DENVER – The city has a complete list of its affordable housing inventory but could still be allowing the sale and resale of affordable properties at incorrect prices, according to a follow-up of the first affordable housing audit from Denver Auditor Timothy M. O’Brien, CPA.
“I’m seeing improvement in the new Department of Housing Stability,” Auditor O’Brien said. “However, the city still has work to do to achieve a truly successful affordable housing program.”
The city’s affordable housing management moved to the newly formed Department of Housing Stability after our second affordable housing audit last year. Previously, affordable housing was managed by the former Office of Economic Development (now called Denver Economic Development & Opportunity), as well as the Department of Community Planning and Development.
In our first audit, we found improper determinations of income eligibility, incorrect pricing of homes, and errors in record keeping that could lead to a loss of the city’s affordable housing inventory.
Affordable housing is defined as housing for which occupants pay no more than 30% of their gross income on housing costs. In the case of owned housing, this includes mortgage payments, taxes, insurance and homeowners association dues.
Since the first audit, the city has improved how it tracks affordable properties and keeps a complete list with little room for human error.
However, the Department of Housing Stability continues to miscalculate the maximum sale prices and resale prices for affordable homes.
Housing Stability does not use mill levy rates, assessment rates, homeowners insurance rates, and private mortgage insurance rates in the affordability calculation for the sale of new affordable units.
Incorrect sale price tables could prevent some individuals from obtaining affordable housing who actually could afford the home. It could also allow affordable homes to be sold to individuals who ultimately cannot afford them.
Similarly, incorrect resale prices could either deprive individuals of appreciated value, or it could allow affordable homeowners to sell their homes for windfall profits at the taxpayers’ expense.
During follow-up work, our auditors found Housing Stability is only checking the math on automated resale price calculations on a limited basis. This is an area of concern because covenants and directions for calculating the maximum resale price vary widely and there is significant room for error due to the increased complexity. Out of about 5,000 affordable housing units in the city, only about 100 did not have a separate covenant that changed the calculation from the standard language.
“Calculating resale prices isn’t a one-size-fits-all process and the department needs to take extra care,” Auditor O’Brien said. “Even with a thorough review of the numbers, getting the calculations right will be a challenge due to the complex and sometimes vague covenants on the thousands of affordable properties across the city.”
The department has also chosen not to correct existing errors in memoranda of acceptance, although managers have made some improvements going forward to how they record documents and send them to the Clerk and Recorder’s Office.
Housing Stability officials told our team it is a waste of time to go back and fix the existing files because they are not legally enforceable. However, the recording process is especially important because title companies for prospective buyers of affordable units rely on covenants to find any restrictions on a property, such as affordability restrictions.
Errors in memoranda of acceptance could lead to the sale of affordable housing to ineligible homebuyers and increases the probability future homebuyers could be unaware of an affordability restriction on a unit. Housing Stability officials say they prefer to develop a new system for restrictive affordable housing documents that will be legally enforceable.
“The city has a record showing problems with keeping track of affordable housing through sale and resale over time,” Auditor O’Brien said. “We need to do everything we can to keep all records updated and available, even if they aren’t legally enforceable.”
Housing Stability has improved how it verifies income for individuals. The department now has a procedure and spreadsheet to calculate applicants’ maximum monthly payments based on gross income. This will help ensure applicants will not pay more than 30% of their income for housing, which decreases the likelihood the applicant will default on the mortgage and lose the affordable home.
Follow-up work on the second affordable housing audit is forthcoming.
The Auditor’s Office also released a follow up report on the Workday User Access Controls audit. The agencies implemented most of our recommendations to ensure oversight of the city’s use of the Workday application, and it is ensuring effective internal controls are in place for user access.