On May 20, 2016, the Office of the Inspector General (“OIG”) for the United States Department of Housing and Urban Development (“HUD”) released the final results of its review of the Office of Multifamily Production’s multifamily accelerated processing (“MAP”) program (the “Audit Report”). The purpose of the audit was to determine whether (1) HUD adequately reviewed and approved loans underwritten by MAP-approved lenders for Federal Housing Administration (“FHA”) insurance and (2) whether the 2016 MAP Guide revisions adequately improved the review and approval process for MAP loans. This audit was likely triggered by the OIG findings in eight separate earlier audits of MAP lenders that underwrote defaulted loans that had been assigned. In those earlier audits relating to nine loans that had been assigned to HUD and which resulted in total insurance claims of approximately $110 million, the OIG had determined that the loans were not properly underwritten and processed. Based on the OIG’s investigation and review of HUD relating to these same loans, it found that (1) HUD did not adequately review and approve MAP loans (“Finding #1”) and (2) the 2016 MAP Guide needed further improvement (“Finding #2”).
With respect to Finding #1, OIG identified nine loans inappropriately approved by HUD, which exposed the FHA insurance fund to unnecessary risk. OIG specifically found that HUD did not require MAP lenders to adequately address eleven underwriting components, including:
1. Inadequate review of principals and contractors
2. Inadequate review of appraisal
3. Inadequate review of project revenue
4. Inadequate review of market studies
5. Inadequate review of project financial background
6. Failure to ensure that critical repairs were completed before closing
7. Inadequate review of project repair cost and scope of work
8. Improper consideration of technical staff conclusions
9. Inadequate assessment of prepaid cost
10.Failure to follow MAP timelines for site inspections
11.Failure to enforce FHA guidelines for loan limits
Although the OIG acknowledged that the newly revised MAP Guide did address several weak areas in the underwriting component of the MAP program, in Finding #2 it indicated that the 2016 MAP Guide needed further improvement in at least four specific areas related to underwriting. First, OIG stated that the execution of onsite physical inspections by appraisers could be clearer in that the 2016 MAP Guide does not clearly show whether onsite physical inspections will be conducted by HUD review appraisers.
Second, OIG found that several of the above-referenced loans, which were inappropriately approved by HUD, were compromised, in part, because HUD management did not fully consider conclusions formed by its technical staff. The OIG concluded that the 2016 MAP Guide does not rectify this issue as it does not require management to provide adequate documentation as to why, in applicable cases, it is overruling technical staff.
Third, OIG found a conflict between the body of the 2016 MAP Guide regarding the valuation process and the related appendix. In the body of the MAP Guide, a “HUD employee” must review an appraisal for USPAP compliance whereas the appendix provides that a certification from a USPAP-certified appraiser is needed.
Fourth, as part of the Multifamily for Tomorrow transformation, HUD implemented the Single Underwriter model in the Office of Multifamily Production. However, OIG found that this model was not clearly outlined within the 2016 MAP Guide.
As a result of the Audit Report, it is likely that we can expect the issuance of further guidance and clarification on the issues addressed by the OIG. Overall, this is good news for MAP lenders as it will hopefully clear up many ambiguities and uncertainties as to the underwriting process for MAP loans.