oversight

The Housing Authority of the City of Meridian Did Not Adequately Maintain Its FHA-Insured Rental Apartments

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-08-25.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




    Housing Authority of the City of Meridian, MS

                  Single Family Loan
                          Program




2014-AT-1009                               AUGUST 25, 2014
                                                        Issue Date: August 25, 2014

                                                        Audit Report Number: 2014-AT-1009




 TO:            Kathleen Zadareky, Deputy Assistant Secretary for Single Family
                 Housing, HU

                Ivery Himes, Director, Office of Single Family Asset Management, HU

                Jemine A. Bryon, Acting General Deputy Assistant Secretary for Public
                  and Indian Housing, P

                Donald J. Lavoy, Deputy Assistant Secretary for Real Estate
                 Assessment Center, PX

                //signed//
FROM:           Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:       The Housing Authority of the City of Meridian Did Not Adequately Maintain Its
               FHA-Insured Rental Apartments


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the Housing Authority of the City
of Meridian’s acquisition and management of its Queen City rental apartments.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
404-331-3369.
                                        August 25, 2014
                                        The Housing Authority of the City of Meridian Did
                                        Not Adequately Maintain Its FHA-Insured Rental
                                        Apartments



Highlights
Audit Report 2014-AT-1009


 What We Audited and Why                       What We Found

We reviewed the Housing Authority of the      The Authority acquired and financed Queen City
City of Meridian’s Queen City apartments at   rental apartments in accordance with HUD’s
the request of the U.S. Department of         Federal regulations by executing 26 FHA-insured
Housing and Urban Development’s (HUD)         mortgages for the purpose of renting the
Single Family Office of Asset Management.     apartments to low- and moderate-income
Our objectives were to determine whether      families. However, the Authority did not
the Authority acquired, financed, and         properly manage and operate the apartments.
managed the purchase of the apartments in     Specifically, the Authority did not adequately
accordance with applicable regulations and    plan for its maintenance. This condition
determine the cause of the Queen City         occurred because the Authority’s maintenance
apartments’ Federal Housing                   plan did not adequately consider the costs of
Administration (FHA) loan defaults.           upkeep and the Authority did not have a
                                              contingency plan in place to address the physical
                                              condition of the apartments in the event of
 What We Recommend                            declining rental income. As a result, the
                                              Authority exposed the FHA insurance fund to
                                              unnecessary risk and a potential loss of more
The audit identified a deficiency which did   than $608,000.
not comply with a requirement in the deeds
of trust which is an agreement between the
originating lender and the Authority.
Specifically, the audit identified that the
Authority did not adequately maintain the
physical condition of Queen City rental
apartments which was required by the deeds
of trust for each property. However, the
deficiency only violated a covenant
provided in the agreement and did not
violate any HUD Federal regulations;
therefore, no recommendations were made
in the report.
                          TABLE OF CONTENTS


Background and Objectives                                                 3

Results of Audit
      Finding: The Authority Did Not Adequately Maintain Its Queen City   5
               Rental Apartments

Scope and Methodology                                                     11

Internal Controls                                                         12

Appendixes
A.    Auditee Comments and OIG’s Evaluation                               13
B.    Physical Condition of the Vacant Properties                         19
C.    Schedule of the Apartments’ Defaulted Loans                         20




                                            2
                  BACKGROUND AND OBJECTIVES
The Housing Authority of the City of Meridian is a public corporation organized under the
laws of the State of Mississippi, and its primary mission is to provide low-income housing
for qualified individuals. To accomplish this purpose, the City appoints a governing board,
and the board designates its own management. The board has governance responsibilities
for all housing activities within Meridian, MS. The Authority was incorporated in 1939
and provides decent, safe, and affordable housing opportunities to more than 3,000
residents in Meridian, MS. It administers 1,215 public housing units and 215 housing
choice vouchers and manages 89 mixed-income apartments. The U.S. Department of
Housing and Urban Development’s (HUD) field office in Jackson, MS, has the
responsibility for overseeing the Authority.

The Authority purchased 87 privately owned apartment units, known as the Queen City
rental apartments, from HUD’s Property Disposition Branch in Jackson, MS on multiple
dates in 1987 and 1988 with 26 different Federal Housing Administration (FHA) loan
transactions totaling more than $1.7 million. HUD’s Loan Management Branch is
responsible for all decisions concerning formerly coinsured mortgages and properties under
its jurisdiction. The Loan Management Branch keeps the Property Disposition Branch
informed of the current status of all potential acquisitions and mortgagee-in-possession
actions. HUD’s Property Disposition Branch manages and sells all acquired properties and
is responsible for the management of those projects which HUD owns. During the time of
the loan transactions, the Loan Management Branches and the Property Disposition
Branches operated at multiple offices across the country and reported to the Office of Asset
Management. However, in 1996 the Office of Asset Management consolidated the
operations of both of the branches and formed what is currently known as the Property
Disposition Branch which now operates with only two field offices in Ft. Worth, TX and
Atlanta, GA.

Queen City consists of 26 properties, comprised of multiple duplexes, triplexes, and
quadplexes, totaling 87 units located within 1 zip code area of Meridian. The Authority
manages and operates the apartments. However, all of Queen City operations are
accounted for separately and are independent with respect to the Authority’s annual
contributions contract with HUD. The Authority and HUD did not enter into any contract
agreements regarding Queen City beyond the FHA loan requirements.

The loans were originated by Bailey Mortgage Company. The loans were refinanced by
Regions Mortgage in March 1999. In September 2013, the Authority stopped making the
mortgage payments for each of the loans. On January 9, 2014, the mayor of Meridian
wrote a letter to HUD on behalf of the Authority, which requested total forgiveness of the
mortgage debt due to Queen City’s insufficient cash flow and poor physical conditions.
On April 30, 2014, HUD’s Neighborhood Watch system showed that the total unpaid
principal balance for the properties totaled more than $1.25 million. A recent as-is
appraisal for the apartments estimated the property’s value at more than $1.1 million.
There were no secondary lien debts on the properties.


                                             3
Our objectives were to determine whether the Authority acquired, financed, and managed
the purchase of the project in accordance with applicable regulations and determine the
cause of the Queen City apartments’ FHA loan defaults.




                                           4
                                     RESULTS OF AUDIT


Finding: The Authority Did Not Adequately Maintain Its Queen
City Rental Apartments
The Authority acquired and financed Queen City rental apartments in accordance with
HUD’s Federal regulations by executing 26 FHA-insured mortgages for the purpose of
renting the apartments to low- and moderate-income families. However, the Authority did
not adequately maintain the physical condition of its Queen City rental apartments. This
condition occurred because the Authority’s maintenance plan did not adequately consider
the cost of upkeep and the Authority did not have a contingency plan in place to address
the physical condition of the apartments in the event of declining rental income. As a
result, the Authority exposed the FHA insurance fund to unnecessary risk and a potential
loss of more than $608,000.



 Apartments’ Physical Condition
 Not Adequately Maintained


                  The Authority acquired and financed Queen City rental apartments in
                  accordance with HUD’s Federal regulations by executing 26 FHA-insured
                  mortgages for the purpose of renting the apartments to low- and moderate-
                  income families, which is consistent with its mission. Specifically, we
                  determined that there was no HUD FHA requirement which would preclude
                  the Authority from acquiring and financing Queen City rental apartments
                  with FHA mortgages. The audit also identified that the use of Single
                  Family FHA loans for financing was allowable because each loan did not
                  exceed the statutory limit of four families. Queen City operations are
                  accounted for separately and are independent with respect to the Authority’s
                  annual contributions contract with HUD, and the project is not a part of the
                  Authority’s project-based housing portfolio, which receives Section 8
                  housing assistance payments.

                  However, the Authority did not properly manage and operate the apartments.
                  Specifically, it did not comply with the deed of trust 1 for each property and
                  did not adequately plan for project maintenance. The Authority’s
                  Modernization Coordinator stated that approximately 70 percent of the units
                  were dilapidated and uninhabitable due to structural, quality, systems, and
                  safety conditions (see appendix B).

   1
    The deed of trust is an agreement between the originating lender and the Authority. For each loan, a deed of trust,
   under the jurisdiction of the State of Mississippi, was used as the instrument for financing. The deed of trust
   contained several covenants, including an agreement that the Authority would not commit, permit, or suffer waste,

                                                          5
impairment, or deterioration of the properties or any part thereof.




                                                         6
             We conducted site visits to each of the apartment buildings and identified
             that only one building with seven units was occupied by tenants. This
             apartment building was the only one for which the mortgage loans were
             current. Authority officials stated that the units were in better condition
             because they were constructed with sounder materials. A 2002 physical
             needs assessment conducted for the occupied apartments showed that the
             physical needs for the 7 units were less extensive than for the other 80 units.

             A June 1996 physical needs assessment estimated that the total cost to
             rebuild the 87 units was more than $1.8 million. The Authority refinanced
             each of the 26 loans associated with the project in March 1999, and the total
             refinance amount was more than $1.6 million. Then in March 2002, an
             independent physical needs assessment estimated that the cost of the
             physical needs was more than $3.8 million. It also concluded that the
             properties were constructed with marginal standards, cheap materials, and
             questionable workmanship. Authority officials also stated that the high
             vacancy rate was due to the poor condition of the properties, which was
             caused primarily by poor workmanship and cheap materials used during the
             original construction of the properties. Queen City had a vacancy rate of
             more than 80 percent 2. Authority officials stated that the condition of the
             properties negatively affected its ability to rely on rental income from
             housing choice vouchers from the neighboring Mississippi Regional
             Housing Authority 5 because some of the units were unable to pass housing
             quality standards inspections. Recently, in October 2012, a physical needs
             assessment estimated that the rebuilding construction costs would be more
             than $3.6 million, and a rehabilitation as-is appraisal estimated the Queen
             City’s value at about $1.2 million, or approximately one-third of the cost of
             construction.

             This condition occurred because the Authority’s prior management did not
             adequately plan for the apartments’ maintenance and upkeep. Specifically,
             the Authority’s maintenance plan in its loan proposal significantly
             underestimated the cost of the upkeep, and the Authority did not have a
             contingency plan to address the physical conditions in the event of declining
             rental income.

                  •   Inadequate maintenance budget - The Authority’s loan proposal
                      included a maintenance plan, which estimated that the maintenance
                      costs would be approximately $830,000 over the life of the 30-year
                      mortgage, or nearly $27,000 each year. However, over a 10-year
                      period from 2003 through 2013, the Authority expended more than
                      $810,000 for maintenance, or approximately $81,000 per year.

2
  The vacancy rate was calculated by dividing the vacant units (65) by the available units (81). The
Authority’s records showed that only 81 units were available for lease when the calculation was
completed. The calculation was not made based on the original 87 units because 6 of the units were
taken off line and were scheduled for demolition due to structural concerns.
                                                 6
    From 1988 through 2013, the Authority expended more than $1.6
    million, or almost double what was planned for maintenance (see
    table 1), from funds generated solely from rental income since
    acquiring the apartments.

       Table 1 - Actual maintenance expense
                Year          Maintenance cost
                1988             $ 42,047
                1989             $ 19,952
                1990             $ 37,250
                1991             $ 28,138
                1992             $ 52,797
                1993             $ 38,350
                1994             $ 41,158
                1995             $ 37,686
                1996             $ 91,973
                1997             $ 52,817
                1998             $ 70,133
                1999             $ 74,607
                2000             $ 88,669
                2001             $ 89,615
                2002             $ 63,691
                2003             $ 66,482
                2004             $ 75,416
                2005             $ 72,352
                2006             $ 62,637
                2007             $110,244
                2008             $ 67,943
                2009             $ 60,929
                2010             $ 95,760
                2011             $108,795
                2012             $ 51,315
                2013             $ 38,473
                Total          $1,639,229


•   Failure to establish a contingency plan - The Authority’s loan
    proposal showed that it planned to rely only on the project’s rental
    income to pay expenses, including maintenance costs. The
    Authority should have created a contingency plan to address the
    upkeep of the physical condition of the project in the event that
    rental income declined.

    Although, the Authority did not have a contingency plan in place, it
    attempted to sustain the project as a viable asset while its rental
    income was significantly declining. Specifically, from March 2009
    to March 2014, the Authority expended more than $700,000 of its
    own non-Federal funds in an attempt to maintain the properties.
    Authority officials provided a letter, dated May 7, 2014, which
    explained that the funds were originally planned for security
    surveillance installation and enhanced lighting upgrades throughout
    the Authority’s public housing portfolio. Authority officials added
    that they had exhausted the non-Federal funds and were no longer
    able to support the project without negatively affecting the
    Authority’s overall operations. The Authority obtained more than

                          7
       $666,000 in low-income tax credits to cover the cost of
       rehabilitating the project in 2013.

       Unlike the Authority’s project-based public housing portfolio, the
       Authority had not received an administrative fee from HUD’s Office
       of Public Housing for Queen City, and it was not an asset
       management project. Under project-based funding, asset
       management projects receive funding directly from HUD, and each
       project has its own project expense level. The project expense level
       is a model-generated estimate of the cost to operate a project. A
       Public Housing Revitalization Specialist stated that in 2008, the
       Authority contacted their office to informally discuss the possibility
       of designating Queen City as a public housing asset management
       project; however, the request was declined due to the condition of
       the properties.

The Authority’s failure to adequately plan for the maintenance of the
properties resulted in its inability to rely on rental income to pay their
expenses, including the mortgage, as shown in table 2. Table 2 also shows
that the apartments had begun to lose rental income and had consistently
operated in a negative cash flow position since 1998. As of April 30, 2014,
the Authority’s outstanding mortgage balances for the defaulted loans were
more than $1.2 million which exposed the FHA insurance fund to
unnecessary risk and a potential loss of more than $608,000. The potential
loss was calculated by multiplying the outstanding mortgage balances for
the defaulted mortgages by the FHA’s insurance fund actual loss rate of 52
percent for fiscal year 2014, quarter 1. (see appendix C).




                             8
                   Table 2 - Schedule of rental income and net income or loss
                      Total net        Dwelling rent        Housing assistance                       Total revenue percentage
Fiscal yearend      income or loss       revenue**             revenue***           Total revenue      increase or decrease
   3/31/1988         $ 77,781                           *                             $229,279
  3/31/1989          $ 46,379                           *                             $269,550                  18%
   3/31/1990         $ 13,656                           *                             $272,307                   1%
   3/31/1991         $ 26,235                           *                             $270,608                  -1%
   3/31/1992        ($ 23,487)                          *                             $249,321                  -8%
   3/31/1993         $ 28,633                           *                             $278,951                 12%
   3/31/1994         $ 42,775            $136,443                $158,521             $294,964                   6%
   3/31/1995         $ 46,905            $133,816                $148,432             $282,248                  -4%
   3/31/1996        ($ 4,848)            $143,598                $160,865             $304,463                   8%
   3/31/1997         $ 33,189            $145,096                $159,812             $304,908                   0%
   3/31/1998        ($ 3,430)            $151,861                $146,518             $298,379                  -2%
   3/31/1999        ($ 17,920)           $164,342                $130,872             $295,214                  -1%
   3/31/2000        ($ 31,373)           $151,121                $146,747             $297,868                   1%
   3/31/2001        ($ 1,699)            $192,049                $121,831             $313,880                   5%
   3/31/2002        ($ 18,354)           $173,848                $111,105             $284,953                  -9%
   3/31/2003        ($ 19,311)           $158,768                $134,929             $293,697                   3%
   3/31/2004        ($ 25,085)           $139,041                $164,490             $303,531                   3%
   3/31/2005        ($116,476)           $145,552                $143,706             $289,258                  -5%
   3/31/2006        ($ 12,457)           $223,943                $ 92,450             $316,393                   9%
   3/31/2007        ($ 26,508)           $213,782                $ 85,610             $299,392                  -5%
   3/31/2008        ($ 39,093)           $178,261                $104,599             $282,860                  -6%
   3/31/2009        ($ 48,281)           $132,842                $ 91,659             $224,501                -21%
   3/31/2010        ($ 87,356)           $144,892                $ 76,283             $221,175                  -1%
   3/31/2011        ($121,042)           $146,438                $ 63,637             $210,075                  -5%
   3/31/2012        ($ 98,519)           $120,398                $ 36,481             $156,879                -25%
   3/31/2013        ($110,994)           $ 82,960                $ 30,957             $113,917                -27%
     Total          ($490,680)          $3,079,051              $2,309,504           $6,958,571
* During these years, the Authority’s accounting system tracked only total rent revenue, and it did not separate dwelling
rent and housing assistance payment revenue.
** Dwelling rent revenue was income received from market rents.
*** Housing assistance revenue was the Authority’s accounting for its Housing Choice Voucher income.



   Subsequent Steps Were Taken
   to Revitalize Queen City

                    The Authority began to develop a plan to restore the distressed apartments
                    in 2007. Specifically, the Authority’s current management stated that in
                    2007 it issued a request for qualifications to private development firms for
                    assistance in the restoration of the apartments’ financial viability. The
                    Authority procured the Michaels Development Company, to assist with
                    planning and development in January 2013. The Authority and Michaels
                    developed a plan for addressing the problems associated with the
                    apartments’ financial and physical condition. The plan involved a new first
                    loan mortgage, supported by Section 8 rents, tax credits received in August
                    2013, and soft subordinate gap funding to cover the costs of acquisition and
                    rehabilitation. We acknowledge that the Authority has taken steps to restore
                    the apartments; however, we did not assess the adequacy of the proposed
                    plan because it involved a significant financial component that has not been
                    approved by HUD.




                                                            9
Conclusion


             The Authority acquired and financed Queen City in accordance with HUD’s
             Federal regulations by executing 26 FHA-insured mortgages for the purpose
             of renting the apartments to low- and moderate-income families. However,
             it did not properly manage and operate the apartments. Specifically, the
             Authority did not adequately plan for their maintenance. Its maintenance
             plan significantly underestimated the cost of the project’s upkeep, and it did
             not have a contingency plan in place to address its physical condition in the
             event of declining rental income. Due to the Authority’s inadequate
             maintenance plan, the condition of the properties declined, and a portion of
             Queen City was uninhabitable, which caused the Authority to lose
             substantial rental income. Therefore, the Authority defaulted on its FHA-
             insured mortgages, which exposed FHA’s insurance fund to an unnecessary
             risk and a potential loss of more than $608,000.


Recommendations


             The audit identified a deficiency which did not comply with a requirement in
             the deeds of trust which is an agreement between the originating lender and
             the Authority. Specifically, the audit identified that the Authority did not
             adequately maintain the physical condition of Queen City rental apartments
             which was required by the deeds of trust for each property. However, the
             deficiency only violated a covenant provided in the agreement and did not
             violate any HUD Federal regulations; therefore, no recommendations were
             made.




                                           10
                      SCOPE AND METHODOLOGY

We performed the review from March 2014 through June 2014 at locations in Jackson and
Meridian, MS, including the HUD field office, the Authority, and the project’s properties.
The audit generally covered the period August 1, 1987, through April 30, 2014. We
adjusted the period when necessary.

To achieve the audit objective, we

   •   Reviewed HUD Handbook 4155.1, REV-1, paragraph 1-1(7f); HUD Handbook
       4155.1, REV-5, paragraph 1-5(C) and section 3-7; 24 CFR (Code of Federal
       Regulations) 203.42; and other HUD program requirements.

   •   Reviewed the Authority’s procedures and controls used to administer its Section 8
       housing quality standards inspections.

   •   Reviewed the Authority’s loan proposal to the lender for the 26 FHA loans.

   •   Reviewed the Authority’s mortgage note and deed of trusts.

   •   Reviewed Queen City’s FHA loan files provided by the Authority.

   •   Obtained origination, default, and other information from HUD’s Neighborhood
       Watch system for loans included in the review.

   •   Interviewed appropriate officials and staff from the HUD Jackson office and the
       Authority.

   •   Conducted site visits at each of the 26 properties.

We conducted a 100 percent review of the 26 FHA loans that the Authority entered into for
the Queen City rental apartments. The primary focus of the review focused on (1) the
Authority’s legal authority to acquire the property with FHA loans, (2) compliance with
FHA’s loan origination requirements for local government agencies, and (3) the
management and operation of the apartments.

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 objective(s). However, the review did not identify findings that would require
corrective actions by the Authority. Specifically, the audit identified a deficiency that was
subject to the jurisdiction of the State of Mississippi in each deed of trust. Since the
Authority did not violate any Federal regulations, no recommendations were made.



                                             11
                             INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and
management, designed to provide reasonable assurance about the 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:

                     •   Policies and procedures to reasonably ensure that the
                         acquisition of HUD owned properties comply with HUD
                         program requirements.

                     •   Policies and procedures to reasonably ensure that the
                         FHA loan financing of single family rental properties
                         comply with HUD program requirements.

               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.


    Significant Deficiency


              Based on our review, we did not identify any significant internal control
              weaknesses.


                                               12
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation     Auditee Comments




Comment 1




                            13
    declining rental revenues, the Authority expended over $700,000 in non­
    Federal funds to maintain the properties.

• In 2007, recognizing that it could not responsibly continue to subsidize
  operations from non-federal funds, the Authority issued a Request for
  Qualifications to private development partners to assist in evaluating and
  implementing options to restore the Apartments to financial viability. The
  Authority procured the Michaels Development Company, an experienced
  multifamily developer, to assist in this endeavor.

• The Authority and Michaels developed a sound plan for addressing
  problems associated with the financial health and physical condition of the
  Apa11ments. The plan entailed purchase of the Apartments and their
  physical rehabilitation by a limited pat1nership of which the Autftority had
  an ownership interest. Acquisition and rehabilitation wou ld be funded
  from a combination of a new FHA mortgage loan suppo11ed by Section 8
  project based reuls, lax credit equity and soft subordinate gap funding.
  The existing FHA loans would be repaid from these new funding sources.
  To fm1her this plan, the Authority:

        o   In April 2012: responded successfully to a competitive RFP for
            project based vouchers issued by the Mississippi Region V
            Housing Authority;

        o In May 2012: submitted an application to the Mississippi Home
          Corporation (MHC) for an allocation of9% Low Income Housing
          Tax Credits. Tax credit applications require proof of commitments
          for a ll funding sources, including first rnongage construction and
          permanent debt, a cotmnitmcnt from an equity investor to
          purchase the prope1ty's tax credits, and evidence of gap funding.
          Unf01tunately, as the program is extremely competitive, this initia l
          appl ication was not approved.

        o    Upon receiving notification that its initial tax credit application
            was denied, the Authority immediately took steps to seek
            rn01tgage relief. It required considerable eff01t just to determine
            what entities owned and serviced the mortgage loans. Tn October
            2012,the Authority applied for but was denied a loan modification
            by Everhome M01tgage on the grounds the prope1ty did not meet
            HUD's loan modification eligibility criteria as a result of the "non­
            owner occupancy of the homes."

        o In April 2013: re-applied to Mississippi Home Corporation (MHC)
          for low income housing tax credits. The Authority was successfu l
          in receiving a $666,754 forward allocation of 2014 Tax Credits
          under the 2012 Health Care Zone Special Allocation Cycle.

        o   Unfortunately, a change in I RS regulations governing the low
            income housing tax credit program lowered the value of the
            project's tax credit allocation. The applicable tax credit rate for
            projecls receiving 2014 allocations was reduced from 9% to a




                    14
            floating rate of about 7.6%. Prior to this change, available) already
            committed funding sources would have readily covered the costs
            of acquisition (including pay-off ofthe existing FHA insured debt)
            and prope1ty rehabilitation. With the change in regulations, the
            project faced a funding gap. To address this funding gap, the
            Authority:

                    In May 2013: applied for HOME funds from MHC.
                    Unfortunately, this application was unsuccessful.

                    In June 2013: applied for affordable housing program
                    funds from the Federal Home Loan Bank of New York.
                    Unfortunately, the application did not score well enough
                    to receive funding.

                    July 2013: began exploring the possibility of m011gage
                    relief. Forgiveness or subordination of the existing FHA
                    insured debt would reduce development costs, so that new
                    sources would once again cover proposed uses. As
                    confirmed by Michaels' legal counsel, as well as HUD
                    officials from the Jackson MS office, if the Apartments
                    had been insured under FHA 's multifamily programs, in
                    all likelihood there would be mechanisms available for
                    HUD to grant mortgage relief. However, for some odd
                    reason (unknown to the Authority), the mortgages,
                    although for multifamily rental units had been provided
                    under an FHA single family program.

                    After over 26 years of faithfully making mot1gage
                    payments on the prope1ty, and expending more than
                    $700,000 of non federal funding originally plmmed to
                    address escalating criminal activity, the Authority
                    exhausted the non federal funds and could no longer
                    support the project without negatively affecting the
                    Authority's high performing operations.

                    January 2014: Meridian Mayor Percy Bland met with
                    Former HUD Secretary, Shaun Donovan regarding
                    Meridian's plan of action which included an FHA
                    111011gage modification to ensure the restoration of
                    viability of the distressed Queen City Apartments. He also
                    indicated to Secretary Donovan that several of the
                    prope1ty's were located within Meridian's Choice
                    Neighborhood planning boundaries which would
                    positively impact over 350 qualified families on
                    Meridian's affordable housing waitlist.

                    March 2013: Responded to the Director Himes' request
                    for additional information needed from the Authority
Comment 1           regarding Queen City.




                   15
Comment 2

Comment 4



Comment 3




Comment 3




Comment 4




            16
                              OIG Evaluation Auditee Comments

Comment 1 The Authority stated that it respectfully asserts that it did, in fact, properly manage
          and operate the apartments. We recognize that the Authority’s current management
          took steps to restore the financial and physical condition of the project. However,
          the Authority could have potentially avoided the necessity of restoring the physical
          and financial condition of the apartments if prior management would have
          adequately planned for the maintenance of the properties when initially acquired.

              The Authority stated that its response to Director Himes’ request for additional
              information was March 2013; however the date was actually March 2014.

Comment 2 We acknowledge that the Authority has formulated a plan to restore the project.
          The Authority contracted with Michaels Development Company, which assisted it
          with developing a plan which involved obtaining additional funding through tax
          credits, soft subordinate gap funding and new FHA financing. However, the fact
          remains that the Authority’s prior management did not adequately plan for the
          maintenance of the project which in turn resulted in its financial distress, thereby
          resulting in the decision by current management to contract with the development
          company.

              We also acknowledge that HUD designated the Authority as a high performer.
              However, the referenced designation is related to the Authority’s operation of its
              Low Rent Housing Program under the Public Housing Assessment System, which
              was not associated with the financing, acquisition, and management of Queen City
              Apartments. Furthermore, a housing authority can receive this designation even
              though their other programs or operations are not performing well.

Comment 3 The Authority stated that the audit failed to ascribe any responsibility to FHA for
          underwriting and approving loans for properties with deficiencies noted in its 2002
          physical needs assessment. Our review of the Authority’s records and HUD’s
          correspondence did not indicate that the properties were uninhabitable or not
          structurally sound when they were acquired by the Authority. Furthermore, when
          the loans were underwritten in 1999, they were refinanced with a FHA streamline
          refinance product without an appraisal; therefore, the FHA approved underwriter
          would have no official knowledge of the physical condition of the properties. HUD
          Handbook 4155.1, section 3.C.2, provides that some streamline refinances do not
          require appraisals, and it also outlines the eligibility requirements for that type of
          product.

              The Authority discussed the potential subordination of the existing FHA-insured
              debt. However, the circumstances surrounding the comment are outside of our
              scope of review, and HUD will make a determination regarding the final course of
              action with respect to the defaulted loans.
                                                17
Comment 4 We acknowledge that the Authority’s current management has taken steps to restore
          the property’s physical condition and financial viability, and we adjusted the report
          accordingly. However, we did not assess the adequacy of the Authority’s proposed
          plan because it involved a significant financial component that has not been
          approved by HUD.




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Appendix B

       PHYSICAL CONDITION OF THE VACANT PROPERTIES*




**Property 1 – This property needs Energy Star windows,          **Property 2 – This property needs Energy Star windows
 an exhaust system, hardie board siding, and roof repairs.       and new hardie board siding.




 **Property 3– This property needs Energy Star windows          **Property 4 – This property needs Energy Star windows,
  and new hardie board siding, and the exterior stairs need     new hardie board*** siding, and new roofing shingles.
  to be repaired.

 * The pictures were taken during OIG audit site visits on May 1, 2014. The listing repairs needed was based on OIG analysis,
 the 2012 needs assessment and comments made by the Authority.
 **These properties have been boarded up due to their physical condition.
 *** A hardie board is known as cement board siding and is a combination of cement and reinforcing fibers formed into 4 foot
 by 8 foot sheets, 1/4 to 1/2 inch thick that is typically used as a tile backing board.




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Appendix C
       SCHEDULE OF THE APARTMENTS’ DEFAULTED LOANS



      FHA            Number          Original            Original             Number of          Outstanding        Potential
  case number        of units      closing date      mortgage amount       months delinquent      balance             loss

  283-0182686            4          4/26/1988             $86,932                  8                $63,327          $32,930
  283-0182634            4          7/12/1988             $84,129                  8                $61,287          $31,869
  283-0182590            4          9/2/1987              $78,369                  8                $59,986          $31,193
  283-0182611            4          9/1/1987              $84,129                  8                $59,986          $31,193
  283-0182657            4          4/28/1988             $71,673                  8                $52,213          $27,151
  283-0183068            4          9/1/1987              $70,739                  8                $50,978          $26,509
  283-0183074            3          9/1/1987              $70,739                  8                $50,978          $26,509
  283-0183051            3          9/1/1987              $68,871                  8                $49,630          $25,808
  283-0183016            3          9/2/1987              $68,871                  8                $49,106          $25,535
  283-0182692            4          4/29/1988             $66,587                  8                $48,432          $25,185
  283-0183045            3          9/2/1987              $64,719                  8                $46,513          $24,187
  283-0182605            3          8/31/1987             $65,186                  8                $46,480          $24,170
  283-0182628            3          9/2/1987              $65,186                  8                $46,480          $24,170
  283-0182815            3          9/2/1987              $64,719                  8                $46,147          $23,996
  283-0183008            3          9/2/1987              $64,719                  8                $46,147          $23,996
  283-0183022            3          9/2/1987              $64,719                  8                $46,147          $23,996
  283-0182998            3          9/2/1987              $64,719                  8                $46,147          $23,996
  283-0182981            3          8/12/1987             $64,719                  8                $46,147          $23,996
  283-0182939            3          9/11/1987             $64,719                  8                $46,145          $23,995
  283-0183039            3          9/2/1987              $64,719                  8                $46,091          $23,967
  283-0182640            3          4/12/1988             $60,100                  8                $43,784          $22,768
  283-0182707            4          4/13/1988             $58,698                  8                $42,687          $22,197
  283-0182742            4          7/20/1988             $58,698                  8                $42,681          $22,194
  283-0182821            4          4/12/1988             $57,297                  0                $41,382          $     0*
  283-0182838            3          4/12/1988             $53,145                  0                $38,381          $     0*
  283-0182578            2          9/2/1987              $47,125                  8                $33,601          $17,473
     Totals             87                            $1,734,226                                 $1,250,833***      $608,983**
* The Authority was current on these two mortgages. The properties connected to these loans were in better condition, and
tenants were living in them.
 * * The potential loss was calculated by multiplying the outstanding mortgage balances for the defaulted mortgages by FHA’s
insurance fund actual loss rate of 52 percent for fiscal year 2014, quarter 1.
***The outstanding mortgage balances above are as of April 30, 2014.




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