SD6 - Report of the Joint Legislative Audit and Review Commission on The Virginia Housing Development Authority

  • Published: 1986
  • Author: Joint Legislative Audit and Review Commission
  • Enabling Authority: Senate Joint Resolution 7 (Regular Session, 1984)

Executive Summary:
The Virginia Housing Development Authority (VHDA) was established in 1972 as a political subdivision of the State to assist low- and moderate-income families in obtaining affordable, safe, and sanitary housing not available from private sources. As of December 31, 1984, over 32,000 families have received loans to purchase single-family dwellings. In addition, VHDA has financed 32,334 rental units in 211 developments located across the State. The authority is the eighth largest financial institution in Virginia in terms of assets.

The types of individuals and families served by VHDA programs vary according to eligibility requirements, the amount of financial assistance provided, and the general conditions of the housing market. VHDA's enabling statutes do not specifically define "low" and "moderate" income. In some programs, VHDA is required to use federal income definitions, while in others it has established its own eligibility requirements.

The financing for VHDA programs comes principally from the sale of revenue bonds. Because the bonds are exempt from federal and State taxes, VHDA loans carry interest rates below private market financing. Although no State-appropriated funds are involved, most VHDA bonds issued through 1981 carried the "moral obligation" backing of the Commonwealth, and over half of the outstanding bonds carry such obligation. Since 1981, however, less than 15 percent of VHDA's bonds have been issued with the moral obligation backing.

Concerns about the housing needs of low- and moderate-income families, the effectiveness of mortgage revenue bonds as a viable financing method, and the State's moral obligation to back VHDA's $1.2 billion bond indebtedness led the 1984 General Assembly to direct JLARC to evaluate the programs, operations, and management of VHDA. Specific points of interest mentioned in Senate Joint Resolution 7 are:

• the activities of VHDA supported by mortgage revenue bonds,
• the extent to which the programs have benefited persons of low and moderate income,
• VHDA's definition of low and moderate income,
• the operations, management, and administration of VHDA, and
• other matters deemed appropriate by the JLARC staff.

In general, JLARC found that VHDA is regarded by municipal bond experts as one of the financially strongest housing finance agencies in the country. Greater efforts are needed, however, to better target the authority's housing programs to serve low- and moderate-income persons whose needs are not met in the private market. Such efforts are particularly important given the funding and program changes at the federal level and the continued need for affordable housing opportunities in the State. JLARC found that although VHDA's programs will not be able to entirely fill the void, the authority's strong financial position could enable it to fund additional programs and modify existing programs to reduce the impact of federal housing cuts.

Multi-Family Development and Monitoring (pp. 11 • 34)

VHDA has provided loans for the construction and rehabilitation of nearly 200 subsidized and non-subsidized rental projects and administers federal rent subsidies. The authority sets eligibility guidelines for its rental programs and selects projects to finance. VHDA also has continued oversight responsibilities for the financial and physical condition of its projects.

Need for Low- and Moderate-Income Rental Housing: Although about 80 percent of the rental units financed to date have housed low- and very-low income persons, VHDA's current multi-family program is focused on financing non-subsidized rental projects for moderate-income households. Households having gross annual incomes as high as $49,500 can live in some of the authority's non-subsidized apartments. This change in emphasis has coincided with the dramatic reduction in federal housing programs, and leaves the State without a program to add significantly to the number of rental units affordable to most lower-income households. Furthermore, the Governor's Commission on Virginia's Future reported in 1984 that "some recent shifts in the rental market ... are making it harder for [low- and moderate-income citizens] to find suitable housing at affordable prices."

JLARC's review found that VHDA's "seven-times test" for its conventional rental projects enables some high-income households to occupy these units. VHDA's eligibility limits for most projects are above area median incomes and the authority's income limits for its homeownership program. As a result, some households which are eligible to occupy a VHDA conventional apartment would be ineligible for a VHDA home mortgage loan. These indicators, and the limits imposed by other states for similar projects, suggest that income limits for VHDA's conventional rental program could be reduced to better target lower income groups in need of rental housing.

Recommendation (1). In light of the decline of federal programs and the rental housing needs which continue to exist for low- end very-low-income Virginians, VHDA should designate a portion of its substantial fund balances to make additional housing available for lower income groups and those with special housing needs. VHDA might specifically consider:

• providing low- or no-interest loans to make the development of additional units feasible at rents that are affordable to low- or very-Low-income persons;

• financing additional rental units for groups, such as the State's mentally and physically disabled and elderly persons, whose special housing needs may not have been adequately addressed;

• increasing the percentage of units reserved for lower-income persons in the authority's conventional rental projects from 20 to 25 percent;

• tightening income restrictions on the conventional units reserved for lower-income groups by establishing different standards based on tenant household size; and

• providing direct rental subsidies for lower-income tenants.

Recommendation (2). VHDA should replace the current seven-times test for determining eligibility for its conventional rental units with a standard that more closely approximates the authority's single-family loan limits and better targets the households which VHDA was mandated to serve. The authority could set its standard at 120 percent of the area median income for future conventional project tenants. This standard would lower income eligibility and would not be tied to a given unit's rent.

Multi-Family Development Selection: VHDA appears to have made sound financial decisions in its selection of multi-family developments. However, improvements in the processes used to select projects and developers are needed.

Although broad regulatory guidelines and Code provisions help guide the authority's multi-family financing decisions, VHDA has not developed specific selection criteria. The absence of written selection criteria has contributed to VHDA financing some projects which have extraordinary development costs and rents. Such projects might experience marketing difficulties in the future. The use of written criteria would help VHDA staff to determine if an application satisfies the intent of statutory and regulatory guidelines.

Although VHDA has made loans to about 70 private developers, 35 percent of all projects financed as of November 1984 were sponsored by six developers. The number of loans awarded to three developers account for 28 percent of the total selections and 21 percent of the total dollar amounts awarded. Only four projects were totally or partially sponsored by minority developers. While not all experienced developers are interested in becoming involved with government-financed projects, these figures and the responses to a JLARC telephone survey of 20 developers raise questions about the openness of VHDA's loan award process. Limitations on the amount of loan dollars awarded to any one borrower, such as those imposed on private lenders by State and federal laws, would serve as an additional financial safeguard for the authority in the event a developer defaulted, and would encourage a competitive process. In addition, the authority needs to take steps to increase the level of minority participation in its multi-family development program.

Recommendation (3). In light of its public responsibility to serve low- and moderate-income Virginians, VHDA should participate in projects with rents affordable to those income groups. VHDA should develop and use written criteria to review and select proposals under its Conventional Loan Program. Written selection criteria - developed before proposals are accepted for review - should ensure that uniform consideration is given to each proposal, and should serve as a guide to prospective applicants. The authority may wish to reconsider its practice of financing projects which are in direct competition with other VHDA conventional projects already under development.

Recommendation (4). The authority should prepare and maintain written summaries detailing the selection criteria used to evaluate each multi-family proposal, how well the proposal met the criteria, and the rationale for final selection decisions. The summaries should serve as a written public record of the authority's financing decisions.

Recommendation (5). VHDA should consider limiting the amount of outstanding loan commitments awarded to any one developer. Such a provision would reduce the potential impact that a single borrower's default could have on the authority's finances and should signify that VHDA intends to encourage more participation by all developers.

Recommendation (6). VHDA should establish a goal to have minority developers, contractors, and subcontractors involved in at least three to five percent of its outstanding loan awards. Key elements to ensure that its goal is met include the development of a plan by VHDA to encourage the participation of minorities in the development process and a mechanism to monitor compliance with the goal.

Monitoring VHDA Rental Projects: State law grants VHDA the power to oversee the projects constructed with funds from its bonds. VHDA's oversight activities include evaluating property management, monitoring the financial and physical condition of each project, certifying tenant eligibility, and monitoring federal housing assistance payments for subsidized projects. VHDA housing management staff approve increases in rents for its conventional projects, and management agent fees for all projects.

JLARC found that the authority's control of rent increases and supervision of management agents have been inconsistent for some owners and management companies. These inconsistencies reduce VHDA's ability to effectively control rents and management fees, directly affect the affordability of its rental properties, and could weaken VHDA's rental portfolio.

Weaknesses also exist in the internal operations of the Housing Management Division which, if continued, could negatively affect the authority's monitoring functions. These include the lack of formalized oversight policies and the failure to perform required project inspections.

Recommendation (7). VHDA should ensure that its oversight responsibilities for multi-family projects are implemented consistently. Precise criteria should be developed to identify the conditions under which rent increases will be granted. Guidelines should ensure that a management fee increase for "superior performance" is not granted to any agent who consistently violates the authority's housing management practices. Moreover, since such decisions directly affect who can be served by the authority's rental properties, VHDA's Board of Commissioners should approve increases in project rents and management fees.

Recommendation (8). VHDA should develop a written operations manual outlining prescribed housing management procedures. In addition, VHDA management should ensure that all required project inspections are completed in a timely fashion.

Single Family Home Loans (pp. 35 - 54)

Single-family home mortgages comprise two-thirds of the authority's lending activity. As required by federal law, VHDA's homeownership program serves low- and moderate-income persons purchasing their first homes. VHDA sets the eligibility requirements and determines the methods used to process loan applications and collect mortgage payments. The average cost of homes financed by VHDA in FY 1984 was $51,756, and the median household income was over $24,000.

Homebuyers Served by VHDA: Section 36-55.33:1(C2) of the Code of Virginia charges VHDA to make its loans only after determining that a loan "is not otherwise available from lenders upon reasonably equivalent terms and conditions. . . ." Despite statutory and regulatory provisions, VHDA does not have an adequate means for determining if loan applicants are eligible for conventional mortgages. Consequently, JLARC found that 2,888 (23 percent) of all VHDA's home loan commitments during the past four years, totaling $113.7 million, were made to applicants with sufficient income to qualify for conventional, private loans. Had VHDA excluded applicants qualified for conventional mortgages, more VHDA mortgage funds would have been available for persons unable to qualify for private mortgages.

JLARC's review also found that VHDA's sale price and income limits - the two principal eligibility requirements that VHDA uses to target its home loan program - need adjusting in order to more adequately reflect family size and geographic differences in housing markets. In addition, measures are needed by VHDA to better assist Virginians living in economically-depressed areas (designated as "targeted areas") and those families who qualify under the authority's eligibility guidelines but cannot afford the up-front costs associated with mortgage loans.

Recommendation (9). VHDA loans should be made only after verification that applicants are not qualified for "reasonably similar" mortgages from conventional lenders. Lenders originating VHDA loans should be required to make such a verification by computing the minimum income required for each applicant to qualify for a conventional loan at the current interest rates. VHDA should require that a worksheet with these calculations be submitted as part of each loan application. VHDA's loan officers should review the worksheets to verify eligibility for VHDA financing. Applicants that have sufficient income to qualify for conventional loans should be permitted to submit documents verifying that they were denied conventional financing for income reasons. Upon submission of such evidence, VHDA might reconsider the application for further processing.

Recommendation (10). To recognize differences in housing costs and more equitably serve households across the State, VHDA should make additional distinctions within its sales price limits by separating the high-cost areas from other areas currently within the "remainder of State" category. The Board of Commissioners should adopt separate sales price limits for each of these areas. Sales price limits should be based on periodic surveys of home sales prices throughout the Commonwealth.

Recommendation (11). VHDA should adjust its income limits to better reflect geographic differences in area median incomes. VHDA should divide areas with high median incomes from other areas currently grouped with the "remainder of State" category. The Board of Commissioners should adopt separate income limits for these high-income areas.

Recommendation (12). VHDA should establish a separate income limit for one-person households. The Board of Commissioners may also wish to reimpose a limit on the amount of loans available for single-person households equal to their proportion of the State population.

Recommendation (13). VHDA should utilize additional methods to increase the commitment of loans in rural and inner-city areas. The authority should become involved in additional training for VHDA-approved lenders in these areas, increased promotional efforts, .preparation and distribution of detailed maps and inventories of eligible neighborhoods, and exploration of innovative financing techniques for home rehabilitation loans. Appropriate exceptions to the authority's underwriting standards should also be developed to account for special circumstances that may exist in rural and inner-city areas.

Recommendation (14). VHDA should establish a program to assist lower-income applicants with paying the costs of taking out a home loan. To this end, the authority might consider setting aside a portion of its fund balances to assist eligible families with down payments, application fees, mortgage insurance, and closing costs. The assistance could be offered as a loan or a subsidy.

Processing and Collecting Mortgage Loans: In addition to establishing eligibility requirements, VHDA staff are also involved in reviewing and approving loan applications. VHDA-approved lenders are responsible for collecting monthly mortgage payments. VHDA's loan servicing staff establish collection policies and monitor lenders to ensure that the collection of mortgage payments is accurate and timely.

JLARC's review of these functions found that VHDA could process applications in a more timely manner. In addition, VHDA loan collection procedures - which are more aggressive than most other lenders - were found to have contributed to low loan delinquency races. However, these procedures should be reexamined by the authority to ensure that they do not contribute to unnecessary foreclosures.

Recommendation (15). To expedite loan processing, VHDA should consider releasing mortgage funds at a rate that can be efficiently processed by staff, instituting computer and supervisory checks on processing durations, and providing additional training for lenders originating VHDA loans.

Recommendation (16). Although the authority's collection policies have contributed to its consistently low delinquency rates, VHDA should review its policies to ensure that they do not result in unnecessary foreclosures. The authority should seek the advice of its approved lenders on specific ways its collection policies might be modified.

Financing VHDA Programs (pp. 55 - 88)

The financial position of VHDA is reported by municipal bond experts to be among the best in the nation for state housing finance agencies. The authority is the eighth largest financial institution in Virginia in terms of assets. The authority's strong financial position has enabled it to obtain favorable bond ratings and attractive interest rates. Such a position also minimizes the likelihood that the State's "moral obligation" pledge will ever be called upon to replenish the authority's bond reserves and suggests that a portion of the authority's fund balances exceeding $160 million could be used for additional housing purposes.

Moral Obligations Pledge: Virginia law clearly states that VHDA's bonds do not constitute a liability on the Commonwealth. However, State law contains a provision whereby the General Assembly is legally authorized, though not required, to appropriate State funds to replenish VHDA's capital reserve funds in the event that reserves are insufficient to meet its debt service requirements. Such a provision is commonly referred to as a "moral obligation" pledge in the municipal -bond field.

JLARC staff reviewed the conditions under which the State might be called upon to back the authority's bond reserves. Given the existing level of bond security, favorable loan portfolio characteristics, and VHDA's overall financial strength, it appears highly unlikely that the State's moral obligation pledge will be called upon in the foreseeable future. Moreover, the authority's Director of Finance stated that "there is virtually no chance that VHDA will experience losses from a resolution which cannot be covered either by funds available in the resolution or . . . the authority's general fund." In addition, municipal bond analysts indicate that investors today place more emphasis on the financial record of the issuing authority than they did when the authority was created in 1972. Limiting the issuance of future bond debt that carries the moral obligation pledge would reduce the amount of bond debt viewed as a contingent liability against the State in the future.

Should the State decide to remove the moral obligation pledge from some or all future bond issues, it should convey to investors that such action does not represent a lack of faith in VHDA's bond activities. Rather, VHDA's secure financial position and its ability to stand alone enable the State to take such action.

Recommendation (17). The General Assembly may wish to amend Section 36-55.41(2) of the Code of Virginia to restrict the use of the State's moral obligation pledge on future single-family bonds unless prior approval is granted by the General Assembly. This action would reflect the practice which the authority has followed on single-family bonds since 1981, and would indicate the strength of these issues. Moreover, this action would limit the issuance of additional bond debt that would be viewed as a contingent liability against the Commonwealth.

Recommendation (18). VHDA should assess the effects of removing the moral obligation pledge from future multi-family bonds and report its findings to the General Assembly. Any recommended action should consider the additional costs to the authority and developers from structuring the bond issues without moral obligation, the alternatives available to compensate for removing the provision, and the potential impacts on future programs and clients.

Fund Balances: As of June 30, 1984, VHDA has accumulated $160 million in fund balances - a growth of $27 million from 1983. This represents the amount above the required levels of bond reserves and the authority's operating expenses, and includes one of the largest general funds of any housing agency in the country. Past investment earnings and VHDA's limited use of fund balances for programmatic purposes have contributed to the growth in the balances.

It appears, however, that the authority could now use a portion of the assets associated with the fund balances for additional housing programs without jeopardizing its strong financial position. Greater use of these funds would help to meet the continued housing needs of low- and moderate-income groups, and those with special needs, such as the physically and mentally handicapped. Use of fund balances can help to reduce the impact of federal cuts on Virginia's housing situation.

Recommendation (19). VHDA should make greater use of a portion of its fund balances to provide additional affordable housing, and to reduce the impacts of federal housing cuts. The assets associated with the unallocated portion of VHDA's general fund balances (up to 20 percent) could be used for programs to meet the housing needs of low-income and disabled Virginians. The Board of Commissioners should review the appropriateness of the authority's general fund balance that is held as a contingency reserve. The board should establish the necessary contingency reserve at a level that promotes security for the authority's bonds while making the greatest feasible amount available for important housing programs.

Administration of the Authority (pp. 67 - 78)

VHDA is the primary source of State support for housing assistance programs in Virginia. It is essential that the authority properly manage its programs and resources to address the housing needs of low- and moderate-income Virginians. Three important ways in which VHDA can better manage its resources are by: (1) taking a lead role in planning and coordinating housing services; (2) including representation of client groups on the Board of Commissioners; and (3) ensuring that procurement practices conform to State requirements, that computer operations are effective and efficient, and that staffing levels and costs are appropriate.

Planning and Coordination: Revisions in federal housing programs and federal tax laws continue to have a significant impact on low-income housing programs in Virginia. Yet the 1984 report of the Governor's Commission on Virginia's Future cited a continued need for housing the poor, the physically and mentally handicapped, the elderly, and others not served by the private market. State and local housing agencies, including VHDA, need to coordinate their efforts to respond to the declining federal support and a continuing need for low- and moderate-income housing. In addition, VHDA needs its own long-range plan to ensure that its programs meet housing needs in the future. Such a plan would help to ensure that the authority is prepared to provide affordable housing even in the event of further reductions of federal support.

Recommendation (20). VHDA and the Department of Housing and Community Development should jointly develop a State housing plan. Such a plan should propose policies and programs in response to reductions in federal programs and the continued housing needs of low- and moderate-income Virginians. In addition, the plan should specify methods for coordinating the programs of State and local housing agencies on a continuing basis. The plan should be reported to the House and Senate General Laws committees.

Recommendation (21). A comprehensive assessment of -housing needs in Virginia should be made by the Department of Housing and Community Development on a periodic basis. To ensure that special housing needs are identified, DHCD should coordinate its assessment with VHDA, the Department of Social Services, and the Department for the Aging. VHDA should cooperate with DHCD in financing this effort and use the results to tailor its programs accordingly. The needs assessment could be used to guide VHDA's planning efforts and as a resource for other housing service providers.

Recommendation (22). VHDA should continue its efforts to develop a long-term strategic plan for the authority. In particular, VHDA should ensure that new and existing programs meet the housing needs of persons who are not served by the private market. The plan should address the needs of those who have been most affected by federal housing cuts. VHDA should seek input from the Department of Housing and Community Development, the Department of Mental Health and Mental Retardation, the Department of Social Services, and the Department of Aging to ensure the plan addresses the housing needs of special groups such as the handicapped and the elderly. The plan should be used to direct and monitor the authority's efforts to fulfill its public mission, with specific criteria for evaluating VHDA's progress in meeting its goals.

Recommendation (23). VHDA should adopt a formal process for coordinating the development and administration of new programs. Mid-level managers directly responsible for supporting anticipated new programs should participate in the preparation of an implementation plan. The plan should detail the administrative responsibilities of each affected section and the effects of the new program on staff workload. The Board of Commissioners and VHDA management should use the plan when considering the implementation of new programs.

Board Role and Composition: The Board of Commissioners is responsible for VHDA and its mission to provide housing for low- and moderate-income persons. To better assess the authority's ongoing performance in meeting its public mission, the board needs to monitor more closely the implementation and the effects of its policies. Moreover, to ensure broader public participation in the development of the authority's policies, appointment of board members representing recipients of housing services and the general public may be appropriate.

Recommendation (24). The General Assembly may wish to amend Section 36-55.28, Code of Virginia, to require that one of nine VHDA commissioners be a consumer member experienced in the housing problems of low- and moderate-income persons, and that a second be a "citizen member" with no financial interest in the real estate, banking, or building industries. This requirement could be made effective upon the expiration of the terms of two current members.

Managing Procurement, Data Processing, and Personnel: Sound finances, effective programs, and efficient operations are promoted by a strong management system. Overall, VHDA's management controls were found to be adequate. However, VHDA was not found to be in compliance with the intent of Virginia's competitive procurement requirements in its hiring of an auditing firm. In addition, JLARC found that VHDA placed inadequate priority on automating its operations, and has not approached data processing development in a consistent fashion. JLARC staff found no significant problems with staffing levels and salaries, though some minor adjustment in salary ranges may be appropriate.

Recommendation (25). VHDA should ensure that its contract for an annual external audit complies with the Virginia Public Procurement Act and is competitively awarded.

Recommendation (26). VHDA's top management should assume greater responsibility for prioritizing automation needs and providing the necessary resources to meet the demand for additional computer systems and refinements to existing systems. VHDA's computer operations section and the EDP committee should be involved in data processing development decisions.

In addition, VHDA staff should detail and document their requests for adjustments and additions to the authority's existing computer systems. Staff for whose use new systems are being developed should participate with the computer operations section in designing and adjusting the system to ensure that it efficiently and effectively performs the needed data processing functions.