+-----------------------+----------------------------------------------+
| ![](media/image1      | U.S. DEPARTMENT OF HOUSING                   |
| .wmf){width="2.125in" |                                              |
| height="2.125in"}     | AND URBAN DEVELOPMENT                        |
|                       |                                              |
|                       | #####                                        |
|                       | ## OFFICE OF AFFORDABLE HOUSING PRESERVATION |
|                       |                                              |
|                       | ######## MARK-TO-MARKET PROGRAM              |
+-----------------------+----------------------------------------------+

**FINAL REPORT**

# ON

######### **COMPLIANCE AUDITS AND AGREED-UPON PROCEDURES REVIEWS**

######### **OF**

######### **PARTICIPATING ADMINISTRATIVE ENTITIES**

# FOR THE SEVENTEEN MONTHS ENDED MAY 31, 2004

######### **March 31, 2005**

######### **OFFICE OF AFFORDABLE HOUSING PRESERVATION**

######### **MARK-TO-MARKET PROGRAM**

####### 

Regis & Associates, PC

Contract Number: C-ATL-01769

Date of Order: June 25, 2004

# TABLE OF CONTENTS

INTRODUCTION 1

EXECUTIVE SUMMARY 3

Overview 3

Results in Brief 5

BACKGROUND, OBJECTIVES &
SCOPE........................................................8

Background .8

Objectives, Scope, and
Methodology....................................................\...11

RESULTS 14

PAE Profile 14

Review Findings 15

Class 1 -- Reporting Timelines 16

Class 2 -- Project File Products 18

Class 3 -- Administrative Processes 21

Nationwide Results 23

Conclusion 27

Recommendations............................................................................
27

Other
Matters..................................................................................32

Prior Year
Findings...........................................................................35

APPENDICES:

Appendix A: Statistical Sampling Methodology

Appendix B: Listing of Selected Participating Administrative Entities

Appendix C: PAE Report Types and Sample Selection

Appendix D: Summary of Statistical Analysis

Appendix E: Summary Result of Supplementary Review

+-------------------+--------------------------------------------------+
| # INTRODUCTION    |                                                  |
|                   |                                                  |
| #                 |                                                  |
+-------------------+--------------------------------------------------+
| ## Introduction   | The Multifamily Assisted Housing Reform and      |
|                   | Affordability Act of 1997 (MAHRA) established    |
|                   | the Mark-to-Market (M2M) Program as a vehicle    |
|                   | for restructuring certain multifamily properties |
|                   | insured by the Federal Housing Administration    |
|                   | when their housing assistance contracts expire.  |
|                   | The Office of Multifamily Housing Assistance     |
|                   | Restructuring (OMHAR) was created at that time   |
|                   | to administer the M2M program. The H.R.          |
|                   | 3061/Public Law 107-116 extended OMHAR through   |
|                   | September 30, 2004. The M2M Program will         |
|                   | continue taking new referrals through September  |
|                   | 30, 2006 and will continue the restructuring     |
|                   | process on these referrals until complete.       |
|                   | Effective October 1, 2004, with the legislative  |
|                   | sunset of OMHAR on September 30, 2004, the       |
|                   | Department of Housing and Urban Development      |
|                   | (HUD) established a new office, the Office of    |
|                   | Affordable Housing Preservation (OAHP), to       |
|                   | continue administering the M2M Program.          |
|                   |                                                  |
|                   | The M2M Program's documentation and              |
|                   | administrative procedures were established under |
|                   | OMHAR, and most of the properties involved in    |
|                   | the M2M Program were processed under OMHAR. The  |
|                   | administrative change from OMHAR to OAHP did not |
|                   | result in any changes to the policies and        |
|                   | operating procedures previously established      |
|                   | under OMHAR. Accordingly, the names OMHAR and    |
|                   | OAHP are used interchangeably in this report.    |
|                   |                                                  |
|                   | OAHP currently administers the M2M Program and,  |
|                   | as such, has many responsibilities including the |
|                   | accountability for and monitoring of the         |
|                   | restructuring activities. The restructuring      |
|                   | activities are performed by private and public   |
|                   | Participating Administrative Entities (PAEs)     |
|                   | pursuant to a Portfolio Restructuring Agreement  |
|                   | (PRA) between OAHP and each PAE. PAEs develop    |
|                   | and implement restructuring plans to determine   |
|                   | market rents, identify improvements necessary    |
|                   | for properties to be competitive in the          |
|                   | marketplace, and identify methods of             |
|                   | restructuring the finances of properties, if     |
|                   | needed, to make operating at comparable market   |
|                   | rents financially feasible.                      |
|                   |                                                  |
|                   | As part of its monitoring responsibilities, OAHP |
|                   | engaged Regis & Associates, PC to perform        |
|                   | special-purpose compliance audits (compliance    |
|                   | audits) and agreed-upon procedures (AUP) reviews |
|                   | of the PAEs. The purpose of these assessments    |
|                   | was to evaluate the performance of PAEs in the   |
|                   | M2M Program in accordance with the Operating     |
|                   | Procedures Guide (OPG), the PRA, and the MAHRA.  |
|                   |                                                  |
|                   | In performing this engagement, OAHP requested a  |
|                   | review of all PAEs that had restructuring        |
|                   | transactions that were accepted by the PAE and   |
|                   | for which restructuring plans were approved by   |
|                   | OAHP between January 1, 2003 and May 31, 2004.   |
|                   | In this regard, we visited 17 PAEs and tested    |
|                   | 116 Full restructuring transactions. We          |
|                   | conducted seven compliance audits and ten AUP    |
|                   | reviews. We performed 28,350 test procedures and |
|                   | identified 147 occurrences of noncompliance. We  |
|                   | reported these findings to OAHP and the PAEs     |
|                   | upon completion of each engagement.              |
+-------------------+--------------------------------------------------+
| ##                |                                                  |
+-------------------+--------------------------------------------------+

##  

+-------------------+--------------------------------------------------+
| #                 |                                                  |
| EXECUTIVE SUMMARY |                                                  |
+-------------------+--------------------------------------------------+
| ## Overview       | The Office of Affordable Housing Preservation    |
|                   | (OAHP), an office within the Department of       |
|                   | Housing and Urban Development (HUD), engaged     |
|                   | Regis & Associates, PC to perform special        |
|                   | purpose compliance audits (compliance audits)    |
|                   | and agreed-upon procedures (AUP) reviews of      |
|                   | Participating Administrative Entities (PAEs).    |
|                   | These assessments, which supplement OAHP's       |
|                   | monitoring activities, evaluate the performance  |
|                   | of Participating Administrative Entities in the  |
|                   | Mark-to-Market (M2M) Program.                    |
|                   |                                                  |
|                   | The compliance audits required an assessment of  |
|                   | the risks associated with PAE noncompliance, an  |
|                   | evaluation of the PAE internal controls, and the |
|                   | performance of audit procedures. The AUP reviews |
|                   | required the performance of test procedures      |
|                   | agreed to by OAHP. The objective of both         |
|                   | engagements was to determine whether the PAEs    |
|                   | were operating in accordance with the M2M        |
|                   | Program's Operating Procedures Guide (OPG), the  |
|                   | Portfolio Restructuring Agreement (PRA), the     |
|                   | Multifamily Assisted Housing Reform and          |
|                   | Affordability Act of 1997 (MAHRA), and the       |
|                   | Mark-to-Market Extension Act of 2001. Based on   |
|                   | OAHP's request, we tested all PAEs that had      |
|                   | restructuring transactions (assets) meeting      |
|                   | pre-defined selection criteria. The criteria     |
|                   | included transactions that were accepted by the  |
|                   | PAE and which had their restructuring plans      |
|                   | approved by OAHP between January 1, 2003 and May |
|                   | 31, 2004. Our work was performed at 17 PAEs on a |
|                   | statistically selected sample of 116 assets in   |
|                   | the M2M Program portfolio. We conducted          |
|                   | compliance audits on seven of the PAEs and AUP   |
|                   | reviews on ten of the PAEs.                      |
|                   |                                                  |
|                   | At OAHP's request, we reviewed one additional    |
|                   | PAE, which had an approved and closed            |
|                   | transaction. This transaction was not            |
|                   | statistically selected, and was a restructuring  |
|                   | transaction that met a secondary criterion of    |
|                   | being approved during the period January 1, 2003 |
|                   | to May 31, 2004, and which subsequently closed.  |
|                   | As described in Appendix E, since the scope of   |
|                   | this additional review was not consistent with   |
|                   | the other 17 PAEs, we did not include the        |
|                   | results of that review in this final report,     |
|                   | however we provided the results in a separate    |
|                   | report that was presented to the PAE and to      |
|                   | OAHP.                                            |
|                   |                                                  |
|                   | We applied the procedures documented in OAHP's   |
|                   | *Agreed-Upon Procedures Workplan Checklist* to   |
|                   | test both the compliance audits and AUP reviews. |
|                   | As a part of our design of the compliance audit  |
|                   | procedures, we identified and correlated the     |
|                   | relevant sections of 24CFR§401 to the            |
|                   | requirements of the OPG, the PRA, and the MAHRA. |
|                   | All of these procedures were designed to obtain  |
|                   | reasonable assurance that the PAEs were          |
|                   | executing the restructuring process in           |
|                   | accordance with the requirements of the M2M      |
|                   | Program.                                         |
|                   |                                                  |
|                   | Under the M2M Program, an asset restructuring is |
|                   | comprised of a series of tasks that a PAE must   |
|                   | undertake. We tested these tasks (also referred  |
|                   | to as attributes) for completeness and           |
|                   | organization of the three main product files,    |
|                   | procedural compliance with 11 processes,         |
|                   | adherence to procurement policies, and accuracy  |
|                   | of event dates as described in the Statement of  |
|                   | Work. A detailed description of the attributes   |
|                   | and the results of the findings are listed in    |
|                   | the *Nationwide Results* section and Appendix D  |
|                   | of this report. This technical approach          |
|                   | facilitated not only the determination of        |
|                   | compliance with the OPG, the PRA, and the MAHRA  |
|                   | but also the identification of weaknesses that   |
|                   | might adversely affect a PAE's performance and   |
|                   | reporting relating to the M2M Program.           |
|                   |                                                  |
|                   | We projected the results of our tests to the     |
|                   | asset and the PAE population as a whole. The     |
|                   | cumulative results of our test work provide a    |
|                   | significant perspective on the PAEs' compliance  |
|                   | with the requirements of the restructuring       |
|                   | process, as articulated in the laws,             |
|                   | regulations, and guidelines for the M2M Program. |
|                   | In addition, they provide a perspective on the   |
|                   | adequacy of OAHP's monitoring of the M2M         |
|                   | Program.                                         |
|                   |                                                  |
|                   | Based on the attributes tested, we estimate that |
|                   | timeline reporting had a compliance rate of 93%, |
|                   | project files products had a compliance rate     |
|                   | ranging from 96% to 100%, and administrative     |
|                   | processes had a compliance rate ranging from 90% |
|                   | to 100%. The compliance rates identified above,  |
|                   | based on a 99% confidence level of the results,  |
|                   | indicate that the PAEs are substantially         |
|                   | adhering to the requirements of the OPG, the     |
|                   | PRA, and the MAHRA on a nationwide basis.        |
|                   | Furthermore, these results indicate that OAHP is |
|                   | effectively monitoring the PAEs' restructuring   |
|                   | activities. The results of the tests performed   |
|                   | indicate occurrences of noncompliance with the   |
|                   | OPG, the PRA, and the MAHRA, based on the        |
|                   | provisions of 24CFR§401. These occurrences of    |
|                   | noncompliance relate to stipulated timeline      |
|                   | failures, incomplete project files, and          |
|                   | administrative process failures, which are       |
|                   | reported in the *Recommendations* section of     |
|                   | this report. Details of these findings are       |
|                   | discussed in the *Review Findings* section of    |
|                   | this report.                                     |
+-------------------+--------------------------------------------------+
| ##                | Although the results of our test work revealed   |
|  Results in Brief | management practices and conditions that could   |
|                   | be improved, we noted overall general compliance |
|                   | with the M2M Program's requirements. Moreover,   |
|                   | we also noted a willingness by OAHP and the PAEs |
|                   | to improve the efficiency and effectiveness of   |
|                   | the M2M Program's management.                    |
|                   |                                                  |
|                   | In performing this engagement, we visited 17     |
|                   | PAEs and tested 116 Full restructuring           |
|                   | transactions (assets). For these 17 PAEs         |
|                   | visited, we conducted seven compliance audits    |
|                   | and ten AUP reviews. We performed 28,350 test    |
|                   | procedures and identified 147 occurrences of     |
|                   | noncompliance. Specifically these include:       |
|                   |                                                  |
|                   | -   At the asset level, we performed 27,840 test |
|                   |     procedures and identified 141 occurrences of |
|                   |     noncompliance. These 141 occurrences of      |
|                   |     noncompliance consisted of 63 occurrences in |
|                   |     the compliance audits and 78 occurrences in  |
|                   |     the AUP reviews.                             |
|                   |                                                  |
|                   | -   At the PAE organization level, we performed  |
|                   |     an additional 510 test procedures and        |
|                   |     identified six occurrences of noncompliance. |
|                   |                                                  |
|                   | As illustrated in Table 6 and described in       |
|                   | Appendix A, the overall error rate attributable  |
|                   | to these 147 occurrences of noncompliance        |
|                   | equates to 1.08%.                                |
|                   |                                                  |
|                   | We reported these findings to OAHP and the PAEs  |
|                   | upon completion of each PAE AUP review or        |
|                   | compliance audit engagement.                     |
|                   |                                                  |
|                   | We have classified the occurrences of            |
|                   | noncompliance into three classes of program      |
|                   | risk. These risk classes are *Reporting          |
|                   | Timelines, Project File Products, and            |
|                   | Administrative Processes*. They are discussed in |
|                   | the *Results* section of this report*.*          |
|                   |                                                  |
|                   | The overall results of our test work indicate    |
|                   | that the predominance of findings relates to     |
|                   | missing documentation in the project files.      |
|                   | Generally, the missing documents provide         |
|                   | independent support for restructuring plan       |
|                   | assumptions or may represent agreement of        |
|                   | parties to various elements of the plan. The     |
|                   | second most frequent group of findings relates   |
|                   | to completion of restructuring tasks within the  |
|                   | OPG and PRA specified timelines. These findings  |
|                   | represent a financial cost to OAHP because       |
|                   | Section 8 rent subsidies, in many cases, are     |
|                   | continued at above-market rates until a          |
|                   | restructuring transaction reaches completion.    |
|                   | The remaining findings relate to the failure of  |
|                   | PAEs to maintain adequate documentation in the   |
|                   | administrative process and oversight of          |
|                   | third-party contracts as prescribed in the PRA.  |
|                   |                                                  |
|                   | #### Figure 1: Ana                               |
|                   | lysis of Compliance Audit Findings (Asset Level) |
|                   |                                                  |
|                   | ![](media/image3.wmf)                            |
|                   |                                                  |
|                   | We have illustrated the distribution of the 63   |
|                   | occurrences at the asset level for the seven     |
|                   | compliance audits in Figure 1 above. Thirty five |
|                   | percent (22 occurrences) relate to Reporting     |
|                   | Timelines and 65% percent (41 occurrences)       |
|                   | relate to Incomplete Project File Products.      |
|                   |                                                  |
|                   | #### Figure                                      |
|                   | 2: Analysis of AUP Review Findings (Asset Level) |
|                   |                                                  |
|                   | ![](media/image4.wmf)                            |
|                   |                                                  |
|                   | We have illustrated the distribution of the 78   |
|                   | occurrences at the asset level for the 10 AUP    |
|                   | Reviews in Figure 2 above. Forty percent (31     |
|                   | occurrences) relate to Reporting Timelines and   |
|                   | 60% (47 occurrences) relate to Incomplete        |
|                   | Project File Products.                           |
|                   |                                                  |
|                   | **Figure 3: Analysis of Compliance Audit and AUP |
|                   | Review**                                         |
|                   |                                                  |
|                   | **Findings (PAE Organizational Level)**          |
|                   |                                                  |
|                   | ![](media/image5.wmf)                            |
|                   |                                                  |
|                   | At the PAE organizational level, we have         |
|                   | illustrated the distribution of findings         |
|                   | relating to both compliance audits and AUP       |
|                   | reviews in Figure 3 above. Of the six            |
|                   | occurrences of noncompliance, 33% (2             |
|                   | occurrences) relate to compliance audits and 67% |
|                   | (4 occurrences) relate to AUP reviews.           |
|                   |                                                  |
|                   | We present further details of these findings and |
|                   | the associated risks in the *Review Results*     |
|                   | section of this report.                          |
+-------------------+--------------------------------------------------+
| ##                |                                                  |
+-------------------+--------------------------------------------------+

+-------------------+--------------------------------------------------+
| # BACKGROUND, OB  |                                                  |
| JECTIVES, & SCOPE |                                                  |
+-------------------+--------------------------------------------------+
| ## Background     | As part of its housing mission, the Department   |
|                   | of Housing and Urban Development (HUD) is        |
|                   | charged with increasing the availability of      |
|                   | decent, safe, and affordable rental housing      |
|                   | nationally. In recent years, the cost of rental  |
|                   | housing has increased significantly, and a       |
|                   | considerable percentage of low and               |
|                   | very-low-income renters have been forced to      |
|                   | spend a disproportionate amount of their income  |
|                   | on basic housing needs.                          |
|                   |                                                  |
|                   | More than 25 years ago, in an effort to spur the |
|                   | construction of affordable housing and encourage |
|                   | private owners to participate in its             |
|                   | *Project-Based Section 8 Program,* HUD entered   |
|                   | into long-term contracts with property owners,   |
|                   | which provided for annual rent increases. These  |
|                   | increases were automatic regardless of           |
|                   | prevailing market rents. As a result of the      |
|                   | automatic rent increases under the Section 8     |
|                   | Program, many of these properties charge rents   |
|                   | at amounts higher than prevailing market rent.   |
|                   | This results in excessive expenditures of funds  |
|                   | for HUD's Section 8 Program. The original        |
|                   | housing rental subsidy contracts on thousands of |
|                   | privately owned multifamily properties with      |
|                   | FHA-insured mortgages have expired over the last |
|                   | several years. To help ensure that the federal   |
|                   | taxpayer is not paying more for this program     |
|                   | than the marketplace requires, the               |
|                   | Mark-to-Market (M2M) Program was created to      |
|                   | reduce federal spending on housing subsidies.    |
|                   | The reduction is accomplished through            |
|                   | restructuring, making it financially feasible    |
|                   | for multifamily properties currently charging    |
|                   | rents greater than comparable market rents to    |
|                   | survive and continue to offer quality,           |
|                   | market-competitive housing at comparable market  |
|                   | rents.                                           |
|                   |                                                  |
|                   | The Multifamily Assisted Housing Reform and      |
|                   | Affordability Act of 1997 (MAHRA) established    |
|                   | the M2M Program as a vehicle for restructuring   |
|                   | multifamily properties insured by the FHA when   |
|                   | the existing housing assistance contracts        |
|                   | expire. The Office of Affordable Housing         |
|                   | Preservation (OAHP), an office within HUD,       |
|                   | administers the M2M Program and, as such, has    |
|                   | many responsibilities, including monitoring of   |
|                   | the restructuring activities. In keeping with    |
|                   | HUD's mission and its objective of increasing    |
|                   | the availability of decent, safe, and affordable |
|                   | rental housing, the major goals of the M2M       |
|                   | Program are:                                     |
|                   |                                                  |
|                   | -   *Social*: Preserving affordable housing      |
|                   |     stock by maintaining the long-term physical  |
|                   |     and financial integrity of privately owned,  |
|                   |     HUD subsidized rental housing insured by     |
|                   |     FHA;                                         |
|                   |                                                  |
|                   | -   *Economic*: Reducing the long term project   |
|                   |     based Section 8 rental assistance costs and  |
|                   |     reducing the cost of mortgage insurance      |
|                   |     claims paid by FHA; and                      |
|                   |                                                  |
|                   | -   *Administrative*: Establishing a nationwide  |
|                   |     network of locally-based PAEs to administer  |
|                   |     the M2M Program, promoting greater operating |
|                   |     and cost efficiencies in the Section 8       |
|                   |     assisted properties, and addressing problem  |
|                   |     properties by terminating relationships with |
|                   |     owners who violate Program agreements and    |
|                   |     requirements.                                |
|                   |                                                  |
|                   | When Section 8 contracts at above-market rents   |
|                   | expire, OAHP reduces rents to market levels and, |
|                   | where needed, restructures the existing mortgage |
|                   | debt to levels supportable at the lower rents.   |
|                   | As required by MAHRA, OAHP solicited and         |
|                   | selected capable organizations, referred to as   |
|                   | Participating Administrative Entities (PAEs), to |
|                   | assist in the restructuring process. The PAEs    |
|                   | were selected through a qualifying process and   |
|                   | are classified as either Public or Private       |
|                   | (Non-Public) entities. The Public PAEs are       |
|                   | comprised of state and local housing finance     |
|                   | agencies, whereas the Private PAEs consist of    |
|                   | both not-for-profit and for-profit entities. The |
|                   | Private PAEs are usually contracted by OAHP to   |
|                   | perform restructurings on eligible properties    |
|                   | outside of the state and local housing finance   |
|                   | agencies' jurisdictions. The PAEs' duties are    |
|                   | restricted to restructuring activities pursuant  |
|                   | to a Portfolio Restructuring Agreement (PRA)     |
|                   | between OAHP and each PAE. The PAEs develop      |
|                   | restructuring plans to determine appropriate     |
|                   | market rents, identify any improvements          |
|                   | necessary for the property to become competitive |
|                   | in the marketplace, and identify methods for     |
|                   | restructuring the finances of the property, if   |
|                   | needed, to make operating at market rents        |
|                   | financially feasible.                            |
|                   |                                                  |
|                   | OAHP is responsible for the evaluation and       |
|                   | monitoring of the PAEs to ensure compliance with |
|                   | the M2M Program. To achieve this objective, OAHP |
|                   | developed, and continually updates, the M2M      |
|                   | Program Operating Procedures Guide (OPG) that    |
|                   | sets forth the uniform process for restructuring |
|                   | FHA-insured Section 8 housing projects. In       |
|                   | addition, OAHP developed the M2M Program's       |
|                   | Agreed*-Upon Procedures Checklist* as a tool for |
|                   | evaluating the PAEs adherence to the             |
|                   | requirements of the OPG, the PRA, and the MAHRA. |
|                   | OAHP also relies on the results of other audits  |
|                   | for the evaluation of the PAEs, such as OMB      |
|                   | Circular A-133 Audits, Federal Contract Audits,  |
|                   | and other reviews. Finally, OAHP retains         |
|                   | independent auditors to evaluate and report on   |
|                   | the PAEs' adherence to the requirements of the   |
|                   | M2M Program.                                     |
|                   |                                                  |
|                   | There are two major types of restructuring       |
|                   | transactions - a mortgage debt restructuring     |
|                   | transaction (Full) and a rent restructuring      |
|                   | transaction (Lite).                              |
|                   |                                                  |
|                   | Mortgage debt-restructuring transactions, known  |
|                   | as "Fulls", occur when the PAEs develop          |
|                   | restructuring plans that include reduction of    |
|                   | rents to market levels and restructured mortgage |
|                   | financing. These plans are approved by OAHP when |
|                   | all the established criteria are satisfied. The  |
|                   | Full mortgage debt restructuring also involves a |
|                   | thirty-year Use Agreement.                       |
|                   |                                                  |
|                   | Rent restructuring transactions, known as        |
|                   | "Lites", occur when the PAEs develop             |
|                   | restructuring plans that reduce rents to market  |
|                   | levels without refinancing the mortgage debt. A  |
|                   | Use Agreement is not required for Lites. OAHP    |
|                   | approves the restructurings once it determines   |
|                   | that the long-term physical and financial        |
|                   | integrity of the property would not be           |
|                   | jeopardized.                                     |
|                   |                                                  |
|                   | In its July 2001 *Report to Congressional        |
|                   | Committees*, the U.S. General Accounting Office  |
|                   | reported OAHP's estimation that the M2M Program  |
|                   | would save the federal government \$563 million  |
|                   | over 20 years on properties that were            |
|                   | restructured as of June 15, 2001. According to   |
|                   | OAHP's current estimate, the PAEs had completed  |
|                   | 2,643 transactions as of April 30, 2005, with    |
|                   | total projected savings of \$1.5 billion over 20 |
|                   | years.                                           |
+-------------------+--------------------------------------------------+
| ##                | OAHP engaged Regis & Associates, PC to perform   |
| Objectives, Scope | compliance audits and AUP reviews of PAEs to     |
| , and Methodology | enhance its oversight and evaluation of these    |
|                   | organizations under the M2M Program. The focus   |
|                   | of our work was to determine whether the PAEs    |
|                   | complied with the major requirements of the PRA, |
|                   | the OPG, and the significant provisions of       |
|                   | applicable laws and regulations during the       |
|                   | period January 1, 2003 to May 31, 2004. Regis &  |
|                   | Associates, PC was not engaged to form a         |
|                   | judgment as to the economic benefits or worth of |
|                   | the restructuring transactions that have been    |
|                   | executed. Moreover, our report does not provide  |
|                   | a legal determination of PAEs' compliance with   |
|                   | the requirements identified above. Our work was  |
|                   | designed to test procedural compliance with      |
|                   | these requirements. In addition, the evaluation  |
|                   | addressed the following secondary objectives:    |
|                   |                                                  |
|                   | 1.  The determination of the completeness and    |
|                   |     organization of the product files as         |
|                   |     required by the PRA and OPG.                 |
|                   |                                                  |
|                   | 2.  The determination of the completeness of     |
|                   |     data and procedural compliance with the      |
|                   |     processes required by the PRA and OPG.       |
|                   |                                                  |
|                   | 3.  The determination of the accuracy of the     |
|                   |     event dates in the PAEs' documents and the   |
|                   |     MIS tracking reports.                        |
|                   |                                                  |
|                   | OAHP's intent was to review each PAE that had an |
|                   | active portfolio of current restructuring        |
|                   | transactions. This resulted in an expanded scope |
|                   | to include full restructuring transactions       |
|                   | (assets) that were accepted and approved between |
|                   | the period January 1, 2003 and May 31, 2004.     |
|                   | This resulted in the selection of 17 PAEs from   |
|                   | which we then statistically selected an overall  |
|                   | sample of 116 Full restructuring transactions    |
|                   | with a sampling rate ranging from 100% (for PAEs |
|                   | having fewer than 4 eligible properties) to 33%  |
|                   | (for PAEs having more than 4 eligible            |
|                   | properties).[^1] We determined that visiting the |
|                   | 17 PAEs and sampling 116 restructuring           |
|                   | transactions would provide sufficient data to    |
|                   | compute average exceptions with a 99% confidence |
|                   | interval. Our selected sample of 116 Full        |
|                   | transactions comprised both "Closed" and "Action |
|                   | Other Than Closing" (AOTC) Full transactions.    |
|                   |                                                  |
|                   | We reviewed applicable laws, implementing        |
|                   | regulations, policies, and pertinent documents   |
|                   | in order to obtain an understanding of the M2M   |
|                   | Program, its requirements, and the PAE's and     |
|                   | OAHP's responsibilities. We reviewed *OAHP's     |
|                   | Agreed-Upon Procedures Workplan Checklist* and   |
|                   | designed additional procedures for the           |
|                   | compliance audits.                               |
|                   |                                                  |
|                   | We conducted our fieldwork from July 2004        |
|                   | through March 2005 in accordance with auditing   |
|                   | standards generally accepted in the United       |
|                   | States and *Government Auditing Standards,*      |
|                   | issued by the Comptroller General of the United  |
|                   | States, the procedures referenced in the OPG,    |
|                   | the PRA, and the *AUP Workplan Checklist*        |
|                   | developed by OAHP.                               |
|                   |                                                  |
|                   | We coordinated our fieldwork with OAHP and       |
|                   | interviewed the PAEs' officials designated as    |
|                   | our contacts for the compliance audits and AUP   |
|                   | reviews. We designed these interviews to obtain  |
|                   | an understanding of the PAEs' policies and       |
|                   | procedures for internal control, procurement,    |
|                   | training, and file maintenance that affect their |
|                   | operations in the M2M Program. We requested that |
|                   | the PAEs provide documents and information on    |
|                   | the performance of the required restructuring    |
|                   | activities for the selected assets. We obtained  |
|                   | confirmation that the documents and files        |
|                   | provided were accurate and complete. The data    |
|                   | requested and evaluated for compliance included: |
|                   |                                                  |
|                   | 1.  Documents constituting the credit file,      |
|                   |     contract file, and closing file.             |
|                   |                                                  |
|                   | 2.  Documents detailing the eleven primary       |
|                   |     processes in the PAEs' restructuring         |
|                   |     function; namely, training, conflict of      |
|                   |     interest notifications, owner eligibility    |
|                   |     reviews, tenant/owner meetings and required  |
|                   |     notices, due diligence/data collection,      |
|                   |     underwriting, restructure approvals,         |
|                   |     closing, documentation distribution and      |
|                   |     conversion, procurement processes/oversight  |
|                   |     of third party contractors, and OAHP         |
|                   |     invoicing.                                   |
|                   |                                                  |
|                   | 3.  Documents detailing the dates that events    |
|                   |     occurred as indicated in the PAEs' file      |
|                   |     documents and the MIS tracking reports.      |
|                   |                                                  |
|                   | We reviewed and tested the restructuring records |
|                   | and other evidential matter attesting to the     |
|                   | PAEs' restructuring activities.                  |
|                   |                                                  |
|                   | In addition, we assessed the PAEs' risk of       |
|                   | noncompliance, evaluated their internal          |
|                   | controls, and performed other audit procedures   |
|                   | in conducting the seven compliance audits. The   |
|                   | objectives of the audits were to test the PAEs'  |
|                   | compliance with the significant provisions of    |
|                   | 24CFR §401, to identify instances of             |
|                   | noncompliance, and to provide reasonable         |
|                   | assurance of compliance with the M2M Program.    |
|                   |                                                  |
|                   | At the completion of fieldwork at the PAE's      |
|                   | site, we briefed OAHP and the PAE officials on   |
|                   | the results of our work. Additionally, we        |
|                   | provided each PAE with a draft report and the    |
|                   | opportunity to comment on the results. We        |
|                   | prepared individual reports detailing the        |
|                   | results, which presented our findings,           |
|                   | recommendations, and the PAE's responses on the  |
|                   | compliance audits and AUP reviews performed for  |
|                   | the 17 PAEs. This final report on compliance     |
|                   | audits and AUP reviews represents the projected  |
|                   | results of the test work from our sample of 116  |
|                   | Full restructuring transactions. It describes    |
|                   | our execution of the compliance audits and AUP   |
|                   | reviews and statistically summarizes the results |
|                   | by review category. Our report concludes with    |
|                   | recommendations designed to enhance the          |
|                   | efficiency of the Program's operations and other |
|                   | matters, which require OAHP's attention.         |
+-------------------+--------------------------------------------------+

+-------------------+--------------------------------------------------+
| # RESULTS         |                                                  |
+-------------------+--------------------------------------------------+
| ## PAE Profile    | Based on a population of 342 "Full"              |
|                   | restructurings (assets) that were "accepted" and |
|                   | "approved", we conducted 17 PAE reviews, as      |
|                   | illustrated in Table 1 below. We performed seven |
|                   | compliance audits and ten AUP reviews. We        |
|                   | selected a sample of 116 assets comprising 47    |
|                   | and 69 Full transactions for the compliance      |
|                   | audits and AUP reviews, respectively.            |
|                   |                                                  |
|                   | ###                                              |
|                   | # Table 1: Sample Selected and Result Statistics |
|                   |                                                  |
|                   | +------------------+-------+-------+-------+     |
|                   | |                  | ###   |       | #     |     |
|                   | |                  |  Type |       | ####  |     |
|                   | |                  |  of R |       | Total |     |
|                   | |                  | eview |       |       |     |
|                   | +------------------+-------+-------+-------+     |
|                   | |                  | ###   | **AUP |       |     |
|                   | |                  | Audit | Rev   |       |     |
|                   | |                  |       | iew** |       |     |
|                   | +------------------+-------+-------+-------+     |
|                   | | PAEs Reviewed    | 7     | 10    | *     |     |
|                   | |                  |       |       | *17** |     |
|                   | +------------------+-------+-------+-------+     |
|                   | | Population of    | \-    | \-    | **    |     |
|                   | | Full Assets      |       |       | 342** |     |
|                   | +------------------+-------+-------+-------+     |
|                   | | Full Assets      | 47    | 69    | **    |     |
|                   | | Reviewed         |       |       | 116** |     |
|                   | +------------------+-------+-------+-------+     |
|                   | | Occurrences of   | 65    | 82    | **    |     |
|                   | | Noncompliance    |       |       | 147** |     |
|                   | +------------------+-------+-------+-------+     |
|                   |                                                  |
|                   | The work performed, and the results thereof, are |
|                   | based on asset sample coverage of approximately  |
|                   | 34%.[^2]                                         |
|                   |                                                  |
|                   | Our PAE sample included ten public and seven     |
|                   | private PAEs. As illustrated in Figure 4 below,  |
|                   | the ten public PAEs reviewed were distributed    |
|                   | into four compliance audits and six AUP reviews, |
|                   | while the seven private PAEs were distributed    |
|                   | into three compliance audits and four AUP        |
|                   | reviews.                                         |
|                   |                                                  |
|                   | **Figure 4: Types of PAEs Tested**               |
|                   |                                                  |
|                   | ![](media/image6.wmf)                            |
+-------------------+--------------------------------------------------+
| ##                | Of the 116 assets tested, 94 were "Closed" and   |
|                   | 22 were "Action Other Than Closing " (AOTC). As  |
|                   | illustrated in Figure 5, we tested 43 "Closed"   |
|                   | assets and 4 "AOTC" assets as part of the        |
|                   | compliance audits and tested 51 "Closed" assets  |
|                   | and 18 "AOTC" assets as part of the AUP reviews. |
|                   |                                                  |
|                   | Figure 5: Full Restructuring Assets Tested       |
|                   |                                                  |
|                   | ![](media/image7.wmf)                            |
+-------------------+--------------------------------------------------+
| #                 | #### During ou                                   |
| # Review Findings | r compliance audits and AUP reviews, we noted ma |
|                   | nagement practices and conditions that could be  |
|                   | improved thereby enhancing the efficiency and ef |
|                   | fectiveness of the Program. We reported our find |
|                   | ings and other matters for consideration to OAHP |
|                   |  and each PAE in the individual review reports.  |
|                   |                                                  |
|                   | In this report, we have classified the findings  |
|                   | and their frequency into three classes of        |
|                   | noncompliance, as identified below:              |
|                   |                                                  |
|                   | Class 1 - Findings of Noncompliance in the       |
|                   | Reporting Timelines                              |
|                   |                                                  |
|                   | #### Class 2                                     |
|                   | - Findings of Noncompliance in the Project Files |
|                   |                                                  |
|                   | #### Class 3 - Finding                           |
|                   | s of Noncompliance in the Administrative Process |
|                   |                                                  |
|                   | We report these findings based on the nature of  |
|                   | the engagement in which they were identified.    |
+-------------------+--------------------------------------------------+
| ## Class 1 -- Re  | Class 1 comprises findings of noncompliance with |
| porting Timelines | applicable M2M Program policies for stipulated   |
|                   | timelines. These timelines relate to the         |
|                   | performance of certain required activities in    |
|                   | the restructuring process. The results of our    |
|                   | test work indicated that the overall compliance  |
|                   | rate was 93.2%. Alternatively, this equates to a |
|                   | noncompliance rate of 6.8%, which represent 53   |
|                   | occurrences. As shown in Table 2, of the 116     |
|                   | assets tested, the frequency of noncompliance    |
|                   | with stipulated timelines ranged from 4 to 20    |
|                   | occurrences within four specific categories. The |
|                   | distribution of these findings into categories   |
|                   | within timeline reporting phases in critical     |
|                   | dates tracking is presented in Figure 6. These   |
|                   | findings relate to closing docket submission     |
|                   | within 65 days, Second tenant meetings held      |
|                   | within ten days of plan submission, closing      |
|                   | completion in 12 months (365 days), and plan     |
|                   | submission in 210 days. All of these findings    |
|                   | relate to specific requirements, each of which   |
|                   | has significant effects on the restructuring     |
|                   | process.                                         |
|                   |                                                  |
|                   | The closing process for a restructuring          |
|                   | generates a large number of legal documents      |
|                   | necessary to define each party's rights and      |
|                   | obligations and to record them with the local or |
|                   | state governments. In order to close a           |
|                   | transaction promptly, it is necessary for the    |
|                   | PAE to assemble the final closing documents and  |
|                   | submit them to OAHP within the 65-day limit as   |
|                   | specified in Section 8-2 D, Chapter 8 of the     |
|                   | OPG. PAEs may distribute recorded documents      |
|                   | later, provided they include a copy of the       |
|                   | non-recorded document in the closing docket.     |
|                   | Failure to provide the Hubs and Program Centers  |
|                   | with key provisions of the transaction may limit |
|                   | project management's ability to provide timely   |
|                   | information on restructured assets.              |
|                   |                                                  |
|                   | The failure to hold the second tenants meeting   |
|                   | not less than 10 days prior to submitting the    |
|                   | restructuring plan deprives tenants of their     |
|                   | final opportunity to review the plan and present |
|                   | any additional issues for inclusion. It is HUD's |
|                   | and OAHP's policy to accord tenants the maximum  |
|                   | opportunity for consideration of their comments. |
|                   | Section 1-4, Chapter 1 and Section 3-9 D.1,      |
|                   | Chapter 3 of the OPG, derived from               |
|                   | 24CFR§401.500, were established to accord the    |
|                   | PAE enough time to consider any final tenant     |
|                   | concerns, modify the plan as necessary, and      |
|                   | submit the plan to OAHP in a timely manner.      |
|                   |                                                  |
|                   | Article 5.7.1 of the PRA requires the PAE to     |
|                   | complete closing within 12 months of the date    |
|                   | that the property was assigned to the PAE for    |
|                   | restructuring. Failure to close a property       |
|                   | within the 365-day limit may necessitate         |
|                   | additional Section 8 expenditures until the      |
|                   | restructuring is complete.                       |
+-------------------+--------------------------------------------------+
| ##                | Article 5.7.1 of the PRA also requires the PAE   |
|                   | to submit the                                    |
|                   |                                                  |
|                   | restructuring plan within the 210-day limit of   |
|                   | the date that the property was assigned for      |
|                   | restructuring. Failure by the PAE to meet the    |
|                   | specified timeline may affect the PAE's ability  |
|                   | to close within 365 days, as required.           |
|                   |                                                  |
|                   | ####                                             |
|                   |                                                  |
|                   | ####                                             |
|                   |  Table 2: Class 1 -- Reporting Timeline Findings |
|                   |                                                  |
|                   | +----------------------------+---------+-----+   |
|                   | | **Types of Timeline        | **C     | **  |   |
|                   | | Findings**                 | ritical | No. |   |
|                   | |                            | Date    | Of  |   |
|                   | |                            | T       | Oc  |   |
|                   | |                            | racking | cur |   |
|                   | |                            | Phase** | -re |   |
|                   | |                            |         | nce |   |
|                   | |                            |         | s** |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **OPG Timeline             |         |     |   |
|                   | | Requirement**              |         |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **A**: PAEs did not submit | Closi   | 20  |   |
|                   | | closing docket within 65   | ng/Post |     |   |
|                   | | days of transaction        | Closing |     |   |
|                   | | closing                    |         |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **B**: PAEs did not hold   | Under   | 19  |   |
|                   | | the second tenant meeting  | writing |     |   |
|                   | |                            | /Restru |     |   |
|                   | | at least 10 days prior     | cturing |     |   |
|                   | | submission of the          | Plan    |     |   |
|                   | |                            |         |     |   |
|                   | | > restructuring plan.      |         |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **PRA Timeline             |         |     |   |
|                   | | Requirement**              |         |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **C**: PAEs did not close  | Closi   | 10  |   |
|                   | | the transaction within 365 | ng/Post |     |   |
|                   | |                            | Closing |     |   |
|                   | | days from the assignment   |         |     |   |
|                   | | date.                      |         |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **D**: PAEs did not submit | Under   | 4   |   |
|                   | | the restructuring plan     | writing |     |   |
|                   | |                            | /Restru |     |   |
|                   | | within 210 days from the   | cturing |     |   |
|                   | | assignment date.           | Plan    |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **Total Occurrences**      |         | **5 |   |
|                   | |                            |         | 3** |   |
|                   | +----------------------------+---------+-----+   |
+-------------------+--------------------------------------------------+
| ##                | **Figure 6: Class 1 -- Occurrences by Timeline   |
|                   | Reporting Phase**                                |
|                   |                                                  |
|                   | ![](media/image8.wmf)                            |
|                   |                                                  |
|                   | As illustrated in Table 2 above, for the four    |
|                   | timeline requirement categories, we identified   |
|                   | 53 occurrences of noncompliance. The             |
|                   | distribution of these occurrences of             |
|                   | noncompliance are illustrated in Figure 6 above  |
|                   | and indicates that 57% (30 occurrences) relate   |
|                   | to failures in tracking timeline requirements in |
|                   | the Closing/Post Closing phase. In addition, 43% |
|                   | (23 occurrences) relate to failures in tracking  |
|                   | timeline requirements in the                     |
|                   | Underwriting/Restructuring Plan phase.           |
+-------------------+--------------------------------------------------+
| #                 | Class 2 comprised of findings of noncompliance   |
| # Class 2 -- Proj | with M2M Program policies and procedures         |
| ect File Products | relating to restructuring documentation. OAHP    |
|                   | requires PAEs to retain certain documents in the |
|                   | project files for each asset processed. The      |
|                   | results of our test work indicated that the      |
|                   | overall compliance rate was 96.3%.               |
|                   | Alternatively, this equates to a noncompliance   |
|                   | rate of 3.7% in which the PAEs failed to comply  |
|                   | with eight requirements for documentation. As    |
|                   | shown in Table 3, of the 116 assets tested, the  |
|                   | frequency of noncompliance for each              |
|                   | documentation requirement ranged from less than  |
|                   | 5 to 39 occurrences. The types of these findings |
|                   | and distribution of occurrences by project files |
|                   | product attribute is presented in Table 3 and    |
|                   | Figure 7. The predominance of findings in the    |
|                   | Class, which represent three of the failures of  |
|                   | noncompliance, relates to: Failure to obtain a   |
|                   | report of title (title bring-down); inadequate   |
|                   | code compliance information; and incomplete      |
|                   | documentation certifying subsidy layering        |
|                   | review.                                          |
|                   |                                                  |
|                   | Copies of initial title documents are sometimes  |
|                   | submitted as original loan documentation.        |
|                   | However, over the years, the Owners may have     |
|                   | granted property rights such as easements or may |
|                   | have had liens placed against the property.      |
|                   | Section 4-7 D, Chapter 4 of the OPG and Resource |
|                   | Desk Guidance dated August 1, 2001 require that  |
|                   | PAEs obtain and review a report of title (title  |
|                   | bring-down) during the due diligence stage to    |
|                   | assist in determination of ownership structure   |
|                   | and any encumbrances and to allow sufficient     |
|                   | time to resolve any title issues. OAHP allows a  |
|                   | reimbursement cost of up to \$500 per            |
|                   | transaction for this process. If the title       |
|                   | bring-down is not obtained during the data       |
|                   | collection stage, there may not be enough time   |
|                   | to resolve title issues such as major liens and  |
|                   | loan modification before closing.                |
|                   |                                                  |
|                   | As part of the supporting materials in data      |
|                   | collection, code compliance information is       |
|                   | obtained to describe any violations unabated at  |
|                   | the time of the restructuring and a history of   |
|                   | corrected violations. Section 4-7.A, Chapter 4,  |
|                   | of the OPG requires that the PAE contact the     |
|                   | appropriate entity in the property's             |
|                   | jurisdiction to obtain any available information |
|                   | regarding the project's compliance with          |
|                   | applicable codes. If this is not addressed,      |
|                   | there is a possibility that fire, building, and  |
|                   | zoning code violations would go undetected and   |
|                   | may undermine the effectiveness of the           |
|                   | restructuring process.                           |
|                   |                                                  |
|                   | Subsidy layering review is a statutory           |
|                   | requirement under MAHRA §514(e)(7) designed to   |
|                   | prevent multiple funding sources for the same    |
|                   | property. PAEs must certify to OAHP that every   |
|                   | restructuring plan submitted for approval meets  |
|                   | the HUD subsidy layering requirement and that no |
|                   | overlaps of Sources and Uses were found. Failure |
|                   | to meet the requirement may result in excess     |
|                   | financial assistance.                            |
+-------------------+--------------------------------------------------+
| ##                | The other findings of noncompliance in this      |
|                   | Class, which represent the remaining five        |
|                   | requirements, relate to missing or incomplete    |
|                   | owners' data for miscellaneous activities in the |
|                   | restructuring, including owner's certification,  |
|                   | owner's adoption of PAE's PCA, related party     |
|                   | checklist, and notification to tenants and other |
|                   | interested parties of the completed              |
|                   | restructuring plan. The requirements for this    |
|                   | documentation are provided in Section 3-9,       |
|                   | Chapter 3; Section 4-2, Chapter 4; Section 4-8,  |
|                   | Chapter 4; and Section 4-9, Chapter 4, of the    |
|                   | OPG. These documents are necessary to define     |
|                   | each party's rights and obligations in the       |
|                   | restructuring process. Failure to complete them  |
|                   | undermines the efficiency and effectiveness of   |
|                   | the M2M Program.                                 |
|                   |                                                  |
|                   | **Table 3: Class 2 -- Project File Product       |
|                   | Findings**                                       |
|                   |                                                  |
|                   | +----------------------------+---------+-----+   |
|                   | | **Types of Project File    | **Re    | **  |   |
|                   | | Product Findings**         | porting | No. |   |
|                   | |                            | Attr    | of  |   |
|                   | |                            | ibute** | Oc  |   |
|                   | |                            |         | cur |   |
|                   | |                            |         | -re |   |
|                   | |                            |         | nce |   |
|                   | |                            |         | s** |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **E**: Report of Title     | Due     | 39  |   |
|                   | | (title bring-down) was not | Di      |     |   |
|                   | |                            | ligence |     |   |
|                   | | obtained during due        |         |     |   |
|                   | | diligence stage.           |         |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **F**: Code compliance     | Sup     | 22  |   |
|                   | | information was not        | porting |     |   |
|                   | |                            | Ma      |     |   |
|                   | | obtained as required.      | terials |     |   |
|                   | |                            | (SM)    |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **G**: Subsidy layering    | Sup     | 18  |   |
|                   | | review did not meet HUD's  | porting |     |   |
|                   | |                            | Ma      |     |   |
|                   | | certification requirement  | terials |     |   |
|                   | |                            | (SM)    |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **H**: No letter from PAE  | Owner's | 5   |   |
|                   | | to Owner transmitting      | Package |     |   |
|                   | |                            | (OP)    |     |   |
|                   | | owner's certification      |         |     |   |
|                   | | requirement                |         |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | **I:** Others -- four      | Tenant  | 4   |   |
|                   | | incomplete documentation   | &       |     |   |
|                   | | for                        | Owner's |     |   |
|                   | |                            | Meet/   |     |   |
|                   | | miscellaneous              |         |     |   |
|                   | | restructuring activities   | SM /OP  |     |   |
|                   | | with a                     |         |     |   |
|                   | |                            |         |     |   |
|                   | | frequency less than 5      |         |     |   |
|                   | +----------------------------+---------+-----+   |
|                   | | > **Total Occurrences**    |         | **8 |   |
|                   | |                            |         | 8** |   |
|                   | +----------------------------+---------+-----+   |
+-------------------+--------------------------------------------------+
| ##                | #### Figure 7: Class 2 -                         |
|                   | - Occurrences by Project File Product Attributes |
|                   |                                                  |
|                   | ![](media/image9.wmf)                            |
|                   |                                                  |
|                   | As illustrated in Table 3 above, the eight       |
|                   | project file product findings comprised 88       |
|                   | occurrences. The distribution of these findings  |
|                   | illustrated in Figure 7 above indicates that 47% |
|                   | (41 occurrences) relate to incomplete/missing    |
|                   | documentation in Supporting Materials attribute. |
|                   | Additionally 44% (39 occurrences ) relate to Due |
|                   | Diligence attribute; 7% (6 occurrences ) relate  |
|                   | to Owner's Package attribute; and 2% (2          |
|                   | occurrences ) relate to Tenant/Owner's Meeting.  |
+-------------------+--------------------------------------------------+
| ## Class 3-       | Class 3 comprised of findings related to the     |
|                   | failure of PAEs to adequately oversee            |
| #                 | third-party contracts as prescribed in the PRA   |
| # Administrative  | and comply with applicable M2M Program policies  |
|                   | and procedures for administrative file           |
| ## Process        | maintenance. The results of our test work        |
|                   | indicated that the overall compliance rate was   |
|                   | 89.6%. Alternatively, this equates to a          |
|                   | noncompliance rate of 10.4%, which represents 6  |
|                   | occurrences. From the 17 PAEs reviewed, the      |
|                   | frequency of noncompliance with the              |
|                   | administrative process ranged from 1 to 6        |
|                   | occurrences. The distribution of these           |
|                   | occurrences by process attribute is presented in |
|                   | Figure 8. These findings, which are based on     |
|                   | individual PAE processes (notwithstanding the    |
|                   | number of assets tested), relate to lack of      |
|                   | three-bid procurement, erroneous billing, and    |
|                   | inadequate teaming partner oversight.            |
|                   |                                                  |
|                   | HUD reimburses PAEs for costs associated with    |
|                   | specified subcontractors' activities. Article    |
|                   | 9.2.1 of the PRA requires PAEs to obtain at      |
|                   | least three bids in their procurement process or |
|                   | obtain prior approval for any alternative        |
|                   | competitive procurement process. The lack of a   |
|                   | competitive procurement process undermines the   |
|                   | effectiveness of the M2M program and may         |
|                   | influence the opportunity to obtain best value;  |
|                   | taking into consideration cost, quality, and     |
|                   | delivery.                                        |
|                   |                                                  |
|                   | As provided in Section 2-3 C.6, Chapter 2, of    |
|                   | the OPG and Article 9.2.2 of the PRA, PAEs are   |
|                   | required to submit single original invoices for  |
|                   | only one claim per service. Failure to comply    |
|                   | with these requirements increases risk of        |
|                   | improper payments.                               |
|                   |                                                  |
|                   | Notwithstanding the PAEs right to enter into     |
|                   | teaming partner subcontracts, Article 7 of the   |
|                   | PRA requires the PAE to monitor and diligently   |
|                   | supervise the teaming partner's performance and  |
|                   | remain solely responsible and liable for the     |
|                   | proper and timely performance of the services of |
|                   | their agreement. Failure to provide adequate     |
|                   | oversight raises concerns regarding PAEs'        |
|                   | involvement in the M2M program as policy changes |
|                   | or underwriting recurring themes may not be      |
|                   | addressed on time.                               |
+-------------------+--------------------------------------------------+
| ##                | Figure 8: Class 3 -- Occurrences by              |
|                   | Administrative Process Attribute                 |
|                   |                                                  |
|                   | ![](media/image10.wmf)                           |
|                   |                                                  |
|                   | As noted above, the frequency of PAEs'           |
|                   | noncompliance with the administrative process    |
|                   | resulted in 6 occurrences. The distribution of   |
|                   | these findings illustrated in Figure 8 above     |
|                   | indicates that 50% (3 occurrences (involving 2   |
|                   | of the 17 PAEs), relate to failure in            |
|                   | Procurement/Billing Oversight; while the other   |
|                   | 50% (3 occurrences involving 3 of the 17 PAEs)   |
|                   | relate to failure in Teaming Partner Oversight.  |
+-------------------+--------------------------------------------------+
| ## N              | The results of our review of the sampled PAEs    |
| ationwide Results | and assets are projected to the entire PAE and   |
|                   | asset populations. The cumulative results of our |
|                   | test work offer significant perspective on the   |
|                   | PAEs' compliance with the laws, regulations, and |
|                   | guidelines of the M2M Program.                   |
|                   |                                                  |
|                   | We present the projected results according to    |
|                   | the classes of findings and their related        |
|                   | attributes. As noted in the *Executive Summary*  |
|                   | section of this report, based on the attributes  |
|                   | tested, we estimate that Timeline Reporting had  |
|                   | a compliance rate of 93%, Project Files Products |
|                   | had a compliance rate ranging from 96% to 100%,  |
|                   | and PAE Administrative Processes had a           |
|                   | compliance rate of 90% to 100%. The compliance   |
|                   | rates identified above, based on 99% confidence  |
|                   | level of the results, indicate that the PAEs are |
|                   | substantially adhering to the requirements of    |
|                   | the MAHRA, the OPG and the PRA on a nationwide   |
|                   | basis. They further indicate that OAHP has been  |
|                   | effectively monitoring the PAEs' M2M             |
|                   | restructuring activities.                        |
|                   |                                                  |
|                   | A description of each attribute tested and the   |
|                   | projected results are detailed below:            |
|                   |                                                  |
|                   | **Class 1 -- Reporting Timeline Process:**       |
|                   |                                                  |
|                   | -   [Attribute: Timing]{.underline}              |
|                   |                                                  |
|                   | > We verified the accuracy of the reported       |
|                   | > critical dates. We estimate that the exception |
|                   | > rate for this attribute is 6.76%; and, in      |
|                   | > addition, we are 99% confident that the true   |
|                   | > exception rate as a whole is not more than     |
|                   | > 7.64%.                                         |
|                   |                                                  |
|                   | **Class 2 -- Project File Products:**            |
|                   |                                                  |
|                   | -   [Attribute: Restructuring Plan               |
|                   |     Package]{.underline}                         |
|                   |                                                  |
|                   | > We verified the existence of plan narratives   |
|                   | > on PAE's conclusions relating to ownership,    |
|                   | > market rents, net operating income, mortgage   |
|                   | > information and evaluation of the physical     |
|                   | > condition of the property. We estimate that    |
|                   | > the exception rate for this attribute is       |
|                   | > 0.00%; and, in addition, we are 99% confident  |
|                   | > that the true exception rate as a whole is not |
|                   | > more than 0.00%.                               |
|                   |                                                  |
|                   | -   [Attribute: Tenant and Community             |
|                   |     Comments]{.underline}                        |
|                   |                                                  |
|                   | > We confirmed tenant and community comments for |
|                   | > 1^st^ and 2^nd^ tenant meetings. We estimate   |
|                   | > that the exception rate for this attribute is  |
|                   | > 0%; and, in addition, we are 99% confident     |
|                   | > that the true exception rate as a whole is not |
|                   | > more than 0%.                                  |
|                   |                                                  |
|                   | -   [Attribute: Supporting                       |
|                   |     Materials]{.underline}                       |
|                   |                                                  |
|                   | > We confirmed that the PAE documented           |
|                   | > information on rental                          |
|                   | >                                                |
|                   | > Assistance and assessment plan, loan           |
|                   | > information, financial                         |
|                   | >                                                |
|                   | > assessment and third-party reports. We         |
|                   | > estimate that the                              |
|                   | >                                                |
|                   | > exception rate for this attribute is 2.40%     |
|                   | > and, in addition, we are 99% confident that    |
|                   | > the true exception rate as a whole is not      |
|                   | >                                                |
|                   | > more than 2.67%.                               |
|                   |                                                  |
|                   | -   [Attribute: Owner's Package]{.underline}     |
|                   |                                                  |
|                   | > We verified the existence of ownership         |
|                   | > documentation, including loan history          |
|                   | > statement, related party checklist, insurance, |
|                   | > major repairs, subordinate debt, and use       |
|                   | > restriction and agreements. We estimate that   |
|                   | > the exception rate for this attribute is       |
|                   | > 0.91%; and, in addition, we are 99% confident  |
|                   | > that the true exception rate as a whole is not |
|                   | > more than 1.39%.                               |
|                   |                                                  |
|                   | -   [Attribute: Other Supporting                 |
|                   |     Information]{.underline}                     |
|                   |                                                  |
|                   | > We verified the existence of miscellaneous     |
|                   | > restructuring documentation, including asset   |
|                   | > information from HUD, evaluation of            |
|                   | > management, transmittal of approved or         |
|                   | > rejected restructuring plan and commitment. We |
|                   | > estimate that the exception rate for this      |
|                   | > attribute is 0.00%; and, in addition, we are   |
|                   | > 99% confident that the true exception rate as  |
|                   | > a whole is not more than 0.00%.                |
|                   |                                                  |
|                   | -   [Attribute: Closing File]{.underline}        |
|                   |                                                  |
|                   | > We verified the existence of closing file      |
|                   | > correspondences, notifications and             |
|                   | > certifications relating to closing activities. |
|                   | > We estimate that the true exception rate for   |
|                   | > this attribute is 0.00%; and, in addition, we  |
|                   | > are 99% confident that the true exception rate |
|                   | > as a whole is not more than 0.00%.             |
|                   |                                                  |
|                   | -   [Attribute: Closing Docket]{.underline}      |
|                   |                                                  |
|                   | > We verified the completeness of the closing    |
|                   | > docket, including the transmittal letter and   |
|                   | > documentation related to mortgage,             |
|                   | > rehabilitation funding, multifamily claims,    |
|                   | > insurance, Use Agreements, Section 8           |
|                   | > documents, and additional documents. We        |
|                   | > estimate that the exception rate for this      |
|                   | > attribute is 0.00%; and, in addition, we are   |
|                   | > 99% confident that the true exception rate as  |
|                   | > a whole is not more than 0.00%.                |
|                   |                                                  |
|                   | -   [Attribute: Conflict of                      |
|                   |     Interest]{.underline}                        |
|                   |                                                  |
|                   | > We confirmed that PAEs had established         |
|                   | > procedures to identify conflicts of interest.  |
|                   | > We estimate that the exception rate for this   |
|                   | > attribute is 0.00%; and, in addition, we are   |
|                   | > 99% confident that the true exception rate as  |
|                   | > a whole is not more than 0.00%.                |
|                   |                                                  |
|                   | -   [Attribute: Owner Eligibility]{.underline}   |
|                   |                                                  |
|                   | > We verified the determination of eligibility   |
|                   | > check and notification to OAHP. We estimate    |
|                   | > that the exception rate for this attribute is  |
|                   | > 0.00%; and, in addition, we are 99% confident  |
|                   | > that the true exception rate as a whole is not |
|                   | > more than 0.00%.                               |
|                   |                                                  |
|                   | -   [Attribute: Tenant/Owner Meetings and        |
|                   |     Required Notices]{.underline}                |
|                   |                                                  |
|                   | > We verified the existence of documentation     |
|                   | > relating to tenant and owner communications,   |
|                   | > including kick-off meetings, notices for first |
|                   | > and second tenant meetings, and notices to     |
|                   | > local government. We estimate that the true    |
|                   | > exception rate for this attribute is 0.22%;    |
|                   | > and, in addition, we are 99% confident that    |
|                   | > the true exception rate as a whole is not more |
|                   | > than 0.32%.                                    |
|                   |                                                  |
|                   | -   [Attribute: Due Diligence/Data               |
|                   |     Collection]{.underline}                      |
|                   |                                                  |
|                   | > We verified that the PAEs obtained the owners' |
|                   | > documents, lender records, HUD asset           |
|                   | > management records, report of title, insurance |
|                   | > and tax information, and bond documentation or |
|                   | > determined whether they could proceed without  |
|                   | > them. We estimate that the exception rate for  |
|                   | > this attribute is 3.39%; and, in addition, we  |
|                   | > are 99% confident that the true exception rate |
|                   | > as a whole is not more than 4.31%.             |
|                   |                                                  |
|                   | -   [Attribute: Underwriting]{.underline}        |
|                   |                                                  |
|                   | > We verified the existence of documentation     |
|                   | > relating to the PAEs' requests for exception   |
|                   | > rent limitation waivers and discussions with   |
|                   | > the Owner, existing mortgagee, or proposed new |
|                   | > lender. We estimate that the exception rate    |
|                   | > for this attribute is 0.00%; and, in addition, |
|                   | > we are 99% confident that the true exception   |
|                   | > rate as a whole is not more than 0.00%.        |
|                   |                                                  |
|                   | -   [Attribute: Mortgage Restructure             |
|                   |     Approvals]{.underline}                       |
|                   |                                                  |
|                   | > We verified the submission and approval of the |
|                   | > restructuring plans and commitment. We         |
|                   | > estimate that the exception rate for this      |
|                   | > attribute is 0.00%; and, in addition, we are   |
|                   | > 99% confident that the true exception rate as  |
|                   | > a whole is not more than 0.00%.                |
|                   |                                                  |
|                   | -   [Attribute: Documentation Distribution and   |
|                   |     Conversion]{.underline}                      |
|                   |                                                  |
|                   | > We verified the distribution of closing        |
|                   | > documents, the existence of acknowledgment     |
|                   | > letters from pertinent parties, confirmed      |
|                   | > post-closing internal review and verification  |
|                   | > of funds disbursement. We estimate that the    |
|                   | > exception rate for this attribute is 0.00%;    |
|                   | > and, in addition, we are 99% confident that    |
|                   | > the true exception rate as a whole is not more |
|                   | > than 0.00%.                                    |
|                   |                                                  |
|                   | **Class 3 -- Administrative Processes:**         |
|                   |                                                  |
|                   | -   [Attribute: Contract File                    |
|                   |     Processes]{.underline}                       |
|                   |                                                  |
|                   | > We evaluated the PAE's processes and           |
|                   | > procedures for contract                        |
|                   | >                                                |
|                   | > file maintenance, including PAE conflict of    |
|                   | > interest,                                      |
|                   | >                                                |
|                   | > closing/post-closing management and training.  |
|                   | > We estimate                                    |
|                   | >                                                |
|                   | > that the exception rate for these attributes   |
|                   | > is 0.00%; and, in                              |
|                   | >                                                |
|                   | > addition, we are 99% confident that the true   |
|                   | > exception rate as a                            |
|                   | >                                                |
|                   | > whole is not more than 0.00%.                  |
|                   |                                                  |
|                   | -   [Attribute: Procurement, Subcontractor       |
|                   |     Oversight, and Invoicing                     |
|                   |     Processes]{.underline}                       |
|                   |                                                  |
|                   | > We evaluated the PAEs' procedures and          |
|                   | > oversight of third party contractors,          |
|                   | > including procurement and invoicing, and cost  |
|                   | > reimbursements. We estimate that the exception |
|                   | > rate for this attribute is 1.90%; and, in      |
|                   | > addition, we are 99% confident that the true   |
|                   | > exception rate as a whole is not more than     |
|                   | > 2.47%.                                         |
|                   |                                                  |
|                   | -   [Attribute: Teaming Partner                  |
|                   |     Oversight]{.underline}                       |
|                   |                                                  |
|                   | > We evaluated the PAE's internal procedures for |
|                   | > approval of restructuring plans and the        |
|                   | > monitoring and supervision of the duties of    |
|                   | > its teaming partner. We estimate that the      |
|                   | > exception rate for these attributes is 10.34%; |
|                   | > and, in addition, we are 99% confident that    |
|                   | > the true exception rate as a whole is not more |
|                   | > than 18.89%.                                   |
+-------------------+--------------------------------------------------+
| ## Conclusion     | Based on the procedures performed, and the       |
|                   | overall results, we determined that the PAEs     |
|                   | were in substantial compliance with the          |
|                   | restructuring requirements of the M2M Program.   |
|                   | We, therefore, conclude that OAHP has been       |
|                   | effectively monitoring the nationwide            |
|                   | restructuring activities.                        |
|                   |                                                  |
|                   | Although we found substantial compliance with    |
|                   | the restructuring requirements of the M2M        |
|                   | Program, the results of our test work identified |
|                   | findings and management practices and            |
|                   | conditions, which require consideration by OAHP. |
|                   | These findings indicate opportunities for        |
|                   | improving the restructuring process.             |
|                   | Implementation of our recommendations would      |
|                   | enhance the effectiveness of the PAEs'           |
|                   | activities in the restructuring process. These   |
|                   | *Recommendations* are discussed below.           |
|                   |                                                  |
|                   | In order to ensure continued success of the M2M  |
|                   | program, we suggest that OAHP continue its       |
|                   | periodic and annual review programs to maintain  |
|                   | the quality of contractor products and the       |
|                   | efficiency of the program.                       |
+-------------------+--------------------------------------------------+
| #                 | 1.  **Controls Over Stipulated Timeline Events   |
| # Recommendations |     Should Be Improved**                         |
|                   |                                                  |
|                   | We noted that for 13 of the 17 PAEs reviewed,    |
|                   | there were failures to comply with the timelines |
|                   | requirements stipulated by the OPG and the PRA.  |
|                   | These occurrences included failures to hold the  |
|                   | 2^nd^ tenant's meeting at least ten days before  |
|                   | submitting a restructuring plan to OAHP,         |
|                   | failures to submit restructuring plans within    |
|                   | 210 days of acceptance, failures to close        |
|                   | restructuring transaction within 365 days of     |
|                   | acceptance, and failures to submit closing       |
|                   | dockets to OAHP within 65 days of closing.       |
|                   |                                                  |
|                   | According to PAEs, these failures resulted from  |
|                   | a variety of reasons including delays in         |
|                   | obtaining documentation or information from      |
|                   | Owners and other parties. They also noted that   |
|                   | owners are occasionally un-cooperative,          |
|                   | resulting in the rescheduling of the second      |
|                   | tenant meetings. In instances where a teaming    |
|                   | partner relationship exists, the PAEs, in some   |
|                   | cases, failed to adequately to monitor the       |
|                   | teaming partner's performance with respect to    |
|                   | the closing phase. Many of the PAEs attributed   |
|                   | the delays in the submission of closing dockets  |
|                   | with their decision or their closing agents'     |
|                   | decisions to wait for the return of some         |
|                   | recorded documents.                              |
|                   |                                                  |
|                   | OAHP's timelines are designed to complete a      |
|                   | restructuring concurrent with the expiration of  |
|                   | the existing Housing Assistance Payment (HAP)    |
|                   | contract. OAHP has estimated the time required   |
|                   | to complete each phase of a restructuring        |
|                   | transaction, taking into consideration the time  |
|                   | necessary for OAHP's reviews of the work         |
|                   | products. Delays in completing certain phases    |
|                   | can have a negative effect on the total time to  |
|                   | complete the restructuring and may result in     |
|                   | closing occurring after the stipulated time.     |
|                   |                                                  |
|                   | Recognizing that delays may occur that are       |
|                   | beyond the control of the PAEs, OAHP has         |
|                   | implemented procedures by which the PAEs may     |
|                   | apply for additional time to complete certain    |
|                   | phases of the restructuring through the use of   |
|                   | waivers. We recommend that OAHP strictly enforce |
|                   | its timeline policies through additional         |
|                   | monitoring of PAE performance and issuance of    |
|                   | notices of non-compliance where appropriate. We  |
|                   | further recommend that OAHP consider             |
|                   | establishing a waiver policy for the submission  |
|                   | of closing dockets since the current OPG has no  |
|                   | provisions for waivers for this event and, in    |
|                   | some cases, time extensions may be warranted.    |
|                   |                                                  |
|                   | **2. Report of Title (Title Bring-Down) Should   |
|                   | Be Obtained During the Due Diligence Phase**     |
|                   |                                                  |
|                   | We noted that for 7 of the 17 PAEs, Title        |
|                   | Bring-Down Reports were not obtained during the  |
|                   | due diligence phase of the restructurings as     |
|                   | required in the OPG and the Resource Desk        |
|                   | issuances. A Title Bring-Down Report discloses   |
|                   | ownership changes, liens, easements, or other    |
|                   | issues that may have occurred subsequent to the  |
|                   | original HAP contract.                           |
|                   |                                                  |
|                   | The PAEs stated that they relied on discussions  |
|                   | with the Owners or their attorneys or reviews of |
|                   | documents on file with HUD to determine whether  |
|                   | there were title issues, liens, or easements     |
|                   | that required consideration in the development   |
|                   | of the restructuring plan. The PAEs placed       |
|                   | greater emphasis on obtaining the title reports  |
|                   | during the closing phase of the restructurings.  |
|                   |                                                  |
|                   | While the PAE inquiry procedures may provide     |
|                   | them with some level of comfort that there are   |
|                   | no issues, more reliable information must be     |
|                   | obtained from a title search performed during    |
|                   | due diligence. Obtaining the title report during |
|                   | due diligence ensures that financial issues are  |
|                   | included in the restructuring plan and other     |
|                   | legal matters are identified and addressed so as |
|                   | not to delay closing.                            |
|                   |                                                  |
|                   | We recommend that OAHP require that each title   |
|                   | bring-down be ordered within the same timeframe  |
|                   | listed in the PRA for other required third-party |
|                   | reports such as PCAs and appraisals. OAHP should |
|                   | also consider adding this title bring-down       |
|                   | requirement to the Transaction Review process to |
|                   | ensure compliance.                               |
|                   |                                                  |
|                   | **3. Code Compliance Inquiries of Local Building |
|                   | Codes Should Be Adequately Documented**          |
|                   |                                                  |
|                   | We noted that 4 of 17 PAEs reviewed did not      |
|                   | document code compliance information in          |
|                   | accordance with the OPG. These instances of      |
|                   | noncompliance were evidenced by a lack of        |
|                   | records being maintained to indicate contact     |
|                   | with any local building, fire, or other          |
|                   | enforcement authorities, to determine if there   |
|                   | are outstanding or recent code violations. The   |
|                   | OPG requires that inquiries be made of the       |
|                   | appropriate local officials to determine whether |
|                   | there are any outstanding unabated violations or |
|                   | whether there have been recent violations that   |
|                   | have not been corrected.                         |
|                   |                                                  |
|                   | PAEs often rely on the Physical Condition        |
|                   | Assessment (PCA) and the PCA inspectors to       |
|                   | obtain information regarding code compliance.    |
|                   | Some PCA reports assess code compliance through  |
|                   | the application of general or national codes.    |
|                   | Most PCA Reports may briefly mention the code    |
|                   | compliance work but do not present sufficient    |
|                   | detail of the procedures performed or the        |
|                   | results. These PCA inspectors may not be         |
|                   | knowledgeable of local codes or may not detect   |
|                   | recent code violations that have not been        |
|                   | repaired. If code compliance requirements are    |
|                   | not strictly followed, there is the risk that    |
|                   | fire, building and zoning code violations could  |
|                   | go undetected and could undermine the            |
|                   | effectiveness of the restructuring process.      |
|                   |                                                  |
|                   | We recommend that OAHP issue specific guidance   |
|                   | on the procedures for obtaining and documenting  |
|                   | code compliance information. These procedures    |
|                   | should include documentation to describe any     |
|                   | violations, unabated at the time, and a history  |
|                   | of corrected violations. When this task is       |
|                   | delegated to a PCA Inspector, the PCA should     |
|                   | clearly address code compliance in the report    |
|                   | and include the names of the regulatory agencies |
|                   | contacted, individuals' titles, date, or other   |
|                   | identifying information. If no response is       |
|                   | received, the PCA should state that fact and     |
|                   | describe any other procedures performed to       |
|                   | ensure that the property complies with local     |
|                   | codes. OAHP should periodically monitor and      |
|                   | remind the PAEs that it is their responsibility  |
|                   | to ensure that PCA reports are properly reviewed |
|                   | to ensure that code compliance information meets |
|                   | the requirement.                                 |
|                   |                                                  |
|                   | > **4. Subsidy Layering Review Should Be         |
|                   | > Documented in Accordance with HUD's            |
|                   | > Certification Requirements**                   |
|                   |                                                  |
|                   | We noted that for 3 of the 17 PAEs reviewed,     |
|                   | there was insufficient documentation to support  |
|                   | the required subsidy layering review and         |
|                   | certification. MAHRA requires this analysis and  |
|                   | certification to ensure that a property is not   |
|                   | receiving overlapping assistance. This lack of   |
|                   | documentation occurred where the determination   |
|                   | for each restructuring did not meet HUD's        |
|                   | certification requirement to ensure that all     |
|                   | sources have been identified and reflected in    |
|                   | the Source and Use Statement.                    |
|                   |                                                  |
|                   | The general reason provided by PAEs' management  |
|                   | indicated that a subsidy layering review was not |
|                   | necessary since claims payment does not involve  |
|                   | excess federal subsidy. Failure to perform and   |
|                   | document the review, as required, could result   |
|                   | in potential overlapping or multiple funding     |
|                   | sources for the same property and receipt of     |
|                   | excess financial assistance.                     |
|                   |                                                  |
|                   | We acknowledge that OAHP has recently developed  |
|                   | standardized forms, Form 5.4 and Form 5.5, to    |
|                   | address a part of this issue. We recommend that  |
|                   | OAHP continue to monitor compliance with the     |
|                   | requirement to ensure that the PAEs specifically |
|                   | report the subsidy layering analysis performed   |
|                   | and certify the completion of such analysis in   |
|                   | accordance with HUD's certification requirement. |
|                   |                                                  |
|                   | **5. Document Maintenance in the Restructuring   |
|                   | Process Should Be Improved**                     |
|                   |                                                  |
|                   | We noted instances of missing or incomplete      |
|                   | documentation for 4 of the 17 PAEs reviewed.     |
|                   | These PAEs did not maintain project files in     |
|                   | accordance with the OPG. These instances of      |
|                   | noncompliance relate to various other activities |
|                   | in the restructuring process, including          |
|                   | ownership certification, owner's adoption of     |
|                   | PAE's PCA, related parties checklist, and        |
|                   | notification to tenants and other interested     |
|                   | parties of completed restructuring plans.        |
|                   |                                                  |
|                   | According to PAEs' management, most of these     |
|                   | failures resulted from a lack of management      |
|                   | quality control. In some instances, the          |
|                   | documents were inadvertently omitted or          |
|                   | misplaced and, in other instances, follow-up     |
|                   | with Owners was not performed to ensure that the |
|                   | documents were executed.                         |
|                   |                                                  |
|                   | We recommend that OAHP emphasize to the PAEs the |
|                   | importance of completing the required documents, |
|                   | since, in some cases, these are necessary for    |
|                   | defining each party's rights and obligations in  |
|                   | the restructuring process. Since the             |
|                   | predominance of these findings relate to due     |
|                   | diligence, OAHP could ensure compliance by       |
|                   | requiring the PAEs to submit certain             |
|                   | documentation attesting to the completion of the |
|                   | due diligence requirement along with their       |
|                   | invoice for payment.                             |
|                   |                                                  |
|                   | **6. PAE Administrative Processes Should Be      |
|                   | Improved**                                       |
|                   |                                                  |
|                   | We noted failures in the administrative          |
|                   | processes for 4 of the 17 PAEs reviewed. These   |
|                   | PAEs did not to maintain effective               |
|                   | administrative processes in accordance with the  |
|                   | OPG and PRA as required. These include           |
|                   | inadequate management of teaming partners and    |
|                   | failures to document procurement procedures for  |
|                   | third-party subcontractors.                      |
|                   |                                                  |
|                   | Some of the reasons provided by PAEs included    |
|                   | the assertion that supervision of subcontractors |
|                   | has been informal, which may lead to lapses in   |
|                   | control oversight. With regard to teaming        |
|                   | partner arrangements, PAEs are responsible for   |
|                   | the performance of all restructuring activities, |
|                   | regardless of whether a Teaming Partner may      |
|                   | actually be performing those activities. Failure |
|                   | to provide adequate oversight constitutes        |
|                   | ineffective management, which may undermine the  |
|                   | effectiveness of the M2M program. In instances   |
|                   | where there were procurement failures, they      |
|                   | noted that documentation could not be located    |
|                   | and communication of information necessary for   |
|                   | corrective action by both the PAE and OAHP has   |
|                   | been ineffective. The lack of a competitive      |
|                   | process may influence the opportunity to obtain  |
|                   | best value contract service.                     |
|                   |                                                  |
|                   | We recommend that OAHP ensure that the PAEs      |
|                   | adhere to PRA guidelines regarding teaming       |
|                   | partners' subcontracts. PAEs should establish    |
|                   | procedures to document their teaming partner     |
|                   | reviews such as obtaining written reports on the |
|                   | status of projects. In addition, OAHP should     |
|                   | ensure that all issues regarding restructuring   |
|                   | are communicated directly to the PAE and not     |
|                   | only to the teaming partner to ensure their      |
|                   | involvement in the restructuring of each asset.  |
|                   |                                                  |
|                   | We recommend that OAHP require that PAEs enhance |
|                   | their procedural control to ensure that          |
|                   | procurement is done through an acceptable and    |
|                   | competitive process. We also recommend that PAEs |
|                   | maintain adequate documentation in files or      |
|                   | submit written request for an alternate process  |
|                   | to OAHP for approval.                            |
+-------------------+--------------------------------------------------+
| ## Other Matters  | In conjunction with the performance of fieldwork |
|                   | on the 17 compliance audits and                  |
|                   | Agreed-Upon-Procedures reviews, we observed      |
|                   | several matters that we believe should be        |
|                   | communicated to OAHP's management. These         |
|                   | matters, in connection with the application of   |
|                   | the procedures that we agreed to perform, depict |
|                   | varying practices by PAEs and require further    |
|                   | consideration by OAHP.                           |
|                   |                                                  |
|                   | **Post Closing Polices and Procedures Regarding  |
|                   | Funds Disbursement Should Be Enhanced**          |
|                   |                                                  |
|                   | The PAEs have varying procedures for monitoring  |
|                   | the disbursement of funds during closing. For    |
|                   | instance, some PAEs do not maintain any          |
|                   | documentation of funds disbursed by the escrow   |
|                   | agent, including excess funds that should be     |
|                   | refunded to HUD. The PAEs indicated that no      |
|                   | specific guidance is provided in the OPG and     |
|                   | that they rely on the final settlement statement |
|                   | for details of the funds disbursed. These        |
|                   | statements, however, were not always maintained  |
|                   | in the asset files. PAEs also do not have        |
|                   | procedures to ensure that any remaining escrow   |
|                   | funds are not held indefinitely.                 |
|                   |                                                  |
|                   | Lack of accountability over escrow funds         |
|                   | increases the risk that funds may not be applied |
|                   | or received by appropriate parties as required.  |
|                   |                                                  |
|                   | To address these issues and to ensure that all   |
|                   | funds have been disbursed to the appropriate     |
|                   | parties or are accounted for, OAHP has designed  |
|                   | and implemented Form 7.21 to document and obtain |
|                   | additional information from the PAEs and the     |
|                   | closing agents on closing account transactions.  |
|                   |                                                  |
|                   | We recommend that OAHP establish a post-closing  |
|                   | review of the status of escrow funds to ensure   |
|                   | that PAEs have procedures to monitor the close   |
|                   | out and final disbursement of all escrow funds.  |
|                   | In addition, PAEs should obtain copies of wire   |
|                   | confirmation or checks for the disbursement of   |
|                   | funds by the Escrow Agent. This documentation    |
|                   | should be filed in the closing docket.           |
|                   |                                                  |
|                   | **Critical Date Tracking Report/MIS System       |
|                   | Should Be Improved**                             |
|                   |                                                  |
|                   | > During our reviews of timeline reporting, we   |
|                   | > noted the following in the Critical Date       |
|                   | > Tracking Report generated from the MIS system: |
|                   |                                                  |
|                   | -   There were no data fields in the MIS system  |
|                   |     to record the dates for Closing Docket       |
|                   |     Submission                                   |
|                   |                                                  |
|                   | -   Control features in the MIS system were not  |
|                   |     adequate to identify omissions of critical   |
|                   |     data upon completion of a reporting phase.   |
|                   |     Specifically, we noted one instance where    |
|                   |     the critical date tracking report was        |
|                   |     completed up to the post-closing phase but   |
|                   |     the date of 2^nd^ Tenant Meeting was missing |
|                   |                                                  |
|                   | -   There were inconsistencies in tracking the   |
|                   |     milestones for Restructuring Plan            |
|                   |     Submission. On the MIS Critical Dates        |
|                   |     Tracking Report, some PAEs used the "Initial |
|                   |     PAE Restructuring Plan Submission to OAHP"   |
|                   |     while OAHP used "PAE Submits Restructuring   |
|                   |     Plan to OAHP" since their determination for  |
|                   |     the 210-day plan submission requirement was  |
|                   |     met by submission of an "approvable plan".   |
|                   |     However, although the plan may be considered |
|                   |     approvable, any minor changes in the model   |
|                   |     would require an electronic resubmission,    |
|                   |     which would trigger a change to the original |
|                   |     submission date. The new date often results  |
|                   |     in a date that would reflect a default in    |
|                   |     timeline; and, although another phase in the |
|                   |     Critical Dates Tracking Report captures      |
|                   |     resubmission date, the system does not       |
|                   |     recalculate and adjust the milestone from    |
|                   |     the original submission date.                |
|                   |                                                  |
|                   | The MIS system supports OAHP's internal and      |
|                   | external reporting on Program statistics and     |
|                   | cost reimbursements. In this regard, accurate    |
|                   | reporting and adherence to established timelines |
|                   | are critical to ensuring that restructuring is   |
|                   | completed efficiently and effectively.           |
|                   |                                                  |
|                   | We recommend that OAHP review the MIS data       |
|                   | fields and the parameters for entering           |
|                   | milestones to ensure that management reports     |
|                   | accurately reflect the status of each            |
|                   | restructuring. The MIS system should be modified |
|                   | to facilitate end user tracking and reporting of |
|                   | critical dates, including the date for closing   |
|                   | docket submission to OAHP.                       |
|                   |                                                  |
|                   | Furthermore, to enhance the system controls, we  |
|                   | recommend that required data fields be           |
|                   | identified and completeness checks be designed   |
|                   | in the system to ensure that stages of the       |
|                   | report are not completed without these required  |
|                   | data.                                            |
|                   |                                                  |
|                   | OAHP should provide a clear policy on the        |
|                   | criteria that form the basis of tracking         |
|                   | milestone for Plan Submission. The PRA           |
|                   | requirement should be updated to reflect a clear |
|                   | and unequivocal statement that would be          |
|                   | practical to test in the MIS system.             |
|                   |                                                  |
|                   | **Guidance on Semi-Annual Report to OAHP Should  |
|                   | Be Updated**                                     |
|                   |                                                  |
|                   | We noted varying practices by PAEs regarding the |
|                   | requirement on semi-annual reporting to OAHP for |
|                   | housing assistance renewals. Appendix M of the   |
|                   | OPG indicates that PAEs should report            |
|                   | semi-annually on those projects that, either     |
|                   | 'renew project-based assistance despite tenant   |
|                   | support for tenant-based assistance during the   |
|                   | tenant consultation process or renew with        |
|                   | tenant-based assistance'. Most PAEs do not       |
|                   | submit this report on the basis that they do not |
|                   | have any projects that meet the criteria. In     |
|                   | addition, some PAEs indicated that the           |
|                   | information required is discussed in the 'rental |
|                   | assistance assessment plan' and through tenant   |
|                   | survey for each project.                         |
|                   |                                                  |
|                   | We recommend that OAHP issue guidance to clarify |
|                   | the reporting requirement, including a           |
|                   | standardized format. In those reporting periods  |
|                   | where no condition resulted in renewal of        |
|                   | project-based assistance despite tenant support  |
|                   | for tenant-based assistance, we recommend that   |
|                   | PAEs provide a negative semi-annual report to    |
|                   | OAHP to document that they have reviewed their   |
|                   | transactions and none meet the criteria.         |
|                   |                                                  |
|                   | #                                                |
+-------------------+--------------------------------------------------+

+-------------------+--------------------------------------------------+
| ## Pr             | During the performance of our fieldwork, we      |
| ior Year Findings | conducted a follow-up review of prior year       |
|                   | findings, which we considered necessary to       |
|                   | communicate to OAHP's management. The following  |
|                   | table describes the number of findings reported  |
|                   | in the prior year, 2003, compliance audits and   |
|                   | AUP reviews and the current status of the        |
|                   | findings based on the PAEs revisited. We did not |
|                   | review the asset files from which these findings |
|                   | were generated, rather we determined whether     |
|                   | corrective actions were taken through interviews |
|                   | with PAEs and review of the current files.       |
|                   |                                                  |
|                   | ## Table 5: Analysis of Prior Year Findings      |
|                   |                                                  |
|                   | <table>                                          |
|                   | <colgroup>                                       |
|                   | <col style="width: 39%" />                       |
|                   | <col style="width: 7%" />                        |
|                   | <col style="width: 13%" />                       |
|                   | <col style="width: 13%" />                       |
|                   | <col style="width: 13%" />                       |
|                   | <col style="width: 13%" />                       |
|                   | </colgroup>                                      |
|                   | <tbody>                                          |
|                   | <tr class="odd">                                 |
|                   | <td colspan="2"                                  |
|                   | rowspan="2"><strong>Details</strong></td>        |
|                   | <td colspan="3"><strong>Class of                 |
|                   | Findings</strong></td>                           |
|                   | <td rowspan="2">% <strong>Status</strong></td>   |
|                   | </tr>                                            |
|                   | <tr class="even">                                |
|                   | <td><p><strong>Time-</strong></p>                |
|                   | <p><strong>line Reports</strong></p></td>        |
|                   | <td><strong>Project Files                        |
|                   | Product</strong></td>                            |
|                   | <td><strong>Admin Process</strong></td>          |
|                   | </tr>                                            |
|                   | <tr class="odd">                                 |
|                   | <td>Number of Current Year PAEs with Prior       |
|                   | Year Findings</td>                               |
|                   | <td>13</td>                                      |
|                   | <td></td>                                        |
|                   | <td></td>                                        |
|                   | <td></td>                                        |
|                   | <td></td>                                        |
|                   | </tr>                                            |
|                   | <tr class="even">                                |
|                   | <td>Total Findings Reported</td>                 |
|                   | <td>95</td>                                      |
|                   | <td>52</td>                                      |
|                   | <td>36</td>                                      |
|                   | <td>7</td>                                       |
|                   | <td></td>                                        |
|                   | </tr>                                            |
|                   | <tr class="odd">                                 |
|                   | <td>Total Findings Closed</td>                   |
|                   | <td>72</td>                                      |
|                   | <td>30</td>                                      |
|                   | <td>35</td>                                      |
|                   | <td>7</td>                                       |
|                   | <td>76%</td>                                     |
|                   | </tr>                                            |
|                   | <tr class="even">                                |
|                   | <td>Total Repeat Findings</td>                   |
|                   | <td>23</td>                                      |
|                   | <td>22</td>                                      |
|                   | <td>1</td>                                       |
|                   | <td>0</td>                                       |
|                   | <td>24%</td>                                     |
|                   | </tr>                                            |
|                   | </tbody>                                         |
|                   | </table>                                         |
|                   |                                                  |
|                   | The analysis in Table 5 above indicates that, of |
|                   | the 95 findings reported from the 13 PAEs        |
|                   | visited in 2003, 72 (76%) findings were          |
|                   | considered closed and 23 (24%) findings were     |
|                   | repeat conditions. From the repeat conditions,   |
|                   | 96% (10 of 13 PAEs) relate to timeline failures  |
|                   | and 4% (1 of 13 PAEs) relate to project files    |
|                   | product failures. We noted that most of the      |
|                   | repeat findings relate to noncompliance with 65  |
|                   | days closing docket submission requirement in    |
|                   | which 8 of the 13 PAEs revisited did not take    |
|                   | adequate corrective action since the prior year. |
|                   |                                                  |
|                   | In regard to corrective actions on findings      |
|                   | closed, we noted significant improvement in the  |
|                   | completion of Owner's Adoption of PAE's PCA      |
|                   | (Form 4.7) in the current files reviewed. Based  |
|                   | on the number of assets reviewed and             |
|                   | occurrences, we noted that the noncompliance     |
|                   | rate fell from 30% in the prior year to 1% in    |
|                   | the current year.                                |
|                   |                                                  |
|                   | Over the last three years, the overall error     |
|                   | rate (based on number of occurrences and         |
|                   | procedures tested) [^3] has decreased from 1.56% |
|                   | to 1.08% as shown in Table 6.                    |
|                   |                                                  |
|                   | #### Ta                                          |
|                   | ble 6 -- Overall Error Rate for Past Three Years |
|                   |                                                  |
|                   |   ----------                                     |
|                   | -------------- ----------- ---------- ---------- |
|                   |                                                  |
|                   | **Class of Findings**    **Error                 |
|                   |                                                  |
|                   |                          Rate                    |
|                   |                                                  |
|                   |                          Summary**               |
|                   |                                                  |
|                   |                                                  |
|                   |                  **2002**    **2003**   **2004** |
|                   |                                                  |
|                   |   Timel                                          |
|                   | ine Reporting       7.62%       12.32%     6.76% |
|                   |                                                  |
|                   |   Proje                                          |
|                   | ct Files Product    1.00%       0.78%      0.71% |
|                   |                                                  |
|                   |   Contr                                          |
|                   | act /Admin          0.89%       1.08%      1.40% |
|                   |                                                  |
|                   | Processes                                        |
|                   |                                                  |
|                   |   Total                                          |
|                   |                     1.56%       1.79%      1.08% |
|                   |   ----------                                     |
|                   | -------------- ----------- ---------- ---------- |
|                   |                                                  |
|                   | Timeline Reporting continued to have the highest |
|                   | error rate since over the years restructuring    |
|                   | became more difficult to process within the      |
|                   | stipulated 12-month period. Such difficulties    |
|                   | are encountered where Owners are reluctant to    |
|                   | restructure their mortgages and, instead, choose |
|                   | to accept the rent reductions without            |
|                   | restructuring or where the properties are in     |
|                   | need of substantial repairs. As a result of the  |
|                   | high error rate, OAHP improved its processing of |
|                   | waiver requests and began enforcing the contract |
|                   | terms more aggressively to achieve higher        |
|                   | compliance. The error rate declined from 7.62%   |
|                   | in 2002 to 6.76% in 2004.                        |
|                   |                                                  |
|                   | A decline in the error rates for Project Files   |
|                   | Products was noted over the past three years     |
|                   | from 1.00% in 2002 to 0.71% in 2004. It appears  |
|                   | that adequate corrective action has been taken   |
|                   | to prevent repeat occurrences. Significant       |
|                   | improvement was noted in the collection and      |
|                   | documentation of owners' data and supporting     |
|                   | materials such as Owner's Adoption of PAE's PCA, |
|                   | Loan History Statement, and Checklist of Related |
|                   | Party Agreement.                                 |
|                   |                                                  |
|                   | In the case of Contract/Administrative           |
|                   | Processes, an increase in the error rate was     |
|                   | noted over the past three years from 0.89% in    |
|                   | 2002 to 1.40% in 2004. The error rate increased  |
|                   | due to increase in the number of PAEs reviewed,  |
|                   | which included PAEs not previously visited, and  |
|                   | findings from the inclusion of new test          |
|                   | procedures relating to teaming partner           |
|                   | oversight.                                       |
|                   |                                                  |
|                   | In general, the overall decline in error rates   |
|                   | is attributed to OAHP's continuous monitoring of |
|                   | the PAEs' restructuring activities and           |
|                   | modification of its policies and procedures to   |
|                   | improve the efficiency and effectiveness of the  |
|                   | program. In addition, the PAEs respond favorably |
|                   | to these evaluations and modify their internal   |
|                   | procedures to achieve higher compliance with the |
|                   | requirements.                                    |
+-------------------+--------------------------------------------------+

[^4]See Procedures for Error Rate at Appendix A

Appendix A

Statistical Sampling Methodology

Regis & Associates, PC retained Dr. Gary Anderson as its statistician to
determine appropriate sampling processes and associated statistical
techniques for the evaluation of PAE performance as a whole. Our sample
selection was based on a population of 342 "Full" asset restructurings
that were "Accepted" and "Approved but Not Closed" or "Closed" between
January 1, 2003 and May 31, 2004. We determined that sampling 116
restructuring transactions (34% of the above population) at 17 PAEs
would provide sufficient data to compute estimated error rates to within
1% with 99% confidence interval.

We developed a sampling methodology that would statistically support
projections of the actual exception occurrences in our sample to the
total population of PAEs. We augmented the basic statistical sample to
aid in identifying internal control weaknesses and noncompliance
occurrences with the specific attributes required in the Statement of
Work.

OAHP specified that all PAEs that processed restructurings meeting the
criteria above be reviewed in the current review cycle. Seventeen of the
twenty-two PAEs had restructurings eligible for review. In selecting the
sample size of 116 assets, we applied a sampling rate of 100% for PAEs
with four or fewer eligible restructurings and a sampling rate ranging
from 80.0% to 30.3 % for PAEs with five or more eligible restructurings.

We tabulated the results of each procedure in the AUP checklist and
consolidated the results of all assets tested from all the PAEs reviewed
to determine the number of errors. We calculated sample error rates by
dividing the number of "No" responses (representing an error) by the
Total responses excluding "Not Applicable" responses, which are
considered statistically neutral. We performed standard statistical
procedures to the sample error rates to determine the confidence
intervals with a precision of 99%.

+-----------------------------------------------------------------------+
| Appendix B                                                            |
|                                                                       |
| Listing of Selected Participating Administrative Entities             |
+-----------------------------------------------------------------------+

+-----------------------------------------------------------------------+
| Appendix C                                                            |
|                                                                       |
| PAE Report Types and Sample Selection                                 |
|                                                                       |
| +------------------------------------+-----------+-------+------+     |
| | PAE                                | Review    | Popul | Sa   |     |
| |                                    | Type      | ation | mple |     |
| +------------------------------------+-----------+-------+------+     |
| |                                    |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | CreditVest, Inc.                   | Audit     | 42    | 13   |     |
| +------------------------------------+-----------+-------+------+     |
| | Foley and Judell, LLP              | Audit     | 29    | 9    |     |
| +------------------------------------+-----------+-------+------+     |
| | Indiana Housing Finance Authority  | Audit     | 3     | 3    |     |
| +------------------------------------+-----------+-------+------+     |
| | Jefferson County Assisted Housing  | Audit     | 8     | 4    |     |
| | Corporation                        |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | Louisiana Housing Finance Agency   | Audit     | 9     | 4    |     |
| +------------------------------------+-----------+-------+------+     |
| | North Carolina Housing Finance     | Audit     | 5     | 4    |     |
| | Agency                             |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | NW Financial Group                 | Audit     | 33    | 10   |     |
| +------------------------------------+-----------+-------+------+     |
| | > *Compliance Audit Total*         | 7         | 129   | 47   |     |
| +------------------------------------+-----------+-------+------+     |
| |                                    |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | Colorado Housing Finance Agency    | AUP       | 2     | 2    |     |
| +------------------------------------+-----------+-------+------+     |
| | First Housing Development          | AUP       | 22    | 7    |     |
| | Corporation                        |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | Heskin/Signet Partnership          | AUP       | 54    | 16   |     |
| +------------------------------------+-----------+-------+------+     |
| | Kitsap County Consolidated Housing | AUP       | 9     | 4    |     |
| | Authority                          |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | New Mexico Mortgage Finance        | AUP       | 2     | 2    |     |
| | Authority                          |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | North Dakota Housing Finance       | AUP       | 1     | 1    |     |
| | Agency                             |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | Real Estate Recovery, Inc          | AUP       | 44    | 12   |     |
| +------------------------------------+-----------+-------+------+     |
| | Ontra, Inc                         | AUP       | 40    | 13   |     |
| +------------------------------------+-----------+-------+------+     |
| | The Siegel Group, Inc              | AUP       | 38    | 11   |     |
| +------------------------------------+-----------+-------+------+     |
| | Utah Housing Corporation           | AUP       | 1     | 1    |     |
| +------------------------------------+-----------+-------+------+     |
| | > *AUP Review Total*               | 10        | 213   | 69   |     |
| +------------------------------------+-----------+-------+------+     |
| |                                    |           |       |      |     |
| +------------------------------------+-----------+-------+------+     |
| | > TOTAL                            | 17        | 342   | 116  |     |
| +------------------------------------+-----------+-------+------+     |
+-----------------------------------------------------------------------+
| +------------------------------------------------------------------+  |
| | Appendix D                                                       |  |
| |                                                                  |  |
| | Summary of Statistical Analysis                                  |  |
| |                                                                  |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Attributes     | P   | Sa   | Nu   | Num | Er  | Conf   |      |  |
| | |                | opu | mple | mber | ber | ror | idence |      |  |
| | |                | lat |      | of   | of  | R   | Int    |      |  |
| | |                | ion |      | Pr   | E   | ate | ervals |      |  |
| | |                |     |      | oced | xce |     | \@99%  |      |  |
| | |                |     |      | ures | pti |     |        |      |  |
| | |                |     |      |      | ons |     |        |      |  |
| | |                |     |      | P    |     |     |        |      |  |
| | |                |     |      | erfo |     |     |        |      |  |
| | |                |     |      | rmed |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | |                |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Class 1 --     |     |      |      |     |     |        |      |  |
| | | Reporting      |     |      |      |     |     |        |      |  |
| | | Timelines      |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Timing         | 342 | 116  | 1    | 53  | 6   | (5.88, |      |  |
| | |                |     |      | ,044 |     | .76 | 7.64)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | |                |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Class 2 --     |     |      |      |     |     |        |      |  |
| | | Project File & |     |      |      |     |     |        |      |  |
| | | Products       |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Restructuring  | 342 | 116  | 812  | 0   | 0   | (0.00, |      |  |
| | | Plan Package   |     |      |      |     | .00 | 0.00)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Tenant         | 342 | 116  | 580  | 0   | 0   | (0.00, |      |  |
| | | &Community     |     |      |      |     | .00 | 0.00)  |      |  |
| | | Comments       |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Supporting     | 342 | 116  | 1    | 41  | 2   | (2.14, |      |  |
| | | Material       |     |      | ,972 |     | .40 | 2.67)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Owners Package | 342 | 116  | 1    | 6   | 0   | (0.43, |      |  |
| | |                |     |      | ,160 |     | .91 | 1.39)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Other          | 342 | 116  | 3    | 0   | 0   | (0.00, |      |  |
| | | Supporting     |     |      | ,248 |     | .00 | 0.00)  |      |  |
| | | Information    |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Closing File   | 342 | 116  | 1    | 0   | 0   | (0.00, |      |  |
| | |                |     |      | ,624 |     | .00 | 0.00)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Closing Docket | 342 | 116  | 12   | 0   | 0   | (0.00, |      |  |
| | |                |     |      | ,180 |     | .00 | 0.00)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Conflict of    | 342 | 116  | 116  | 0   | 0   | (0.00, |      |  |
| | | Interest       |     |      |      |     | .00 | 0.00)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Owner          | 342 | 116  | 116  | 0   | 0   | (0.00, |      |  |
| | | Eligibility    |     |      |      |     | .00 | 0.00)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Tenant/Owner   | 342 | 116  | 1    | 2   | 0   | (0.11, |      |  |
| | | Meetings       |     |      | ,044 |     | .22 | 0.32)  |      |  |
| | | Required       |     |      |      |     |     |        |      |  |
| | | Notices        |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Due Diligence/ | 342 | 116  | 1    | 39  | 3   | (3.07, |      |  |
| | | Data           |     |      | ,508 |     | .69 | 4.31)  |      |  |
| | | Collection     |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Underwriting   | 342 | 116  | 464  | 0   | 0   | (0.00, |      |  |
| | |                |     |      |      |     | .00 | 0.00)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Mortgage       | 342 | 116  | 464  | 0   | 0   | (0.00, |      |  |
| | | Restructure    |     |      |      |     | .00 | 0.00)  |      |  |
| | | Approvals      |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Documentation  | 342 | 116  | 1    | 0   | 0   | (0.00, |      |  |
| | | Distribution   |     |      | ,508 |     | .00 | 0.00)  |      |  |
| | | and Conversion |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | *Total Project |     |      | *26, | *   |     |        |      |  |
| | | File Products* |     |      | 796* | 88* |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | |                |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Class 3 --     |     |      |      |     |     |        |      |  |
| | | Administrative |     |      |      |     |     |        |      |  |
| | | Processes (By  |     |      |      |     |     |        |      |  |
| | | PAE)           |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Contract       | 17  | 17   | 272  | 0   | 0   | (0.00, |      |  |
| | | Processes      |     |      |      |     | .00 | 0.00)  |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Procurem       | 17  | 17   | 170  | 3   | 1   | (1.33, |      |  |
| | | ent/Contractor |     |      |      |     | .90 | 2.47)  |      |  |
| | | Ove            |     |      |      |     |     |        |      |  |
| | | rsight/Billing |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | Teaming        | 17  | 17   | 68   | 3   | 10  | (1.80, |      |  |
| | | Partner        |     |      |      |     | .34 | 18.89) |      |  |
| | | Oversight      |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| | | *Total         |     |      | *    | *6* |     |        |      |  |
| | | Administrative |     |      | 510* |     |     |        |      |  |
| | | Process*       |     |      |      |     |     |        |      |  |
| | +----------------+-----+------+------+-----+-----+--------+      |  |
| |                                                                  |  |
| | Totals 28,350 147                                                |  |
| +------------------------------------------------------------------+  |
+-----------------------------------------------------------------------+

Note: Where the number of exceptions was zero, since only a sample of
transactions was selected, qualitatively it is likely that the overall
percentage of errors is small.

Appendix E

Summary Result of Supplementary Review

OAHP originally intended to review transactions at all PAEs having an
active portfolio of assets as of May 31, 2004 meeting certain acceptance
and approval criteria as described in the Scope and Methodology section
above. Based on those criteria, 17 PAEs were selected. OAHP subsequently
identified an additional PAE for review that had a transaction that was
accepted prior to 2003, approved during the period January 1, 2003 to
May 31, 2004, and subsequently closed.

Since the scope and sample methodology for this additional review was
not consistent with the initial 17 PAEs, the results of the review are
not included in this report. The results of that review did not disclose
any findings that were significantly different from those identified in
the review of the initial 17 PAEs.

We have communicated the detailed results of that review in a separate
report to the PAE and OAHP.

[^1]: See Sampling Methodology Document at Appendix A

[^2]: See Sampling Methodology Document at Appendix A

[^3]:

[^4]: ^3^