GAO Study is Critical of HUD Oversight of the Housing Trust Fund Program

The U.S. Government Accountability Office (GAO) was asked by members of Congress to examine the use and oversight of funds from the Housing Trust Fund (HTF) Program.  In August 2023, the GAO published its findings in a report titled, “Affordable Housing – Improvements Needed in HUD’s Oversight of the Housing Trust Fund Program.” The report examines (1) the number and production rate of HTF units; (2) how selected grantees have used HTF and other funding sources; and (3) HUD’s HTF oversight and reporting.

What GAO Found

As of March 1, 2022, HTF grantees had developed 2,186 rental units (in 263 projects) for households with extremely low incomes (not exceeding 30% of the area median).

For the 12 selected grantees GAO reviewed, HTF accounted for about 10 percent of the total funds for 70 completed projects. Equity from investors in Low-Income Housing Tax Credits (LIHTC) was the largest funding source. 43 of the projects were new construction (with an average per unit development cost of $262,732), 26 of the projects were rehabilitation (with an average per unit development cost of $188,758), and one project was acquisition only ($34,590 per unit).

Average costs vary widely from state to state, with California being the highest ($359,593 per unit) to Mississippi being the lowest ($144,614 per unit).

Interestingly, the average per-unit development cost for projects with nonprofit developers was about $40,000 higher than costs for projects with for-profit developers. The reason for this appears to be that nonprofit organizations focus more on populations that are more costly to serve, such as special needs tenants who may require additional or enhanced facilities.

The selected grantees were the state agencies responsible for administering the HTF program in Arizona, California, Georgia, Maine, Massachusetts, Minnesota, Mississippi, New York, North Dakota, Tennessee, and Utah.

HUD monitors compliance with HTF funding commitment and expenditure deadlines, but weaknesses exist in its oversight and reporting. Specifically, HUD has not –

• Monitored grantee compliance with requirements for reporting project completion dates or data on total project units in HUD’s information system;
• Effectively communicated requirements for grantees to obtain cost certifications for completed HTF projects;
• Conducted or scheduled a comprehensive assessment of fraud risks; and
• Disclosed limitations in its external HTF reports that could lead to misinterpretation of project cost and funding data.

HUD officials are drafting procedures for better monitoring of HTF grantees. Implementation of these procedures will begin in 2024.

HUD annually allocates HTF grant funds to states using a formula to determine grant amounts. The formula considers the shortage of rental homes affordable and available to very low-income and extremely low-income (ELI) renter households and the extent to which such households are living in substandard housing or spending more than 50% of their income on rent. The program has a minimum annual grant of $3 million for each of the 50 states and the District of Columbia. In 2022, 21 states and DC received less than $5 million and 23 states received between $5 million and $25 million. Allocations for the remaining seven states ranged from $26 million (Pennsylvania) to $132 million (California).

By statute, all HTF funds must benefit very low- or extremely low-income households.  HUD has indicated that at least 80% of the funds must be used for the production, rehabilitation, preservation, or operation of rental housing. 75% of the funds for rental housing must benefit ELI families or families with incomes at or below the poverty line. HTF rental units must adhere to income and rent restrictions for an affordability period of 30 years.

The largest source of federal assistance for developing affordable rental housing is the LIHTC program, which provides federal income tax credits to encourage private equity investments in the construction or rehabilitation of affordable rental housing. LIHTC equity represents about 40% of total funding.  A high percentage of HTF projects also utilize HOME funds, which is the largest HUD-administered program that funds housing development.

About 57% of HTF units completed have been efficiency or one-bedroom units, about 26% are two-bedroom units, and about 17% have three or more bedrooms. Almost all HTF activity has been rental since low-income and ELI households may have difficulty obtaining mortgages for homeownership.

Most completed HTF units (about 80%) are in projects located in metropolitan areas. Grantees generally use HTF funds to target special populations and build permanent supportive housing. Nine of the 12 selected grantees awarded HTF funds to projects that targeted special populations. Special populations include individuals experiencing homelessness, formerly incarcerated individuals, older adults, and veterans.

Weaknesses Identified in the Study

HUD identified two weaknesses in HUD’s oversight of project completion requirements:

1. Project Completion Deadline: HUD does not have procedures for reviewing whether HTF grantees are entering completion information into the HUD database within the 120-day regulatory deadline and has not conducted reviews. It does appear that grantee confusion regarding completion requirements may be contributing to noncompliance in this area. One specific area of confusion is the difference between HTF and LIHTC definitions of project completion. Since HUD is not reviewing project completion times, it is unaware of grantee noncompliance in this area.
2. Data on total units in completed projects: HUD’s data on the total number of units (HTF plus non- HTF units) in completed projects is inaccurate, and HUD does not have a centralized process for identifying likely errors.

Other program weaknesses include –

• Failure of the grantees to comply with cost certification requirements;
• HUD has not comprehensively assessed HTF fraud risks; and
• HUD’s reporting on HTF costs and funding could be misinterpreted.

Conclusions

• Because HUD does not review grantees’ final drawdown and completion dates, it has been unaware of grantee noncompliance with and confusion about the requirement to enter project completion information within 120 days of the final drawdown of funds. Conducting such reviews and providing grantees additional instruction on the requirement could help ensure the timely completion of HTF-assisted projects and enhance the accuracy of HUD’s data on HTF unit production.
• HUD has not effectively communicated requirements for grantees to obtain cost certifications for completed HTF projects, as evidenced by the absence of cost certifications for many projects.
• Because HUD has not scheduled or conducted a comprehensive assessment of fraud risks in the HTF program, it is not well-positioned to identify and mitigate risks that could reduce the program’s efficiency and effectiveness.

Recommendations of the GAO

1. HUD should develop and implement a centralized process to monitor HTF grantee compliance with data entry requirements;
2. HUD should develop and implement a system to monitor the total number of units in completed projects;
3. HUD should use formal notices and training to enhance communication of the cost certification requirements;
4. HUD should schedule and conduct a comprehensive assessment of HTF fraud risks; and
5. HUD should revise its public reports on the HTF program to disclose that the amount of non-HTF funds may be underreported and that HTF units are only a portion of the total units in HTF-assisted projects.

HUD has agreed to all five recommendations and will implement policies to adopt these recommendations in 2024.

BOTTOM LINE

This report responds to a Congressional request to assess the utilization and supervision of funds from the Housing Trust Fund (HTF) program. The report covered the number of HTF units developed, funding sources, and oversight by the Department of Housing & Urban Development (HUD).

By March 2022, 2,186 rental units for ELI households were developed via the HTF. In a study of 12 grantees, HTF contributed around 10% of total funds for 70 completed projects, with LIHTC being a major source. Costs varied across states, with nonprofits incurring higher costs due to serving more costly populations.

HUD’s oversight was found to have weaknesses, including noncompliance with project completion reporting, lack of cost certifications, incomplete assessment of fraud risks, and misleading external reporting. The GAO recommends improving monitoring, communication, risk assessment, and public reporting. HUD agreed to implement these recommendations in 2024. All HTF grantees are encouraged to review the GAO report and be proactive in implementing changes that are likely to occur in 2024.