oversight

Berkadia Approved a Mortgage for the Temtor Project That Was Not Economically Sound

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-08-04.

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

        Berkadia Commercial Mortgage,
             LLC, St. Louis, MO
           Section 220 Multifamily Insurance Program




Office of Audit, Region 7        Audit Report Number: 2015-KC-1005
Kansas City, MO                                       August 4, 2015
To:            Terry Clark, Branch Chief – Counterparty Oversight, HTNA

               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

Subject:       Berkadia Approved a Mortgage for the Temtor Project That Was Not
               Economically Sound




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Berkadia Mortgage, LLC’s underwriting of the
loan to fund the Temtor project.
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
913-551-5870.
                    Audit Report Number: 2015-KC-1005
                    Date: August 4, 2015

                    Berkadia Approved a Mortgage for the Temtor Project That Was Not
                    Economically Sound




Highlights

What We Audited and Why
We audited Berkadia Commercial Mortgage, LLC’s underwriting of the loan to fund the
renovation of the Temtor project in St. Louis, MO. We initiated this audit because the project
failed quickly after completion, resulting in a large loss to the Federal Housing Administration
insurance fund. Our audit objective was to determine whether Berkadia properly underwrote the
items that established the maximum mortgage amount for the Temtor project.

What We Found
Berkadia did not properly determine the maximum mortgage amount for the Temtor loan,
resulting in an $11.3 million loss to HUD. Ineligible and unsupported items increased the U.S.
Department of Housing and Urban Development (HUD)-insured mortgage by more than $6
million. Berkadia included projected commercial rents without establishing the market rate and
tax increment financing (TIF) payments that were not guaranteed. The project’s actual income
was insufficient to pay the larger mortgage. The owners defaulted on the loan beginning with
the first payment after final endorsement, leading to submission of a claim to HUD.

What We Recommend
We recommend that HUD refer Berkadia to the Mortgagee Review Board for the violations that
caused a more than $11 million loss to HUD’s FHA insurance fund. We also recommend that
Berkadia modify policies and procedures to ensure that future loans represent an acceptable risk
to HUD. These measures would include a documented review of third-party reports, written
procedures to value TIF and tax abatement, and a process to evaluate the competence of the
project management team.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: Berkadia Approved a Mortgage That Was Not Economically Sound ........ 4

Scope and Methodology ...........................................................................................8

Internal Controls ......................................................................................................9

Appendixes ..............................................................................................................10
         A. Schedule of Questioned Costs .................................................................................. 10

         B. Auditee Comments and OIG’s Evaluation ............................................................. 11

         C. Criteria ....................................................................................................................... 34




                                                                     2
Background and Objective
Berkadia Commercial Mortgage, LLC, was organized as a Delaware limited liability company in
August 2009. In December 2009, Berkadia began operations by acquiring the commercial
mortgage origination and servicing business of Capmark Financial Group, Inc., and some of its
subsidiaries. This report refers to Berkadia as the lender regardless of whether the activities
discussed occurred before or after the acquisition of Capmark.
Berkadia originates commercial real estate loans for the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, the Government National Mortgage Association
(Ginnie Mae), and the Federal Housing Administration (FHA), (collectively the agencies), using
their underwriting guidelines, and sells the loans after they are funded. If Berkadia follows
established underwriting guidelines, the agencies must purchase the principal amount of the loan
and accrued interest. Berkadia retains the servicing rights. With respect to FHA loans, the U.S.
Department of Housing and Urban Development (HUD) provides mortgage insurance coverage,
and institutional investors purchase related Ginnie Mae securities.
Berkadia underwrote the HUD-insured loan to fund the renovation of the former Coca-Cola syrup
plant, also known as the Temtor. The project also included a redevelopment of nine scattered sites
located in the South Carondelet neighborhood of St. Louis, Mo. The combined project included
109 units and 37,845 square feet of commercial space and had an original mortgage amount of more
than $14.4 million. HUD authorized the mortgage under Section 220 of the National Housing Act,
which provides for substantial rehabilitation of multifamily rental apartments. Capmark submitted
the application for firm commitment to HUD on July 7, 2009. After Berkadia acquired Capmark, it
made several amendments and extensions to the firm commitment between December 2009 and
March 2010. The appraisal was updated on March 29, 2010, and the project reached initial
endorsement on April 1, 2010. After the rehabilitation was complete, the project reached final
endorsement on January 30, 2012.
The lender is required to follow HUD’s Multifamily Accelerated Processing (MAP) Guide, which
provides mortgage insurance program descriptions, borrower and lender eligibility requirements,
application requirements, HUD underwriting standards for all technical disciplines, construction
administration requirements, and closing instructions. The lender determines the maximum
mortgage amount by taking the lowest of three calculations: 1) 90% of the sum of the HUD
estimated cost of repairs and rehabilitation and the as is value of the property (substantial
rehabilitation), 2) a mortgage amount that does not exceed 90% of the project’s estimated net
income (which is known as 1.1 debt service ratio coverage) and 3) statutory per unit limits, adjusted
by the Field Office high cost percentage. In this case, the debt service value (calculation 2), which
is the project income divided by a discount rate, was the lowest amount and controlled the
maximum mortgage amount.
Our audit objective was to determine whether Berkadia properly underwrote the items that
established the maximum mortgage amount for the Temtor project.



                                                  3
Results of Audit

Finding: Berkadia Approved a Mortgage That Was Not
Economically Sound
Berkadia did not properly determine the maximum mortgage amount for the Temtor loan. It did
not have adequate controls to ensure that the loan was economically sound. The project’s actual
income was insufficient to pay the mortgage, leading to default and HUD’s paying a $14.2
million claim.
Ineligible and Unsupported Items Increased the Mortgage by More Than $6 Million
Berkadia did not properly determine the maximum mortgage amount for the Temtor loan.
Ineligible and unsupported income and payments were included in the calculation of the
maximum mortgage amount. The ineligible and unsupported items increased the maximum
insurable mortgage by more than $6 million.
Unacceptable Commercial Rent
Berkadia included commercial rent in projected income without establishing the market rent.
The MAP Guide requires the appraiser to develop the market rent by comparison to properties as
similar as possible in location, structural type, number of bedrooms, and average unit size. The
appraisal defines market value as the price in a competitive and open market with both parties
acting in their own best interest, with the price unaffected by sales concessions. The MAP Guide
further required the lender to use due diligence in reviewing third-party reports, such as the
appraisal.

The appraisal did not include adequate information to establish the market rent for commercial
property in the primary market area and, therefore, did not justify using the projected commercial
income to increase the maximum insurable mortgage. The Berkadia appraiser questioned the
commercial rents in the appraisal. Specifically, she asked “whether the leases are arm’s length
transactions, what type of tenant improvements were included, etc.” If Berkadia had investigated
the issues raised by its appraiser during the review of the Coca-Cola syrup plant appraisal, it
would have learned that four of the five comparable commercial properties used in the appraisal
were not arm’s-length transactions. In addition, it would have learned that one of the leases
included several material concessions, including tenant improvements. Therefore, the appraisal
did not reliably establish a market rate for the commercial property. However, Berkadia
included the unreliable commercial rent amount of $262,940 in the projected annual net income.
This addition increased the maximum mortgage amount based on the debt service ratio by more
than $3.5 million.
Uncertain Income Inclusions
Berkadia increased the mortgage amount by including uncertain tax increment financing (TIF)
payments in projected income. The mortgage amount based on the debt service ratio included




                                                4
$238,777 in annual TIF payments. The MAP Guide does not provide guidance on how to
process TIFs.
The City of St. Louis Web site explained that TIFs use new or incremental tax revenues
generated by the project after completion. The TIF note indicated that the City’s obligations on
the TIF note would end in August 2031, regardless of whether the principal amount or interest
had been paid in full. The TIF payments were not assured because they were contingent upon
future events. Because the TIF payments were not assured, they should not have been used as a
basis to increase the mortgage. The TIF payments increased the maximum mortgage amount
based on the debt service ratio by more than $2.9 million.
Inexperienced Borrower Management Team
Berkadia approved a borrower management team that had no HUD experience to manage this
complex project. The MAP Guide required the lender’s underwriter to evaluate the resume of
the principals and require the addition of members to the development team if necessary to
satisfy experience requirements. The project owners and management agent disclosed that they
had no previous HUD experience. The project required rehabilitation of a former industrial
building that was more than 100 years old and had been largely vacant for more than 20 years
and several commercial and residential properties that were more than 80 years old and had been
vacant or underused in recent years. The management agent’s resume indicated that this single
project was larger than his entire previous portfolio. This fact is particularly important in
determining the maximum insurable mortgage because the appraisal stated that it assumed
responsible ownership and competent property management.
Berkadia Lacked Controls
Berkadia did not have adequate controls to ensure that the Temtor loan was economically sound.
Specifically, Berkadia’s procedures did not require adequate testing of items that increased the
maximum insurable mortgage.
Inadequate Appraisal Review
Berkadia’s procedures did not require an adequate appraisal review. The Berkadia appraiser
identified significant concerns with the Temtor appraisal, which remained in the final report.
These concerns included a failure to establish arm’s-length commercial rent comparables.
Berkadia’s procedures did not require that the questions and comments raised by the loan
reviewers be resolved. It required only that all changes be deemed satisfactory by the
underwriter.
Inadequate Review of TIF Payments
Berkadia’s procedures did not cover TIF payments. Berkadia’s chief underwriter stated that tax
abatement and TIF were handled the same way. Even if Berkadia added this unwritten
procedure to the quality control plan it fails to recognize the underlying differences between tax
abatements and TIF.
Insufficient Assessment of Project Management
Berkadia’s procedures did not test the competence of the project management team. While its
procedures generally directed the underwriter to evaluate the credit worthiness, experience, and
character of the owner and management agent, they failed to adequately assess management


                                                 5
experience and competence. The procedures specifically required a review of credit reports and
public record searches, as well as a site evaluation of the subject’s average time to lease, method
of reaching a potential tenant base, deferred maintenance, and other important positive or
negative attributes of onsite personnel. However, this process did not establish management’s
ability to control project costs. The review was not adequate as evidenced by the fact that the
management agent had no written procedures for administering project funds.
The Project Defaulted, Leading to HUD’s Paying a Claim
The project’s actual income was insufficient to pay the mortgage, leading to default and HUD’s
paying a $14.2 million claim.
Insufficient Cash Flow
The owners defaulted on the loan beginning with the first payment after final endorsement when
the project did not generate the projected income. On March 7, 2012, the project made a partial
payment of the first mortgage payment, which was due on March 1, 2012. By December 2012,
the unpaid mortgage payments totaled nearly $750,000.
The management agent was unable to lease the commercial space at the rent projected in the
appraisal. Instead, he rented the property to his own business at a much lower cost. The
appraiser projected that the commercial space would produce $7.20 per square foot or $262,940.
The actual commercial space income was $2.51 per square foot, which produced $94,137. This
amount included 7,246 square feet of space rented to a business owned by the management agent
for $0.33 per square foot.
Actual TIF payments were less than the projected payments used to determine the maximum
mortgage. The project received no TIF payments from the City until 2013. Because a large
portion of the TIFs was based on generating commercial income, it was likely that TIF payments
would continue to fall below projections.
The management agent reported excessive operating expenses and was replaced after 11 months
of project operation. The former management agent stated that the new management company
was larger and able to absorb some administrative costs. The actual operating expenses averaged
$36,104 per month higher than projected expenses. These extra expenses reduced the net
operating income by $397,144.
Loss to HUD
HUD paid a claim of $14.2 million after Berkadia assigned the mortgage to HUD. HUD later
sold the note for $2.9 million, resulting in a loss of $11.3 million.

Conclusion
The Temtor project’s actual income was insufficient to pay the mortgage. The owners defaulted
on the loan beginning with the first payment, leading to submission of a claim and HUD’s
sustaining an $11.3 million loss. The MAP Guide requires the lender to certify that the loan is
economically sound. Berkadia did not have adequate controls to ensure that the Temtor loan was
economically sound.




                                                 6
Recommendations
We recommend that the Branch Chief – Counterparty Oversight

1A.   Refer Berkadia to the Mortgagee Review Board for appropriate action for violations that
      caused a more than $11 million loss to HUD’s FHA insurance fund.
1B.   Require Berkadia to modify policies and procedures to ensure that future loans represent
      an acceptable risk to HUD. Berkadia should include a documented review of third-party
      reports, written procedures to value TIF and tax abatement, and a process to evaluate the
      competence of the project management team.




                                               7
Scope and Methodology
We performed audit work from November 2014 through May 2015. We conducted audit
fieldwork at Berkadia’s office at 12444 Powerscourt Drive, Suite 400, St. Louis, MO. Our audit
period covered January 1, 2009, to April 1, 2010.
To accomplish our objective, we
   Reviewed relevant regulations and HUD guidance;
   Reviewed Berkadia’s quality control plan (Berkadia was not able to provide Capmark
    procedures);
   Reviewed the request for firm commitment to underwrite this loan submitted by Berkadia,
   Reviewed the property appraisal and the associated findings of HUD’s Lender Qualification
    and Monitoring Division and the contract appraiser hired by Berkadia to review the original
    appraisal;
   Reviewed the TIF and tax abatement included in the calculation of the maximum insurable
    mortgage; and
   Interviewed Berkadia staff, project appraisers, and HUD Staff.
We obtained the request for firm commitment and the associated documents submitted by
Berkadia. We reviewed the application for a multifamily housing project and the supplement to
the project analysis. We determined that the maximum insurable mortgage was limited by the
debt service ratio of the project.
We reviewed the projected cash inflow amounts that were used to determine the debt service
ratio. These amounts included net income of the project, TIF payments, and tax abatement. The
appraisal provided the projected net income value used in the application. We reviewed the
appraisal and interviewed the third-party appraiser and the HUD review appraiser. We
researched the ownership of the commercial comparables using public records and obtained a
copy of the lease of the largest property.
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.




                                                8
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:

   Controls to ensure compliance with the multifamily accelerated processing program
    underwriting requirements.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

   Berkadia did not have adequate procedures to ensure that the Temtor loan was economically
    sound.




                                                  9
Appendixes

Appendix A


                            Schedule of Questioned Costs
                                             Unreasonable
                          Recommendation
                                            or unnecessary
                              number
                                                   1/
                                1A           11,312,956

                                Totals           11,312,956



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
     $11,312,956. We calculated the loss incurred by HUD by subtracting the proceeds of the
     note sale of $2,876,000 from the claim paid by HUD of $14,188,956. We calculated the
     net loss to be $11,312,956.




                                            10
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




                               11
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 3




                               12
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




                               13
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




                               14
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 5




                               15
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               16
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 6




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 6




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 7




Comment 8




Comment 9




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10




Comment 11




                               20
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 12




Comment 13




                               22
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 14




                               23
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 15




Comment 16




                               24
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 17




Comment 18




                               25
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 19




                               26
                         OIG Evaluation of Auditee Comments


Comment 1   Berkadia stated the report failed to consider the appropriate sections of the MAP
            Guide, failed to acknowledge HUD’s significant role in underwriting and
            approving the loan, ignored the conclusions of a loan default review, and did not
            analyze significant events that occurred that were not foreseen.
            We reviewed Berkadia’s underwriting of the Temtor loan using the
            responsibilities of the underwriter as stated in the MAP Guide. Berkadia’s
            comments included extensive criteria for HUD’s responsibilities in the
            underwriting process. Berkadia implies HUD’s review of the underwriting
            documents relieves Berkadia of responsibility. Berkadia attempts to support this
            position by restating sections of the MAP Guide. However, HUD’s role in
            approving the loan is not relevant to whether Berkadia fulfilled its responsibilities.
            We reviewed HUD’s loan default review. The conclusions of the third party
            reviewer supported our findings. We have included the conclusions in our
            comments. In its response, Berkadia attempts to portray the default of the Temtor
            mortgage as a routine event caused by circumstances that could not have been
            anticipated and adds post hoc analysis. As noted by Berkadia, we only considered
            information that was available to Berkadia when the loan was underwritten. That
            information did not support the maximum insurable mortgage amount determined
            by Berkadia.
Comment 2   Berkadia stated that our discussion draft of the audit failed to distinguish between
            the actions of Capmark and Berkadia and that during the exit conference we
            agreed to correct the report to distinguish between the two entities.
            We evaluated this request and believe the explanation of the transition is
            sufficiently covered in the Background and Objectives section of this report. We
            interviewed three employees that worked for Capmark and Berkadia and asked
            them to describe any changes noted in the transition from Capmark to Berkadia.
            They told us the procedures and players remained the same. They said changes
            were made in upper management and investors. Berkadia signed an assignment
            of firm commitment for the loan dated January 6, 2010. In the assignment,
            Capmark transferred all of its right, title and interest in the firm commitment to
            Berkadia. Berkadia consented to the assignment and agreed to be bound by the
            terms and conditions of the firm commitment.
Comment 3   Berkadia stated that we had ignored the requirements of the MAP Guide and
            improperly substituted our own post hoc judgment as to how the Temtor loan
            should have been underwritten. Specifically, Berkadia stated we failed to
            acknowledge HUD’s significant role in underwriting a loan under the MAP Guide
            and we failed to consider the appropriate provisions of the MAP Guide in our
            review.




                                              27
            We reviewed the underwriting of the Temtor loan to determine compliance with
            the MAP Guide. Berkadia had specific responsibilities that it did not fulfill, such
            as conducting a sufficient review of all third party reports, determining the loan
            was economically sound, and determining the loan complied with all FHA
            statutory, regulatory, and administrative requirements. Although HUD approved
            the loan, Berkadia was responsible for reviewing the documents to ensure
            compliance with the requirements and that the loan was economically sound,
            which it did not. The MAP Guide (Paragraph 15.1.A) stated, “By permitting a
            MAP Lender to prepare much of the documentation for a loan submission, HUD
            places confidence in the Lender’s integrity and competence.” HUD relied on the
            documents presented by Berkadia. The duties of the lender as written in the MAP
            Guide are not reduced or eliminated based on duties assigned to other parties.
            Our audit objective was to determine whether Berkadia properly underwrote the
            items that established the maximum mortgage amount for the Temtor project.
            The report cites all related requirements to support the findings in the criteria
            section of the report, see Appendix C.
Comment 4   Berkadia states the qualifications of the Lender’s underwriter from the MAP
            Guide and restates the duties of the underwriter already included in the report.
            Berkadia then rewrites the requirements of section 11.1C of the MAP Guide,
            removing important duties assigned to lender’s underwriter, creating a new term
            the “general review.”
            The responsibilities of the underwriter are clearly written in section 11.1C of the
            MAP Guide. We conducted the review of the underwriting of the Temtor loan
            using the requirements as written in the MAP Guide.
Comment 5   Berkadia’s comments included extensive criteria for HUD’s responsibilities in the
            underwriting process. Berkadia stated section 11.2B sheds additional light on
            HUD’s role in the process.
            Berkadia left out two very important paragraphs from the citation when
            presenting its case. These paragraphs limit the responsibility of the HUD review
            appraiser. The MAP Guide states, “The HUD review appraisers’ signature on the
            Master HUD 92264 and the 92273 and 92274 should not be construed as the
            reviewers’ acceptance of full responsibility for all elements of the report.” The
            full citation of Section 11.2B of the MAP Guide has been added to the Criteria
            section of this report, see Appendix C. As stated in comment 3, the duties of the
            lender as written in the MAP Guide are not reduced or eliminated based on duties
            assigned to other parties.
Comment 6   Berkadia adds two more pages of comments from the MAP Guide citing HUD’s
            responsibilities in the underwriting process.
            As stated in comment 3, the duties of the lender as written in the MAP Guide are
            not reduced or eliminated based on duties assigned to other parties.



                                              28
Comment 7     Berkadia stated both Capmark and HUD satisfied their respective requirements
              under the MAP Guide. Berkadia extensively quoted HUD’s responsibilities from
              the MAP guide as evidence that Capmark and HUD fulfilled their responsibilities.
              Berkadia does not provide documentation to support the statement that the
              requirements of the MAP Guide were satisfied. Citing requirements does not
              provide evidence that they were met. As stated in this report, Berkadia did not
              properly underwrite the items that established the maximum mortgage amount for
              the Temtor project.
Comment 8     Berkadia stated HUD certified the accuracy and appropriateness of the judgments
              that we cited as evidence that Capmark did not properly underwrite the loan.
              However, Berkadia has the responsibility to conduct a review of all in-house and
              third party forms/reports/reviews. The duties of the lender as written in the MAP
              Guide are not reduced or eliminated based on duties assigned to other parties.
              The MAP Guide states, “The HUD review appraisers’ signature on the Master
              HUD 92264 and the 92273 and 92274 should not be construed as the reviewers’
              acceptance of full responsibility for all elements of the report.” See comment 3
              above.
Comment 9     Berkadia stated Novogradac, an independent reviewer, concluded that the lender
              complied with MAP Guide requirements in underwriting the loan.
              We reviewed the Novogradac report to Berkadia dated February 7, 2013. The
              report conclusion included three issues. First, actual rent being lower than
              underwritten commercial rents coupled with the increased amount of debt allowed
              on the property were the main contributors to the early default of the loan.
              Second, and to a lesser extent, the delays in lease up at the Coca Cola Syrup Plant
              caused by the water problems also contributed to the early default. Finally, the
              overall lack of detail and support within the appraisal may have also indirectly
              contributed to the early default. Novogradac identified several inconsistencies,
              which may have influenced the underwriting of the transaction. Novogradac
              stated if the information had been better supported and thorough, it may have led
              to a different underwriting conclusion.
              It should also be noted that the review conducted by Novogradac was a document
              review conducted in their office. In contrast, our audit reviewed these documents,
              and we interviewed current and former Berkadia employees, HUD employees,
              City of St. Louis employees, and the project appraiser.
Comment 10 Berkadia stated that contrary to our assertion, the lender is not responsible for the
           third-party expert’s conclusions.
              We did not find any support for this statement in the report written by HUD’s
              Lender Qualification and Monitoring Division. In fact in the report, HUD
              concluded the following were processing oversights and major contributory
              factors to the property's early failure: The application was processed with overly



                                                29
              optimistic appraisal and underwriting assumptions. The assumptions used in
              underwriting were submitted with unattainable residential rents, considerably
              overestimated commercial income, underestimated residential vacancy and total
              expenses were twice that estimated by the appraiser. In response, HUD required
              Berkadia to submit a plan of action to ensure MAP underwriting assesses the
              noted deficiencies of better evaluating market need in urban locations, net
              operating income potential, and loan sizing due diligence. In addition, Berkadia
              proposed to better explore and confirm actual going commercial rents in the local
              market because of “lessons learned.” Clearly, HUD and Berkadia recognized the
              responsibility of Berkadia in underwriting the Temtor loan.
Comment 11 Berkadia stated we failed to consider whether factors other than underwriting
           caused default of the loan including borrower diversion of funds, construction
           delays, and the economy. In so doing, Berkadia has added post hoc analysis to
           this report.
              Our audit objective was to determine whether Berkadia properly underwrote the
              items that established the maximum mortgage amount for the Temtor project. All
              loans involve risks, including construction delays, and economic risks that the
              lender is required to document in the underwriting narrative and mitigate as
              required in MAP Guide, Revised 2002, paragraph 11-1(B). While as noted by
              Berkadia, we have audited the diversion of funds, this information would not have
              been available when the loan was underwritten and is not within the scope of our
              audit.
Comment 12 Berkadia incorrectly stated that we concluded the lender was required to look
           behind, second-guess or edit the appraisal report.
              Berkadia stated a conclusion that is not included in our report. We stated in the
              report that the MAP Guide required the lender to use due diligence in reviewing
              third-party reports. If Berkadia had required an investigation of the issues raised
              by its appraiser during the review of the Coca-Cola syrup plant appraisal, it would
              have learned that four of the five comparable commercial properties used in the
              appraisal were owned by Temtor principals, and two of the properties were leased
              to businesses organized by the management agent of the Temtor. In addition, an
              investigation would have revealed that one of the leases that the appraisal stated
              had no concessions, in fact, included several material concessions. The
              concessions include more than $2.4 million in tenant improvements, guaranteed
              tax abatement, and a 39 percent reduction in the rent upon lease renewal. This is
              particularly important because the property was also used in the appraisal to
              establish the market absorption rate. This then calls into question why the Temtor
              management agent would rent property to his own businesses at a higher rate.
              Therefore, the appraisal did not reliably establish a market rate for the commercial
              property.




                                                30
Comment 13 Berkadia stated they could not find any record of the specific discussion between
           Capmark’s appraisal reviewer and the appraiser and thus cannot comment on the
           reasons that the appraiser chose to make some suggested changes and not others.
              As stated in the report, Berkadia’s procedures did not require that the questions
              and comments raised by the loan reviewers be resolved. In fact, Berkadia did not
              provide any documentation that the concerns noted by their in house appraiser,
              whether the leases were arm’s length transactions and what type of tenant
              improvements were included, were presented to the appraiser.
Comment 14 Berkadia stated we have confused tax abatements with TIFs.
              We explained the differences between tax abatement and TIF in the draft report.
              However, we agree this is confusing so we removed the references to the
              handbook and tax abatements. Our position remains the same that the payments
              were not certain and should not have been used in calculating the maximum
              mortgage amount.
Comment 15 Berkadia stated HUD has the authority to grant waivers, and HUD reviewed and
           approved the use of the TIF payments to increase the mortgage amount.
              Berkadia did not provide any documentation to support that a waiver was
              requested or granted by HUD to allow TIF payments to increase the mortgage
              amount of the Temtor project.
Comment 16 Berkadia stated the management agent met the requirements of the MAP Guide.
           Berkadia stated the MAP Guide does not require previous HUD experience. If it
           did, no new management agent could ever be approved.
              We said in the report Berkadia approved a borrower management team that had
              no HUD experience to manage this complex project. The MAP Guide required
              the lender’s underwriter to evaluate the resume of the principals and require the
              addition of members to the development team, if necessary, to satisfy experience
              requirements.
              Berkadia stated Chapter 10 of the MAP Guide requires an analysis of whether a
              management agent can bill, control expenses, manage vacancy rates, collect rents
              and generally manage a property. There is no indication that the proposed
              management agent did not meet those qualifications.
              As we said in the report, Berkadia’s procedures did not test the competence of the
              project management team. Its review process did not establish management’s
              ability to control project costs. The review was not adequate as evidenced by the
              fact that the management agent had no written procedures for administering
              project funds. Berkadia did not provide any documentation that the analysis of
              the management agent was completed.




                                               31
Comment 17 Berkadia stated that our contention that the lender's appraisal review was
           inadequate is wrong.
              As already addressed above, Capmark reviewed the draft appraisal and provided
              nine pages of comments to the appraiser reflecting Capmark's opinions related to
              the draft. The in-house review appraiser did raise significant concerns about the
              commercial space, whether the leases were arm’s length transactions, and what
              type of tenant improvements were included. Berkadia did not provide any
              documentation showing how the concerns were resolved or even if they were
              presented to the third party appraiser.
              Berkadia stated our suggestion that the Lender's Quality Control Plan is required
              to address TIF payments is unsupported.
              We did not say it was a requirement of the Lender’s Quality Control Plan.
              However, as stated in the report, the TIF payments that were not eligible to
              increase the mortgage payments were used to increase the mortgage by more than
              $2.9 million. We recommended requiring Berkadia to modify policies and
              procedures to ensure that future loans represent an acceptable risk to HUD. This
              should include written procedures to value TIF and tax abatement.
              Berkadia stated our suggestion that the review of the management agent was
              insufficient is wrong.
              As noted earlier Berkadia did not provide any documentation that the analysis of
              the management agent as required by the MAP Guide was completed.
Comment 18 Berkadia claimed the section entitled "insufficient cash flow" further
           demonstrates that the Temtor default was related to borrower actions and not due
           to the underwriting of the loan.
              We limited our audit to information that was available at the time of the
              underwriting of the loan in assessing the performance of Berkadia.
Comment 19 In conclusion, Berkadia stated every loan entails some risk of default. The
           purpose of the MAP Guide is to outline the level of risk that HUD is willing to
           assume and to provide guidance for a lender to gather, analyze and supply
           relevant information to HUD.
              HUD requested we review the underwriting of the loan due to the rapid default.
              Such rapid defaults and claims of HUD insured multifamily projects are rare in
              the current environment. A search of multifamily properties endorsed since
              January 1, 2010 revealed only eleven loans that had been assigned to HUD, three
              of which were held by Berkadia. Berkadia attempts to portray the default of the
              Temtor mortgage as a routine event caused by circumstances that could not have
              been anticipated.




                                                32
Berkadia stated we had failed to consider the appropriate sections of the MAP
Guide and the previous Lender Qualification and Monitoring Division (LQMD)
review of the loan.
As noted in the Scope and Methodology of this report we reviewed relevant
regulations and the findings of HUD’s LQMD. We communicated several times
during our audit with the former head of LQMD.
Berkadia stated that they should not and cannot be held responsible for any
underwriting errors made by Capmark.
However, Berkadia consented to the assignment of the firm commitment and
agreed to be bound by the terms and conditions. Berkadia then became
responsible for ensuring those conditions were met by or before closing.
Berkadia stated the report is fatally flawed and should be withdrawn. As stated in
the comments above, Berkadia claims that the report is flawed are not correct.
Berkadia did not properly determine the maximum mortgage amount for the
Temtor loan, resulting in an $11.3 million loss to HUD.




                                 33
Appendix C
                                        Criteria
Excerpts from the MAP Guide, revised March 15, 2002
3.7 SECTION 220
   C. Maximum mortgage limitations. In general, the HUD maximum insurable mortgage is
   limited to the lesser of:
      1. 90% of HUD estimated replacement cost (new construction) and 90% of the sum of
         the HUD estimated cost of repairs and rehabilitation and the as is value of the
         property (substantial rehabilitation).
      2. A mortgage amount supported by 1.1 debt service coverage (90% of net income).
      3. Statutory per unit limits, adjusted by the Field Office high cost percentage. (See
         Chapter 8 for complete details.)
7.2 SELECTION OF APPRAISERS AND MARKET ANALYSTS
   The MAP Lender is responsible for the selection, approval, and training (if needed) of
   appraisers and market analysts who are familiar with HUD reviews and guidelines. Lenders
   must ensure that each appraiser and market analyst selected is qualified to appraise or
   perform market analyses for multifamily properties by reviewing their education, quality, and
   frequency of multifamily experience, sample appraisals and market studies, professional
   affiliations, and state licenses or certifications.
7.4 APPRAISAL REQUIREMENTS
   A. Each appraisal must meet the following requirements:
      1. Be prepared for the Lender and paid for and initiated by the Lender.
      2. For value-based programs, Section 223(f), Section 232 and Section 232/223(f), each
         appraisal shall be a complete appraisal in accordance with all applicable requirements
         contained in USPAP [Uniform Standards of Professional Appraisal Practice]
         Standards Rule 1 and in compliance with this guidebook. For sections 220 and 221,
         the appraiser may prepare a limited appraisal as outlined in paragraph 7.4 A 4 below.
         The appraiser should reference the Jurisdictional Exception Rule where appropriate.
         The Departure Rule is not authorized. The appraisal report format must meet the
         specifications of Standards Rule 2-2a and be a Self-Contained Report. Form HUD-
         92264 (92264-HCF [health care facility] for Section 232 projects) and supporting
         forms, i.e., HUD-92264-A, HUD-92273 and HUD-92274 must be completed by the
         appraiser. The self-contained report will be supportive of and consistent with the
         conclusions made on the forms
      3. Adequately describe the geographic area, neighborhood, rental competition, sales
         comparables, site, and improvements.
      4. Produce a fair market value supported by the reconciliation of the cost, income, and
         direct sales comparison approaches to value for Section 207/223(f), 232, and



                                               34
         232/223(f). The cost or summation approach must consider all applicable forms of
         depreciation for 223(f) and 232/223(f) cases. For this reason, the replacement cost
         approach shall not automatically set the upper limit of value for these programs. For
         New Construction and Substantial Rehabilitation pursuant to Section 232, the
         replacement cost or summation approach shall in all cases set the upper limit of value
         in the reconciliation process. This policy is not intended to negate the necessity of the
         final reconciliation of the three approaches. Section 232 remains a value-based
         program. It is rather an acknowledgment of the basic principle of substitution in that
         no prudent purchaser would pay more for a property than the cost to acquire a similar
         site and construct improvements of equal desirability and utility. A Limited appraisal
         using the Replacement Cost for projects insured through Sections 221(d) and 220
         should be supported by the cost approach to value. Support “As Is” value in
         Substantial Rehabilitation by use of the income and direct sales comparison
         approaches to value.
     5. Have an effective date within 120 days before the date the Firm Commitment
         application or pre-application package is delivered by the Lender to HUD. Updated
         appraisals can be submitted with the appraiser re-inspecting the subject property, re-
         surveying the rental comparables, and reviewing the market for any additional sales
         comparables.
     6. Be prepared with the list of information supplied by the MAP Lender contained in
         Appendix 4.
     7. Include appraiser’s certification. See certification format in Chapter 11 of MAP
         Guide.
     8. Under MAP the USPAP Departure Rule is not authorized. Instead, the appraiser shall
         invoke the USPAP Jurisdictional Exception Rule to fulfill MAP underwriting
         requirements. By definition, the Jurisdictional Exception Rule renders a specific
         portion of USPAP void and of no force or effect; therefore, for the purposes of that
         assignment, the excepted portion of USPAP does not exist and so cannot be subject to
         the Departure Rule. Pre-application valuation exhibits should be viewed as an
         Appraisal Consulting Assignment as defined in USPAP Standard 4, and are prepared
         as a precursor to the final report submitted at the firm commitment phase. For
         Section 223(f), Section 232 and Section 232/223(f), the appraisals should be a
         Complete Appraisal in accordance with all applicable requirements contained in
         USPAP Standards Rule 1, and in compliance with this guidebook. For Sections 220
         and 221, the appraiser may prepare a Limited Appraisal as outlined in paragraph 7.4
         A 4.
     9. The primary appraiser designated by the Lender and approved by HUD must perform
         the property inspection AND sign the appraisal report and the supporting HUD forms
     10. Photos of the subject, comparable sales and comparable rentals are required with all
         submissions.
7.6 ESTIMATED RENTAL INCOME
  A. Rental estimates. First the annual gross income of the subject project is estimated. The
  processing will include estimates of income from market comparables, rental concessions,
  and an assessment of the general health of the rental market. The gross income estimate


                                               35
  assumes a 100 percent occupancy level and reflects rent levels current as of the appraisal date
  or date of the market study. Also, the effect that any proposed repairs to the project will have
  on rents, expenses, and net income must be considered. (Not all repairs increase rents,
  occupancy, net income, and/or decrease expenses)
  B. Rent comparables. Market Rent by Comparison shall be estimated by the Lender’s
  appraiser by completing HUD-92273. Note that use of HUD Form 97723-S8 is not
  authorized for FHA mortgage application processing. One HUD-92273 form is to be
  prepared for each type and size (if significantly different) of rental unit in the subject
  property. The rent comparables and units selected for comparison shall be as similar as
  possible to the subject property and units as they relate to location, structural type, number of
  bedrooms, and average unit size. Market rate units from partially assisted projects can be
  used as rental comparables in the absence of better rental data. Consistent adjustments for
  significant differences between the comparables and the subject units shall be derived from
  the market and applied to the subject rent estimate. Rental adjustments are always made to
  the comparables for differences from the subject project. The Lender’s appraiser should
  select the final rent estimate based on accepted correlation procedures. Generally, the
  indicated rent estimate will be from the central 60 percent of the rental range of the indicated
  rents. Just as the most appropriate rent comparable must receive more weight, the general
  health of the rental market must be recognized before relying upon one or two optimistic
  indicators. On tax credit and/or bond financed applications the appraiser should also
  complete the HUD-92264T in determining the appropriate processing rents.
8.1 QUALIFICATIONS AND DUTIES
  B. Major Duties and Responsibilities of the Lender’s Underwriter
     1. The underwriter serves as a member of the Lender’s processing team, calling for
        specific requirements and terms in the preparation of underwriting recommendations
        to HUD. The duties and responsibilities are divided into two phases. The first phase
        involves application underwriting and the second phase relates to the construction
        period.
        a. Duties and responsibilities associated with the application underwriting are as
            follows:
            (1) Makes a determination of the acceptability of the general contractor, the
                sponsor, the mortgagor, if formed, and its key principals through a thorough
                analysis of their credit, character, financial condition, motivation for
                ownership, availability of assets for closing and adequacy of income for total
                obligations.
            (2) Uses trade references, bank references, credit data and construction experience
                resumes in analyzing the construction capability of the general contractor
                including financial stability, and ability to complete the project.
            (3) Determines the recommended maximum mortgage amount and other key
                terms of the loan.




                                                36
8.3 FIRM COMMITMENT PROCESSING – DETERMINING ACCEPTABILITY OF THE
BORROWER AND GENERAL CONTRACTOR
    A. In General
    A key component of the underwriting process is to assess the mortgagor’s ability to manage
    the development, construction, completion, and successful lease-up of the property. The
    underwriting of multifamily and healthcare projects involves evaluating the character, ability
    and financial condition of the sponsor, mortgagor, its key principals, and the general
    contractor. The Lender’s underwriter must:
        1. Identify the mortgagor and its principal or key individuals.
        2. Analyze the credit worthiness of the principal sponsors, the mortgagor entity, if
           formed, and the contractor.
        3. Analyze the mortgagor and contractors experience record.
        4. Determine the financial capability of the mortgagor and the general contractor.
        5. Evidence specific experience (within the previous 5 years) in underwriting the
           development and operation/management of health care facilities.
   J. Analyzing the Borrower’s and Contractor’s Previous Experience:
       1. The Lender’s underwriter is to evaluate the resume of the principal(s). In doing so,
          the underwriter will be looking for their experience in developing, owning or building
          similar multifamily properties. Pay particular attention to:
              a. type and size of previous projects;
              b. geographic area of business involvement;
              c. length of time served in this capacity; and
              d. past roles in multifamily business.
       2. Each resume should demonstrate the level of experience needed to successfully
          complete the development of the project.
       3. Require the addition of members to the development team if necessary to satisfy
          experience requirements.
10.1 INTRODUCTION (MANAGEMENT ANALYSIS)
   A. Management agents that operate HUD-insured multifamily properties play a key role in
   providing quality affordable housing. This chapter reflects the policy of property owners,
   management agents, residents and HUD working together over the long term to meet this
   objective. MAP Lenders play an important role in the analysis of the proposed management
   program.
   B. While it is the ultimate responsibility of the project owner/mortgagor to select and oversee
   the management agent of an insured property, the establishment of an effective relationship
   among HUD, the owner, and the management agent is critical to the success of the
   development over the life of the mortgage. The relationship is clarified at the Firm
   Commitment stage, when detailed management documents are submitted with the Firm
   Commitment application or when there is a change in management.
   C. The Lender will review these documents to determine whether the proposed management
   agent demonstrates the capability and track record to assure that the development will be



                                                 37
  managed in a prudent, efficient, and cost-effective manner. The required documents help to
  demonstrate whether or not the agent:
     1.   Is eligible for approval and in good standing with HUD.
     2.   Demonstrates effective management experience and acceptable operating procedures.
     3.   Demonstrates adequate fidelity bond coverage.
     4.   Is in compliance with civil rights laws, regulations and requirements.
     5.   Is able to positively communicate and cooperate with legitimate resident associations.
  D. If the Lender favorably assesses the above items and HUD approves this assessment, then
  the owner may execute a Management Agreement with the proposed agent. Since the
  management agent’s contract is with the project owner, it is HUD’s policy to not
  unreasonably withhold approval of the management agent, consistent with the Department’s
  responsibility to protect the public interest.

10.2 EXHIBITS REQUIRED FOR FIRM COMMITMENT
  1. HUD 2530 Previous Participation Certification. For all principals and affiliates of the
     management agent. This form provides comprehensive information about all HUD-
     related experience by the management agent and is reviewed by the HUD Field Office,
     and at times by the HUD Washington office. This also applies to lessees.
  2. HUD 9832, Management Entity Profile for the Agent. This form provides detailed
     information regarding the organization, operation, and experience of the proposed
     management agent. The management plan should provide a narrative overview as
     support to this exhibit and should include any pertinent leasing or management strategies
     that are not covered in Form HUD-9832.

10.3 LENDER REVIEW OF MANAGEMENT DOCUMENTS
  The Lender will carefully review the deliverables included in the Firm Commitment
  application package to determine the acceptability of the proposed management agent. The
  Management Entity Profile is of particular importance in determining the qualifications of
  the proposed agent.
  The Lender must review the qualifications for the proposed agent to assess the agent’s ability
  to manage the project effectively and in compliance with HUD requirements. The Lender
  must consider each of the factors below in reviewing an agent’s qualifications.
  A. Past and Current Management
          1.     The Lender must review the proposed agent’s past experience and current
                 performance with respect to the following performance indicators
                 a. Billing
                 b. Controlling operating expenses
                 c. Vacancy rates
                 d. Resident turnover
                 e. Rent collection and accounts receivable



                                               38
                 f. Physical security
                 g. Physical condition and maintenance
                 h. Resident relations

11. 1 LENDER UNDERWRITING
  B. Firm Commitment application: The MAP Lender’s underwriter must review the in-house
  and third party reports and determine that the processing of the loan is in accordance with the
  requirements of this guide and that the proposed loan represents an acceptable risk
  (replacement cost programs) or is economically sound (value programs). The underwriter
  must document any changes made to the Lender’s technical reports. In the package
  submitted to HUD, the underwriter must provide a narrative analysis describing the mortgage
  transaction containing a discussion of:
      1. Characteristics of the proposed mortgage that make it economically sound or an
          acceptable risk and the reasons why the Lender recommends the loan for mortgage
          insurance.
      2. Any risk factors.
      3. Changes in the project from the preapplication stage including changes in
          sponsorship, proposed mortgagor development team and Lender reviewers.
      4. Evaluation of the financial capacity of the principals of the borrower and its ability to
          repay the loan.
      5. Evaluation of the financial and technical capacity of the general contractor to
          build/rehabilitate the project.
      6. Property’s financial analysis (profile and trend) (Section 223(f),232/223(f) only)
      7. Property’s physical description (Section 223(f), 232/223(f) only).
      8. History of borrower’s equity investment in the property (Section 223(f),
          232/223(f)refinances only).
      9. Analysis of market, rents, expenses and estimated rent-up and operating deficit.
      10. Adequacy of the proposed Reserve for Replacement (207/223(f) and 232/223(f)
          only).
      11. Documentation of any changes the underwriter made to the appraisal/technical reports
          with justification.
      12. Requests for any waivers of FHA requirements with supporting documentation.
      13. Certifications from the individual reviewers. (See 11.2H.)
  C. Due diligence. With the Firm Commitment package the MAP Lender certifies that:
     1. The Lender has reviewed all in-house and third party forms/reports/reviews.
     2. The preparer of the forms/reports/reviews is qualified as required by this guide, and
        has the insurance, if any required by this guide.
     3. The forms/reports/reviews were prepared in the manner required by the guide and the
        forms/reports reviews are complete and accurate.
     4. The proposed loan represents an acceptable risk to the Department (replacement cost
        programs) or is economically sound (value programs), based upon the Lender's
        review and analysis and the proposed loan and processing complies with all FHA
        statutory regulatory and administrative requirements.



                                               39
11. 2 HUD Field Office Underwriting Review
   B. HUD Reviewers Signature and Certifications: Upon determination of acceptability for
   processing, the HUD reviewers should sign their individual Technical Reviews and when
   determined acceptable for processing, the Master HUD 92264 prepared by the lender. The
   Master HUD 92264 is the most critical underwriting document because it is a summarization
   of key technical processing conclusions which, along with the HUD Form 92264A, are the
   basis for the FHA Firm Commitment. Since MAP requires a technical review of the lender’s
   underwriting conclusions, the Master HUD Form 92264 is the logical and appropriate form
   that HUD reviewers should sign or co-sign to authenticate their review as opposed to
   individual 92264s prepared by third party contractors. HUD appraisal reviewers should also
   sign the Forms 92273 and 92274 which provide crucial underwriting justifications for the
   amounts in the 92264. Long before the implementation of MAP, it has been an FHA basic
   procedure to require the HUD review appraiser’s signature on the aforementioned forms.

   The Department believes that the continuation of this long standing policy clearly documents
   the underwriting conclusions and decisions made by HUD staff. This same policy is extended
   to HUD architecture, and cost, and mortgage credit examiners performing review functions
   under MAP and their respective forms. HUD review appraiser signatures, on such
   Forms as the 92264, attest to the quality of the review, that the processing is in compliance
   with MAP technical instructions, that it is free of errors and has no omissions, and that the
   appropriate appraisal procedures and analysis have been completed. Additionally, as the
   MAP Guide currently states, MAP requires a Technical Review of appraisals.

   The HUD review appraisers’ signature on the Master HUD 92264 and the 92273 and 92274
   should not be construed as the reviewers’ acceptance of full responsibility for all elements of
   the report. To avoid any confusion or misunderstanding regarding the HUD review appraiser
   signing the 92264, 92273 and 92274, the Department invokes the USPAP Jurisdictional
   Rule. The authority justifying this action should be stated in the review appraisers work
   product and in Section O, “Remarks and Conclusions”, of the HUD Form 92264. As a guide
   and for the purposes of consistency we suggest that MAP review appraisers use the following
   language:

   “Despite joint signatures of the appraiser and review appraiser on this document, the review
   appraiser’s signature does not constitute the acceptance of full responsibility for the appraisal
   or the contents of the appraisal report under review. It indicates that the processing has been
   reviewed in conformance with USPAP Standard 3 and related provisions and found to be
   acceptable for use in HUD’s internal underwriting decision making process”.

   The HUD’s review appraisers’ technical review should comply with USPAP Standard 3. To
   document his review, the review appraiser should complete Appendix 7C.1and the review
   report must include a signed certification as prescribed by USPAP Standard 3.
   K. Certifications.
   I understand that my (appraisal, market study or architectural, cost, mortgage credit,



                                                 40
  valuation review) will be used by _______ (name of MAP Lender) to document to the U.S.
  Department of Housing and Urban Development that the MAP Lender’s application for FHA
  multifamily mortgage insurance was prepared and reviewed in accordance with HUD
  requirements. I certify that my review was in accordance with the HUD requirements
  applicable on the date of my review and that I have no financial interest or family
  relationship with the officers, directors, stockholders, or partners of the Borrower, the general
  contractor, any subcontractors, the buyer or seller of the proposed property or engage in any
  business that might present a conflict of interest.
  I am employed full time by the MAP Lender (underwriter) or under contract for this specific
  assignment (appraiser, market analyst, cost architect) and that I have no other side deals,
  agreements, or financial considerations with the MAP Lender or others in connection with
  this transaction.
  __________________ Signature
  Warning: Title 18 U.S.C. 1001, provides in part that whoever knowingly and willfully makes
  or uses a document containing any false, fictitious, or fraudulent statement or entry, in any
  manner in the jurisdiction of any department or agency of the United States, shall be fined
  not more than $10,000 or imprisoned for not more than five years or both.

15.1. SANCTIONS OF A MAP LENDER: OVERVIEW
  A. By permitting a MAP Lender to prepare much of the documentation for a loan submission
  for mortgage insurance, HUD places confidence in the Lender’s integrity and competence.
  HUD and MAP Lenders have a mutual interest in ensuring consistent Lender competence
  and compliance with the MAP Guide and other relevant guidance and handbooks. If in the
  process of performing this work, the Lender places HUD at risk, HUD needs to issue a
  Warning Letter or sanction the Lender as quickly as possible.

15.3. BASIS FOR ISSUING A WARNING LETTER OR SANCTIONING A MAP
LENDER
  A MAP Lender’s underwriting and construction loan administration may lead to a Warning
  Letter or sanction. Examples include, but are not limited to, the following:
  B. Serious offenses that might be a basis for a Warning Letter and/or Probation, Suspension,
  or Termination include:
     5. Evidence that a Lender’s inadequate or inaccurate underwriting was a cause for
        assignment of an FHA-insured mortgage and claim for insurance benefits to HUD.

15.17. REFERRAL TO THE MORTGAGEE REVIEW BOARD OR THE INSPECTOR
GENERAL.
  A. If the Hub/Program Center Director determines that a MAP Lender’s actions or failure to
  act appears to be a compliance matter justifying action by the Mortgagee Review Board,
  including possible removal of its authority to do business as an FHA Lender, s/he must bring
  this matter and the administrative record to the attention of the Director, Office of



                                                41
   Multifamily Development in Headquarters. The Director will refer the matter to the Director
   of the Mortgagee Review Board Division in the Departmental Enforcement Center.
   See Section 2-4, Requests for Mortgagee Review Board Action, HUD Handbook 4060.2
   REV 2, Mortgagee Review Board, and HUD Regulations at 24 CFR 25.
Excerpt from Uniform Standards of Professional Appraisal Practice, 2010-2011 Edition
   Market value means the most probable price which a property should bring in a competitive
   and open market under all conditions requisite to a fair sale, the buyer and seller each acting
   prudently and knowledgeably, and assuming the price is not affected by undue stimulus.
   Implicit in this definition is the consummation of a sale as of a specified date and the passing
   of title from seller to buyer under conditions whereby:
     1. buyer and seller are typically motivated;
     2. both parties are well informed or well advised and acting in what they consider their
          own best interests;
     3. a reasonable time is allowed for exposure in the open market;
     4. payment is made in terms of cash in U.S. dollars or in terms of financial arrangements
          comparable thereto; and
     5. the price represents the normal consideration for the property sold unaffected by special
          or creative financing or sales concessions granted by anyone associated with the sale.




                                                42