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We audited the Housing Authority of the City of Meridian’s Queen City apartments at the request of the U.S. Department of Housing and Urban Development’s (HUD) Single Family Office of Asset Management.  Our objectives were to determine whether the Authority acquired, financed, and managed the purchase of the apartments in accordance with applicable regulations and determine the cause of the Queen City apartments’ Federal Housing Administration (FHA) loan defaults.

The Authority acquired and financed Queen City rental apartments in accordance with HUD’s Federal regulations by executing 26 FHA-insured mortgages for the purpose of renting the apartments to low- and moderate-income families.  However, the Authority did not properly manage and operate the apartments.  Specifically, the Authority did not adequately plan for its maintenance.  This condition occurred because the Authority’s maintenance plan did not adequately consider the costs of upkeep and the Authority did not have a contingency plan in place to address the physical condition of the apartments in the event of declining rental income.  As a result, the Authority exposed the FHA insurance fund to unnecessary risk and a potential loss of more than $608,000.

The audit identified a deficiency which did not comply with a requirement in the deeds of trust which is an agreement between the originating lender and the Authority.  Specifically, the audit identified that the Authority did not adequately maintain the physical condition of Queen City rental apartments which was required by the deeds of trust for each property.  However, the deficiency only violated a covenant provided in the agreement and did not violate any HUD Federal regulations; therefore, no recommendations were made in the report.