DENVER – A new report from Denver Auditor Timothy M. O’Brien, CPA, reveals multiple, significant problems with the city’s affordable housing program, ranging from improper determinations of income eligibility to incorrect pricing of homes.
Our audit also found errors in the way affordable housing memoranda of acceptance were recorded, which can potentially lead to income restricted homes being improperly sold at full-market prices. There has been ongoing media coverage of homes sold in violation of affordable housing covenants over the last year.
The end result is that the Office of Economic Development might not be fulfilling its mission of providing affordable housing through the program it administers, the audit found.
“This audit revealed serious errors in the way the Office of Economic Development was running the program,” Auditor O’Brien said. “Planning organizing monitoring activities could keep our already too small affordable housing supply from jeopardy.”
According to the audit, the city has both overpriced and underpriced homes. Additionally, the Office of Economic Development was not properly determining income eligibility to ensure monthly housing payments were affordable. The agency also did not accurately collect fees from developers meant to fund affordable housing.
Affordable housing is defined as housing for which occupants pay no more than 30 percent of their gross income for housing costs. In the case of owned housing, this includes mortgage payments, taxes, insurance and homeowners’ association dues.
Under the 2002 Inclusionary Housing Ordinance, developers were required to make 10 percent of units affordable in residential developments of 30 or more for-sale homes, or they had to pay a fee to the city. This ordinance ended in 2016 when the new Affordable Housing Permanent Fund took its place. However, affordable units approved for development before 2016 are still subject to the ordinance, and the audit team found continued errors could still threaten the city’s affordable housing inventory today.
The Office of Economic Development miscalculated the sale prices of homes. We found three affordable units, of 25 examined, that were purchased for more than the maximum allowed. The Office of Economic Development did not calculate a maximum sale price table at all for the entire year of 2007, which potentially meant the 51 home sales during this time sold for less than they should have.
The agency was also not properly calculating whether people trying to buy affordable homes were able to afford payments. We tested 23 for-sale units, and found that owners of all 23 were not properly income-verified. The Office of Economic Development calculated affordability based on the maximum area median income levels permitted for the unit, not based on the applicant’s actual income.
The office was not verifying affordable housing applicants would be making monthly payments below 30 percent of their income, and did not start complying with the income verification process until this audit was underway. If new affordable housing owners cannot afford the monthly payments, the risk is higher that they could face foreclosure and the city could lose units in the affordable housing supply.
“Even if an affordable housing unit is priced based on maximum prices allowed according to the area medium income, that doesn’t mean the unit is actually affordable to the individual homebuyer,” Auditor O’Brien said.
The audit also revealed errors in the recording process for documents that secure affordability for affordable homes with the Clerk and Recorder’s office. The recording process is especially important as title companies for prospective buyers of affordable units rely on covenants to find any restrictions on a property, such as affordability restrictions. The city has already identified more than 300 units out of compliance with covenant restrictions, many of which were sold without the Office of Economic Development’s knowledge to buyers who were not income-verified.
Errors in memoranda of acceptance recording could lead to the sale of affordable housing to ineligible homebuyers and increases the probability future homebuyers could be unaware of affordability restrictions on the unit.
We also found that the Office of Economic Development mishandled cash-in-lieu payments from developers. In one instance, the city over-collected $35,762 from a developer. The Office of Economic Development agreed to repay the developer. In another instance, the city issued a permit and certificate of occupancy before receiving the payment. It took the city 12 years to receive the $1.5 million payment. These were funds that could have been reinvested in affordable housing projects.
The city also lacks an accurate and complete compliance database of affordable units. Incomplete data can lead to an increased likelihood of violations of covenant restrictions, ineligible home buyers purchasing affordable housing units, and loss of units from the city’s stock of affordable housing.
While the Office of Economic Development argues many of the problems identified in this report have been fixed or are no longer an issue since the end of the Inclusionary Housing Ordinance, Auditor O’Brien believes the audit findings indicate ongoing areas of concern and weaknesses in controls to keep problems such as these from happening.
“The Office of Economic Development has not demonstrated they can be certain these problems won’t happen again,” Auditor O’Brien said. “It’s time to put stronger internal controls in place over pricing, income verification and recording to ensure the city is taking good care of its affordable housing supply and working to keep units affordable for the long term.”
The Office of Economic Development and Community Planning and Development agreed to all of our recommendations and we will be following up to make sure the agency makes significant improvements in the near future.