HUD wants state to repay $268,415 in ineligible spending on soft-second mortgage program
The Finance Authority of New Orleans used a state homebuyer subsidy to hand out hundreds of thousands of dollars more than it should have in interest-free home loans and closing-cost assistance; gave aid to a few families that made too much money to qualify; and collected millions in fees and reimbursements that weren't allowed under federal rules, according to a federal audit published Monday.
View full sizeAs he was trying to sell his house at 10139 Hammond St., Diah Stephenson found that the buyer was having problems getting money from the FANO program. Stephenson was photographed Oct. 19.The findings could present another setback to a $10 million homebuyer-aid program that FANO has been trying to get off the ground for months.
In the meantime, the U.S. Housing and Urban Development Department's auditor wants the state of Louisiana to pay back the federal government $268,415 in ineligible costs that FANO doled out under its "soft-second" mortgage program. In three cases, families that made more than the income cap of about $72,000 a year got up to $65,000 in loans that become gifts over time, plus as much as $10,000 to cover closing costs.
In other instances, families got loans in spite of having sufficient cash reserves to afford payments themselves.
The HUD auditor also demanded that the state and FANO explain another $1.2 million in payments to homebuyers that didn't have proper documentation and $1.3 million in fees paid to the authority. The audit said that if the state couldn't substantiate those payments, it should pay HUD back.
FANO spokeswoman Terrell Perry said the authority is working with the state to address the audit findings.
Some program files didn't include proper evidence that the purchaser was actually a first-time homebuyer, while others didn't show that the home being bought had been severely damaged in Hurricane Katrina, as required. Others simply lacked proper proof of the recipients' income.
In its official response, the state's Office of Community Development acknowledged that it failed to keep proper controls on the way FANO handled the $27.8 million program. State officials said they have demanded supporting documents from FANO that might justify some of the spending.
State Community Development Director Robin Keegan also acknowledged that her agency reimbursed FANO using the federal money on a "fee per loan" basis, which is not allowed under HUD rules.
The findings could have a major impact on a pending city program, too. Mayor Mitch Landrieu's administration and FANO have held a month of delicate negotiations over how a new, $10 million mortgage subsidy program for first-time homebuyers will work.
Dozens of pending real estate deals have been hanging in the balance since the spring as the program has been delayed time and again, thanks to a prolonged dispute over how the city and FANO, an autonomous agency, should administer it. Former Mayor Ray Nagin told FANO director Mtumishi St. Julien that the second phase of the program was ready to launch in April, and the authority began accepting applications.
When Landrieu took office in May, the city let the agreement with FANO expire and didn't sign it until last month, in part due to concerns about Nagin-era contracts that weren't on solid legal footing.
As it turns out, one of the city's major concerns was FANO's per-loan fee, which ran more than $3,800 per loan under the state program. The city has been waiting for weeks to get an acceptable new breakdown of the authority's fees so they will be eligible for federal reimbursement.
Participating lenders processed 51 loans waiting for FANO approval before it became clear that the money wasn't ready yet. Angry lenders and real estate brokers confronted St. Julien earlier this month and were told the money was in the city's hands. Since then, city officials have been promising the stakeholders quick resolution to negotiations with FANO and priority treatment for deals already in the pipeline.
But the city cancelled a plan to announce a new agreement with FANO on Oct. 22. At that point, a draft of HUD's audit had been sent to FANO and the city. Since then, FANO has not been able to satisfy the city's concerns about HUD requirements.
The problem initially was that FANO wanted to run the city's $10 million program the same way it had handled the state's soft-second effort -- the one now facing millions in questioned costs by the HUD inspector general.
That first program started slowly in 2008, but eventually paid 415 forgivable mortgage loans, called "soft seconds" because they are tacked onto a traditional first mortgage and turn into gifts if the recipient stays in the home and makes his or her first-mortgage payments on time.
To would-be homebuyers of modest means and the developers who see the program as a great way to market rehabilitated properties in still-developing parts of town, the $10 million effort looked exactly the same as its predecessor -- both are financed by the U.S. Department of Housing and Urban Development and offer forgivable loans of up to $65,000 to first-time homebuyers and up to $10,000 in closing-cost assistance.
But behind the scenes, the two programs are different in a few significant ways.
The first batch of money was granted from the state to FANO to run, with essentially no city input. It was considered a "state program." The $10 million batch is actually granted to the city, so the Landrieu administration has decided to exert more control over it, imposing a complex flow-chart for approving loan applications and drawing down the federal money for each loan before paying the homebuyers, rather than reimbursing FANO afterward.
David Hammer can be reached at dhammer@timespicayune.com or 504.826.3322.