OFFICE OF AUDIT
REGION 2
1
NEW YORK-NEW JERSEY
U.S. Department of Housing and Urban
Development, Office of Multifamily Housing
Programs, Washington, DC
HUD’s Oversight of Section 202 Multifamily
Housing Project Refinances
2014-NY-0001 FEBRUARY 19, 2014
Issue Date: February 19, 2014
Audit Report Number: 2014-NY-0001
TO: Mark Van Kirk
Director, Office of Multifamily Asset Management, HTG
//SIGNED//
FROM: Edgar Moore
Regional Inspector General for Audit, New York-New Jersey Region, 2AGA
SUBJECT: HUD Did Not Provide Effective Oversight of Section 202 Multifamily Project
Refinances
Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final results of our review of HUD’s oversight of Section 202
multifamily housing project refinances.
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 8L, 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
(212) 264-4174.
February 19, 2014
HUD Did Not Provide Effective Oversight of Section 202
Multifamily Housing Project Refinances
Highlights
Audit Report 2014-NY-0001
What We Audited and Why What We Found
We audited the U.S. Department of HUD did not have adequate controls to ensure that all
Housing and Urban Development’s Section 202 refinancing resulted in economical and
(HUD) oversight of Section 202 efficient outcomes. Specifically, (1) HUD did not
multifamily housing project refinances ensure that at least half the debt service savings that
as part of the Inspector General’s goal resulted from refinancing were used to benefit tenants
of promoting fiscal responsibility and or reduce housing assistance payments, (2) consistent
financial accountability. Our objective accountability for the debt service savings was not
was to determine whether HUD had always maintained, and (3) some refinancing were
adequate controls to ensure that Section processed for projects that had negative debt service
202 refinancing was conducted in an savings, which resulted in higher debt service costs
effective and efficient manner. than before the refinancing. These deficiencies were
due to HUD’s lack of adequate oversight and
inconsistent nationwide policy implementation
What We Recommend
regarding debt service savings realized from Section
202 refinancing activities. As a result, millions of
We recommend that HUD (1) develop dollars in debt service savings were not properly
and implement consistent nationwide accounted for and available, the savings may not have
policies for oversight and monitoring of been used to benefit tenants or for the reduction of
debt service savings, thereby ensuring housing assistance payments, and some refinanced
that at least $21 million per year is used projects ended up costing HUD additional housing
to benefit tenants or reduce housing assistance payments because of the additional cost for
assistance payments; (2) direct field debt service.
offices to account for and analyze debt
service savings and when possible,
require the savings to be used to offset
housing assistance payments; and (3)
implement procedures to ensure that
refinancings comply with the
requirement to generate positive debt
service savings.
TABLE OF CONTENTS
Background and Objective 3
Results of Audit
Finding: HUD Did Not Provide Effective Oversight of Section 202 4
Multifamily Project Refinances
Scope and Methodology 12
Internal Controls 13
Appendixes
A. Schedule of Funds To Be Put to Better Use 15
B. Auditee Comments and OIG’s Evaluation 16
C. Criteria 22
2
BACKGROUND AND OBJECTIVE
The U.S. Department of Housing and Urban Development’s (HUD) Office of Multifamily Housing
Programs is responsible for the overall management, development, direction, and administration of
HUD’s multifamily housing programs. Within the Office of Multifamily Housing Programs, the
Office of Asset Management is responsible for the oversight of multifamily project assets after their
development.
Under the Office of Asset Management, the Field Asset Management Division is responsible for
matters affecting the condition and management of the properties; dealing with property ownership
and sales issues; and processing requests for refinancing of Federal Housing Administration (FHA)-
insured mortgages, HUD-held mortgages, and Section 202 direct loans.1
Public Law 106-569, dated December 27, 2000, governs the refinancing of Section 202 projects into
Federal Housing Administration (FHA) insurance under section 223(f). HUD Notice H 2002-16
implemented the public law and indicated that at least 50 percent of debt service savings had to be
used for the benefit of the tenants or rehabilitation or modernization of the project. Therefore, debt
service savings realized from refinancing for longer terms at reduced interest rates could have been
used to reduce rents or housing assistance payments.
Public Law 111-372, dated January 4, 2011, was implemented by Notice H 2012-8 on May 4, 2012.
The major changes in the new policy included eliminating the requirement to escrow debt service
savings and the requirement that at least 50 percent of the annual savings be made available for
specific purposes benefiting the tenants.
Our audit objective was to determine whether HUD had adequate controls to ensure that Section
202 refinancing was conducted in an effective and efficient manner.2
1
Section 202 direct loans are long-term loans made by HUD to nonprofit borrower corporations formed to provide rental
assistance for elderly and handicapped persons. As such, these HUD loans do not have mortgage insurance.
2
Standards for Internal Control in the Federal Government, published by the U.S. Government Accountability
Office in 1999, definition and objectives section, states that internal controls should provide reasonable assurance
that the objectives of the agency are achieved in several categories, including effectiveness and efficiency of
operations and the use of the entity’s resources.
3
RESULTS OF AUDIT
Finding: HUD Did Not Provide Effective Oversight of Section 202
Multifamily Project Refinances
HUD did not have adequate controls to ensure that all Section 202 refinancing resulted in
economical and efficient outcomes. Specifically, (1) HUD did not ensure that at least half of the
debt service savings that resulted from the refinancing were used to benefit tenants or reduce
housing assistance payments, (2) consistent accountability for the debt service savings was not
always maintained, and (3) some refinancing were processed for projects that had negative debt
service savings, which resulted in higher debt service costs than before the refinancing. These
deficiencies were due to HUD’s lack of adequate oversight and inconsistent nationwide policy
implementation regarding debt service savings realized from Section 202 refinancing
activities. As a result, millions of dollars in debt service savings were not properly accounted
for, available savings may not have been used to benefit tenants or for the reduction of housing
assistance payments, and some refinanced projects ended up costing HUD additional housing
assistance payments because of the additional costs for debt service.
Fifty Percent of Debt Service
Savings Were Not Always Used
To Benefit Tenants or Reduce
Housing Assistance Payments
HUD did not have effective oversight and monitoring to ensure that all Section
202 refinancings resulted in economical and efficient outcomes. Many projects
realized significant annual budget savings when they refinanced their Section 202
loans and obtained a new FHA-insured loan. In addition, many projects not only
benefited from huge increases in cashflow from debt savings, but continued to
receive substantial rent increases. Thus, HUD did not have an effective strategy
for realizing possible savings of housing assistance payment subsidies from the
refinancings. Verification of project records at three field offices revealed that
HUD had not implemented procedures to ensure that debt service savings were
used to benefit tenants or reduce housing assistance payments.
The public law provides that the HUD Secretary must make available at least 50
percent of the annual savings resulting from reduced Section 8 or other rental
housing assistance contracts in a manner that is advantageous to the tenants,
including reducing the rents of the unassisted tenants in a prorata sharing of the
savings from the refinancing. Therefore, the public law implies that annual
savings in debt service costs from the refinancing would result in lower costs for
4
Section 8 and housing assistance, which should be used to benefit tenants.
Despite the public law’s allowance for debt service savings to reduce or offset
housing assistance and thus save millions of dollars in housing subsidies, there
was no mechanism to ensure that this was done. Using computer-assisted audit
techniques, we extracted information on Section 202 projects that had been
refinaced from HUD’s iREMS (Integrated Real Estate Management System). We
calculated that for 971 Section 202 projects refinanced since 2002, there was a
total of at least $42.1 million in annual debt service savings.
Therefore, at least half of this amount, or $21 million per year, could and should
have been used to benefit tenants and for future reductions in the housing
assistance payments provided to these projects. The total debt service savings
over the years for projects refinanced before 2012 are calculated to be at least
$183.3 million, and a significant amount of these funds could have been available
to reduce housing assistance payments or offset rent increases.
HUD headquarters officials concurred with our concern that under the old policy,
projects accumulated large debt savings account balances despite having agreed to
use the funds for items eligible under that policy. HUD headquarters officials
indicated that they would meet on this issue and planned to provide guidance to
the field offices on this matter. HUD headquarters staff also wanted to ensure that
all HUD field offices addressed this issue consistently. Under the new May 2012
policy, HUD officials believed that the debt savings would be better addressed
since the savings would become part of the budget-based rent calculations.
Consistent Accountability for
Debt Service Savings Was Not
Maintained
HUD did not implement consistent and effective nationwide policies and
procedures for tracking debt service savings. For the three field offices reviewed,
each office administered the savings in a different manner. For example, one
field office required projects to escrow the savings while not reducing the costs,
two field offices did not properly account for and track the savings, and one field
office allowed refinancings with negative debt service savings. As a result, there
was a lack of control over and inconsistent accountability for the actual and
planned uses of the funds.
The results of our audit work at the three HUD field offices are described below.
Buffalo, NY, HUD Multifamily Office
We examined and analyzed data from all Buffalo office Section 202 projects that
had been refinanced into FHA insurance since 2002. There were 39 such projects
5
processed under Public Law 106-569 and HUD Notice H 2002-16. In addition,
the Buffalo office had 19 projects that were in the “pipeline” at the time of our
fieldwork, being processed under the new Public Law 111-372 and HUD Notice
H 2012-8, dated May 4, 2012.
Projects Required To Escrow Debt Service Savings
The Buffalo office had 39 Section 202 direct loans that refinanced and were
required by the Buffalo office to escrow the debt service savings. The projects
would then need to request HUD approval to draw down and use the funds. For
these projects, HUD officials informed us that the annual debt service savings
were more than $1.8 million. The balance in the debt savings accounts as of
November 2012 was more than $3 million. However, it appeared that these funds
were not needed by the projects for current or operational needs as they were
available to be drawn down, much like in a reserve for replacement account.
Many projects had plans to use the debt savings but sometimes did not follow the
plan, providing further evidence that the debt savings were not needed by the
projects. Therefore, HUD needs to address this issue as the more than $3 million
in unused debt savings could be put to better use if HUD follows the public law
by offsetting housing assistance payments with the savings.
The following are two examples of projects refinanced from the Buffalo office.
Project Number 014-11145
This project is a 40-unit subsidized Section 202 project that refinanced in 2006.
The Buffalo office calculated the annual debt service savings to be $32,400 per
year. Rather than offsetting housing assistance payments with a portion of the
savings, HUD required the project to deposit the entire $32,400 into a debt service
savings escrow account. HUD also required the project to submit a 5-year plan
for the proposed uses of the escrowed debt savings. However, the owners did not
follow the 5-year plan and used only a small portion of the debt savings for items
that appeared to be eligible under Public Law 106-569.
Consequently, as of February 2013, the escrow account contained more than
$139,000 in unused debt service savings. These funds amounted to excess
housing assistance payment subsidies that were not needed by the project, but
HUD had no mechanism for using these funds for a housing assistance payment
offset. In addition, the project had a reserve for replacement balance of more than
$273,000. Finally, the project continued to receive large rent increases to cover
operating costs, including a 7.3 percent rent increase in 2009.
6
Project Number 014-11162
This project is a 151-unit subsidized Section 202 project that refinanced in 2009.
The Buffalo office calculated the annual debt service savings to be $168,341 per
year. These funds were also deposited into a debt service savings escrow account.
This particular project had not used any of the savings for eligible costs, despite
having a 5-year plan to use all of the funds primarily on remodeling the units,
including the replacement of refrigerators and stoves. The project had more than
$561,000 in debt savings in an escrow account as of March 12, 2013. However,
although the project had available debt service savings, it continued to receive
rent increases, with a 2.4 percent rent increase in June 2009 and a 4 percent rent
increase in June 2010.
Buffalo officials did not receive updated policy direction regarding how to use the
debt savings reserves. Therefore, HUD needs to explore the possibility of saving
these funds by using the reserves to offset monthly housing assistance costs.
Collectively, at the Buffalo office, the 39 projects were required to escrow more
than $1.8 million per year, and the balance in the debt savings accounts was more
than $3 million as of Novermber 2012. Since these funds did not appear to have
been needed by the projects for current or operational needs, HUD needs to
address how to recapture these unnecessary funds and save housing assistance
payment subsidies and develop a plan for how to effectively use the annual $1.8
million in debt savings that continues to accrue.
HUD Buffalo Pipeline Projects Showing Debt Savings
For the 19 Section 202 projects in the pipeline that were being processed under
Public Law 111-372, or the “new,” policy, the Buffalo office did not have the
projects maintain escrows for debt savings as this was not required. HUD staff
calculated the annual debt savings for these 19 projects to be $625,293. This
amount could be available for a reduction in housing assistance payments or rents
since (as proven under the old policy) projects were able to save the total debt
savings in escrow accounts and operate and pay their costs without using the debt
savings. In addition, most of the projects had adequate reserve for replacement
balances and would not appear to need the funds for replacement since noncritical
repairs were made with loan proceeds at the time of FHA closing.
Pittsburgh, PA, Multifamily Office
The Pittsburgh office provided us a listing of 58 Section 202 projects that were
refinanced from 2003 through November 30, 2012. All 58 projects generated
annual debt service savings as required by the public law, amounting to more than
$2 million per year, collectively.
7
Pittsburgh officials did not properly ensure that the debt service savings from the
refinances were accounted for and used as intended by the public law. While they
required, in writing, the projects to deposit the debt service savings into their
respective residual receipts accounts, the balance in the accounts was not tracked
or controlled. The office acknowledged that the accounts could contain surplus
cash in addition to the debt service savings.
The Pittsburgh office then made the projects request approval for the use of
residual receipts. However, from 2003 through 2012, many of the projects
accumulated large balances in their residual receipts accounts. While the
Pittsburgh office required the projects to submit a form HUD-9250 to release
funds from their residual receipts accounts, the office had no record of the uses or
balances of debt savings at each project.
We calculated that in the years since the respective closings of refinances, the
Pittsburgh Section 202 projects had generated at least $9.8 million in annual debt
service savings3. These are funds that technically either could have been used for
housing assistance payment offsets or should have been tracked for other
allowable uses.
Below is an example of a Section 202 project refinanced by the Pittsburgh office.
Project Number 033-11072
This project is a 50-unit subsidized Section 202 project that refinanced in 2007.
The Pittsburgh office calculated the annual debt service savings to be $66,698. It
sent the project owner a letter requiring that the debt savings of $66,698 per year
be deposited into the project’s residual receipts account. A review of iREMS
showed that $66,698 (annual debt service savings) was deposited as required into
the residual receipts account. However, the Pittsburgh office did not have
procedures in place to ensure that uses of debt savings from the residual receipts
account were (at least 50 percent) to benefit tenants as required under the public
law for Section 202 refinance transactions. Thus, by the end of 2012, this project
had accumulated more than $330,000 in its residual receipts account, indicating
that most of the annual debt savings remained unused.
According to the new HUD policy, under Notice H 2012-14, entitled “Use of
New Regulation, Section 8 Housing Assistance Payments (HAP) Contracts
Residual Receipts to Offset Project-Based Section 8 Housing Assistance
Payments,” the Pittsburgh office had recently started making housing assistance
payment offsets from owners’ residual receipts accounts. This change was based
on the HUD policy of not maintaining more than $250 per unit in the residual
receipts account. As a result, in December 2012, HUD officials offset a
3
The total debt service savings were calculated by multiplying the annual debt service savings for each refinanced
project by the number of years since the closing for the refinancing.
8
scheduled housing assistance payment by taking $34,778 from the residual
receipts account, based upon the new HUD policy of using excess residual
receipts for housing assistance payment offsets.
Pittsburgh officials confirmed that these housing assistance payment offsets
occurred at projects that refinanced before the new policy was in effect and that
these residual receipts consisted primarily of debt service savings at many
projects. They informed us that they would continue to offset the monthly
housing assistance payments for this project from residual receipts. Pittsburgh
officials also offset housing assistance payments at other projects with residual
receipt balances that might contain large amounts of debt service savings. HUD
needs to look at this issue nationally to ensure that housing assistance payments
are offset in this manner by all field offices and document how much of the
excess residual receipts is from debt savings.
Detroit, MI, Multifamily Office
The Detroit office refinanced 78 Section 202 projects into FHA insurance from
2003 through November 30, 2012. While most of the projects had a positive
annual debt savings as required by the pubic law, the Detroit office processed at
least 12 projects that resulted in negative annual debt savings; that is, the
refinancing resulted in a higher debt sevice payment and a need for additional
housing assistance payment subsidies.
For the projects with debt service savings, the Detroit office did not execute debt
service savings agreements or have the projects escrow the savings since this was
not required by the notice. However, we asked Detroit officials how the office
tracked the use of debt service savings for compliance with the uses under the
public law and found that the Detroit office did not track the debt savings for the
projects.
We calculated that more than $14.3 million in debt service savings4 related to 78
projects that were refinanced over an 8-year period had not been accounted for by
the Detroit office and represented funds that could be put to better use if they
were used to offset increases in housing assistance payments.
We tested 6 of the 78 projects during our site visit. An example is described
below.
Project Number 044-11105
This project is a 146-unit subsidized Section 202 project that refinanced in 2006.
The project had significant debt savings as a result of the refinancing. The Detroit
4
See footnote 3 for computation method.
9
office, at our request, calculated the annual debt service savings to be $98,823.
However, Detroit officials informed us that the office did not track the uses of
debt savings but, rather, that debt savings flowed to residual receipts. Although
the project had to request approval from HUD for the use of residual receipts,
there was no assurance that the funds would be used to benefit tenants or reduce
housing assistance payments.
We calculated that the project had received at least $592,940 in extra funds from
the debt savings since the refinance date. Yet the project had only $82,514 in its
residual receipts account as of December 31, 2012. This means that $510,426 in
debt savings was expended without accountability regarding the use of the funds.
Further, in addition to the extra nearly $100,000 in available funding per year, the
project had been approved for rent increases amounting to 7.4 percent since the
date of refinance, costing even more in housing assistance payment subsidies.
Some Refinanced Projects
Resulted in Negative Debt
Service Savings
HUD’s Detroit office refinanced at least 12 Section 202 projects that had negative
annual debt service savings, although the public law did not allow for this until
the 2011 amendment and HUD implemented the change with a May 2012 housing
notice. The 2000 Public Law 106-569 (American Homeownership and Economic
Opportunity Act), Section 811, Prepayment and Refinancing, paragraph (a)(2),
provides that “the prepayment may involve the refinancing of the loan if such
refinancing results in a lower interest rate on the principal of the loan for the
project and in reductions in debt service related to such loan.” The 2011 Public
Law 111-372, Section 201, amended the cited 2000 public law and indicated that
refinancing is authorized with negative debt service savings only in cases in
which a project assisted with a loan under Section 202 carries an intererst rate of 6
percent or lower. In addition, a data search of iREMS showed that HUD
processed at least 160 FHA mortgages from 2002 through 2011 that had an
increase in debt service payments from their Section 202 payments; that is,
negative debt savings. We calculated that these FHA loans cost the taxpayers at
least $19 million per year in additional housing assistance payment subsidies. As
a result, HUD needs to implement procedures to ensure that all future Section 202
refinancings comply with the requirement to generate positive debt service
savings or the limited exception to this requirement related to 6 percent or lower
interest rates.
10
Conclusion
HUD did not have effective oversight and monitoring to ensure that all Section
202 refinancings resulted in economical and efficient outcomes. Half of the debt
services savings were not always used to benefit tenants or reduce housing
assistance payments, consistent accountability for the debt service savings was
not always maintained, and some refinancings were processed for projects that
had negative debt service savings, which resulted in higher debt service costs than
before the refinancing. As a result, millions of dollars in debt service savings
were not properly accounted for, available debt service savings was not always
used to benefit tenants or for the reduction of housing assistance payments, and
some refinanced projects ended up costing HUD additional housing assistance
payments because of the additional costs for debt service. We attribute this
condition to HUD’s lack of adequate oversight and inconsistent nationwide policy
implementation regarding debt service savings realized from Section 202
refinancing activities.
Recommendations
We recommend that the Director, Office of Multifamily Asset Management,
1A Clarify, develop or issue policies and procedures as needed to ensure that
the calculation and use of any Section 202/223(f) refinancing savings is to
benefit project purposes or reduce housing assistance payments and is
supported by appropriate monitoring and accounting for these savings,
thus resulting in funds to be put to a better use of $21,097,996.
1B Require that each Hub or field office review its refinanced Section
202/223(f) projects for debt service savings amounts, utilizing data
provided from this audit for possible additional debt service savings.
Where legally possible each Hub or field office should identify, account
for by project, and use these amounts for current and future opportunities
benefiting tenants or to fund reductions in housing assistance payments.
1C. Implement procedures to ensure that all future Section 202 refinancings
comply with the requirement to generate positive debt service savings or
the limited exception to this requirement related to 6 percent or lower
interest rates.
11
SCOPE AND METHODOLOGY
Our audit period covered January 1 through December 31, 2012. We conducted our fieldwork at
the HUD multifamily program centers in Buffalo, NY, and Pittsburgh, PA, and the Detroit, MI,
hub between October 2012 and July 2013.
To accomplish our objective, we
Reviewed applicable laws and regulations, policies and procedures, HUD notices and
guidance, and internal controls relating to Section 202 refinancing activities.
Obtained, reviewed, and analyzed HUD multifamily data for Section 202 refinanced
projects.
Interviewed HUD headquarters and field office management and staff responsible for
oversight of Section 202 project refinancing.
Obtained, reviewed, and analyzed hardcopy and electronic project documentation
nationwide and at the three program centers and hubs visited during the audit.
We relied on computer-processed data for providing background information on the Section 202
projects that were refinanced during our audit period. We performed a minimal level of testing
and found the data to be adequate for our purposes.
We used computer assisted audit techniques to extract and analyze information on Section 202
projects that had been refinaced from iREMS and also reviewed data on all Section 202
refinancing transactions nationwide from 2003 through 2012 to determine the annual and
cumulative amounts of debt service savings, we conducted detailed testing of all Section 202
refinancing transactions at three field offices that had large volumes of project refinancing from
2003 through 2012, including Buffalo, NY, Pittsburgh PA, and Detroit MI.
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 objective.
12
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
objective:
Program operations – Policies and procedures that management has
implemented to reasonably ensure that a program meets its objectives.
Compliance with laws and regulations – Policies and procedures that
management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
Safeguarding resources – Policies and procedures that management has
implemented to reasonably ensure that resources are safeguarded against
waste, loss, and misuse.
Validity and reliability of data – Policies and procedures that management
has implemented to reasonably ensure that valid and reliable data are
obtained, maintained, and fairly disclosed in reports.
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.
13
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:
Program operations – HUD did not have adequate controls to ensure that
program objectives would be met as the three field offices reviewed
administered debt service savings resulting from the refinancings
differently, thereby reducing the likelihood that program objectives would
be attained (see finding).
Compliance with laws and regulations – HUD had not implemented
adequate controls to ensure that the use of debt service savings was
consistent with laws and regulations as the savings may not have been
used to benefit tenants or reduce housing assistance payments (see
finding).
Safeguarding resources – HUD had not implemented adequate controls to
ensure that debt service savings were adequately safeguarded against waste,
loss, and misuse as the savings were not tracked or properly accounted for
at two of the field offices (see finding).
14
APPENDIXES
Appendix A
SCHEDULE OF FUNDS TO BE PUT TO BETTER USE
Funds to be
Recommendation
put to better
number
use 1/
1A $21,097,996
1/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an Office of Inspector General (OIG) recommendation is
implemented. These amounts include reductions in outlays, deobligation of funds,
withdrawal of interest, costs not incurred by implementing recommended improvements,
avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
that are specifically identified. In this instance, if HUD implements our recommendation,
it will ensure that the annual debt service savings of more than $21 million will be
properly safeguarded and used as intended for allowable purposes to benefit the projects,
tenants, or both and reduce or offset future housing assistance payments.
15
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
16
Ref to OIG Evaluation Auditee Comments
Comment 3
Comment4
Comment 5
Comment 6
Comment 7
Comment 8
17
Ref to OIG Evaluation Auditee Comments
Comment 9
Comment 10
18
OIG Evaluation of Auditee Comments
Comment 1 The objectives cited when we began our review were our survey objectives,
which are normally broad; however, after the survey we normally refine the
objectives. Thus, our audit objective was to determine whether HUD had
adequate controls to ensure that Section 202 refinancing was conducted in an
effective and efficient manner. For our audit objective we found that HUD did
not have adequate controls to ensure that all Section 202 refinancings resulted in
economical and efficient outcomes. These deficiencies were due to HUD’s lack
of adequate oversight and inconsistent nationwide policy implementation
regarding debt service savings realized from Section 202 refinancing activities.
Comment 2 HUD indicated that as a result of another programmatic effort over $159 million
and $37 million of residual receipts had been used to fund the cost of Housing
Assistance Payments in fiscal years 2013 and 2014 respectively to date. HUD
indicated that Housing Notice 2012-14 made this possible. We agree that HUD
has taken action to apply excess residual balances, which also include debt service
saving to fund Housing Assistance Payments and this is mentioned in the report
(review of the Pittsburgh Office Refinances). However, HUD has not ensured
that this policy, as it relates to debt service savings, was properly implemented in
all field offices; as each field office reviewed handled debt service savings
differently.
Comment 3 Public Law 106-569 provides that upon execution of the refinancing of a project,
the HUD Secretary shall make available at least 50 percent of the annual savings
resulting from reduced Section 8 or other rental housing assistance contracts in a
manner that is advantageous to the tenants, including reducing the rents of the
unassisted tenants in a prorata sharing of the savings from the refinancing.
Therefore, the public law implied that annual savings in debt service costs from
the refinancing would result in lower costs for Section 8 and housing assistance,
which should be used to benefit tenants. Despite the public law’s allowance for
debt service savings to reduce or offset housing assistance and thus save millions
of dollars in housing subsidies, there was no mechanism to ensure that this was
done. The total debt service savings over the years for projects refinanced before
2012 are calculated to be at least $183.3 million, and a significant amount of these
funds (50% or $91.75 million) could have been available to reduce housing
assistance payments or offset rent increases. This amount which was available for
reducing or offsetting housing assistance payment are in addition to the annual
debt service savings we conservatively reported in the funds to be put to better use
section of the report.
Comment 4 The next to last paragraph on page 7 that refers to projects that the Buffalo, New
York HUD Office processed under Public Law 111-372, the “new policy” is
19
reflected correctly. HUD’s Public Housing staff calculated the annual debt
service savings for the 19 projects financed under the new policy to be $625,293.
Thus, all debt service savings should be used in calculating the annual housing
assistance payment budget, as this is a national issue for which HUD should
consider having all field offices use to offset housing assistance payments.
Comment 5 We did not say eliminate the debt service savings escrow accounts, however, we
encourage HUD to work with project owners to review the debt service savings in
the escrow accounts and help determine what action can be taken to use these
funds to benefit tenants and reduce housing assistance payments, as part of the
audit resolution process.
Comment 6 We did not say that debt service savings should be used as they are being accrued.
What we are saying is that although the debt service savings were required to be
deposited in the residual receipts account, these funds were not tracked and there
is no record of how the debt service savings were used. Some projects had
accumulated very large residual receipts balances, which could indicate that most
of the debt service saving had not be used to reduce housing assistance payments
or to benefit tenants.
Comment 7 It is possible that debt service savings may have resulted in lower rent increases
but this cannot be substantiated as there was a lack of accountability as to how the
funds were used. Furthermore, we noted that one project received a total of 7.4
percent in rent increases while having almost $100,000 of additional funding from
the debt service savings, which resulted in additional Housing Assistance
Payments.
Comment 8 Twelve projects in the Detroit Office were approved for refinancing although they
resulted in negative debt service savings. HUD indicated that about half of these
projects had rent savings and that there were mitigating considerations for the
others. Public Law 106-569 Section 811 (a)(2) provided that the Secretary shall
approve the prepayment of any indebtedness if the refinancing results in a lower
interest rate on the principal of the loan and reductions in the debt service on the
loan. Thus, there was no provision for approving projects for refinancing if they
did not meet these requirements.
Comment 9 We revised recommendation 1A based on HUD’s comments but kept the original
recommendation 1E, which is now 1C, because HUD needs to comply with the
requirement to generate positive debt service savings or the limited exception to
this requirement related to 6 percent or lower interest rates, as this issue was not
addressed in HUD’s proposed recommendations
Comment 10 We combined the original recommendations 1B, 1C and 1D into the current
recommendation 1B as suggested by HUD but kept the funds to be put to better
use in the current revised recommendation 1A. The funds to be put to better use
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are an annual recurring amount of debt service savings if HUD implements our
recommendation; it will ensure that the annual debt service savings of more than
$21 million will be properly safeguarded and used as intended for allowable
purposes to benefit the projects, tenants, or both and reduce or offset future
housing assistance payments.
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Appendix C
CRITERIA
The public law related to the refinancing of multifamily Section 202 projects into FHA insurance
under section 223(f) is as follows. Public Law 106-569, specifically, Title VIII, Housing for
Elderly and Disabled Families, published on December 27, 2000, contained Subtitle A,
Refinancing for Section 202 Supportive Housing for the Elderly. Included in the law was the
statement “…the [HUD] Secretary shall approve the prepayment of any indebtedness to the
Secretary relating to any principal and interest under the loan as part of a prepayment under
which (1) the project sponsor agrees to operate the project until the maturity date of the original
loan under terms at least as advantageous to existing and future tenants…, and (2) the
prepayment may involve refinancing of the loan if such refinancing results in a lower interest
rate on the principal of the loan for the project AND in reductions in debt service related to such
loan.” There were no provisions in the 2000 law for refinancings that resulted in higher debt
service or negative debt service savings.
Another provision in the Act, entitled “Use of Unexpended Amounts,” stated, “Upon execution
of the refinancing for a project pursuant to this section, the Secretary shall make available at least
50 percent of the annual savings resulting from reduced Section 8 or other rental housing
assistance contracts in a manner that is advantageous to the tenants, including (1) not more than
15 percent of the cost of increasing the availability or provision of supportive services, which
may include the financing of service coordinators and congregate services; (2) rehabilitation,
modernization, or retrofitting of structures, common areas, or individual dwelling units; (3)
construction of an addition or other facility in the project, including assisted living facilities (or,
upon the approval of the Secretary, facilities located in the community where the project sponsor
refinances a project under this section, or pools shared resources from more than one such
project) or (4) rent reduction of unassisted tenants residing in the project according to a pro rata
allocation of shared savings resulting from the refinancing.”
The law did not prohibit HUD from using at least 50 percent of the debt savings for housing
assistance payment offsets and implied that the refinance savings would result in reduced Section
8 or housing assistance payments. In August 2002, HUD issued Notice H 2002-16, which
provided guidance on implementing the public law and included language similar to the law as
stated above. The notice provided, in part, as follows:
Use of project-based Section 8 contract savings
A. Upon approval of the refinancing of a project under this Notice and recordation of the Section
202 Use Agreement, the Secretary shall make available at least 50 percent of the annual savings
resulting from reduced Section 8 or other rental housing assistance contracts in a manner that is
advantageous to the tenants-specifying the 4 items listed above.
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HUD did not provide for what to do with the remaining savings (the other 50 percent) from
refinancings or in what manner or how long to make 50 percent of the housing assistance savings
available to the projects. In addition, while the notice referred to the savings as “Section 8
Contract savings,” our fieldwork showed that it is commonly referred to as “debt service
savings.”
Public Law 111-372 resulted in changes to the above requirements for refinancing Section 202
loans and was implemented by Notice H 2012-8 on May 4, 2012. The major changes in the new
policy included eliminating the requirement to escrow debt service savings and the requirement
that at least 50 percent of the annual savings be used for specific purposes benefiting the tenants.
Notice H 2012-8, dated May 4, 2012, requires projects to quantify annual debt savings, but there
is no provision for the use of the savings. The new notice applies only to projects that had not
been approved for refinancing by HUD as of May 4, 2012. In addition, both the public law and
the notice allow the refinancing of Section 202 projects without reductions in debt service
(negative debt savings) but only for refinancings approved after May 4, 2012, and meeting
certain other provisions, which are specified in the notice.
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HUD Did Not Provide Effective Oversight of Section 202 Multifamily Project Refinances
Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-02-19.
Below is a raw (and likely hideous) rendition of the original report. (PDF)