The U.S. Department of Housing and Urban Development – Office of Inspector General audited Berkadia Commercial Mortgage, LLC’s underwriting of the loan to fund the renovation of the Temtor project in St. Louis, MO. We initiated this audit because the project failed quickly after completion, resulting in a large loss to the Federal Housing Administration insurance fund. Our audit objective was to determine whether Berkadia properly underwrote the items that established the maximum mortgage amount for the Temtor project.
Berkadia did not properly determine the maximum mortgage amount for the Temtor loan, resulting in an $11.3 million loss to HUD. Ineligible and unsupported items increased the U.S. Department of Housing and Urban Development (HUD)-insured mortgage by more than $6 million. Berkadia included projected commercial rents without establishing the market rate and tax increment financing (TIF) payments that were not guaranteed. The project’s actual income was insufficient to pay the larger mortgage. The owners defaulted on the loan beginning with the first payment after final endorsement, leading to submission of a claim to HUD.
We recommend that HUD refer Berkadia to the Mortgagee Review Board for the violations that caused a more than $11 million loss to HUD’s FHA insurance fund. We also recommend that Berkadia modify policies and procedures to ensure that future loans represent an acceptable risk to HUD.