We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of Section 202 multifamily housing project refinances as part of the Inspector General’s goal of promoting fiscal responsibility and financial accountability.  Our objective was to determine whether HUD had adequate controls to ensure that Section 202 refinancing was conducted in an effective and efficient manner.

HUD did not have adequate controls to ensure that all Section 202 refinancing resulted in economical and efficient outcomes.  Specifically, (1) HUD did not ensure that at least half the debt service savings that resulted from refinancing were used to benefit tenants or reduce housing assistance payments, (2) consistent accountability for the debt service savings was not always maintained, and (3) some refinancing were processed for projects that had negative debt service savings, which resulted in higher debt service costs than before the refinancing.  These deficiencies were due to HUD’s lack of adequate oversight and inconsistent nationwide policy implementation regarding debt service savings realized from Section 202 refinancing activities.  As a result, millions of dollars in debt service savings were not properly accounted for and available, the savings may not have been used to benefit tenants or for the reduction of housing assistance payments, and some refinanced projects ended up costing HUD additional housing assistance payments because of the additional cost for debt service.

We recommend that HUD (1) develop and implement consistent nationwide policies for oversight and monitoring of debt service savings, thereby ensuring that at least $21 million per year is used to benefit tenants or reduce housing assistance payments; (2) direct field offices to account for debt service savings and when possible, require the savings to be used to offset housing assistance payments; and (3) implement procedures to ensure that refinancings comply with the requirement to generate positive debt service savings.