Neighborhood Stabilization Program: HUD and Grantees Are Taking Actions to Ensure Program Compliance but Data on Program Outputs Could be Improved
Published: 2010-12-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress created the Neighborhood Stabilization Program (NSP) to help reduce the number of foreclosed and abandoned properties and restore depressed local housing markets. The Housing and Economic Recovery Act of 2008 (HERA) authorized the program's first round (NSP 1), providing $3.92 billion in grant funds to states and local governments. The Department of Housing and Urban Development (HUD) administers the program. HERA mandated that GAO report on whether grantees were using NSP 1 funds in accordance with the act's criteria. For this mandate, GAO examined (1) grantees' progress and challenges in meeting NSP 1 obligation and income-targeting requirements, (2) HUD's actions to mitigate program risks and ensure grantees' compliance with key NSP 1 requirements, and (3) HUD's efforts to collect program data and assess program performance. To address these objectives, GAO analyzed HUD data and the information system used for NSP 1; interviewed HUD officials and representatives of NSP 1 grantees; analyzed HUD's internal control processes; and conducted limited tests of 8 grantees' compliance with key NSP 1 requirements.
section_title: What GAO Found
paragraphs: According to HUD data, the vast majority of the 309 NSP 1 grantees obligated their funds within the required 18-month time frame. As a result, over 99 percent of NSP 1 funds were obligated as of early October 2010. Also, consistent with HERA criteria, most grantees obligated at least 25 percent of their funds for housing for low-income households. Some grantees with whom GAO spoke modified their NSP 1 strategies to meet obligation deadlines and overcome other challenges such as competition from private investors in acquiring foreclosed and abandoned homes. For instance, with HUD approval, some grantees expanded the geographic areas they were targeting. Grantees also participated in banks' "first look" programs, which give grantees the chance to bid on bank-owned properties before other potential buyers. HUD provided training, guidance, and technical assistance to grantees to address new requirements and risks posed by NSP 1. Although the grantees GAO spoke with were generally satisfied with HUD's guidance and program support, some said these efforts would have been more useful if provided earlier. HUD officials said that some of the assistance grantees found useful was delivered using funds that HUD received well after the start of NSP 1. HUD also established various internal control processes for NSP 1 and hired additional staff to help oversee the program. HUD field office staff conducted remote monitoring of all grantees and on-site monitoring for 176 grantees that HUD considered to be higher risk. Although HUD is still aggregating the results of its on-site monitoring, available results from the four field offices GAO contacted generally showed compliance with key NSP 1 requirements but also found some financial management deficiencies. HUD is requiring grantees to take corrective actions, where appropriate. GAO's review of records for 32 properties at 8 grantees found no instances of significant noncompliance with key NSP 1 requirements. To collect information on NSP 1, HUD adapted an existing financial and information system--the Disaster Recovery Grant Reporting (DRGR) system--and provided training and guidance on its use. HUD has used the system to monitor NSP 1 grantees' obligations and summarize program outputs for specific types of activities (rehabilitation and construction, demolition, and homeownership assistance). However, variation in the way grantees entered information into DRGR makes it difficult to summarize outputs for each activity (e.g., housing units acquired) without undercounting, and overall outputs (e.g., total benefiting households) without overcounting. HUD has developed a method for addressing the overcounting problem, but insufficient guidance to grantees and HUD field staff may be contributing to variation in data entry that limits the usefulness of DRGR output information. For example, HUD has not provided grantees with specific written guidance on selecting output measures, which can lead to inconsistency among grantees. HUD is planning an assessment of NSP outcomes that will focus primarily on the program's second round (NSP 2) but will also include NSP 1 in geographic areas where the two phases of the program overlap.
section_title: What GAO Recommends
paragraphs: GAO recommends that HUD provide additional guidance to NSP grantees and HUD field staff to help ensure that information on output measures is collected in HUD's data system in a more consistent manner. HUD agreed with the report's recommendations.

section_title: Letter
paragraphs: In recent years, declining home prices and weak economic conditions  have contributed to a surge in vacant and foreclosed properties that has  negatively impacted many communities across the United States. Such  properties can destabilize neighborhoods by lowering the value of  surrounding homes and attracting crime. They also can impose costs on  communities, for example by reducing property tax revenue and straining  the resources of local police and code enforcement offices. To address  these issues, Congress created the Neighborhood Stabilization Program  (NSP), which provides grants to states and local governments to help  reduce the number of foreclosed and abandoned properties and restore  depressed local housing markets. The first phase of this program, NSP 1,  was authorized by the Housing and Economic Recovery Act of 2008  (HERA), which provided $3.92 billion in grant funds. The program is  administered by the Department of Housing and Urban Development  (HUD) through its existing Community Development Block Grant (CDBG)  program. In October 2008, HUD allocated NSP 1 funds to 309 CDBG  grantees, including all 50 states. Under NSP 1, state grantees may use  funds directly or reallocate them to local governments within their states.
HERA defines a variety of “eligible uses” of NSP 1 funds to allow grantees  to address issues associated with foreclosed and abandoned properties.  For example, grantees may choose to acquire and rehabilitate properties  for rental or resale, or demolish blighted structures. HERA also imposed  several key requirements governing the use of NSP 1 funds. For example,  grantees must use the funds in “areas of greatest need” within 18 months  of receiving them from HUD; for this requirement, HUD interpreted “use”  to mean obligate. In addition, HERA required that all NSP 1 funds benefit  households with incomes at or below 120 percent of area median income  (AMI), and at least 25 percent of the funds benefit households with  incomes at or below 50 percent of AMI; for the 25 percent requirement,  HUD interpreted “use” to mean expended.
HERA mandated that GAO conduct periodic audits of whether NSP 1  funds are being used in a manner consistent with criteria set forth in  HERA. This review examines (1) grantees’ progress and challenges in  meeting HERA obligation time frames and income-targeting criteria, (2)  HUD’s actions to mitigate program risks and ensure grantees’ compliance  with key NSP 1 requirements, and (3) HUD’s efforts to collect program  data and assess program performance.
To review grantees’ progress and challenges in meeting HERA obligation  time frames and income-targeting criteria, we analyzed HUD data on  program obligations and grantees’ uses of funds. We reviewed state  grantees’ action plans and reports on NSP 1 activities to determine the  methods states used to distribute NSP 1 funds to subrecipients, and the  factors they considered in making these decisions. We analyzed Disaster  Recovery Grant Reporting (DRGR) data to determine the extent to which  the subrecipients also received NSP 1 funds directly from HUD. We spoke  with selected grantees to discuss their approaches to using NSP 1 funds  and the challenges they faced in implementing the program.
To determine the actions HUD has taken to mitigate program risks and  ensure grantees’ compliance with key NSP 1 requirements, we reviewed  NSP 1 regulations and guidance, examined HUD’s efforts to oversee the  use of NSP 1 funds and provide technical assistance to grantees, and  interviewed HUD headquarters and field office officials and  representatives of selected grantees. In addition, we reviewed HUD’s  guidance and procedures for monitoring grantee compliance with program  requirements and obtained and summarized on-site monitoring results (as  of September 15, 2010) from four HUD field offices responsible for  overseeing grantees we visited. We also conducted limited tests of  selected grantees’ compliance with key NSP 1 requirements and relevant  internal controls through reviews of property-level records of completed  NSP 1 activities (see discussion of site visits below). Additionally, we  spoke with staff from the HUD Office of the Inspector General (OIG)  about their NSP-related audits and reviewed the results of their completed  audits.
To review HUD’s efforts to collect program data and to assess the  reliability of the data, we reviewed HUD OIG audits of the information  system HUD adapted for NSP 1 (the DRGR system) and HUD  documentation and guidance for using the system. We also interviewed  HUD and grantee staff responsible for entering and monitoring DRGR  data. We also assessed the reliability of the DRGR information we used by  conducting reasonableness checks to identify any missing or erroneous  data and by interviewing knowledgeable HUD officials to ensure we  interpreted the data correctly. For the purpose of this and the first  objective, we concluded that the data we used were sufficiently reliable  for our purposes. To review HUD’s efforts to assess program performance,  we interviewed HUD’s Office of Policy Development and Research and  Office of Community Planning and Development (CPD) staff  knowledgeable of a planned NSP assessment.
To address all of our objectives, we interviewed representatives from 18  NSP 1 grantees. We interviewed a group of 11 grantees selected to  represent different housing markets, grant amounts, and grantee types to  discuss their approaches for using NSP 1 funds, progress they had made,  and challenges they faced in implementing the program. We conducted  site visits at another group of 8 grantees selected to represent a variety of  completed NSP 1 activities, types of grantees, and geographic areas. To  avoid overburdening grantees, we focused our site visits on grantees that,  on the basis of information from HUD, were not receiving extensive  technical assistance or being monitored on-site by HUD staff. At these  sites, we interviewed grantee staff to obtain information on their  processes for complying with NSP 1 requirements and internal control  procedures, and reviewed property-level records of completed NSP 1  activities. We also interviewed staff from four HUD field offices:  Columbus, Ohio; Miami, Florida; Philadelphia, Pennsylvania; and San  Francisco, California. Appendix I contains a more detailed description of  our scope and methodology and a list of NSP 1 grantees we contacted.
We conducted our work in two phases. We did our initial audit work (April  through December 2009) in Washington, D.C., and at 15 sites across the  United States, including Florida, Indiana, Maryland, Nevada, Pennsylvania,  and Virginia. This work resulted in briefings to your staff in December  2009 on the status of HUD’s and grantees’ initial implementation of NSP 1.  The second phase of our NSP 1 work was conducted in Washington, D.C.,  and at 8 sites across the United States, including locations in Arizona,  Florida, Ohio, Pennsylvania, and Virginia from January through December  2010. This report focuses on the results of our audit work during the  second phase. We conducted all of our NSP 1 work in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions.
subsections: section_title: Background
paragraphs: Congress established NSP to try to reduce inventories of foreclosed homes  by providing funding to state and local governments to, among other  things, acquire and rehabilitate or demolish foreclosed and abandoned  homes. HERA allows grantees to use NSP 1 funds to    establish financing mechanisms for the purchase and redevelopment of  foreclosed homes and residential properties;   purchase and rehabilitate homes and residential properties that have been  abandoned or are in foreclosure in order to sell, rent, or redevelop them;    establish land banks for foreclosed homes and residential properties;    demolish blighted structures; and  redevelop demolished or vacant properties.
Land banks are governmental or nongovernmental nonprofit entities  established, at least in part, to assemble, temporarily manage, and dispose  of vacant land for the purpose of stabilizing neighborhoods and  encouraging reuse or redevelopment of urban property. Land banks often  acquire properties through tax foreclosures, intergovernmental transfers,  nonprofit transfers, and open-market purchases but can also acquire them  through foreclosure.
In addition to these five eligible uses, HERA outlined the following key  requirements for using NSP 1 funds, as follows:  1.  All NSP 1 funds must be used within areas of greatest need as  determined by grantees on the basis of the following factors:   percentage of homes financed by subprime loans, and  likelihood of a significant rise in the rate of foreclosures. 2.  All NSP 1 funds must be used to benefit households with incomes at or  below 120 percent of AMI. 3.  At least 25 percent of NSP 1 funds must benefit households with  incomes at or below 50 percent of AMI.  4.  The sale, rental, or redevelopment of abandoned and foreclosed homes  must remain affordable to the above income groups for the longest  feasible term.  5.  All NSP 1 funds must be used (obligated) by grantees within 18 months  of their receipt.  6.  All properties must be acquired at a discount established by HUD.  7.  If a property is sold to an individual as a primary residence, the sale  price cannot be more than the total acquisition and redevelopment  costs.
In October 2008, HUD issued guidance on implementing NSP 1 in a Notice  in the Federal Register. With respect to the requirement that NSP 1 funds  be used within 18 months, HUD stated, “funds are used when they are  obligated by a state, unit of general local government, or any subrecipient  thereof for a specific NSP activity; for example the acquisition of a specific  property.” According to the Notice, funds are considered to be obligated  for an activity when orders are placed, contracts are awarded, and goods  and services are received. HUD specified that funds are not obligated for  an activity when subawards (for example, grants to subrecipients or units  of local government) are made. The Notice also stated that grantees must  expend their NSP 1 funds within 4 years of receipt. In accordance with  HERA, HUD established a required discount rate that would apply to any  property acquired through NSP 1. Initially, HUD set the discount at 15  percent for grantees’ total acquisition portfolios but subsequently reduced  it to 1 percent per property acquired. HUD reduced the required discount  to provide grantees with more flexibility in acquiring foreclosed properties  and to avoid the potentially adverse impact of discounts on neighborhood  property values. Among other provisions, HUD required that each NSP- assisted homebuyer complete at least 8 hours of homebuyer counseling.
HUD also required that NSP 1 grantees submit “NSP 1 action plans” in the  form of substantial amendments to their existing CPD consolidated plan.  HUD required grantees to identify in these plans areas of greatest need  within their states or communities, approaches for implementing NSP 1  and expected program outputs, and plans for complying with key  requirements. After grantees submitted these plans and HUD approved  them, HUD executed grant agreements for NSP 1.
NSP 1 implementation has a tight time frame (see fig. 1). For instance,  HUD had to establish its formula for allocating funds 60 days after the  enactment of HERA. As HERA linked NSP 1 to CDBG, HUD was able to  take advantage of the administrative infrastructure of one of the federal  government’s largest and most flexible community and economic  development programs. Established in 1974, CDBG provides states and  local entitlement communities—eligible metropolitan cities and  counties—with funding to address locally determined community and  economic development priorities. CDBG funds may be used to  rehabilitate housing, improve infrastructure, provide job training, and fund  nd  other community-determined projects.  other community-determined projects.
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Some examples include the building of community centers or firehouses, or repairing  sewage treatment plants. foreclosed homes in each state or locality,   subprime mortgages in each state or locality, and    homes in default or delinquency in each state or locality.
As required by HERA, all 50 state governments and Puerto Rico received  an allocation of at least $19.6 million. HUD also allocated NSP 1 funds to  local (city and county) governments. Figure 2 shows the total state and  local government allocations for each state.
HUD CPD is implementing NSP 1. CPD administers CDBG and other  formula and competitive grant programs from its offices at HUD  headquarters and 43 field offices located throughout the United States.  The headquarters office sets program policy, while field office staff are  responsible for a wide range of grant management activities, including  annual reviews and approval of grantee action plans, execution of grant  agreements, and monitoring of grant recipients. CPD’s monitoring of the  CDBG program focuses on high-risk recipients. Each year, CPD sets a  formal monitoring goal. For fiscal year 2010, the overall goal for CPD and  each of its field offices was to monitor a minimum of 870 formula and  competitive grant recipients. For each CPD program, field staff analyze  potential risks for grantees in a number of areas, including: financial (size  of grant, financial compliance), physical (physical control of assets),  management (staff capacity), satisfaction (citizen complaints and grantee  responsiveness), and services (meeting program objectives and progress).
HUD modified the DRGR system for the purposes of collecting and  maintaining information on NSP activities. DRGR is new to NSP 1 grantees  and HUD field staff unless they had prior experience with Disaster  Recovery Assistance grants, another program managed by CPD. In its  NSP 1 Notice, HUD explained that no other reporting system was as  flexible as DRGR and that statutory time frames did not allow sufficient  time to develop a new system or modify an existing one to perfectly fit  NSP. HUD’s key modifications to DRGR included:    adding data fields to collect information specific to NSP, such as land  removing drop-down menu selections for ineligible uses under NSP; and   adaptations to enable grantees to designate whether properties had been  resold or rented or were single- or multifamily.
DRGR was set up to monitor grantees’ progress in implementing NSP 1 by  tracking budgets, obligations, expenditures, and program outputs. DRGR  also serves as a financial management system through which grantees  obligate and draw down funds. At the beginning of NSP 1, grantees  inputted their NSP 1 action plans into DRGR. In their actions plans in  DRGR, grantees set up their budgets and performance measures for  different DRGR activities that were linked to larger projects. The action  plan serves as a template for required progress reports, or Quarterly  Performance Reports (QPR), that grantees must submit to HUD field staff  on a quarterly basis. QPRs show updated information on NSP 1 progress  for grantees’ projects and activities listed in DRGR.
For each DRGR activity, NSP 1 grantees complete data fields that include  (1) the projected start date, (2) the national objective (the income group  the activity benefits), (3) the responsible organization (either the grantee  or a subrecipient), and (4) the activity type (e.g., acquisition,  rehabilitation, demolition). For each DRGR activity, grantees must also  include a narrative and output measures—for example, the number of  housing units or properties acquired, rehabilitated, land banked, or  demolished, or the numbers of households or persons benefiting from the  activity. In addition, grantees must list the addresses of properties  benefiting from the activity but are not required to include the amount of  funds spent on each property in DRGR. In a June 2009 report, the HUD  OIG concluded that DRGR was sufficient to collect the basic information  that HUD needed to monitor NSP 1. In a September 2009 report, the HUD  OIG reviewed selected controls within DRGR in order to examine whether  funds were properly safeguarded. While the OIG did not find misuse of  funds in their review, they did identify several weaknesses, including  access policies and testing of transactions, that CPD staff have been  addressing.
section_title: NSP 1 Grantees Overcame Challenges and Used a Variety of Strategies to Meet Obligation and Income-Targeting Requirements
subsections: section_title: Most Grantees Met the Deadline for Obligating Funds
paragraphs: HERA required NSP 1 grantees to obligate all of their funds within 18  months, creating a September 2010 deadline for most grantees. In order  to obligate their funds, grantees had to satisfy certain conditions, including  providing a specific property address and (where applicable) a detailed  scope of work for rehabilitating, constructing, or demolishing a property.  According to HUD guidance, grantees are considered to have obligated  NSP 1 funds once they have placed orders, awarded contracts, received  goods and services, or executed similar transactions that will require  payment by the grantee. For example, funds for acquiring a property are  considered obligated when the property seller accepts the grantee’s  purchase offer.
Data in DRGR indicate that the vast majority of the 309 NSP 1 grantees  met their deadline for obligating funds. As a result, more than 99 percent  of NSP 1 funds were obligated as of October 1, 2010. Figure 3 shows  grantees’ progress toward meeting obligation deadlines as of June 24, 2010  (about 3 months prior to most grantees’ deadlines), compared with their  progress by their deadlines. As of the earlier date, 27 grantees had  obligated an amount equal to 100 percent of their total NSP 1 grant funds.  In contrast, 275 grantees had obligated 100 percent by October 1, 2010—at  which point the vast majority of grantee’s deadlines had passed— and 29  had obligated between 80 percent and 99.9 percent. These figures are  preliminary because HUD (1) gave grantees 30 days after their deadlines to  ensure that all obligations prior to the deadline were recorded in DRGR  and (2) is in the process of reviewing whether grantees’ obligated their  NSP 1 funds properly. CPD staff told us that 1 business day after a  grantee’s obligation deadline passes, they are blocking the grantee’s access  to funds and reviewing samples of obligations to ensure they are proper.  As of the end of September, HUD officials told us that field office staff had  reviewed samples for 20 grantees and found no improper obligations. They  plan to review all grantees for compliance with obligation guidance.  Additionally, the OIG is reviewing obligations as part of its compliance  audits of selected NSP 1 grantees. In August 2010, HUD outlined a  process for addressing a grantee’s failure to meet its obligation deadline  and anticipated that many such grantees would face a choice of entering  into an agreement with HUD to use the remaining funds or having their  funds recaptured.
Figure 4 shows the percentage of grantee obligations that fell under  different NSP 1 activities as of October 1, 2010. NSP 1 grantees obligated  most NSP 1 funds for acquisition and rehabilitation, with smaller amounts  obligated for other activities such as construction of new housing,  demolition, and land banking. “Homeownership assistance” includes various types of homeownership assistance such as down- payment assistance and housing counseling for those applying for down-payment assistance.
Due to rounding, the percentages in the graphic add up to a total of 101 percent. Funds spent toward  public services and relocation payments and assistance were not included in the graph because they  each rounded to zero percent, as did the total amount of funds not yet obligated.
HUD data also show that 298 NSP 1 grantees obligated at least 25 percent  of their grant funds for activities benefiting low-income households. As of  October 1, 2010, the data indicate that, in total, grantees obligated 35.1  percent of funds set aside for activities that would benefit this group. This  pattern is consistent with a HERA requirement that 25 percent of NSP 1  funds be used to benefit households at or below 50 percent of AMI. In the  NSP 1 Notice, HUD stated that it will assess grantees’ compliance with this  provision prior to and at grant closeout on the basis of grantees’  expenditures.
section_title: State Grantees Often Used a Combination of Methods to Distribute NSP 1 Funds within Their States
paragraphs: As discussed earlier, HUD made NSP 1 allocations to 309 units of  government, including each of the 50 states. Collectively, the states  received more than half of NSP 1 funds. States had some flexibility in how  they chose to distribute NSP 1 funds but were required to target areas of  greatest need. States could choose to use funds themselves through state- administered programs or could reallocate funds to local entitlement or  nonentitlement communities within their areas of greatest need. In their  HUD-approved action plans, states had to identify areas of greatest need  using factors that included the following:    percentage of homes financed by subprime loans, and  likelihood of a significant rise in foreclosure rates.
Our review of NSP 1 action plans for all states (including the District of  Columbia) found that all of the states included these factors among their  criteria for determining their areas of greatest need. Some states also used  factors not listed in HERA in determining their areas of greatest need,  such as unemployment rates or percentages of the population at or below  50 percent of AMI. In their action plans, states had to outline their  methods for reallocating NSP 1 funds or for using the funds themselves to  make the most impact within the areas of greatest need within their state.  HERA also allowed states to allocate their funds to local entitlement  communities that may have already received NSP 1 funds directly from  HUD, as well as to nonentitlement communities. According to HUD data  as of June 2010, of the total NSP 1 funds that HUD allocated to the states,  states reallocated approximately 9 percent, or $176 million, to 57 local  governments in 21 different states that had already received NSP 1 funds  directly from HUD (see fig. 5).
Once states determined the areas of greatest need, many of them used  competitions to award NSP funds for specific purposes. For example, one  state used a competition for the acquisition and rehabilitation of  multifamily properties, and another state used a competition specifically  to help it meet NSP 1’s 25 percent set-aside requirement to benefit  households with incomes at or below 50 percent of AMI. Eligible  applicants—nonprofits, for-profit developers, and local governments,  among others—often varied by state and by the type of competition. While  some states invited nonprofits and for-profit developers to compete for  funds directly, other states allowed only local jurisdictions to apply or  required nonprofits to get buy-in from their local governments in order to  receive funds.
Our review of NSP 1 action plans found that states distributed funds using  three main methods: (1) reallocation through competitions, (2)  reallocation on the basis of formulas, and (3) through state-administered  programs. Many state grantees used a combination of methods to  distribute funds, while a smaller number relied on a single method. More  specifically, our review found that 14 states distributed all of their NSP 1  funds by reallocating them on a competitive basis, 7 states used a formula  to reallocate all of their funds, and 1 state used all of the funds itself by  administering the program through its housing finance agency and by  contracting with other entities. In contrast, 26 states used a combination  of two or more of the methods. For example, a number of states with  some of the largest NSP 1 grants, including California and Ohio, used a  formula to allocate funds to areas of greatest need within the state and  then held a competition for the 25 percent set-aside to benefit households  with incomes at or below 50 percent of AMI. Six states utilized all three  distribution methods—competition, formula, and use of funds—through  state-administered programs. A number of states decided to administer  some of their NSP 1 funds themselves through state-administered  programs; for example, 1 state created a new statewide soft second loan  financing program (Arizona) and another state channeled some of its NSP  1 funds into the Low Income Housing Tax Credit Program and the  Permanent Supportive Housing Program (Georgia).
Many states that used competitions to distribute NSP funds used similar  criteria to rank applicants and award funds. For example, on the basis of  our review of their action plans, many states considered applicants’  capacity to carry out projects and project readiness, as well as whether  applicants’ proposals focused on projects that would serve the areas of  greatest need within the state. Other frequently used competitive factors  included applicants’ experience administering NSP-related activities and  ability to leverage other funding sources. A few states ranked applicants  based on green building activities or gave priority to applicants that  proposed projects that would help meet the 25 percent set-aside  requirement.
section_title: Grantees Employed Various Strategies for Using NSP 1 Funds
paragraphs: NSP 1 grantees with whom we spoke employed various different strategies  for obligating and expending funds for NSP-eligible activities. For  example, as shown in figure 6, some grantees found that homebuyer- driven strategies—that is, strategies that allowed individual homebuyers to  identify NSP-eligible properties and receive NSP 1 funds from grantees to  assist with the acquisition or rehabilitation—were the most appropriate  for the market conditions in their area. An example of a homebuyer-driven  strategy would be one in which a grantee provided homebuyers with  financial assistance—down-payment assistance, closing costs,  rehabilitation costs, or soft second loans—to enable them to acquire a  home within an NSP 1 target area. Another approach grantees used was a  more property-driven strategy in which grantees or their subrecipients— such as housing authorities, nonprofits, or for-profit developers—directly  acquired, rehabilitated, and resold or rented NSP properties to individuals  or families meeting NSP-specific income requirements. Finally, in some  cases, grantees’ strategies included demolishing blighted structures and  land banking the parcels on which the demolished properties stood for  e demolished properties stood for  future use.  future use.
NSP 1 grantees we spoke with used different NSP strategies depending on  the particular housing market conditions in their target areas. For  example, one grantee we contacted used a homebuyer-driven strategy in  areas where the generally good condition of the properties could attract  potential purchasers. Under that strategy, qualified homebuyers looked for  properties in NSP 1 target areas and chose NSP-eligible homes that did not  require a lot of rehabilitation. The grantee then conducted the required  due diligence on the home, including having it appraised and inspected,  and completing environmental reviews. After the due diligence had been  completed, the grantee assisted buyers with the acquisition of a property  (at the required discount) and provided some funding for down-payment  assistance and closing costs. The same grantee implemented a more  property-driven strategy in target areas where homes required a higher  level of rehabilitation—a potential deterrent for some homebuyers. Under  this strategy, the grantee worked with nonprofit developers to acquire and  rehabilitate the homes, then resold the homes to NSP-eligible buyers.  Another grantee with whom we spoke used NSP 1 funds for demolition  projects and the removal of blight to help stabilize its communities. Some  of the land on which the demolished properties were located will be land  banked for future use. This strategy made the most sense for this  particular grantee as it did not have a strong housing market for sale or  rental.
In order to meet the 25 percent set-aside requirement to benefit  households with incomes at or below 50 percent of AMI, most of the  grantees we spoke with employed similar strategies. Several of the  grantees we spoke with planned to acquire, rehabilitate, and rent out  multifamily properties to meet this requirement. A couple of grantees also  had back-up strategies for meeting the 25 percent set-aside as well, such as  acquiring and rehabilitating single-family homes and renting them out to  low-income individuals or families.
section_title: Some Grantees Modified Their Strategies to Meet the Obligation Deadline and Address Implementation Challenges
paragraphs: Grantees we spoke with faced several challenges implementing NSP 1— including tight time frames, competition from private investors, and  challenges in acquiring properties—but generally found ways to address  them. While 16 of the 18 NSP 1 grantees that we contacted had obligated  their full grant allocations by October 1, 2010, most said they had faced  some difficulties in trying to meet this requirement. For example, several  grantees mentioned they had encountered competition from private  investors in their efforts to acquire NSP-eligible properties. One grantee  said both in-state and out-of-state investors have seized the opportunity to  acquire NSP-eligible properties at low prices, and another grantee  provided an example where a group of investors acquired about 90  properties at one time. One grantee official expressed concern that  investors looking to rent out properties may not be responsible landlords,  which could undermine efforts to stabilize neighborhoods. Finally, private  investors sometimes outbid grantees for NSP-eligible properties, and  because investors may pay with cash and do not have to meet the same  due diligence requirements as NSP 1 grantees, they are able to act more  quickly and have more success acquiring properties.
Furthermore, a few of the grantees we spoke with that planned to rent out  multifamily properties said they faced challenges meeting the 25 percent  set-aside obligation requirement. Officials from two grantees told us it was  difficult to find foreclosed multifamily rental projects to purchase in NSP 1  target areas. Additionally, one grantee told us that they were facing  neighborhood opposition to a multifamily project because neighbors  feared that affordable housing units would depress home values in the  area.
A broader study of NSP grantees sponsored by the Board of Governors of  the Federal Reserve System and two Federal Reserve banks cited  challenges similar to those that we identified. For example, the study  highlights competition from private-sector investors, grantees’ difficulties  identifying a potential pool of foreclosed properties to acquire, and the  reluctance of some property holders to work with grantees. The study also  noted that local requirements and practices, such as stringent local  standards for publicly financed rehabilitation, often put NSP grantees at a  competitive disadvantage to investors.
In order to overcome implementation challenges such as meeting  deadlines or competition from investors, some grantees we spoke with  modified their implementation strategies by    moving away from homebuyer-driven models to directly acquiring    working with banks’ “first look programs,” and    working with the National Community Stabilization Trust (NCST).
To overcome implementation challenges, some grantees had to make  changes to their original program strategies. For example, several grantees  we contacted said it would be difficult to meet the obligation deadline  using their homebuyer-driven strategies. Competition from private  investors and tight obligation time frames required some grantees to move  funds from their homebuyer-driven models towards supporting more  property-driven strategies where they purchased and rehabilitated homes  themselves. Using a more direct strategy allowed some grantees to speed  up the pace of obligations. In addition, one grantee shifted its focus from  homebuyers to renters in order to help it meet the deadline for obligating  funds, as potential homebuyers in its housing market were finding it  difficult to obtain mortgages due to job loss and poor credit.
Some NSP 1 grantees also expanded their target areas to expedite  property acquisition. With HUD approval, some NSP grantees expanded  their target areas to include more ZIP codes or census tracts in order to  expedite acquisitions and circumvent investor competition. Several  grantees also worked with banks’ “first look” programs, which gave them  the opportunity to bid on bank-owned foreclosed properties before other  potential buyers. Grantees also worked with NCST, a national nonprofit  organization to acquire foreclosed properties in their target areas. NCST  facilitates communication between NSP grantees and banks and provides  grantees with listings of NSP-eligible properties from which to choose.  Many grantees with whom we spoke found NCST to be very helpful in  acquiring properties, and one grantee we contacted said working with  NCST helped it acquire 80 percent of the homes on which it had placed  bids. In an effort to standardize the acquisition process for NSP grantees,  HUD recently partnered with NCST to create the “National First Look  Program” in September 2010. The program gives communities  participating in NSP a “first look” or right of first refusal to purchase  foreclosed homes before the properties are made available to private  investors. According to HUD officials, the program grew out of an  initiative HUD announced in July 2010, which gave NSP-eligible  purchasers the opportunity to acquire foreclosed properties owned by  HUD’s Federal Housing Administration at 10 percent below the appraised  value.
section_title: HUD Has Taken Actions to Mitigate NSP 1 Program Risks through Training, Technical Assistance, and the Establishment of Internal Controls
paragraphs: As previously noted, HERA established specific program requirements for  NSP 1 beyond those for CDBG, including an accelerated timeline for  obligating funds and the requirement that grantees must use 25 percent of  their NSP 1 funds to benefit households at or below 50 percent AMI.  Additionally, HERA required that NSP 1 grantees ensure, among other  things, that properties are acquired at a discount and properties sold to  individuals as a primary residence cannot be resold for more than the total  cost of acquisition and redevelopment.
At the start of NSP 1, HUD conducted a front-end risk assessment (FERA)  to assess NSP 1 program risks and identify actions required to reduce  control risks to an acceptable level. Among other risks, HUD’s review  noted that the scale of the effort could overwhelm some grantees; meeting  the requirement to obligate funds within an 18-month time frame could be  challenging for grantees, especially those with limited real estate  experience; and HUD’s personnel resources were not adequate to oversee  the program. The FERA concluded that implementing NSP 1 successfully  and within required time frames would require early and regular  deployment of controls, including training, technical assistance, and  monitoring. The FERA also recommended additional HUD staff to support  NSP-related activities, because field staff were already overextended  managing existing programs.
subsections: section_title: HUD Provided Training and Guidance and Made Program Modifications to Address Program Challenges, but Some Grantees Said Some of These Efforts Were Not Timely
paragraphs: HUD provided training and guidance on NSP 1 using a variety of methods,  including    online guidance, webinars, and answers to frequently asked questions;  teleconferences and increased communication with field staff; and   classroom and one-on-one instruction (e.g., on DRGR).
HUD provided eight online video training presentations with associated  printouts (“modules”) that outlined NSP 1-specific requirements, policies,  and procedures. For example, the first module provided overall NSP 1  guidance and rules on eligible uses, activities, and properties. HUD also  released webinars, hosted by HUD staff and technical assistance  providers, on a weekly basis that provided guidance on topics such as  obligating funds and meeting the 25 percent set-aside requirement. A  majority of the grantees we spoke with said that, overall, the material  covered in the modules and webinars provided good information and  helped them implement their NSP 1 programs.
HUD faced significant challenges in issuing comprehensive guidance and  training to grantees at NSP 1’s outset because the program was relatively  complex and had to be implemented quickly. Most of the grantees that we  interviewed said that the combination of HUD’s guidance and training was  helpful but some grantees had raised some concerns. Several grantees that  we spoke with about 1 year after the program began said that the guidance  and training they received was not always timely. For example, one  grantee said that the information it received at an NSP problem-solving  clinic in early 2010 would have been more useful had it been provided 6  months earlier. Additionally, two grantees said they did not always get  timely answers to questions about program rules when the field office staff  they asked had to obtain clarification from HUD headquarters. HUD  officials said that some of the assistance grantees found useful was  delivered using funds that HUD received well after the start of NSP 1.
HUD modified NSP policy in two key respects to address challenges faced  by grantees in implementing the program. Grantees we spoke with said  that the first of these modifications helped them overcome difficulties they  were experiencing in acquiring properties. More specifically, in June 2009,  HUD reduced the required discount from the appraised value at which  grantees must purchase NSP-eligible properties. HUD reduced the  discount from a minimum of 5 percent for individual acquisitions to a  minimum of 1 percent, and eliminated the 15 percent discount for  aggregate acquisitions. This change was intended to mitigate the  potentially adverse impact that the larger discounts could have on  neighborhood property values and the inability or unwillingness of the  holders of foreclosed properties to sell at prices that reflect the higher  discount.
NSP 1 grantees had mixed views about the effect of the other program  modification, implemented in April 2010, which expanded the definitions  of foreclosed and abandoned properties. As a result of the program  modification, properties no longer had to have completed the foreclosure  process to be purchased with NSP funds, and the standards for what  constituted an abandoned property eligible for NSP were loosened—for  example, to include tenant-occupied properties. HUD made these  changes in response to suggestions from local communities to increase the  reach of NSP by allowing more properties to qualify. HUD headquarters  staff said this change also enabled some NSP 1 grantees to increase the  pace of their acquisitions and meet their obligation deadlines. They added  that, on the basis of comments from grantees, the expanded definitions  had helped grantees acquire multifamily properties but had not yet been  used to acquire single-family homes. Similarly, some CPD field staff said  the expanded definitions helped grantees that were facing challenges in  meeting the obligation deadline by increasing the number of eligible  properties they could acquire. Specifically, field staff reported that it  helped some of their grantees to fulfill the 25 percent set-aside  requirement by easing restrictions on acquiring multifamily properties,  which many grantees we spoke with intend to rent to low-income  households. Several grantees we spoke with expressed similar views,  noting that the new definitions helped them acquire multifamily  properties. However, others indicated that the broader definitions would  not make a significant impact at this stage in their NSP 1 efforts because  they had made many of their acquisitions prior to the definition changes or  had a large inventory of fully foreclosed homes available. The expanded  definitions may have a greater effect on acquisitions of properties for the  more recent rounds of funding (NSP 2 and NSP 3), since they are in earlier  stages of planning and implementation.
section_title: HUD Provided Technical Assistance to Support Grantees in Implementing NSP 1
paragraphs: In August 2009, HUD awarded $50 million in ARRA funds through a  competition to provide technical assistance for NSP grantees (under both  NSP 1 and NSP 2). According to HUD, as of October 2010, $28.6 million  had been budgeted for NSP technical assistance and $11 million of that  amount had been drawn down. Nine national technical assistance  providers were awarded 89 percent of the funds to operate at the national  level, and three local technical assistance providers received 11 percent of  the funds to operate at the local level. Among other areas, NSP technical  assistance providers were tasked with    helping NSP grantees implement sound underwriting, management, and    building the capacity of public-private partnerships;    developing strategies to serve low-income households;    providing training on the operation and management of land banks; and  training grantees and their subgrantees on HUD program rules and  financial management requirements.
The providers delivered support to grantees through various methods,  including “direct assistance” (assistance provided in person), “on-call  remote assistance” (assistance provided via phone or e-mail), and “Web- based” assistance, which provides answers to questions submitted via  HUD’s NSP resource exchange Web site.
Direct. HUD headquarters and field staff identified grantees that  demonstrated a need for support in specific NSP program areas or  exhibited capacity concerns in meeting the obligation deadline. Technical  assistance providers conducted needs assessments for direct assistance  for 98 grantees during late 2009 and early 2010. As of August 2010, 59  grantees had requested direct assistance, 58 of which received it.
On-call remote. As of August 2010, technical assistance providers had  received 93 requests for on-call remote technical assistance and responded  to 84 of those requests (with 27 completed and 57 in progress). HUD  officials said they received approximately 3 to 4 on-call remote technical  assistance requests weekly. Technical assistance providers also facilitated  NSP problem-solving clinics that were open to all grantees and field staff.
Web-based. HUD officials said that technical assistance providers had  established the NSP resource exchange Web site as a place for grantees to  submit technical assistance requests and share knowledge. The Web site  also has a “frequently asked questions” link that is regularly updated with  answers to questions from grantees that can be searched by topic.  According to HUD, technical assistance providers answered 2,389 out of  2,544 NSP questions submitted between April and August 2010.
HUD officials said that NSP 1 grantees mostly requested technical  assistance in two major areas: (1) program design and (2) financial  underwriting skills. In terms of program design, HUD staff said that some  grantees had selected unsuitable NSP 1 approaches for their local housing  markets. For example, some grantees had planned to implement strategies  for selling homes or increasing home ownership in what were primarily  rental markets. In another example, one grantee was initially not planning  to use NSP 1 funds for demolition, even though, according to HUD staff,  demolition was an appropriate use of NSP 1 funds given the grantee’s local  housing market conditions. Grantees also requested technical assistance  to enhance their knowledge of property financing.
HUD set up accounts in DRGR for each technical assistance provider to  track the use of technical assistance funds and the performance of  grantees receiving the assistance. HUD staff told us they plan to use this  information to assess whether the technical assistance improved grantees’  performance. HUD staff also said they will conduct post-technical  assistance monitoring to assess grantees’ compliance with NSP 1  requirements and determine if additional assistance is necessary.  Additionally, HUD officials said that the agency is collecting feedback on  the quality of technical assistance at training events and through the NSP  resource exchange Web site, among other means. HUD officials said they  would use this feedback to determine potential needs for NSP 2 and 3, and  to help determine whether current technical assistance providers should  continue to participate in HUD programs. Given the critical role that HUD  assigned to technical assistance for mitigating program risks, it will be  important for HUD to follow through with these planned assessments to  ensure that the assistance had the intended effect.
section_title: HUD Hired Staff and Implemented Internal Control Processes for NSP 1
paragraphs: The FERA conducted for NSP 1 cited the lack of HUD staff capacity to  absorb the additional workload and recommended the addition of 20 to 25  staff to support NSP 1. With funding from the fiscal year 2009 continuing  resolution, as of November 2010, HUD had hired 10 term staff as NSP  specialists—whose duties include monitoring and oversight of grantees— placing 7 in field offices that generally had more than 20 NSP 1 grantees  and 3 in headquarters. Also as of November 2010, the agency had hired  an additional 32 field staff with funding provided by the American  Recovery and Reinvestment Act of 2009 (ARRA) to work on implementing  NSP 2 but also to contribute to NSP 1 efforts, such as monitoring grantee  compliance with program requirements.
The FERA also noted the importance of implementing controls to mitigate  program risks. HUD adapted a range of internal control processes already  in place for the CDBG program to ensure compliance with program  requirements and mitigate the risks posed by NSP 1 (see fig. 7). Before  releasing grantees’ NSP 1 funds, HUD required all grantees to submit a  substantial amendment (or “NSP 1 action plan”) to their CPD consolidated  and annual action plans by December 2008 to describe how they would  use NSP 1 funds. As noted earlier, NSP 1 action plans identify areas of  greatest need, establish expected program outputs, set forth plans for  complying with key requirements, and define relevant NSP 1 terms (such  as blighted structures, housing rehabilitation standards, and affordable  rents). HUD reviewed NSP 1 action plans to determine if grantees’ planned  uses of funds were in accordance with key HERA requirements. After  approving the action plans, HUD signed the grant agreements (most were  signed in March 2009, according to HUD officials, resulting in 18-month  obligation periods ending in September 2010).
Also prior to releasing NSP 1 funds, HUD implemented additional controls  for grantees at higher risk of noncompliance with program requirements.  For example, in the initial stage of the program, HUD designated 104  grantees as high risk because their NSP 1 grants were at least three times  greater than their annual CDBG allocations or they had audit findings or  other performance problems in similar HUD grant programs. HUD added a  “special condition” to the NSP 1 agreements of these high-risk grantees  that required them to submit management plans along with their NSP 1  action plans. The management plans detail the number, types, and  responsibilities of staff positions supporting the grantee’s NSP 1 program.
Furthermore, after grantees inputted their action plans into DRGR, CPD  field office staff used a checklist to confirm that the action plans were  entered in a manner that would allow HUD to track NSP 1 funds and  monitor whether some key reporting requirements were met (see fig. 7).  Field staff used an action plan checklist to verify that grantees had  identified eligible NSP 1 uses, responsible organizations, and income- based national objectives associated with activities in DRGR. Once field  office staff reviewed and approved a grantee’s action plan in DRGR, HUD  headquarters released the grantee’s NSP 1 funds.
After releasing grantees’ funds, HUD has used remote and on-site  monitoring of grantees’ ongoing performance to assess compliance with  program requirements. HUD field staff used a QPR checklist to review  areas covered by the action plan checklist and to monitor grantees’  progress in meeting their obligation deadlines.
Additionally, CPD field office staff conducted on-site monitoring of 176  grantees (57 percent of NSP 1 grantees). The field offices selected these  grantees on the basis of risk scores calculated using five risk factors: (1)  financial soundness, (2) overall management capacity, (3) client  satisfaction with services, (4) extent to which services benefit targeted  areas and clientele, and (5) NSP 1 program progress. The factor for  management, which constituted the largest part of the score, considered  grantees’ capacity to implement NSP 1 based on HUD monitoring  information and grantees’ use of subrecipients. The factor for NSP 1  program progress—the second-largest scoring component—considered  other aspects of grantee capacity, including how much NSP 1 funding the  grantee received relative to its regular CDBG allotment, the type of  activities undertaken, and the grantee’s capacity to manage its NSP 1  program. Although CPD field offices primarily used the risk analysis  scores to select grantees for monitoring and identifying specific  compliance areas to review, they also considered HUD OIG audit findings,  where applicable.
To prepare for on-site monitoring, CPD issued a revision to HUD’s  Community Planning and Development Monitoring Handbook in April  2010 that provided HUD staff with guidance for monitoring grantees’  compliance with NSP 1 requirements. The guidance includes “exhibits,” or  checklists that cover key NSP 1 requirements, including the income  qualifications of program beneficiaries, rules on continued affordability,  obligation deadlines, and the 25 percent set-aside for low-income families.
HUD field offices conducted the majority of on-site monitoring from April  through September 2010. As of September 2010, HUD officials told us they  were still in the process of aggregating on-site monitoring results. As a  result, program-wide data on the extent to which grantees are complying  with NSP 1 requirements are not readily available. In the absence of  centralized data, we reviewed the monitoring results for 40 NSP 1 grantees  overseen by the four CPD field offices that we contacted during the course  of our work (the field offices are in Philadelphia, Pennsylvania; Columbus,  Ohio; Miami, Florida; and San Francisco, California). The on-site  monitoring found that 32 of the 40 grantees were in full compliance with  the requirements reviewed. However, CPD field staff identified a total of  13 findings (potential deficiencies requiring corrective action) for the  other 8 grantees. Most of the findings were related to financial  management and accounting issues—for example, deficiencies in  accounting systems for personnel and other administrative costs—and  others related to oversight of subrecipients. Additionally, 1 grantee did not  clearly document that two homebuyers received homebuyer counseling  prior to obtaining their mortgages loans. The same grantee did not take  adequate steps to ensure that a multifamily rental property would remain  affordable to income-eligible households. HUD required the 8 grantees to  take corrective actions on the findings and has an established process for  following up on the status of corrective actions. Because many grantees  are still completing their NSP 1 activities, following through on this  process will be key to ensuring grantees’ compliance with program  requirements.
In cases where HUD identifies major compliance problems, it may freeze a  grantee’s access to NSP 1 funds. HUD officials said they had not needed to  take this action as of September 2010.
section_title: Selected Grantees Complied with Key NSP 1 Requirements for Properties We Reviewed
paragraphs: We reviewed selected grantee’s compliance with key NSP 1 requirements  for a nonstatistical sample of 32 NSP 1 properties. We selected eight  grantees in five states covering different geographic regions and housing  market conditions and reviewed records for four properties at each  grantee. Our review focused on requirements relevant to activities (e.g.,  acquisition, rehabilitation, etc.) that had been completed when we  conducted our selection process. We did not conduct a financial audit of  the grantee or the funds expended on the properties.
As shown in figure 8, we reviewed grantee compliance with key NSP 1  requirements and relevant internal controls concerning the use of grant  funds. Some of the requirements and controls were relevant to all types of  NSP 1 activities. Other requirements and controls applied only to specific  activity types.
We found no instances of significant noncompliance with the key NSP 1  requirements we reviewed for the 32 properties in our nonstatistical  sample. The results of our review cannot be generalized to the total  population of NSP 1 activities or grantees.
Table 1 shows the types of activities that had been completed at the  properties we reviewed. Seventeen of the 32 properties we reviewed had  been acquired and undergone rehabilitation. Six of those 17 properties  were resold by the grantees, and a seventh property was directly acquired  and rehabilitated by the homebuyer with NSP 1 assistance.
section_title: HUD Adapted an Information System for NSP 1, but Data on Program Outputs Have Limitations
subsections: section_title: HUD Modified DRGR and Provided Training and Guidance
paragraphs: HUD made several modifications to DRGR—a system that was designed to  assist in managing Disaster Recovery grants—in order to collect  information for NSP 1 and subsequent rounds of the program. For  example, HUD modified system menus to include items unique to NSP,  such as land banks; removed inapplicable items; and enabled grantees to  designate whether properties had been sold or rented or were single- or  multifamily. HUD also provided training and technical assistance to HUD  field staff and NSP grantees that were unfamiliar with DRGR. These efforts  included one-on-one troubleshooting workshops, online information, and a  help desk. In addition, HUD technical assistance providers held 10 joint  sessions for HUD field staff and grantees on DRGR.
As we have seen, grantees established action plans in DRGR, creating  projects and linking activities to them. For activities, HUD required  detailed information, including    a national objective (e.g., targeting low-, moderate-, and middle-income    an activity type (e.g., acquisition, rehabilitation, demolition,  homeownership assistance, land banking, administration),    a responsible organization (grantee or subrecipient carrying out the    performance measures (e.g., output measures such as the number of  properties, housing units, or households or persons benefiting).
In addition, HUD instructed grantees to enter projected and actual output  measures for each activity in DRGR and provided a predetermined list of  outputs for each activity type. HUD officials said they considered the  number of households benefiting to be the primary output measure for  NSP 1. Under each activity, HUD also required grantees to enter a property  address at the point they obligated funds for a property.
HUD headquarters developed training and checklists for CPD field office  staff to use in reviewing the information grantees entered in DRGR,  including action plans and QPRs. The action plan checklist required field  offices to ensure that (1) grantees established an activity for each  responsible organization, (2) activities met income-based national  objectives, (3) every activity type had a corresponding NSP eligible use,  and (4) each multifamily project had its own activity. The QPR checklist  covers these areas and requires field staff to monitor grantees’ progress in  meeting their obligation deadlines and projected outputs.
HUD uses DRGR for a number of monitoring and reporting purposes. As  discussed earlier, HUD uses information grantees enter into DRGR to  monitor grantees’ progress in meeting obligation deadlines and set-aside  requirements for low-income households. HUD also has put program-wide  and grantee-specific “snapshot” reports on its NSP Resource Exchange  Web site to provide financial and other information about NSP 1 to the  public. In addition, the Administration has included DRGR-generated  information on NSP 1 in its monthly housing scorecard. Thus far, the  scorecard has reported three output measures: (1) number of housing  units constructed or rehabilitated, (2) number of housing units demolished  or cleared, and (3) number of housing units for which direct  homeownership assistance was provided. In the October housing  scorecard, HUD reported that by March 2013, about 36,000 units would be  rehabilitated or constructed; 8,000 units would be demolished; and direct  homeownership assistance would be provided for about 18,000 units. For  reasons described in the next section, it is difficult to know the number of  unique housing units or benefiting households these data represent, and  the data may tend to understate activity-specific outputs.
section_title: Reporting Flexibilities and Shortcomings in HUD Guidance Have Limited the Usefulness of Output Data in DRGR
paragraphs: Although DRGR has been a useful tool for monitoring grantees’  obligations, variation in the way grantees were allowed to classify certain  activities and select output measures in DRGR complicates the analysis of  program outputs. As under the CDBG program—-which was designed to  give grantees substantial flexibility—-HUD officials said they permit NSP 1  grantees to group activities in different ways. For example, HUD officials  told us they instructed grantees to enter information for property  acquisitions under a rehabilitation activity if the acquisition and  rehabilitation are to be carried out by the same responsible organization  and are to be rehabilitated within a short time frame. Accordingly, our  review of DRGR information for 18 grantees identified a number of  variations, including: (1) one activity (classified as “rehabilitation”)  covering both the acquisition and rehabilitation of housing units; (2) two  activities (one classified as “acquisition” and the other as “rehabilitation”)  for acquiring and rehabilitating units; and (3) one activity (classified as  “acquisition for land banking”) for acquiring, demolishing, and land- banking housing units. Due to these variations, totaling outputs for  individual activity types can result in undercounting program outputs  (because grantees that combine two or more activities report the  associated outputs under a single activity type) and totaling outputs across  multiple activity types can result in double counting program outputs  (because grantees that do not combine activities may report the same  outputs under multiple activity types).
HUD officials said that the variation did not affect their ability to monitor  grantees’ compliance with program requirements but acknowledged that it  complicated analysis of program outputs. HUD officials said they were in  the process of identifying duplicate property addresses in DRGR, which  will allow them to report total numbers of NSP 1 housing units and  benefiting households without double counting these outputs.  Undercounting is likely primarily an issue with the acquisition activity  type, because, as previously noted, HUD allows grantees to combine  acquisition and rehabilitation under a rehabilitation activity in some  circumstances. Additionally, HUD officials said they were more focused  on reporting outputs for “end uses” of NSP 1 funds, such as the number of  housing units rehabilitated and demolished and the number of benefiting  households.
However, we found that grantees did not always group acquisition and  rehabilitation under a rehabilitation activity. For instance, contrary to  HUD’s instructions, we identified several instances in which grantees  combined acquisition and rehabilitation under an acquisition activity. HUD  officials indicated they had found similar cases in their reviews of DRGR  information. As a result, totaling output data for rehabilitation activities  may understate actual outputs. HUD training and its QPR review checklist  developed for CPD field staff responsible for reviewing activity data in  DRGR do not adequately address this issue. In particular, the checklist  that field staff use to review grantees’ QPRs does not require field staff to  determine whether grantees grouped activities in accordance with HUD  guidance. As a result, HUD staff may not be detecting errors in how  grantees are classifying activities, which can negatively affect the accuracy  and reliability of NSP 1 output data and therefore the usefulness of these  data for monitoring program progress and results.
We also found variation in how grantees selected output measures for  different activity types. For example, one grantee selected “number of  properties” as its sole output measure for the majority of its activities  (including acquisition and rehabilitation) and did not select numbers of  households benefiting, which HUD told us it considers the program’s  primary output measure. For the same activities, another grantee selected  multiple output measures—number of properties, housing units,  households benefiting, and persons benefiting. HUD officials said they  explained the output measures grantees should input into DRGR as part of  DRGR training and strongly encouraged grantees to select all applicable  output measures. However, the documentation HUD staff cited as  guidance for grantees, including the NSP 1 Notice, did not provide specific  instructions on which output measures should be linked to each activity  type. Additionally, while HUD’s QPR checklist requires field staff to  determine whether grantees used the “right” output measures for each  activity, it does not specify which output measures should be entered for  each activity type. As a result, HUD may not be collecting consistent  output data for each activity, which impairs the agency’s ability to  summarize and report on program outputs in an accurate and consistent  manner.
GAO’s Standards for Internal Control emphasizes the need for federal  agencies to collect reliable information with which to manage their  programs and to review the integrity of performance measures. Due to  limitations in HUD guidance to grantees and field office staff, HUD lacks  assurance that these standards are being met.
section_title: A Planned Assessment of NSP Outcomes Will Focus on NSP 2 but Will Also Include NSP 1-assisted Areas
paragraphs: HUD is in the process of contracting for an assessment of NSP that will  evaluate the impact of the program by tracking outcomes in the  neighborhoods where NSP-assisted activities took place. HUD’s Office of  Policy Development and Research (PD&R) is overseeing the assessment in  collaboration with CPD. The assessment will focus primarily on the  impacts of NSP 2—which funds the same types of activities as NSP 1—but  will also incorporate the results of NSP 1 where the two rounds of the  program overlap. According to PD&R staff, many neighborhoods receiving  NSP 2 funds also received NSP 1 funds. HUD does not plan to conduct a  separate assessment of NSP 1 outcomes, in part because HERA did not  provide funding for an evaluation. However, ARRA, which authorized NSP  2, did provide funds for program evaluation.
HUD has established outcome measures for NSP. In its May 2009 Notice of  Funding Availability (NOFA) for NSP 2, HUD established short- and long- term outcome measures as guidance for grantees in their application  process. CPD staff said they would also apply these measures to NSP 1.  The outcome measures are    short-term: (1) arrest decline in home values and (2) reduce or eliminate  vacant and abandoned properties; and long-term: (1) increase sales in target areas and (2) increase median  property values.
PD&R staff said they have been working closely with CPD to develop the  objectives and scope of the assessment. They said the assessment will  track conditions and trends in NSP-assisted neighborhoods in relation to  the short- and long-term outcome measures. They also will attempt to  identify suitable comparison areas (e.g., similar areas that did not receive  assistance) to demonstrate the impact of NSP, but expect this to be more  challenging. Additionally, PD&R staff noted that DRGR was structured to  track spending by DRGR activity rather than by property, making it  difficult to determine the amount of NSP 1 funds that were spent in a  particular geographic area. PD&R staff plan to obtain and review  additional records from NSP 2 grantees to determine the amount of funds  spent on NSP 2 properties and may collect similar information for NSP 1  properties in areas served by both rounds of the program. HUD is  anticipating that the assessment will be completed no earlier than January  2014. Given that NSP 1 and NSP 2 share a common set of eligible activities,  the results of the assessment should be useful for understanding the  impact of both rounds of the program on assisted neighborhoods.
section_title: Conclusions
paragraphs: NSP 1 provided a mechanism for state and local governments to mitigate  the destabilizing effects of mortgage foreclosures, but HUD and grantees  faced a number of implementation challenges, including the program’s  tight time frames and the limited capacity of some grantees to undertake  real estate activities. HUD took actions to help grantees meet these  challenges though guidance, training, and technical assistance.  Additionally, HUD established internal control procedures to mitigate  risks and promote compliance with program requirements. Our work  suggests that these efforts helped grantees obligate funds in a timely  manner, adopt strategies appropriate to their communities, and follow  program rules. Nevertheless, because many NSP 1 activities have not been  completed, continued HUD oversight will be required to ensure that any  implementation and compliance problems are identified and addressed in  an effective manner. In particular, HUD will need to follow through on its  efforts to ensure that grantees are taking corrective actions on findings  from on-site monitoring visits.
As NSP 1 and other rounds of NSP progress, assessing program outputs  and outcomes will become increasingly important. HUD took a number of  important steps to collect key program data in DRGR, including  information on grantees’ activities and performance measures. However,  variation in how grantees entered this information make it difficult to  accurately summarize program outputs without undercounting (in the  case of activity-specific outputs) or overcounting (in the case of program- wide outputs). While HUD has developed a method to resolve the  overcounting issue, limitations in HUD’s written guidance to grantees and  field staff may be contributing to variation in data entry and impairing  HUD’s ability to accurately summarize program outputs. Existing guidance  does not require field staff to review whether grantees properly grouped  activities and does not specify which output measures grantees should  select for each type of activity. Similarly, HUD has not provided grantees  with written guidance specifying the output measures they should select  for different activity types. In the absence of such guidance, HUD lacks  assurance that it is collecting consistent information from NSP 1 grantees  and that it is summarizing and reporting program outputs in an accurate  manner. Because grantees involved in NSP 2 and 3 also are using DRGR,  addressing limitations in written guidance would benefit HUD’s analysis of  output data for all rounds of NSP.
section_title: Recommendations for Executive Action
paragraphs: To ensure the consistency of data collection in DRGR and enhance the  reporting of program outputs for all rounds of NSP, we recommend that  the Secretary of HUD take the following two actions:    Update the QPR review checklist to include reviews of whether grantees  are (1) grouping activities in accordance with HUD instructions and (2)  selecting the appropriate output measures for different activities.
Issue written guidance to NSP grantees on the output measures they  should select for different activities.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to HUD for its review and comment. We  received written comments from the Deputy Assistant Secretary for Grant  Programs, CPD, that are reprinted in appendix II. We also received  technical comments from HUD that we incorporated into the final report  as appropriate. In its written comments, HUD stated that, in general, the  draft report accurately represented its efforts to implement NSP 1. HUD  also agreed to implement both of the report’s recommendations in the first  half of 2011.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Housing and Urban Development, and other  interested parties. In addition, the report will be available at no charge on  GAO’s Web site at http://www.gao.gov.
If you or your staffs have questions about this report, please contact me at  (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Congress created the Neighborhood Stabilization Program (NSP), which is  administered by the Department of Housing and Urban Development  (HUD), to help reduce the number of foreclosed and abandoned properties  and restore depressed local housing markets. The Housing and Economic  Recovery Act of 2008 (HERA) authorized the first phase of this program  (NSP 1), providing $3.92 billion in grant funds to states and local  governments. HERA mandated that GAO report on whether NSP 1 funds  were being used in a manner consistent with criteria set forth in the act.  To respond to this mandate we examined (1) grantees’ progress and  challenges in meeting NSP 1 obligation time frames and income-targeting  criteria, (2) HUD’s actions to mitigate program risks and ensure grantees’  compliance with key NSP 1 requirements, and (3) HUD’s efforts to collect  program data and assess program performance.
subsections: section_title: Grantee Progress and Challenges
paragraphs: To examine NSP 1 grantees’ progress and challenges in meeting HERA  obligation time frames and income-targeting criteria, we reviewed data  from HUD’s Disaster Recovery Grant Reporting (DRGR) system on  grantee obligations, analyzed states’ methods for distributing funds to  other entities for obligation, and interviewed representatives from selected  NSP 1 grantees (see selection criteria below). We also reviewed relevant  HERA provisions and program guidance from the Department of Housing  and Urban Development (HUD), including the NSP 1 Notice.
We analyzed DRGR data as of June 24, 2010, and October 1, 2010, to  calculate the percentage of their grant allocation each grantee had  obligated at both points in time. Using the October data, we also  calculated the overall percentage of NSP 1 funds obligated by grantees and  the proportion of funds obligated for different activities. To do these  calculations, we used the approach set forth in the NSP 1 Notice, which  does not differentiate between obligation of grant funds and program  income in assessing progress toward obligation deadlines. For the  analysis of obligations by activity type, we combined the data for  acquisition, rehabilitation, and disposition because—as described in the  body of this report—grantees sometimes group two or more of these  activities together under a single activity in DRGR.
Because state grantees could reallocate their funds to other entities (e.g.,  local governments) for obligation as long as the funds targeted areas of  greatest need, we examined the methods states used to distribute their  NSP 1 funds. We did this by analyzing information in DRGR on states’  HUD-approved NSP 1 action plans to determine whether the states used  required criteria for determining areas of greatest need and the types of  distribution methods they used, including reallocation by competition,  reallocation by formula, and through state-administered programs.  Additionally, by analyzing DRGR data as of June 24, 2010, we also  determined the number of states that reallocated funds to local  governments that had also received NSP 1 funds directly from HUD. We  also determined the number of local governments that received NSP 1  funds both directly from HUD and from state reallocations, as well as the  amount and percentage of program funds this represented. The funding  amounts and percentages are approximate because in two states it was  unclear from HUD data how reallocations were divided between two  recipients, only one of which was a direct grantee. We included the entire  reallocations for these two cases ($3.6 million in total) in our nationwide  total of $175.8 million as it seemed likely that the funds were used by the  direct grantee.
We also assessed the reliability of the DRGR information (discussed later  in this section). We concluded that the data we used were sufficiently  reliable for our purposes.
We interviewed 11 grantees to discuss their approaches to implementing  NSP 1, the progress they had made, and challenges they faced in meeting  obligation time frames and income-targeting criteria. We selected these  grantees to cover areas with substantial foreclosure problems and provide  some variation in geographic location, housing market conditions, and  grantee types. We also focused on grantees that had made some progress  in implementing their NSP 1 programs. The grantees were: State of  Indiana, City of Fort Wayne, and City of Indianapolis (Indiana); Lee  County, Orange County, and City of Tampa (Florida); and State of Nevada,  Clark County, City of Henderson, City of Las Vegas, and City of North Las  Vegas (Nevada). We had previously spoken with these grantees during the  first phase of our work, which we conducted in April through December  2009.
We also interviewed officials from four HUD field offices about grantees’  progress and challenges in implementing NSP 1. We selected these field  offices to provide some geographic variation and because they were  responsible for overseeing some of the grantees that we visited on-site.  The field offices were located in Columbus, Ohio; Miami, Florida;  Philadelphia, Pennsylvania; and San Francisco, California.
We also spoke with staff from NeighborWorks® America and the National  Community Stabilization Trust to obtain their perspectives on grantees’  progress and challenges.
section_title: HUD’s Actions to Mitigate Risks and Ensure Compliance
paragraphs: To examine the steps HUD has taken to ensure grantees’ compliance with  key NSP 1 requirements and mitigate program risks, we reviewed NSP 1  statutes and regulations and HUD’s front-end risk assessment (FERA) for  the program. We reviewed relevant documentation and interviewed HUD  officials about the agency’s efforts to hire additional staff to address gaps  in capacity to oversee NSP 1 grantees (a program risk identified in the  FERA) and to provide training and technical assistance to grantees.  Additionally, we interviewed staff from the 11 grantees described above  about HUD’s training, technical assistance, and oversight processes for  NSP 1 to obtain their perspectives on these efforts.
We reviewed HUD’s internal controls for NSP 1, including HUD’s guidance  and procedures for monitoring grantee compliance with key program  requirements. In addition, we reviewed results of on-site monitoring of  NSP 1 grantees conducted by the four field offices we contacted. More  specifically, we reviewed the results for the 40 grantees for which the field  offices had completed monitoring letters as of September 15, 2010. In  addition, we interviewed HUD headquarters and field office officials on  the status and results of their on-site monitoring.
Additionally, we visited 8 grantees to conduct limited tests of compliance  with key program requirements. We purposefully selected the grantees to  cover different eligible NSP 1 activities, types of grantees, and geographic  areas where characteristics of housing markets may vary. The grantees we  selected were: Collier County and Lee County (Florida); City of Columbus  and City of Dayton (Ohio); Maricopa County and City of Phoenix  (Arizona); Philadelphia, Pennsylvania; and Prince William County,  Virginia. We primarily focused on grantees with completed activities,  which intentionally overrepresented grantees that had made the most  progress in implementing NSP 1 at the time of our review and ensured we  would review a variety of activities for compliance with NSP 1 key  requirements. Further, to avoid overburdening grantees, we focused our  site visits on grantees that, on the basis of information from HUD, were  not receiving extensive technical assistance or being monitoring on-site by  HUD staff.
At each grantee, we reviewed records for four properties, for a total of 32  properties in our sample. To select the four properties to be reviewed at  each grantee, we obtained a list of NSP 1 properties with completed  activities and applied the following steps: (1) We identified the group of  properties with the largest number of completed activities (e.g.,  acquisition, rehabilitation, resale, etc.). We grouped the remaining  properties by type of activity. (2) We allocated the number of properties to  be selected from the different groupings to intentionally capture  properties with the most completed activities, while also covering the  grantee’s full range of activities. (3) We randomly selected properties from  each group up to the predetermined allocation.
We developed a checklist to review compliance with program  requirements and internal controls for the following types of activities for  each property: acquisition, rehabilitation, demolition, financing, and  resale. We selected the checklist components by reviewing federal internal  control standards and analyzing NSP 1 requirements in statutes,  regulations, and relevant HUD program guidance. Figure 8 in the body of  this report includes the requirements and controls we reviewed.
We are not able to generalize the results of our compliance testing to all  NSP 1 grantees or activities. We did not conduct financial audits of the 8  grantees or the 32 properties.
section_title: HUD Data Collection and Performance Assessment
paragraphs: To examine HUD’s efforts to collect program data and assess the  reliability of NSP data, we reviewed HUD Office of Inspector General  (OIG) audits of the DRGR system. We interviewed OIG staff about these  audits and reviewed documentation on HUD’s actions to address the OIG’s  recommendations. We also reviewed documentation on HUD’s  modifications to DRGR and efforts to train system users. This information  included HUD training materials and guidance to grantees and field staff  on entering and reviewing data on program activities and output measures.  We also interviewed HUD headquarters, HUD field office, and grantee staff  with responsibilities for inputting or monitoring DRGR data. We also  conducted reasonableness checks of DRGR data to identify any missing or  erroneous data and by interviewing knowledgeable HUD officials to  ensure we interpreted the data correctly. For the purpose of this and the  first objective, we concluded that the data we used were sufficiently  reliable for our purposes.
Additionally, we reviewed the NSP output data that HUD posted on its  NSP Web site and included in the Administration’s monthly housing  scorecard. Furthermore, we examined DRGR action plans and Quarterly  Performance Reports (for the second quarter of calendar year 2010) for 18  grantees—the 11 cited previously plus others we visited on-site (described  in the previous section of this appendix). Our examination focused on the  consistency with which grantees set up activities and selected program  output measures in DRGR when entering their action plans and  performance reports, and the extent to which they followed applicable  HUD guidance. Finally, we reviewed federal internal control standards  relevant to data quality and controls.
To obtain information on HUD’s plans to assess NSP 1, we reviewed the  scope of work for a planned HUD study of NSP program outcomes. In  addition, we interviewed HUD staff knowledgeable of the study, including  officials from HUD’s Office of Policy Development and Research and  Office of Community Planning and Development.
We conducted this performance audit from January to December 2010, in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
section_title: Appendix II: Comments from the Department of Housing and Urban Development
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Steven Westley, Assistant  Director; Allison Abrams; Emily Chalmers; Mya Dinh; Ying Long; John  McGrail; Meredith Moore; Jasminee Persaud; and Carl Ramirez made key  contributions to this report.