Improving the Process for Allocating Loan Management Set-Aside Funds to Multifamily Housing Projects

RCED-85-29: Published: Nov 16, 1984. Publicly Released: Nov 16, 1984.

Additional Materials:

Contact:

John H. Luke
(202) 275-6111
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

The Loan Management Set-Aside (LMSA) Program is administered by the Department of Housing and Urban Development (HUD) to help maintain the financial viability of multifamily housing projects with cash-flow problems. The program is available to both insured and held projects. GAO reviewed the process used by HUD to allocate LMSA funds in fiscal years (FY) 1983 and 1984 and the basis used by HUD for restricting the use of LMSA funds for held projects.

HUD used a process that consisted of three stages to allocate program funds in FY 1983 and 1984. First, headquarters issued a memorandum containing instructions to field offices on the factors to consider in identifying projects that would benefit from LMSA funds. Second, field offices identified possible projects and submitted statistical and/or narrative information on funding needs to headquarters. Third, headquarters used the field data to select projects to receive LMSA funds. GAO determined that HUD needs to: (1) provide clearer instructions to its field offices on how to identify projects with the greatest potential for mortgage default; (2) provide guidance to its field offices on how to compute the number of units and the related amount of LMSA assistance needed for a project; (3) require that its field offices document how LMSA funds would ensure projects' long-term viability, especially how LMSA funds would solve cash-flow problems; and (4) clarify how tenant income, which affects the amount of rent the project owner can charge, should be considered in identifying projects and documented when submitting funding proposals to headquarters. GAO also found that HUD has not developed an approach to measure when it is cost-effective to use LMSA funds for held rather than insured projects. GAO concluded that HUD needs to clarify how to measure cost-effectiveness for held projects in order to provide reasonable assurance that program funds are spent effectively.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Prior to the final allocation of FY 85 LMSA funds, HUD did not identify for its field offices the specific selection factors to be used. However, HUD did explain to its field offices how to determine and document a number of factors, some of which were used in the final allocation process. HUD plans to formalize procedural improvements in FY 86.

    Recommendation: The Secretary of Housing and Urban Development should develop specific procedures for identifying and selecting projects to be funded and the procedures should be incorporated into the LMSA handbook and the Code of Federal Regulations (CFR). These procedures should explain to field offices how factors used to identify and select projects to receive LMSA funds (for example, imminent danger of default, number of units requested, and owner contribution) are to be determined, documented, and evaluated.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: For the FY 85 allocation process, HUD issued a memo in December 1984, requiring its field offices to submit the necessary documentation on projects' financial situation. HUD, however, has not incorporated these changes in the LMSA handbook or CFR, but plans to formalize procedural improvements in FY 86.

    Recommendation: The Secretary of Housing and Urban Development should develop specific procedures for identifying and selecting projects to be funded and the procedures should be incorporated into the LMSA handbook and CFR. These procedures should instruct the field offices to document clearly for headquarters that: (1) projects' financial problems are traceable to inadequate cash flow; and (2) the infusion of program funds is expected to provide a reasonable assurance of long-term project viability.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: For the FY 85 allocation process, HUD issued memos to its field offices regarding the consideration and documentation of tenants' financial situation. HUD, however, has not incorporated these changes in the LMSA handbook or CFR, but plans to formalize procedural improvements in FY 86.

    Recommendation: The Secretary of Housing and Urban Development should develop specific procedures for identifying and selecting projects to be funded and the procedures should be incorporated into the LMSA handbook and CFR. These procedures should state clearly the extent to which tenants' financial situation (measured in terms of rent-to-income ratio) should be: (1) considered by field offices when identifying projects; and (2) documented when submitting funding proposals to headquarters.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: HUD: did not develop a methodology to measure cost-effectiveness; elected to focus resources on insured and section 202 projects; and to consider held projects on an exception basis questions addressing extensive effort to differentiating between insured and held projects given the limited funding. It appears unlikely that HUD will insert a methodology in the handbook or CFR.

    Recommendation: The Secretary of Housing and Urban Development should insert in the LMSA handbook and CFR a methodology to measure and compare the cost-effectiveness of using LMSA on insured versus held projects. The methodology should explain whether, for a well-managed held project, cost-effectiveness should be measured only in the context of minimizing expenditures from the HUD multifamily insurance fund or in the broader context of the overall costs avoided by the government if a held project is likely to go into foreclosure and eventually sold with subsidies to lower income tenants.

    Agency Affected: Department of Housing and Urban Development

 

Explore the full database of GAO's Open Recommendations »

Jul 13, 2016

Jun 8, 2016

May 31, 2016

May 2, 2016

Jan 8, 2016

Sep 15, 2015

Jul 23, 2015

Jul 10, 2015

Jul 6, 2015

May 19, 2015

Looking for more? Browse all our products here