Finding Text
Finding 2025-002: Material Weakness, Material Noncompliance - Special Tests and Provisions, Mortgage Status and Reserve for Replacements Repeat Finding: 2024-002 Federal Agency: U.S. Department of Housing and Urban Development Federal Program Name: Section 232 Mortgage Insurance for Nursing Homes and Section 241(a) Supplemental Loan Insurance Multifamily Rental Housing Assistance Listing Number: 14.129 and 14.151 Award Period: January 1, 2025 through December 31, 2025 Criteria or Specific Requirement: HUD regulations, the applicable HUD Regulatory Agreement, and the insured mortgage loan documents require the Organization to make timely debt service payments, including principal, interest, mortgage insurance premiums, and required escrow deposits, in order to remain in compliance with HUD program requirements. Condition/Context: During the fiscal year, the Organization experienced ongoing financial distress and declining liquidity, which adversely affected its ability to meet financial obligations as they became due. As a result, mortgage payments, including required principal, interest, mortgage insurance premiums, and escrow deposits, were not made in accordance with the loan and regulatory agreements. As of December 31, 2025, delinquent amounts totaled approximately $978 thousand. Questioned Costs: $977,775 consisting of delinquent principal and interest of $762,871 and deficiencies in tax, insurance and MIP escrows of $214,904. Cause: The Organization did not maintain sufficient cash reserves or effective cash-flow forecasting controls to ensure that required debt service payments were prioritized and paid timely. Effect: As a result of the failure to make required debt service payments, the loan entered default status and was assigned from the lender to HUD, increasing HUD's exposure under the mortgage insurance program. The default resulted in the assessment of late charges and ultimately led to the appointment of a court-ordered receiver, significantly limiting the Organization's control over its operations and financial activities. Recommendation: The Receiver and the Organization should work with HUD to develop and implement a formal workout or resolution plan, including enhanced cash-flow monitoring and debt service planning, to address the loan default and restore compliance with HUD debt service requirements. Views of Responsible Officials: Management acknowledges the finding related to the failure to make required debt service payments under the HUD Section 232 and Section 241(a) insured mortgage loan agreements. The Organization experienced significant financial distress and constrained liquidity during the fiscal year, which limited its ability to remit required principal, interest, mortgage insurance premium, and escrow payments as they became due. As a result of the loan default, the mortgage was assigned to the U.S. Department of Housing and Urban Development. With the appointment of a Receiver over the Organization, responsibility for cash management, financial oversight, and debt service planning has transitioned to the Receiver. The Receiver is marketing the facility towards a sale in order to satisfy the outstanding loan balance with HUD. Interim corrective actions include enhanced cash-flow monitoring, prioritization of operational suppliers, and ongoing communication with HUD regarding the project's financial condition and sale status. Management believes that these actions will support progress towards stabilization and marketability of the Organization.