oversight

Prudential Huntoon Paige Associates, LTD Did Not Underwrite and Process a $49 Million Loan in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-30.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




        Prudential Huntoon Paige Associates, LTD
                     Arlington, VA

       Multifamily Accelerated Processing Program




 2014-AT-1015                             SEPTEMBER 30, 2014
                                                        Issue Date: September 30, 2014

                                                        Audit Report Number: 2014-AT-1015




TO:            Benjamin Metcalf, Deputy Assistant Secretary for Multifamily Housing, T

               Dane Narode, Associate General Counsel for Program Enforcement, CACC

               Craig T. Clemmensen, Director, Departmental Enforcement Center, CACB

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

SUBJECT:       Prudential Huntoon Paige Associates, LTD Did Not Underwrite and Process a
               $49 Million Loan in Accordance With HUD Requirements.


       Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of Prudential Huntoon Paige
Associates’(Prudential) underwriting of a 221(d)(4) project, Preserve at Alafia (Alafia).

        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.
                                           September 30, 2014
                                           Prudential Huntoon Paige Associates Did Not Underwrite
                                           and Process a $49 Million Loan in Accordance With
                                           HUD Requirements



Highlights
Audit Report 2014-AT-1015


 What We Audited and Why                    What We Found

We audited Prudential’s underwriting of    Prudential did not underwrite and process the loan for
a $49 million mortgage loan to develop     the Preserve at Alafia in accordance with HUD’s
the Preserve at Alafia, a multifamily      guidelines and regulations. Specifically, Prudential did
project located in Riverview, FL. We       not properly analyze the appraisal and market study,
initiated the review based on the early    accurately estimate the project income and rental rates,
default, assignment, and significant       completely disclose all debts related to the property,
amount of the project. Our objective       adequately analyze the eligibility of the participants,
was to determine whether Prudential        and properly document prepaid costs. This condition
underwrote and processed the loan for      was caused by Prudential’s failure to practice prudent
the Preserve of Alafia according to the    underwriting and its failure to conduct a sufficient
U.S. Department of Housing and Urban       review of related documents and third party reports
Development’s (HUD) requirements.          that HUD relied on. As a result, Prudential exposed
                                           the Federal Housing Administration insurance fund to
                                           unnecessary risk and a loss of more than $20 million.
 What We Recommend

We recommend that the Multifamily
Hub refer Prudential to the Mortagee
Review Board to take appropriate action
against its noncompliance, the Office of
General Counsel take appropriate
enforcement actions against the
responsible parties and pursue civil
remedies under the False Claims Act, if
legally sufficient, and the Departmental
Enforcement Center pursue
administrative actions, if warranted.
                           TABLE OF CONTENTS


Background and Objectives                                                      3

Results of Audit
      Finding: Prudential Did Not Underwrite and Process a $49 Million Loan
      In Accordance With HUD Requirements                                      5

Scope and Methodology                                                         15

Internal Controls                                                             17

Appendixes
A.   Schedule of Questioned Costs                                             18
B.   Auditee Comments and OIG’s Evaluation                                    19
C.   Additional Land Sales                                                    51
D.   Average Rent Per Square Foot                                             52
E.   Recalculated Rents                                                       53




                                            2
                     BACKGROUND AND OBJECTIVES

Prudential Huntoon Paige Associates, LTD is one of the nation’s leading originators of FHA
multifamily and healthcare loans with regional offices located throughout the United States.
Prudential is a MAP approved lender that underwrote and processed a 221(d)(4) new
construction of the Preserve at Alafia which consists of 351 units located in Riverview, FL.

Section 221(d)(4) of the National Housing Act authorizes loans to be insured by the Federal
Housing Administration (FHA) for the construction, substantial rehabilitation, and purchase or
refinancing of multifamily projects. By insuring mortgages, HUD encourages private lenders
(mortgagees) to enter the housing market to provide financing which otherwise might not be
available to owners (mortgagors). Under the U.S. Department of Housing and Urban
Development’s (HUD) Multifamily Accelerated Processing program (MAP), approved lenders
prepare, process, review, and submit loan applications for multifamily mortgage insurance. In
accordance with MAP guidelines, the sponsor works with the MAP approved lender, which
submits required exhibits for the pre-application stage. After HUD reviews the exhibits, it either
invites the lender to apply for a firm commitment for mortgage insurance or declines the
application. For acceptable exhibits, the lender submits the firm commitment application,
including a full underwriting package, to HUD to determine whether the loan is an acceptable
risk. Considerations include market need, zoning, architectural merits, capabilities of the
borrowers, and so forth. If HUD determines that the project meets program requirements, it
issues a firm commitment to the lender for mortgage insurance.

In accordance with MAP guidelines and federal regulations, Prudential is responsible for
reviewing all documents submitted to HUD for insurance. The pre-application for Alafia was
submitted in August 2008, and the firm submission was submitted in April 2009, with approval
granted in July 2009. This project was initially endorsed in December 2009 for more than $48
million and finally endorsed in March 2012, for more than $49 million, after receiving a $1.2
million mortgage increase. No principal payments were made for the loan that defaulted in May
2012, and assigned to HUD in December 2012. A claim was paid in March 2013, and the loan
was included in a July 2013 note sale for $29 million, which resulted in more than a $20 million
loss to HUD.

HUD’s Office of Multifamily Housing Programs is responsible for the overall management,
development, direction and administration of HUD's Multifamily Housing Programs. The Office
of Multifamily Housing Development provides direction and oversight for FHA mortgage
insurance loan origination including the implementation of the MAP program.

The Lender Qualifications and Monitoring Division, which is a part of HUD’s Office of
Multifamily, required Prudential to obtain a project default review of the Preserve at Alafia
Apartments from a third party source. Its purpose was to determine what caused the default and
whether the MAP lender complied with program requirements. Prudential hired a third party
contractor that reviewed the loan documents and submitted its report on February 11, 2014,
regarding Prudential’s non-compliance with the MAP Guide and HUD guidance, and


                                                3
management of the default and election to assign processes. Our audit was initiated prior to the
issuance of this report and was separate from this review.

Our audit objectives were to determine whether Prudential underwrote and processed the loan for
the Preserve of Alafia according to HUD’s requirements.




                                                4
                                        RESULTS OF AUDIT


Finding: Prudential Did Not Underwrite and Process a $49 Million
Loan in Accordance With HUD Requirements.
Prudential did not underwrite and process the loan for the Preserve at Alafia in accordance with
HUD’s guidelines and regulations. Specifically, Prudential did not properly analyze the
appraisal and market study, accurately estimate the project income and rental rates, completely
disclose all debts related to the property, adequately analyze the eligibility of the participants,
and properly determine eligibility and document prepaid costs. This was caused by Prudential’s
failure to practice prudent underwriting and to conduct a sufficient review of related documents
and third party reports that HUD relied on. As a result, Prudential exposed the FHA insurance
fund to unnecessary risk and a loss of more than $20 million.


    Prudential Did Not Perform an
    Adequate Review of the
    Appraisal

                  Prudential was responsible for hiring third party appraisers, reviewing appraisals,
                  ensuring that the appraiser was prudent and the appraisal included supported and
                  verifiable information. 1 The land value determined by the appraisal of $10.5
                  million was used to calculate the mortgage amount that was insured by FHA.
                  Prudential signed certifications stating that all of the in-house, third party forms,
                  reports, and reviews were reviewed by Prudential in accordance to HUD
                  guidelines. In addition, Prudential’s appraiser certified that the appraisal
                  conformed with Uniform Standards of Professional Appraisal Practice. During
                  our discussions, Prudential underwriting staff stated that the appraiser acted
                  prudently and had extensive experience in appraising multifamily developments.

                  Based on our review of various related documents, such as site plans, architectural
                  reports, and correspondence and market data, we identified deficiencies with the
                  appraisal and information that appeared to mislead the reader. The deficiencies
                  included inappropriate comparable sales allowing land value to be overstated,
                  unsupported adjustments, and inaccurate site information relevant to the appraisal.

                  Inappropriate Comparable Sales

                  We conducted a review of the appraisal and determined that an outlier 2 was used
                  in the calculation of land value. The outlier consisted of a significantly higher

1
  MAP Guide, Revised 2002, Section 11-1, 7-2, 2-10A, 15-1-A, Uniform Standards of Professional Appraisal
Practice, Edition 2008-2009 Standard Rule 3, 3-1, 3-4
2
  An outlier is something that lies outside of a reasonable range of values and varies significantly with data provided.

                                                           5
                 land sale on Main Street in Tampa, FL, with significantly different characteristics
                 that skewed the land value (see Table 1). This particular land sale was
                 inappropriately used because it was not comparable to the Preserve at Alafia in
                 location and size, violating requirements. 3 We obtained market data for the
                 comparable land sale which identified that the property was located in the
                 Westshore Business District in Tampa, FL, the largest business district in Florida.
                 The Preserve at Alafia; however, is located more than 20 miles south in
                 Riverview, FL, next to the Alafia River, in a residential area under development,
                 that also contained wetlands, and is significantly different from the Tampa
                 Westshore Business District market.

                     Taking a conservative approach and solely excluding the outlier, as discussed
                     above, the estimated amount was $6.4 million or more than $4 million less
                     than the $10.5 million appraised value (see Table1).

                                               Table 1 – Comparable land sales

                                                                         Comparables included in the appraisal
                                     Properties                                     A                      B
                          (Used by lender for value estimate)      Size       Prudential’s      Recalculated adjusted
                          I                                      (acres)   appraiser adjusted      price/square foot
                                                                            price/square foot
                          n
                        Subject Property: Riverview, FL            26.62
                        Sale 1: Phillips- Riverview, FL            49.00 $                2.67 $                   2.67
                          c                                                                                Excluded-not
                           o 2: Main Street - Tampa, FL
                        Sale                                         5.70 $              33.36              comparable
                           n 3: Foxworth- Riverview, FL
                        Sale                                       25.20 $                8.29 $                   8.29
                        Sale
                           d 4: 78th Street- Tampa, FL             16.14 $                5.92 $                   5.92
                        Sale
                           u 5: Oaks at Stone- Tampa, FL             4.66 $               7.23 $                   7.23
                        Sale
                           c 6: Courtney Trace- Brandon, FL        15.11 $                7.20 $                   7.20
                        Sale 7: Rocky Creek-Tampa, FL              10.20 $                2.78 $                   2.78
                           t
                        Sale 8: Lake Kathy- Brandon, FL            22.91 $                5.06 $                   5.06
                           i
                        Average price per square foot                      $              9.06 $                  5.593
                           n
                        Adjusted average price per square foot             $              9.05
                           g
                        Property square foot.                                        1,159,567                1,159,567
                        Land value (price/square foot times
                           a square feet.)
                        project                                             $   10,494,081.35    $        6,485,292.58

                     In conducting additional reviews of the appraisal, we reviewed all land sales
                     and adjustments and identified four of the eight sales used by Prudential’s
                     appraiser, were out of the market area and were not comparable to the
                     Preserve at Alafia. Land sales are required to be comparable in location and
                     size according to HUD Handbook 4465.1. 4 We contacted local realtors and
                     appraisers who provided additional sales in the Brandon, FL 5, and Riverview,
                     FL, areas, which supported a range in value from $2.75 to $7.64 per square

3
  HUD Handbook 4465.1, Section 2-1
4
  HUD Handbook 4465.1, Section 2-1
5
  Brandon, FL, was a submarket of Riverview, FL. Alafia is located in Riverview, FL.

                                                           6
   foot. These land sales were available in public records for Prudential’s
   appraiser at the time of the original appraisal. We also determined that
   Prudential’s appraiser disregarded various indicators of the market downturn,
   and projected land value on the upper end of the scale. Based on this
   additional information, we recalculated the land value at an even lower
   amount of $6.1 million and not the $10.5 million calculated by Prudential’s
   appraiser.

   Prior to final approval, HUD questioned Prudential’s final submission.
   HUD’s correspondence to Prudential, dated June 3, 2009, stated that the $10.5
   million land value was not supported, the price per unit should have been used
   instead of price per square foot to calculate land value, and requested
   justification for adjustments used in the appraisal. Prudential provided HUD a
   response including an additional appraisal which supported a $10.5 million
   value using price per unit. The appraiser obtained an average price per unit of
   $21,723, but used $30,000 per buildable unit, stating that the unit value was
   closer to the upper end of the price range but did not provide support. We do
   not agree that the new appraisal was representative of the current market.

   In addition, Prudential’s appraiser justified the appraisal and addressed HUD’s
   concerns by stating that more recent land sales could not be obtained, that the
   land values closer to the Tampa area did not experience a significant decrease,
   and that the waterfront location insulated it from fluctuations in the market.
   However, during the review of Prudential’s appraisal, we obtained two
   additional land sales that were available in public records and more
   comparable to the subject site (see Appendix C). Prudential allowed both
   appraisers to use the upper end of the scale to calculate land value and did not
   require the first appraiser to use land sales that were comparable to the
   Preserve at Alafia and were questioned by HUD, which resulted in an
   overstated land value.

Inappropriate Adjustments

   The appraiser made adjustments based on the river location; however, the
   market reactions for multifamily properties may not have supported such an
   adjustment. Because the site plan included only 1 of the 11 apartment
   buildings with a direct river view, based on added premiums for river view
   units, the income for Alafia would have only increased by $28,800 per year.
   It is doubtful a prudent investor would pay considerably more for a water front
   site versus a non-water front site due to a return on investment of only $28,800
   per year. Without additional sales and analysis, there was no support for a
   significant increase in site value based on the river influence.

   Also, Prudential’s appraiser failed to make appropriate adjustments based on
   the market reactions or other acceptable methods to adjust for notable
   differences, which was a violation of the Uniform Standards of Professional


                                 7
                      Appraisal Practice. 6 The appraisal did not disclose that the Preserve at Alafia
                      did not have adequate entrance and exit access, utilities were not provided to
                      the site and that the site contained wetlands and potential species that were
                      required to be removed by the County. The appraisal also stated the site
                      would have road frontage, which was not consistent to site plans, as discussed
                      below. By excluding these relevant characteristics of the subject site that
                      would have required additional adjustments, the appraiser violated the
                      Uniform Standards of Professional Appraisal Practice Standard Rule 1-2 7.
                      This data was readily available to Prudential’s appraiser via public records,
                      site plans, and other documentation.

                 Inaccurate site information

                      Prudential’s appraiser failed to properly identify the location of the vacant
                      land site which is a violation of Uniform Standards of Professional Appraisal
                      Practice 8 and did not correctly describe it as required by MAP Guide. 9 The
                      appraisal included an aerial photograph of the acreage being appraised which
                      indicated that Preserve at Alafia would have frontage along Gibsonton Road
                      and the Alafia River (see Photo 1), which was not consistent with the site
                      plans (see Photo 2). According to the site plans and our April 2014 site visit,
                      Alafia did not have frontage along Gibsonton Road. This space was reserved
                      for the commercial development. The appraiser should have had data to
                      sufficiently identify the site, as required by Uniform Standards of Professional
                      Appraisal Practice. 10




                           Photo 1- Aerial shot included in            Photo 2 - Aerial shot based on site
                           Prudential’s appraisal.                     plans and actual construction.



6
  Uniform Standards of Professional Appraisal Practice, Edition 2008-2009 Standard Rule 1-2(e) and (i) and HUD
Handbook 4465.1 Section 2-3
7
  Uniform Standards of Professional Appraisal Practice, Edition 2008-2009 Standard Rule 1-2e
8
  Uniform Standards of Professional Appraisal Practice, Edition 2008-2009 Standard Rule 1-2(e) and (i), and 2-2(iii)
9
  MAP Guide, Revised 2002, Section 7-4
10
   USPAP, Edition 2008-2009, Standard Rule 1-2e, comment line 518

                                                         8
                  HUD instructed Prudential to obtain a default review from a third party source to
                  determine what caused the default. The report documented that Prudential’s
                  underwriter failed to comment in the underwriting narrative that the appraisal
                  noted that the current market rents may not allow for a cost feasible development
                  at the time, which was critical to the mortgagor’s ability to sustain the project and
                  a violation of MAP Guide. 11 In addition, the report documented that the land was
                  overstated and that inappropriate comparable land sales were used by the
                  appraiser. The reviewer used the price per unit methodology to determine
                  financial feasibility and recalculated the land value at $6.6 million. The reviewer
                  also stated that the significantly higher land sale was an outlier 12 based on
                  multiple characteristics and should not have been included.

     Prudential Did Not Perform an
     Adequate Review of the Market

                  Prudential did not ensure that the market study analysis included updated
                  information to reflect the economic conditions and did not use the data available
                  to make an adequate analysis of the overall demand and feasibility for the
                  Preserve at Alafia, as required by HUD Handbook 4465.1. 13 The study included
                  outdated statistics, such as unemployment rates, census data, and trend analysis
                  for employment, and building permits, that were dated from January 2000 to May
                  2007, about 15 months prior to the effective date of the July 2008 report. The
                  market study disregarded available data indicating market decline, such as
                  unemployment rates, as listed by the U.S. Bureau of Labor Statistics that showed
                  that unemployment rates were consistently rising and nearly doubling by June
                  2008, which was one month prior to the effective date of the report.

                  In addition, the market study included comparable properties in which the average
                  rent per square foot ranged from $1.09 to $1.14, but the market study proposed an
                  average of $1.49 for Preserve at Alafia (see Appendix D). The comparable
                  properties had larger floor plans and significantly lower rents in comparison to
                  Alafia, and the market study showed no indication that the market could achieve
                  similar rents to those proposed for the Preserve at Alafia. However, the market
                  study stated the projects unique amenities and location justified the rents.

                  Furthermore, the market study did not identify properties with occupancy levels
                  above 90 percent with rents similar to Preserve at Alafia (see Table 2). The
                  market included renters with the capacity to pay rents significantly lower than the
                  rents for Alafia. Without an analysis of the market Alafia was targeting, the study
                  was not useful and appeared to be misleading.


11
   MAP Guide, Revised 2002, Section 7-1a
12
   An outlier is something that lies outside of a reasonable range of numbers (values) and varies significantly with the
other data provided.
13
   HUD Handbook 4465.1 Section 1-8

                                                           9
                                           Table 2 - Occupancy rates

                              Hillsborough County           Submarket: Brandon
                              Quarter 1    Quarter 1    Quarter 1      Quarter 1                      Lender
                                 2008         2008         2008           2008     Market study       revised
                              occupancy     average     occupancy       average    proposed rents    rents for
                                 rates       rental        rates         rental      for Alafia       Alafia
                              percentage      rates     percentage        rates      (average)      (July 2009)
                 All units      93.89      $    870         94.37      $    874    $   1,484        $   1,364
               1 Bed/1 Bath     94.74      $    724         96.27      $    747    $   1,263        $   1,145
               2 Bed/2 Bath     93.83      $    942         95.02      $    909    $   1,492        $   1,353
               3 Bed/2 Bath     90.97      $   1,124        89.53      $   1,055   $   1,698        $   1,595


                 Prudential’s risk officer conducted an analysis of the market prior to underwriting,
                 and indicated that the subject market area was listed as “red” which indicated
                 market concerns. This would indicate that Prudential was aware of the state of
                 the market and should have mitigated the risks accordingly.

                 Prudential’s default report stated that the market study failed to include
                 developments in the planning phase that were stalled due to a poor economic and
                 credit environment, as required by MAP Guide. 14 The market study justified the
                 Preserve at Alafia’s development by stating its unique location, off the Alafia
                 River, and the superior amenities. However, the default report stated that the
                 market’s willingness to pay rent premiums based on amenity packages and the
                 location of property was not recession proof. The market study failed to
                 adequately describe specific housing market conditions and characteristics of
                 projects under construction, as required. 15

     Prudential Overstated Project
     Revenue


                 Prudential overstated the project revenue estimated for Preserve at Alafia because
                 it failed to use available up-to-date market data and relied on optimistic indicators
                 which was a violation of requirements. 16 The market study showed that the
                 pricing strategy would offer a superior product, at a slightly higher than gross
                 rent price. Prudential used this methodology and overstated the rents for Alafia,
                 thus overstating the revenue that the property could achieve, which affected the
                 project’s ability to meet its obligations.

                 Prudential priced the units at the top of the market based on optimistic indicators,
                 such as being a mixed use development and having a riverfront location. The
                 mixed use factor was unsupported because it was not certain that the commercial
                 development would be completed. Also, Prudential did not obtain market

14
   MAP Guide, Revised 2002, Section 7-5
15
   MAP Guide, Revised 2002, Section 7-5
16
   MAP Guide, Revised 2002, Section 7-6

                                                       10
                     support to show a demand for riverfront properties in this area or the market’s
                     willingness to pay higher rents in the subject area. Therefore, Prudential should
                     have estimated rents according to the general market demand, as required 17.

                     We recalculated the rents based on the comparable rental property with the
                     highest rent per square foot, which ranged from $1.08 to $1.20, which was
                     similar to rates actually being achieved (see Appendix E). We recalculated the
                     rental income to $4.4 million per year compared to the proposed $5.3 million
                     listed on the loan application dated July 2009, which was nearly $1 million less.

                     During our appraisal review, we determined that the rent premiums of $570,960
                     per year were overstated. Specifically, the rent premiums, or additional revenue
                     charged, for the river view and floor location were not consistent with site plans
                     and market data. The site plans identified that only 1 building would have river
                     views yet the appraiser calculated additional revenue from river views for
                     multiple buildings. The market did not support the additional revenue for floor
                     location with the exception of the top floor yet the appraiser calculated additional
                     revenue for floors in addition to the top floor. We recalculated the premiums
                     which ranged from $235,000 to $250,000, which is less than half of what was
                     initially projected. During discussions with the current property management, we
                     were able to verify that only one side of one building was charged a premium for
                     river view and only top floor units were charged premiums.

                     We identified significant concessions during the Preserve at Alafia’s lease up
                     phase, including a $338 discount for a 2 bedroom unit, which reduced the rental
                     income to $959 per month. Significant concessions reduced income that affected
                     Alafia’s ability to pay its liabilities, such as the mortgage payments. As of April
                     2014, the project was receiving significantly lower rents than proposed by
                     Prudential (see Table 3).

                                         Table 3 - Proposed rents compared to current rents

                                             Rents proposed by
                                            Prudential July 2009             Current rents as of April 2014
                                                            18
                         1 bed/1 bath            708 sq. ft.      $1,100             757 sq. ft.      $855-$905
                         1 bed/ 1 bath             731 sq. ft.    $1,190             784 sq. ft.      $885-$995
                         2 bed/ 2 bath             917 sq. ft.    $1,350             980 sq. ft.    $955-$1,065
                         2 bed/ 2 bath             935 sq. ft.    $1,275             997 sq. ft.    $980-$1,030
                         2 bed/ 2 bath           1,066 sq. ft.    $1,435           1,134 sq. ft.   $1,155-$1,265
                         3 bed/ 2 bath           1,198 sq. ft.    $1,595           1,282 sq. ft.          $1,409




17
     MAP Guide, Revised 2002, Section 7-6b
18
     The difference in size was due to Prudential’s use of net rentable square foot.

                                                             11
     Prudential Failed to Disclose All
     Debts Related to the Project

                 Prudential did not disclose more than $300,000 in liens against the subject
                 property at the time the firm application was submitted to HUD, as required. 19
                 HUD staff conducted a lien search and identified the liens approximately 1 month
                 prior to loan closing. On November 3, 2009, HUD corresponded with Prudential
                 regarding the liens that were filed between May 2008 and March 2009, prior to
                 the April 2009 firm commitment, and the liens filed afterwards between May and
                 August 2009. On November 10, 2009, Prudential provided HUD additional
                 information stating that they obtained a clear title and that funds were escrowed
                 for payment of the liens. The credit reports provided by Prudential during the
                 firm application did not include any debt associated with the property.

                 In addition, we identified that the broker had additional roles in relation to the
                 subject property. The broker also acted as a trustee for a $1 million loan to the
                 mortgagors. The firm application submitted by Prudential did not include the
                 additional $1 million debt on the land. In a November 5, 2009 letter, Prudential
                 stated that the $1 million debt was erroneously left off the application but was
                 included in the pre application underwriting narrative. However, the narrative did
                 not disclose that the additional debt was associated with the broker. An invoice,
                 later obtained, revealed that the broker acted as trustee for the $1 million
                 predevelopment loan provided to the mortgagors. Prudential allowed the broker
                 to have multiple roles which was a violation of the MAP Guide. 20

     Prudential Failed To
     Adequately Analyze the
     Eligibility of the Participants


                 Prudential failed to adequately assess the eligibility of the mortgagor and general
                 contractor, as required. 21 According to the underwriting narrative included with
                 the pre-application submission, the mortgagors and general contractor lacked
                 prior HUD experience with multifamily insured projects. Two of the three
                 mortgagor principals had unrelated experience that dealt with dentistry and
                 corporate finance. Prudential should have mitigated the risk associated with key
                 principals not having prior HUD experience.

                 Based on the loan documents, Prudential did not analyze the financial capacity of
                 the borrowers and mortgagors because the loan was fully funded and would be
                 repaid through project revenue. Prudential should have practiced due diligence
                 and conducted a review of the mortgagors’ financial capacity. If project revenue

19
   MAP Guide, Revised 2002, Section 8-1, 12-1-4G, 8-14
20
   MAP Guide, Revised 2002, Section 2-3J
21
   MAP Guide, Revised 2002, Section 8-3J, 8-3A-4, 8-4A1-2, 8-3F, 8-16, 3-2K

                                                     12
                   was not achieved, which would affect the ability to make mortgage payments, the
                   mortgagors would have been required to input additional capital in order to
                   sustain the project during periods of limited cash flow. Therefore, Prudential
                   should have assessed the financial capacity of the mortgagors. The additional
                   risks involved, such as liens against property, size and amount of project, and lack
                   of previous HUD experience should have also led Prudential to conduct such an
                   assessment.

     Prudential Did Not Determine
     Eligibility and Obtain Adequate
     Support for Prepaid Costs
     Related to the Project

                   Prudential allowed ineligible and unsupported prepaid costs to be included in the
                   mortgage amount and disbursed to the mortgagors. The mortgagor intended to
                   develop the property into a mixed use development, including commercial, retail,
                   and apartments. However, only the costs related to the apartments should have
                   been included as eligible prepaid costs. We identified several invoices that
                   included unrelated cost to the development of the Preserve at Alafia that were
                   incurred 2 to 3 years prior to initial endorsement. The unrelated charges included
                   commercial development for a full service hotel, travel expenses for lodging and
                   airfare to conventions, meals, and security devices for the owners’ businesses not
                   located at the subject site. We also determined that some of the invoices lacked
                   proper support to show a direct relation to the residential project. As a result,
                   Prudential allowed costs unrelated to the development of the project to be
                   included, which was a violation of National Housing Act. 22

     Conclusion

                   Prudential certified that the MAP application for the FHA-insured multifamily
                   loan for Preserve at Alafia was prepared and reviewed in accordance with HUD
                   requirements although it had not properly analyzed the appraisal and market
                   analysis, provided unsupported revenue projections, did not properly analyze the
                   experience and financial capacity of the principals, and did not accurately
                   evaluate prepaid cost and debts associated with the property as required. The
                   MAP approved Lender provided justifications that HUD relied on and failed to
                   exercise prudent underwriting practices during the collapsing economy, and
                   certified that the project was an acceptable risk.

                   HUD placed confidence in Prudential’s integrity and competence, but Prudential
                   failed to follow and implement the MAP Guide and other relevant guidance
                   during the underwriting of and submission to HUD. As a result, HUD approved a


22
     National Housing Act (12 U.S.C. 17151(d)(4)) Section 221

                                                        13
          loan with significant financial and business risk. The owner defaulted on the loan
          resulting in a loss to HUD of more than $20 million.

Recommendations

    We recommend that the Director of HUD’s Jacksonville Multifamily Hub:

    1A.   Refer Prudential Huntoon Paige Associates, LTD to the Mortgagee Review Board
          for appropriate action for violations that caused a more than $20 million loss to
          HUD’s FHA insurance fund.

    We also recommend that HUD’s Associate General Counsel for Program Enforcement:

    1B.   Take appropriate enforcement actions against the responsible parties and pursue
          civil remedies under the False Claims Act, if legally sufficient, against
          responsible parties for incorrectly certifying to the integrity of the data or that due
          diligence was exercised by the underwriting of the loan that resulted in a loss to
          HUD totaling $20,157,329.

    We further recommend that the Director of HUD’s Departmental Enforcement Center:

    1C.   Pursue administrative actions, as appropriate, against the responsible party for the
          material underwriting deficiencies cited in this report.




                                            14
                         SCOPE AND METHODOLOGY

We conducted the audit from January to August 2014 at Prudential’s offices located in Atlanta,
GA, HUD’s Office of Multifamily Development in Jacksonville, FL, and our offices located in
Atlanta, GA. The audit covered the period from August 2008 through March 2012, and was
adjusted as necessary.

The review was conducted based on information contained in the Lenders project files with no
reliance being placed on systems used and maintained by the Lender. The records to be obtained
from the Lender and reviewed for audit evidence are not computer generated or based, therefore
we did not conduct an assessment of data reliability.

To accomplish our objective, we reviewed

   •   Organizational charts effective from August 1, 2008 to December 31,2012;

   •   HUD’s MAP Guidebook and other requirements;

   •   Prudential’s policies and procedures that govern the MAP program related to preparing,
       processing, and submitting the subject application;

   •   List of current and past employees, including job function, date of hire, and date of
       termination, if applicable, who were directly or indirectly involved with the processing or
       approval of the loan;

   •   Prudential’s and HUD’s project files related to the Preserve at Alafia, including, but not
       limited to, correspondence files, emails, third party reports, processing and underwriting
       files, pre-application submissions, firm applications, servicing files, construction, and
       default activity; and

   •   General contractor files related to the Preserve at Alafia, including, but not limited to
       construction plans, contracts, correspondence, and draw requests.

We also conducted a site visit of the Preserve at Alafia in April of 2014.

We conducted interviews with Prudential’s staff as well as HUD’s staff to better understand the
loan details. We conducted a review of the appraisal used in underwriting that identified several
deficiencies identified with Prudential’s appraisal which was used to support the findings
included in this report.

We reviewed 47 percent, or $510,781, of the $1,075,656 in invoices related to prepaid costs
submitted by the mortgagors to Prudential. The sample was selected after conducting a risk
assessment of the total invoices and by selecting invoices based on the amount and type of
services. The mortgagors provided the invoices to support costs prior to initial endorsement that


                                                15
were project related. The primary focus of the review of the invoices was to determine whether
the costs were related to the project and included support that the costs were incurred and paid.

We determined the loss to the FHA fund to be more than $20 million (the amount of the claim
paid $49,667,329 minus the amount of the note sale $29,510,000 = $20,157,329).

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). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                16
                              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, procedures and other management controls implemented to ensure
                      that Prudential administered the Preserve at Alafia in accordance with
                      HUD’s MAP 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.

               We evaluated internal controls related to the audit objective in accordance with
               generally accepted government auditing standards. Our evaluation of internal
               controls was not designed to provide assurance regarding the effectiveness of the
               internal control structure as whole. Accordingly, we do not express an opinion on
               the effectiveness of Prudential’s internal control.




                                                 17
                                      APPENDIXES

Appendix A

                   SCHEDULE OF QUESTIONED COSTS

                            Recommendation           Unreasonable or
                                    number            unnecessary 1/
                                 1B                  $20,157,329



1/      Unreasonable or unnecessary costs are those costs not generally recognized as ordinary,
prudent, relevant, or necessary within established practices. Unreasonable costs exceed the costs
that would be incurred by a prudent person in conducting a competitive business. We
determined the unreasonable cost to be the loss to the FHA fund of $20,157,329. We determined
the loss to the FHA fund to be more than $20 million (the amount of the claim paid $49,667,329
minus the amount of the note sale $29,510,000 = $20,157,329).




                                               18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 2




                         19
Comment 3




Comment 1




Comment 4


Comment 1




            20
Comment 5




Comment 6



Comment 7




            21
Comment 8




Comment 9




            22
Comment 9




Comment 9




            23
Comment 9




Comment 10




             24
Comment 10




Comment 11




Comment 11




Comment 12




             25
Comment 13




Comment 12




Comment 14


Comment 13




             26
Comment 15




Comment 8




             27
Comment 10




Comment 16




             28
Comment 16



Comment 16




Comment 17




             29
Comment 17




             30
Comment 17




Comment 18




Comment 18




             31
Comment 19




             32
Comment 19




             33
Comment 19




Comment 19




Comment 19




             34
Comment 20




Comment 21




             35
Comment 22




Comment 23




Comment 24




             36
Comment 24




Comment 25




             37
Comment 26




             38
Comment 1




            39
                           OIG Evaluation of Auditee Comments


Comments 1 Prudential’s comments state that the conclusion and recommendation in the draft
           report are deeply flawed in several respects and that they are all premised on the
           OIG improperly substituting its own post hoc judgments for the requirements of
           the MAP Guide and the on-the-ground, real-time judgments of HUD, PHP, and
           the qualified professionals retained to provide third-party reports and analyses.
           Prudential also states that the OIG’s draft report also fails to acknowledge HUD’s
           significant role in the underwriting and approval of the Loan, including the fact
           that it was approved by HUD.

              However, Prudential’s response failed to address their roles and responsibility in
              the underwriting process prior to HUD’s subsequent approval of documents.
              Based on the MAP Guide, HUD placed confidence, thus relied, on the documents
              provided by Prudential. In addition, HUD has a process for lender’s to obtain
              MAP approval and requires the lender to make certifications related to the review
              and acceptability of the risk for the project, which HUD also relied on. We
              reviewed the documents Prudential submitted to HUD for final approval and
              concluded that Prudential incorrectly certified that the loan was prepared and
              reviewed according to guidelines and HUD relied on the incorrect certifications.
              Prudential provided several exhibits in its response which will be provided to
              HUD to review as part of the management decision process.

Comment 2     Prudential’s comments state that OIG took 18 months to conduct its review;
              however, our review initially began on February 27, 2013, and then was
              suspended on April 11, 2013. We restarted the audit in January 2014 and
              completed it in September 2014, which was approximately 9 months. In addition,
              Prudential stated the proposed findings in the draft report raised very different
              issues than the draft findings initially provided to Prudential in July 2014 and that
              they were provided limited time to submit their response. However, the draft
              findings provided in July 2014 were the same issues included in the draft report
              with more detail. After providing Prudential the draft findings, we informed them
              that they would be given an opportunity to respond in writing to the findings and
              their written response would be included in the final draft of the report.
              Prudential was continuously updated throughout the audit process regarding any
              changes and additions via email or phone conversations. The draft report was
              submitted to Prudential via email and FedEx on September 12, 2014 and we
              received their comments on September 24, 2014.

Comment 3     Prudential’s comments state that the principal flaw in the draft report was that the
              OIG, with the benefit of hindsight, improperly substituted its judgment for the
              judgments that Prudential and HUD professionals made during the underwriting
              process on the basis of reports of independent, HUD-approved appraisers and
              analysts.



                                               40
            We reviewed the documents used at the time of underwriting, such as the market
            study, appraisal, proposed rents, market conditions, and prepaid cost submissions
            and determined that Prudential did not underwrite the loan for Alafia in
            accordance with guidelines as stated throughout our report. We only evaluated
            data available at the time of underwriting to reach the same conclusions.
            Additional data, such as the default report obtained by Prudential further
            substantiated our conclusions.

Comment 4   Prudential’s comments state that the appraisers and analysts were approved by
            HUD at the commencement of underwriting and that each third-party appraiser
            identified in this report has significant multi-family experience. We acknowledge
            that HUD approved the appraiser and analysts; however, according to the MAP
            Guide Section 7-2, Prudential was responsible for third party contractors and
            according to Section 11-1 was responsible for reviewing third party reports to
            ensure the application and related documents met HUD guidelines.

Comment 5   Prudential’s comments state that unforeseen circumstances caused the Project to
            fail is not evidence of any underwriting errors. However, Prudential was aware
            that the economy was experiencing market decline throughout the country during
            the underwriting of this project and due to the uncertainty of continuing market
            declines, should have taken precaution and practiced prudent underwriting during
            Alafia’s submission. Prudential was also aware that the submarket for Alafia was
            achieving significantly lower rents at the time of underwriting. Yet, they allowed
            Alafia to be priced at the top of the market stating that the location and amenities
            would insulate them from any changes in market. These additional risks should
            have been mitigated by Prudential.

            Prudential also states that for ground-up construction projects like Alafia,
            circumstances can change during the development and construction process that
            cause delays or increase costs. However, delays and additional cost may occur
            with any project which is why Prudential should have assessed the mortgagor’s
            capacity as required by the MAP Guide. However, Prudential did not assess the
            mortgagor’s financial capacity to sustain and add capital to the project if delays or
            additional cost were incurred.

Comment 6   Prudential’s comments state among other things, the Project offered an outdoor
            pool with sundeck, Jacuzzi, BBQ area, car wash area, yoga pavilion, pet bathing
            and grooming station, volleyball court, walking trails, fishing pier overlooking the
            Alafia River, clubhouse, fitness center, media center, cyber café, spa facility and
            Wi-Fi hotspots.

            However, the comparable properties included in the market study and appraisal
            used during underwriting also included similar amenities to Alafia. Specifically,
            Tranquility Lake Apartments offered volleyball courts, gas fire pit, children park,
            car care center (wash/detail), two dog parks, fully gated community, elevator
            access in select buildings, full size washer/dryer in units, microwaves, garden

                                             41
            tubs, walk in closets, garages and carports, private patio/balcony, lake views,
            WIFI in clubhouse, fitness center, business center, game room, grilling areas and
            pool. This property is also located in Riverview, FL, next to a major interstate.
            Other comparable properties included in the market study and appraisal, located
            in Alafia’s submarket, Brandon, FL, included similar properties that were located
            with direct access to the interstate and within walking distance to restaurants,
            hotels, and shopping that at the time of underwriting was already constructed.
            These comparables had larger bedroom sizes and lower rents compared to Alafia.

            In addition, after a review of the site and construction plans dated September 2008
            with final approval of May 2009, it was determined that the construction plans
            and site plans did not include plans for a car wash area, pet and grooming station,
            volleyball court, cyber café, spa facility other than a hot tub, or Wi-Fi hotspots
            located throughout the property as stated by Prudential and the appraisal. The
            current and past managers also confirmed that the only Wi-Fi on the property was
            around the clubhouse and pool area which is typical for all other apartment
            complexes in the area. The appraiser also made misleading and unsupported
            adjustments in the projected income based on unsupported facts between the
            comparable rentals and the subject property. The appraiser also projected rental
            premiums for water views, corner units and floors that were not supported by the
            site and construction plans.

Comment 7   Prudential’s comments state that in 2010, as weak economic conditions persisted,
            HUD recognized the need to make significant changes in the “core underwriting
            standards” applicable to loans insured under HUD’s multifamily mortgage
            insurance programs and, on July 6, 2010, HUD issued Mortgagee Letter 2010-21
            (commonly referred to as the “Risk Mitigation Notice”).

            Prudential fails to recognize that the market began to show indications of decline
            during the underwriting process in 2009 and failed to mitigate the risks involved
            with the uncertainties related to market changes. The MAP Guide applicable at
            the time of underwriting addressed the Lenders and the market analyst
            requirements and responsibilities which were violated as stated within our report.

            Prudential implies that HUD did not believe the situation was dire enough in 2009
            to change the underwriting standards, however this conclusion should not be
            drawn considering the legal ramifications and cost associated with implementing
            changes in regulations on projects in process.

Comment 8   Prudential contends that the Project was also significantly delayed because a
            dispute arose well after initial closing between the borrower and the local
            governmental authority over the construction of an emergency access road and the
            payment of certain impact fees and that this significantly delayed the availability
            of units in the market for over seven months, impacting the rent-up velocity of the
            Project. Prudential states that the unanticipated seven-month delay also caused
            operating losses far in excess of those projected in the underwriting because the

                                            42
              sizing of the initial operating deficit was based on staged occupancy as units
              became available. The cost of constructing the emergency access road and the
              additional impact fees further depleted the working capital reserve and consumed
              funds that could have otherwise been available to fund operating losses.

              However, new constructions may be subject to unanticipated delays and
              additional cost which is why a financial capacity assessment is important.
              However, Prudential does not address that they did not assess the financial
              capacity of the mortgagors during underwriting. Therefore, Prudential was unable
              to identify the need for additional funds from the mortgagors in the event that a
              delay occurred. In addition, Prudential submitted a mortgage increase package to
              HUD for approval of a $1.2 million mortgage increase because of the additional
              costs that included more than $500,000 for cost related to impact fees and
              roadwork. HUD stated this mortgage increase was due to the increase in cost to
              develop and complete the project.

Comment 9     Prudential’s comments state that the OIG concluded that Prudential failed to
              conduct an adequate review of the appraisal, without even discussing Prudential’s
              review of the appraisal at all in its draft report. However, the appraisal was not
              prepared in accordance with HUD regulations. Specifically, the appraisal
              included misleading and unsupported information that HUD relied on. These
              issues were also addressed in the default report conducted by a third party
              reviewer hired by Prudential.

              In addition, the appraisal contained significant flaws not addressed by Prudential.
              Prudential only stated that the appraisers had significant experience appraising
              properties underwritten for FHA-insured loans and did not address their
              responsibility over the third party contractors hired.

Comment 10 Prudential’s comments state that the appraisal satisfied its obligations of the MAP
           Guide and that the draft report failed to acknowledge the requirements set forth in
           Section 7.4 of the MAP Guide or to demonstrate how Prudential allegedly failed
           to satisfy those requirements.

              The reference for MAP 7-4 is footnote 9 of this report. The appraisal failed to
              adequately describe the site or include accurate photos of the site, as required by
              the MAP Guide. The aerial photo included land parcels for 39.96 acres with road
              frontage along Gibsonton Road, which were not the parcels for the apartments
              and only included 26.62 acres. The legal description and plat of the 26.62 acres
              clearly indicates that the phase two site consisting of 26.62 acres had no means of
              ingress and egress. This was also shown on a survey completed by Cumbey and
              Fair, Inc. dated October 31, 2008. Adequate access to the 26.62 acres was not
              obtained until April 8, 2009, when an easement for a private street located off of
              Gibsonton Road was conveyed to Alafia Apartments Complex, LLC. The
              surveys and site plans for the apartments, including the survey provided by
              Prudential with this response, never included these parcels. Prudential states
              “Prudential and HUD knew that it did not include all of the land” which we
                                               43
              determined to be inconsistent with the photo in the appraisal that includes all of
              the land which is also misleading.

              Prudential’s comments also state that, in conducting a post-default review of the
              Project, it was found that the appraisal generally satisfied the reporting
              requirements of the USPAP standards; however, the default report addressed
              some of the same issues we identified.

Comment 11 Prudential’s comments state that the OIG seeks to substitute its own judgment,
           developed 5 years after the fact, with full knowledge of how the Project actually
           performed, for the 2009 opinion of the appraiser and that the OIG then concludes
           that the appraisal and Prudential’s review of the appraisal were insufficient
           because the OIG disagrees with the appraiser’s judgments. Prudential further
           states that the OIG alleges that the appraisal overvalued the land by considering
           inappropriate comparables, including improper adjustments, and relying on
           inaccurate site information. Prudential also states that the OIG objects to the
           inclusion of one of the comparable properties identified by the appraiser, and
           argues that the inclusion of this comparable improperly inflates the value of the
           Alafia land by some $4 million.

              We reviewed the appraisal used at the time of underwriting, which was the data
              available during underwriting and not 5 years later. We identified a significant
              outlier that allowed the land value to be overstated by more than $4 million. This
              outlier was included in the appraisal and was an outlier at the time of the
              appraisal.

Comment 12 Prudential’s comments state that the concerns regarding the land value expressed
           in the draft report are the same concerns that were raised by HUD during the
           processing and underwriting of the loan. Prudential further states that those
           questions were answered to HUD’s satisfaction, yet the OIG seeks to reopen the
           same questions and substitute its judgment (with the benefit of hindsight) for that
           of two HUD-approved appraisers, Prudential and HUD.

              We reviewed the responses provided to HUD by both Prudential and the appraiser
              including the additional appraisal submitted after HUD questioned the same
              issues we questioned. These responses, which HUD relied on, were unsupported
              and misleading.

Comment 13 Prudential’s comments state that the OIG cites two additional, comparable sales
           and asserts that “Prudential’s appraiser disregarded various indicators of the
           market downturn and projected land value on the upper end of the scale,” leading
           the OIG to “recalculate” the land value to $6.1 million and that this
           “recalculation” is inappropriate for several reasons. Prudential states first,
           Prudential, HUD, and the two HUD-approved appraisers all considered the
           market downturn when valuing the land at $10.5 million, a price $4.4 million less



                                               44
              than the purchase price paid for the land in an arms-length transaction that
              occurred less than one year earlier.

              However, the last arm’s length transaction occurred between 2005 and 2006 with
              Alafia River Property Group, LLLP, which was more than 3 years earlier at a time
              when the real estate market was at its peak. The purchase price in 2005 and
              January 2006 had little if any relevance to the site value in March 2009. Alafia
              River Property Group, LLLP actually conveyed the 26.62 acres plus an additional
              .34 acre to Alafia Apartments Complex, LLC on May 22, 2008, with a public
              disclosed consideration of $8,273,469 which is less than the $10,500,000.

              We also researched each comparable sale used by the appraiser and contacted
              realtors and other appraisers in the area for additional sales, as well as information
              related to the multifamily market prior to the effective date of the appraisal. Our
              review included comparable sales used by the appraiser, as well as additional
              sales in determining if the appraised value was supported by market reaction and
              whether or not the “AS IS” site value was credible based on facts and market
              conditions as of the effective date of the appraisal.

              Prudential also states that it was entirely reasonable for the appraisers to value the
              land at the “upper end of the scale” in light of its unique location, which included
              not only the views, but exceptionally good access to Interstate 75, the major
              highway in the area.

              However, the comparable properties included in the appraisal and market study,
              such as Tranquility Lake, The Addison, and Courtney Trace Apartments, had the
              same access to Interstate 75. These comparables had larger bedroom sizes and
              lower rents in comparison to Alafia. Also, based on facts related to the site,
              market conditions, comparable sales and other information obtained during the
              review of the “AS IS” site value of $10,500,000 as of March 4, 2009, were not
              supported.

Comment 14 Prudential’s comments state that the OIG failed to cite USPAP Standard 3, which
           applies to the reviewer. Therefore, we included the reference for the Uniform
           Standards of Professional Appraisal Practice (USPAP) Standard 3 in footnote 1.
           This criterion was used in our review despite being omitted from the footnote;
           therefore, the conclusions drawn did not change.

Comment 15 Prudential’s comments state that the OIG also asserts that the appraiser’s
           adjustments based on the Project’s river location were inappropriate because they
           did not accurately reflect the market, again without disclosing the methodology it
           used in reaching this conclusion. However, we determined that the appraiser’s
           adjustments were not appropriate based on market conditions at the time of
           underwriting, and support was not included in the appraisal for these adjustments
           as disclosed in our report.



                                                45
Comment 16 Prudential’s comments state that the OIG’s assertions that the Project did not have
           adequate entrance and exit access, utilities were not provided to the site and that
           the site contained wetlands and potential species that were required to be removed
           by the County, are inaccurate.

              However, as stated in the report, the site did not have adequate entrance and exit
              access. The Master Water and Sewer Plan developed by Cumbey and Fair, Inc.
              dated August 2008 clearly indicates that utilities are located along Gibsonton
              Drive and that utilities were proposed to be run from Gibsonton Drive to the
              26.62 acre site. The legal description and plat of the 26.62 acres clearly indicates
              that the Phase Two site consisting of 26.62 acres and had no means of ingress and
              egress. This was also shown on a survey completed by Cumbey and Fair, Inc.
              dated October 31, 2008. In addition, the lack of road frontage along a major road
              such as Gibsonton Road would have affected the land value. The comparable
              land sales used by the appraiser included such road frontage.

              Prudential also states in its comments that the wetlands did not in any way
              interfere with the development of the site, nor were there any material costs
              associated with removal of the species; in fact the existence of wetlands and the
              presence of animals is consistent with, and part of the attractiveness of, a heavily-
              wooded riverfront location. However, the removal of species from the property
              was required by the County, which also incurred additional cost.

              Prudential further states that the Lender Quality and Monitoring Division Default
              report obtained by Prudential noted that the underwriting narrative did not address
              the statement in the appraisal that current market rents may not allow for a cost
              feasible development at the time and that such statement in the appraisal was not,
              as the OIG asserts, critical to the mortgagor ability to sustain the project and a
              violation of the MAP Guide. Contrary to Prudential’s comments, the statement in
              the default report conducted by the third party reviewer hired by Prudential is
              critical and indicates that the project may not receive the projected revenue, thus
              making the entire project not feasible, especially, if the mortgagor’s does not have
              additional capital to put towards the project in the event the project revenue is not
              sufficient to make the mortgage payments.

Comment 17 Prudential’s comments state that its market analysis was more than adequate.
           However, the market study was not adequate and supported as stated in our
           report. We identified various instances where the market study did not follow
           guidelines, such as failing to describe the characteristics of the market at the time
           of underwriting and the indicators of the market decline as well as not including
           statements regarding stalled projects due to the market conditions at the time.

              Prudential also states that the OIG fails to acknowledge that the market analysis
              was conducted by a qualified market analyst using data from the same area as the
              Project. However, Prudential failed to recognize that they certified that all
              documents submitted to HUD was adequate and reviewed according to

                                               46
              guidelines, which HUD relied on when making its certification. Prudential failed
              to address their responsibility for the third party market analyst. The market
              analyst also made a certification that the study was completed according to
              guidelines which was not correct.

Comment 18 Prudential’s comments state that the OIG incorrectly asserts that the Market Study
           was supported by outdated information and that the OIG fails to note that the
           Market Study discusses both market trends and projections. However, we
           acknowledge that the market study included trend analysis of projected future
           outcomes; but, the market study failed to use statistics available to show current
           market decline, such as unemployment rates and building permits.

              Prudential states that despite OIG’s seeming contention to the contrary, the MAP
              Guide did not require that the market analysis be updated in 2009 in conjunction
              with the firm commitment application. However, we cited various requirements
              from the MAP Guide which states the study must adequately describe the market
              area and market conditions. The market study failed to assess and make
              projections and trends to include the uncertainty of continuing market decline.
              The default report conducted by the third party reviewer hired by Prudential also
              addressed the market conditions stating that Alafia’s location and amenities was
              not recession proof. In addition, the appraisal dated March 2009 did not include
              statistics to show the greater decline in the market. By February 2009, the
              unemployment rates more than doubled in the subject area and the market decline
              was more evident at the time of this appraisal but did not include data to give a
              clear picture of the present state of the economy.

Comment 19 Prudential’s comments state that there was nothing incorrect about the process
           that Prudential followed to develop its estimates and that their underwriting of
           potential Project revenue was consistent with the MAP Guide and was
           appropriately based on both the rents approved by HUD in the invitation Letter
           and the Novogradac appraisal.

              We do not agree with Prudential’s comment. Despite the declining market,
              Prudential and the market analyst rationalize that the project would sustain
              throughout these market conditions at higher rents. However, Prudential and the
              third party contractors failed to include in its assessment the declining market
              conditions and still priced this project at the top of the market. Prudential also
              failed to address its responsibility for the third party contractors used during the
              underwriting process. It further failed to price the project at conservative levels.
              This was also confirmed during the lease up phase when significant concessions
              were provided and rents were decreased.

              Prudential comments state that using its own (unstated) assumptions, apparently
              developed from data it obtained in 2014 (five years after the actual underwriting),
              the OIG seems to have performed its own underwriting, and determined in the
              draft report that the correct estimate of Project income should have been $4.4

                                               47
               million per year and the rent premiums should only have been $235,000 to
               $250,000 per year. Prudential further states that the draft report does not provide
               the basis for the OIG’s calculations and assumed that such calculations are based
               on the current rents as of April 2014 reported in Table 3 of the draft report.

               However, we did not use data from 2014 to recalculate the rents including rent
               premiums. Instead we used the same files, reports, and data; such as site plans,
               appraisals, market study that was used and available at the time of underwriting.
               In addition, our report documents how the project rents were recalculated. We
               also included an additional table, Appendix E, to the report to further address
               Prudential’s comment.

Comment 20 Prudential’s comments state that all debt related to the Project was fully disclosed
           to HUD before it issued the firm commitment. However, we determined that
           Prudential did not disclose all debts related to the project.

               The default occurred because the mortgage payments were not made due to lack
               of adequate project revenue. The liens, as discussed in comment 21, also
               identified additional debt owed by the mortgagors that would require additional
               funds for payoff in order for the loan to proceed to initial endorsement. Any
               additional funds owed by the mortgagors, including those used to pay off liens
               and additional loans could have been used to support the project. The mortgagors
               were unable to put additional capital into the project during the periods of
               inadequate revenue and Prudential failed to assess the mortgagor’s financial
               capacity during the underwriting process despite the declining market and
               additional debt owed by the mortgagors.

Comment 21 Prudential’s comments state well after the submission of the mortgage insurance
           application, Prudential became aware of the existence of several liens that had
           been filed against the Project. Prudential also state these liens were not reflected
           in the title evidence, credit reports or public records searches received or
           conducted by Prudential prior to submission of the mortgage insurance
           application and did not any have information about the liens that it could have
           disclosed to HUD. However HUD identified the same liens during a public
           records search and therefore Prudential should have been aware of the liens prior
           to submission of its mortgage insurance application and the initial endorsement.

Comment 22 Prudential’s comments state that they did not agree with our assertion that the
           broker had additional roles in relation to the subject property. Yet following this
           statement, Prudential states that it is true that the principal of the broker did act as
           trustee with respect to the pre-development loan. According to this comment
           made by Prudential, they agreed that the broker had an additional role.

               Prudential further states that the OIG made an erroneous assumption that the
               broker received some benefit from the $1 million loan. However, we did not state
               that the broker received some benefit from this loan as stated by Prudential, only

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              that the broker acted as the trustee, which allowed additional roles for the broker.
              According to the MAP Guide, these additional roles are not allowed.

Comment 23 Prudential’s comments state that the OIG concluded, erroneously, that an affiliate
           company owned by the broker also obtained a fee for providing builder’s risk
           insurance for the Project at closing. Based on additional documents provided by
           Prudential, we deleted the statement regarding the builders risk insurance from the
           report.

Comment 24 Prudential’s comments state that the OIG incorrectly indicates that it failed to
           adequately assess the eligibility of the mortgagor and general contractor.
           However, Prudential failed to recognize that they did not assess the mortgagor’s
           financial capacity, as required by MAP Guide Section 8-3A4. In addition the
           MAP Guide, Section 8-4 addresses the purpose of the financial capacity
           assessment including details of the review.

              In addition, the MAP Guide requires that all principals in the proposed transaction
              must submit detailed information regarding previous participation in
              governmental housing transactions in order to be approved by HUD for
              participation in any program of mortgage insurance. The underwriting narrative
              included with the pre-application did not document prior HUD experience. Also,
              we contacted one of the mortgagors who stated that not understanding or knowing
              the HUD guidelines made this process more difficult, which was something that
              should have been mitigated by Prudential.

Comment 25 Prudential’s comments state that working closely with HUD, it properly
           determined the eligibility of, and obtained adequate support for, prepaid costs
           related to the Project. Prudential also states that any incorrect payments were
           small in amount and would have had no bearing on the mortgage default.
           However, Prudential did not obtain adequate support and inappropriately
           determined the eligibility of prepaid cost. The line item for organizational cost
           included more than $1 million in prepaid cost. The unrelated and unsupported
           prepaid costs diverted funds away from the project and allowed costs to be
           inappropriately reimbursed by mortgage proceeds. Based on the National
           Housing Act all cost must be related to the development of the project. Some
           invoices clearly stated that the services were for the commercial and hotel
           development, while others do not include adequate information to show a direct
           relation to the project, yet Prudential did not to address these costs.

Comment 26 Prudential’s comments state that the OIG considered the wrong invoices. We
           compared Prudential’s spreadsheet provided with its response to the spreadsheet
           we used for our assessment of questioned costs. We identified that only 7 of the
           70 invoices included within our sample were subsequently removed by
           Prudential. The seven invoices did not include costs charged to the project and
           represented a small amount. We selected a sample of invoices from the two
           binders Prudential submitted to HUD that included Prudential’s cost allocation of

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prepaid costs. In addition, these cost were included in the initial draw request as
supported by the initial draw submission line item for organization fees.

Prudential also states that HUD determined the percentage allocation and that
OIG inappropriately made a determination of how cost should be allocated.
However, we contacted the vendors listed on the invoices to determine how the
costs associated with the entire project should be allocated, which we presented to
Prudential when the costs were questioned. HUD did not determine the cost
allocation of 73 percent; this was determined by Prudential and submitted to HUD
for approval. HUD relied on Prudential’s allocation and justifications which was
unsupported.

Prudential further states that the OIG ignores that HUD approved the prepaid
expenses and the related draw request. However, HUD informed us that
Prudential provided two different submissions. HUD rejected some invoices
within the first submission and Prudential provided a second submission that
HUD also disallowed cost. It was stated that Prudential should have included
only approved invoices and HUD directly informed them that only invoices
directly related to the project and those referencing the apartments on the invoice
would be approved.




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Appendix C

                           ADDITIONAL LAND SALES
                                                             Sale
                                                            price/                              Distance from
                                                Date of    square.      Sale                       subject
                    Location                     sale        foot    price/unit   Use of land     property
     4409 Tuscany Glen Court, Brandon , FL     3/11/2008   $ 7.64    $ 20,131     Multifamily      6 miles
     11106 Lakewood Point Drive, Seffner, FL   7/3/2008    $ 2.74    $ 13,794     Multifamily     10 miles




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Appendix D

             AVERAGE RENT PER SQUARE FOOT

                                                      Average                Average rent
                                              Year    square     Average      per square
                    Properties                built     foot       rent          foot
             THE PRESERVE AT ALAFIA           2009      984     $ 1,446.00     $ 1.49
        THE ENCLAVE @ TRANQUILITY LAKE        2008      975     $ 1,092.00     $ 1.13
                  THE ADDISON                 2007     1,176    $ 1,338.00     $ 1.14
                COURTNEY TRACE                2006     1,019    $ 1,106.00     $ 1.09
        ESTATES AT TUSCANY RIDGE (Currently
                  Camden Visconti)            2006     1,204    $ 1,309.00     $   1.09




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Appendix E

                                   Recalculated Rents
             Square     Rent
             foot of     per
             Alafia    square Adjusted
              units     foot         rents           Number of units     Rental revenue
               757    $ 1.15      $ 870.55                  56           $     48,750.80
               784    $ 1.20      $ 940.80                  96           $     90,316.80
               952    $ 1.08      $1,028.16                103           $ 105,900.48
               997    $ 1.10      $1,096.70                 16           $     17,547.20
              1134    $ 1.10      $1,247.40                 72           $     89,812.80
              1282    $ 1.10      $1,410.20                  8           $     11,281.60
                           Monthly projected rental revenue              $ 363,609.68
                          Recalculated annual rental revenue             $ 4,363,316.16
                    Prudential’s estimate per July 2009 application      $ (5,338,140.00)
             Difference between recalculation and Prudential estimates
                              (excluding other revenue)                  $   974,823.84




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