Memorandum Report on the Wyoming Community Development Authority's Role in the Village Creek Townhomes' 51 FHA Mortgage Defaults

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-08-12.

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

                                               U.S. DEPARTMENT OF
                              HOUSING AND URBAN DEVELOPMENT
                                        OFFICE OF INSPECTOR GENERAL


                                             August 12, 2014

                                                                                             MEMORANDUM NO:

TO:           Carol Galante
              FHA Commissioner-Assistant Secretary, Office of Housing, H

FROM:         Ronald J. Hosking
              Regional Inspector General for Audit, Denver Region, 8AGA

SUBJECT:      Memorandum Report on the Wyoming Community Development Authority’s
              Role in the Village Creek Townhomes’ 51 FHA Mortgage Defaults


This memorandum is to request that you consider referring the Wyoming Community
Development Authority (State Finance Agency) to the Mortgagee Review Board for its part in
the inappropriate development of and loan origination for the Village Creek Townhomes. All 51
townhomes sold at a foreclosure auction on October 28, 2013, for just over $1.7 million. We
audited the Wyoming Housing Opportunities Association based on information obtained during
our audit of the State Finance Agency, which indicated that 51 Federal Housing Administration
(FHA) mortgages with the same borrower had defaulted. During this audit, we reviewed the
development, loan origination, and management of the Village Creek Townhomes. We
determined that the Association, the State Finance Agency, and the Cheyenne Housing Authority
were all involved in some way with the Village Creek Townhomes. HUD chose not to provide
written comments to this memorandum.

We identified the following information during our audit of the Association (OIG memorandum
number 2013-DE-1801).

                               METHODOLOGY AND SCOPE

We reviewed the predevelopment and development documentation for the Village Creek project.
Specifically, we analyzed the financing for the project and whether the project received other
Federal funds. We reviewed the origination and servicing of the 51 FHA mortgages. Then, we

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                         Visit the Office of Inspector General Web site at www.hudoig.gov.

looked at how the Association managed and operated its home ownership conversion program,
with the ultimate goal of home ownership for the Village Creek tenants. Specifically, we
analyzed the current tenant files; reviewed the home ownership agreement; interviewed tenants;
and interviewed Authority, Association, and State Finance Agency personnel familiar with the
Village Creek development.


The State Finance Agency was the servicer of the 51 FHA loans, provided development loans for
Village Creek, and managed Village Creek after the Association defaulted on its loans.
Specifically, it provided expert guidance to both the Association on how to structure the loans
and to the financial institution that underwrote the loans. It raised capital by selling tax-exempt
mortgage revenue bonds to investors and received no State funding. A State statute created the
State Finance Agency in 1975 as an instrumentality of the State for the purpose of raising capital
to finance affordable housing.

In addition to the State Finance Agency, the key parties involved with the Village Creek
development were as follows:

Wyoming Housing Opportunities Association, Inc., Cheyenne, WY
The Association is the general partner of Village Creek Limited Partnership, which owned
Village Creek Townhomes from its start in 1995 to October 28, 2013. The Association took over
as manager of Village Creek from 2003 to 2012. It is a nonprofit corporation formed to develop
and manage affordable housing within the State of Wyoming. In 1993, the Authority created the
Association. Volunteers direct the board. The Association seeks a variety of creative financing
packages and partnerships to create affordable housing.

Cheyenne Housing Authority, Cheyenne, WY
The Authority developed Village Creek, managed Village Creek from 1994 to 2003, had Section
8 voucher tenants living at Village Creek, and pursued a purchase of Village Creek after the
Association defaulted on the mortgages. The State of Wyoming created the Authority in 1971 to
address the low-income housing needs of the community. A five-member board of
commissioners appointed by the mayor and city council governs its activities.

Village Creek
The Association built and financed the Village Creek Townhomes in 1995 with low-income
housing tax credits; loans from the State Finance Agency, Mercy Housing, and the Authority;
and 51 single-family FHA-insured loans from the State Finance Agency. The legal owner of
Village Creek was the Village Creek Limited Partnership, with the Association as the general
partner and the Federal National Mortgage Association (Fannie Mae) as the investor-limited
partner (Fannie Mae purchased the tax credits).

FHA showed the lender for the 51 FHA loans as American National Bank of Cheyenne (no
longer in business). However, after closing, the loans transferred immediately to the State
Finance Agency for servicing. Documentation reviewed showed that the State Finance Agency


provided expert direction and guidance to American National Bank loan officers during the
origination of the loans.

The Association contracted with the Authority to manage Village Creek from 1995 to 2003. In
2003, the Association terminated its contract with the Authority and assumed full management
responsibilities for the project. In 2012, the Association’s board determined that it did not have
sufficient cash flow to keep the project viable so the board voted to stop making its mortgage
payments and let all 51 FHA mortgages go into default. On November 27, 2012, the State
Finance Agency received a letter informing it of the board’s decision.

The unpaid principal balance on the loans was more than $1.4 million. After the loans defaulted,
the State Finance Agency exercised its right to the assignment of rents on the townhomes. Also,
it received from HUD an extension of 3 additional months to commence the foreclosure process
(through June 2013). The 51 townhomes sold at a foreclosure auction on October 28, 2013, for
just over $1.7 million.

                                 RESULTS OF THE REVIEW

The HUD Wyoming field director worked with the State Finance Agency and the Authority to
find a way to obtain HUD financing quickly so they would not lose the low-income tax credits
due to time constraints. A multifamily project was not an option because such projects generally
took 2 to 3 years to be approved; therefore, the parties decided to use single-family FHA
mortgages on each townhome. The ultimate goal of the Village Creek project was to have the
current tenants purchase the properties at the end of the 15-year tax credit period for the
remaining principal loan balance. Neither, the Association, the State Finance Agency, nor the
Authority entered into agreements with the tenants to ensure that they would have the option to
purchase the units at the end of the 15-year tax credit period. In 2001, the State Finance Agency
modified the loan to lower the monthly payment on the mortgages. The modification added to
the length of the loan.

We obtained the HUD case binder for the Village Creek townhome at 221 Hacienda Court,
Cheyenne, WY. We reviewed the contents according to FHA requirements and noted the
following issues:

       The form HUD-1, Settlement Statement, indicated that both the borrower and the seller
        were the president of the Association. Cash was due from both the borrower and the
       On the HUD-1 addendum, the president of the Association signed in the borrower
        section, stating, “I certify that I (we) have not been paid or reimbursed for any of the cash
        down-payment.” Then he signed in the seller section, stating, “I certify that I have not
        and will not pay or reimburse the borrower(s) for any part of the cash down-payment.”
        He incorrectly certified as both the borrower and seller.
       On the mortgage credit analysis worksheet, under “Do you own more than 4 dwellings?”
        the borrower checked “no,” which is not correct because Village Creek is a 51-unit


Additionally, there were three master HUD case binders (one for each townhome type). We
reviewed these materials for the type of townhome reviewed above (two bedroom) and noted the
following additional information presented to HUD pertaining to creating affordable housing.
This information was for 300 Hacienda Court, Cheyenne, WY:

         The appraisal for model B was $67,000, and a note stated, “Bid for project appears high
          due to developer fee that will be returned as tax credits, large outlay for A&E
          [architectural and engineering] design fees, contingencies, interest reserves, reserve
          funds, and consulting fees.” Additionally it stated, “Tax credits and subsidized rents will
          allow occupants to buy at fixed price in 15 years.”
         The Village Creek fact sheet contained development specifics as follows:
           “…units will be leased to the families for fifteen years, after which they will be sold
              to the families for approximately $35,000 per unit”;
           [The State Finance Agency] “arranged financing for the families at 6.5% interest,
              which equates to a family housing payment of approximately $250 per month when
              the units are sold to the families”;
           “…the debt service on this project has been structured so that at the end of the Tax
              Credit period, when the tenants take ownership of their units, they will be paying less
              than $35,000 for their individual homes”; and
           [Project summary] “…through the combined efforts of Wyoming Housing
              Opportunities Association, Inc., the Cheyenne Housing Authority, the Wyoming
              Community Development Authority, and the City of Cheyenne, fifty families, who
              rely on housing assistance will be provided an opportunity to become homeowners.”

The State Finance Agency played a key role in the development and the loan origination of
Village Creek. However, it did not ensure that safeguards or agreements were in place with the
tenants to guarantee the tenants would be given the opportunity to purchase the units at the
reduced FHA principal balance. Further, it did not practice due diligence in ensuring that these
loans conformed to HUD standards. Therefore, once the loans closed, the FHA insurance fund
was at risk for default.


We recommend that the FHA Commissioner-Assistant Secretary, Office of Housing,

1A.       Refer the State Finance Agency to the Mortgagee Review Board for its part in the
          development and foreclosure of 51 FHA mortgages.