          5,000    26203          7,500
    24107          3,500    24623          3,500         25554         12,190    26247          6,894
    24119          5,000    24626          3,500         25569          5,000    26276          7,500
    24160          3,500    24627          3,500         25575          5,000    26299          7,033
    24169         13,434    24628          3,500         25707          5,000    26311          6,240
    24216         14,999    24656         14,000         25714         14,200    26335          6,400
    24228          3,500    24657          3,500         25716          5,000    26374          7,500
    24348          3,500    24678          3,500         25752          7,500    26375          7,500
    24352          3,500    24708          3,500         25765          5,000    26383          6,780
    24369          3,500    24709          3,500         25768          7,407    26384          7,500
    24376          3,500    24711          3,500         25774         13,400    26416          6,896
    24377          3,500    24731         10,000         25785          7,011    26441          5,200
    24383          3,500    24751          3,500         25789         13,304    26451          7,383
    24392          3,500    24752          2,584         25801          5,000    26493          6,796
    24406          3,500    24753          2,847         25802          5,000   Totals      $803,445
    24410         14,256    24766         14,999         25807          7,500




                                                   41
Appendix E

  SCHEDULE OF ACTIVITIES IN WHICH OWNERSHIP OF
HOMES WAS TRASNFERRED THROUGH THE FORCLOSURE
                    PROCESS

      Activity      Date of            Date of          Date of     Amount of
      number        closing           drawdown         transfer     assistance
       22419     June 29, 2007      July 11, 2007   July 20, 2010      $10,100
       22445     July 13, 2007      July 13, 2007   June 17, 2010         3,500
       22451     July 20, 2007      July 19, 2007   June 24, 2010         2,600
       22480     July 30, 2007      July 27, 2007   July 21, 2010         3,500
       22527      Aug. 3, 2007      Aug. 3, 2007    Apr. 15, 2010         3,500
       22538      Aug. 6, 2007      Aug. 9, 2007    June 16, 2010         3,500
       22635     Aug. 17, 2007     Aug. 21, 2007    Feb. 23, 2010         3,500
       22649     Aug. 17, 2007     Sept. 17, 2007   June 29, 2010         2,975
       22503     Aug. 24, 2007     Aug. 31, 2007    June 29, 2010         3,500
       22836     Sept. 20, 2007    Sept. 17, 2007   Aug. 19, 2010         8,300
       22952     Oct. 12, 2007       Feb. 7, 2008   Aug. 10, 2010         3,500
       22936     Oct. 16, 2007      Oct. 15, 2007    May 4, 2010          3,500
       23018     Oct. 29, 2007      Dec. 12, 2007   May 12, 2010          9,300
       23013      Nov. 9, 2007      Nov. 9, 2007    Mar. 16, 2010         3,500
       23235      Jan. 8, 2008      Jan. 17, 2008   Apr. 15, 2010         3,500
       23367     Jan. 15, 2008      Feb. 12, 2008   Aug. 16, 2010         3,500
       23321     Jan. 29, 2008      Jan. 31, 2008    Apr. 8, 2010         3,500
       23407     Feb. 19, 2008       Mar. 3, 2008   Aug. 10, 2010         3,500
       23463     Mar. 14, 2008       Apr. 2, 2008    Mar. 4, 2010         3,500
       23503      Apr. 1, 2008       Apr. 3, 2008    May 4, 2010          3,500
       23672     Apr. 25, 2008      May 19, 2008     June 8, 2010         3,500
       23599     Apr. 30, 2008      Apr. 30, 2008   May 10, 2010          8,500
       23610      May 8, 2008        June 5, 2008   June 18, 2010         3,500
       23789      June 6, 2008      July 24, 2008   Aug. 19, 2010         3,500
       23897     June 30, 2008      June 27, 2008   June 15, 2010         3,500
       24213     Aug. 22, 2008     Sept. 24, 2008   Aug. 5, 2010          3,500
       24336     Aug. 28, 2008      Sept. 4, 2008   Apr. 15, 2010         3,375
       24522     Oct. 27, 2008      Oct. 29, 2008   Aug. 11, 2010         1,176
       24559      Nov. 6, 2008      Nov. 6, 2008    July 21, 2010         3,500
       24747     Nov. 25, 2008      Dec. 23, 2008   July 29, 2010         3,500
       24708     Nov.26, 2008       Dec. 15, 2008   June 17, 2010         3,500
       24836     Feb. 20, 2009      Feb. 26, 2009   Aug. 5, 2010          3,500
                                  Total                               $130,326




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