1. Slide #1 Annie Stevenson Assets and Asset Income

2. Slide #2 Welcome to Lunch N Learn!  Today’s Topics: Calculating income from assets  Asset market value  Net cash value Verification issues HUD FAQs

3. Slide #3 Welcome to Lunch N Learn!  Upcoming topics for the occupancy series: 4/4/08: Adjusted Income 5/2/08: Verification Issues 6/12/08: PH Rent Calculation 6/13/08: HCV Rent Calculation  Join our email list at www.nanmckay.com for all Lunch ‘n’ Learn updateswww.nanmckay.com

4. Slide #4 Assets and Asset Income  Today’s topics Market value and cash value Calculation of asset income Inclusions and exclusions Verification

5. Slide #5 Assets and Asset Income  Why are assets important for rent calculation? Annual income includes income from assets Therefore, assets may affect annual income  PHAs must consider any asset that has a dollar value or provides any income

6. Slide #6 Assets and Asset Income  PHA must identify and verify Assets Market value of asset Expenses involved to convert asset to cash Actual anticipated income from assets

7. Slide #7 Assets and Asset Income  An asset is an item of value that can be converted to cash More on types of assets later  The market value is the amount the asset is worth  We must also find the cash value of each asset

8. Slide #8 Assets and Asset Income  Why do we need to know both the market and the cash value of an asset? Market value is used to determine the actual income from the asset Cash value is used to determine the total cash value of all the family’s assets in the HUD 50058 calculations

9. Slide #9 Asset Income Calculations on 50058  Include in annual income If the net cash value of all assets is $5,000 or less, the actual income from assets If the net cash value of all assets exceeds $5,000, the greater of:  Actual income from all assets  Imputed income from all assets

10. Slide #10 Net Cash Value  Net cash value of assets means: The value of an asset after deducting reasonable costs that would be incurred in converting the asset to cash  Real property: broker fees, closing costs  Certificate of deposit: penalty for early withdrawal  Stocks: broker fees  Savings accounts

11. Slide #11 Net Cash Value  Net cash value of assets Formula: Market value - Expenses to convert to cash = Net cash value

12. Slide #12 Net Cash Value  Fred’s CD has a $ 7,000 market value  Early withdrawal penalty is $ 400  What is the cash value of this asset? Formula: Market value $ 7,000 - Expenses - 400 =Net cash value $ 6,600

13. Slide #13 Actual Anticipated Income from Assets  Assets can generate income  Income from assets is counted in determining annual income  Examples of income from assets Interest Dividends

14. Slide #14 Actual Anticipated Income from Assets  When an asset earns interest or dividends the formula is: Market value X Interest/dividend rate = Actual anticipated income

15. Slide #15 Quiz  Fred’s CD has a $ 7,000 market value  Early withdrawal penalty is $ 400  Fred will earn 4% interest on the CD  The HUD passbook rate is 1.5%  What is the actual anticipated income from this asset? A. $105 B. $264 C. $99 D. $280

16. Slide #16 Quiz Answer  When an asset earns interest or dividends the formula is: $ 7,000 Market value X 4% Actual interest rate at bank = $ 280 Actual anticipated income

17. Slide #17 Section 6: Assets Market Value - Expenses = Cash value Market Value x interest/div = CD7,000 - 4006,600280

18. Slide #18 Review: Income from Assets  When net cash value of all assets is $5,000 or less, use the actual anticipated income from assets  If net cash value of assets exceeds $5,000 must use the greater of: Actual anticipated income from assets Imputed income from assets (HUD passbook rate times net cash value of all assets)

19. Slide #19 Imputed Asset Income  Imputed asset income is based on the total cash value of all assets and the HUD passbook rate Formula: Total cash value x HUD passbook rate = Imputed asset income

20. Slide #20 Imputed Asset Income  Imputed asset income is income that would be received from an asset if it were converted to cash and placed in a savings account earning a HUD-determined passbook rate.

21. Slide #21 Imputed Asset Income  Do not apply the passbook rate to each individual asset with a cash value over $5000 (unless the family only has that one asset) Add the cash values of all assets together, before applying the HUD passbook rate  Do not apply the passbook rate in lieu of actual asset income if the actual income is zero

22. Slide #22 HUD Passbook Rate  The HUD field office determines the passbook rate for the PHA locality  Based on the average interest rate received on passbook savings accounts at several banks in the local area  Disregard references to a standard 2% rate given in the PH Occupancy Guidebook

23. Slide #23 Section 6: Assets CD7,000 - 4006,600 280 6,600 280.015 99 280

24. Slide #24 Calculating on the HUD-50058  John has a savings account with a current balance of $8000. He will earn 1.35% interest on the account.  The HUD passbook rate is 1.55%  PHA’s policy is to use the current balance of savings accounts as the cash value

25. Slide #25 Answers 108 0155 124 8000 108 8000 JohnSvgs 1

26. Slide #26 Calculating on the HUD-50058  Mary has a savings account with a current balance of $500. She will earn 1.25% interest on the account.  The HUD passbook rate is 1.05%  PHA’s policy is to use the current balance of savings accounts as the cash value

27. Slide #27 Answers 6 0105 0 6 500 6 MarySvgs 1

28. Slide #28 Calculating Cash Value  Ellen has a house which has a market value of $125,000. She has an outstanding mortgage balance of $50,000. If she were to sell, she would pay a realtor $4,200 commission and closing costs of $800.  How do we find the cash value?

29. Slide #29 Calculating Cash Value  Market value  Less HUD asset expenses: Broker fee Legal fee Settlement costs Penalty for early withdrawal  Less mortgage balance  Cash value 125,000 4,200 800 50,000 70,000

30. Slide #30 Calculating Cash Value  HUD does not specify what “reasonable costs” may be deducted in determining cash value  PHA must establish policies that explain what costs they will deduct

31. Slide #31 What Assets Include  Savings and checking accounts PHAs establish policies for determining value of accounts May elect to count current balances or average balances for a given period (2 months, 6 months, etc.)

32. Slide #32 What Assets Include  Accessible amount of trusts available to family Distributed income is included in annual income  If a trust is not revocable by, or under the control of, any family member it will not be considered an asset

33. Slide #33 What Assets Include  Stock, bonds, money market funds and other investment accounts Expenses to convert to cash may involve a brokers fee Income may be in the form of interest or dividends

34. Slide #34 What Assets Include  Equity in real property, other capital investments Equity = market value minus all loans (mortgage) secured by the asset Cash value = equity minus expenses to convert to cash

35. Slide #35 What Assets Include  Expenses to convert real property or other capital investments to cash may include broker fees, sales commissions, settlement costs, and transfer taxes

36. Slide #36 What Assets Include  Retirement savings accounts such as IRAs and Keoghs Withdrawal would result in a penalty The penalty would be considered a cost in converting to cash

37. Slide #37 What Assets Include  Contributions to company retirement and pension funds Before retirement, count only amounts family can withdraw without retiring or quitting After retirement, count regular periodic payments as income

38. Slide #38 What Assets Include  Assets held in the name of more than one person that allow unrestricted access Count full value of the asset

39. Slide #39 What Assets Include  Lump sum additions to family assets, which are retained and verifiable Inheritances, capital gains, lottery winnings, insurance payments (including payments under health & accident insurance and worker’s comp), settlements for personal or property losses Social security & SSI lump sum payments

40. Slide #40 What Assets Include  “Retained and verifiable” means that the lump sum must be in a form that can be verified if retained. If the lump sum was not retained (spent or given away) it cannot be counted as an asset If the lump sum was placed in a savings account or other identifiable asset, it would be counted

41. Slide #41 What Assets Include  Do not count lump sums for deferred periodic payments as assets (except SS & SSI) Such lump sums are counted as income Such SS and SSI lump sums are an exception and will be treated as an asset, if retained and verifiable  If not retained and verifiable they are neither assets nor income

42. Slide #42 What Assets Include  Personal property held as investment gems jewelry coin collections and other collectibles antique cars  To find market value, may need appraisal If so, at PHA’s, not family’s, expense

43. Slide #43 What Assets Include  Surrender value of life insurance policies  Some life insurance will have a surrender value, and some won’t  The surrender value less penalties, if any, is the cash value  Some life insurance policies pay dividends, some interest, and some both

44. Slide #44 Assets Disposed of For Less Than Fair Market Value  Imputed Assets: Assets disposed of within two years prior to examination or reexamination for less than fair market value

45. Slide #45 Assets Disposed of For Less Than Fair Market Value  Cash value of an imputed asset is the difference between the actual cash value of the asset and the amount received  Example: Home market value = $ 225,000 Fees incurred 7,000 Actual Cash value $218,000 -Amount received 150,000 Imputed Cash Value $ 68,000

46. Slide #46 Assets Disposed of For Less Than Fair Market Value  In the previous example, had the family “sold” the property for $1.00, a greater cash value would be counted:  Example: Home market value = $ 225,000 Fees incurred 7,000 Actual Cash value $218,000 -Amount received 1 Imputed Cash Value $217,999

47. Slide #47 Assets Disposed of For Less Than Fair Market Value  Disposal of assets for less than market value is not limited to real property – it includes any personal or business assets disposed of by the family Example: A mother gives her adult daughter, no longer living with her, $5000 cash out of her savings account

48. Slide #48 Assets Disposed of For Less Than Fair Market Value  PHAs can establish through policy a minimum threshold for counting assets disposed of for less than fair market value to avoid having to count small amounts such as gifts and charitable contributions Threshold of $1,000 would be reasonable

49. Slide #49 Assets Disposed of For Less Than Fair Market Value  Dispositions are not considered to be for less than fair market value if part of : divorce or separation bankruptcy foreclosure  PHA should develop applicant/tenant certification form for verification purposes

50. Slide #50 Calculation of Imputed Assets  Denise Smith is disabled and could no longer maintain her home. Two months ago she “sold” his house to her son for $25,000, which she put in a savings account earning 1.25% interest.  The son assumed the $22,000 mortgage and paid all closing costs. The house is appraised at $78,000. HUD passbook rate is 1.5%

51. Slide #51 Calculation of Imputed Assets  Market value  Less HUD asset expenses: Less mortgage balance - Less amount received -  Imputed asset value 78,000 22,000 25,000 31,000

52. Slide #52 Calculation of Imputed Assets 313 015 840 78,000 -47,00031,000 0 56,000 Denise 1 prop (disp) Denise 1 svg 25,000 313

53. Slide #53 Calculating Asset Cash Value and Asset Income on HUD-50058  Carly has a savings account valued at $900 with anticipated interest income of $11. She received an inheritance of $40,000. She used $20,000 of it to buy a car. The remaining $20,000 was put into stocks. If she were to sell the stock the broker fee would be $1,500. The stock is expected to earn a 1.75% dividend this year. The HUD passbook rate is 1.15%.

54. Slide #54 Calculation on HUD-50058 Carly 1 Savings 19,400 0115 223 361 Carly 1 Stocks 18,500 350 361 900 11 20,000 - 1500

55. Slide #55 Income from a Rental Property  It is possible for an assisted family to own real property and rent it out  Income from such a rental would be reported as asset income on the 50058 (unless approached as a business)  Only net rental income is reported

56. Slide #56 Calculating Rental Income on 50058  Harold owns a home and rents it out.  Market value is $125,000  Cash value is $70,000  Rental income is $675 per month  Anticipates expenses (as per next slide)  HUD Passbook rate is 1.4%

57. Slide #57 Income from a Rental Property Rent $675/mo = $8100 Expenses: Maintenance $10/wk = 520 Insurance $40/mo = 480 Taxes $175/half = 350 Interest on Mortgage $325/mo = 3900 Utilities $50/quarter = 200 TOTAL EXPENSES 5450 Net Rental Income $2650

58. Slide #58 Income from a Rental Property 2,650 70,000 2,650 014 980 2,650 Harold 1 Rental 70,000

59. Slide #59 Assets Do Not Include  Personal property (not held as investment) – necessary items such as cars, clothing, furniture

60. Slide #60 Assets Do Not Include  Assets not accessible to the family – such as non-revocable trusts Note that if a non-revocable trust pays a periodic payment it is treated as an income On the 50058 the income would come under Section 7 (income), coded as “N”, other nonwage sources

61. Slide #61 Assets Do Not Include  Interest in Indian trust land  Assets which are part of a business – such as products prepurchased with the intent to sell  Equity accounts in HUD homeownership programs Value of homes being purchased with assistance under 24 CFR 982 Subpart M, Homeownership option  Limited to first 10 years after purchase date of home

62. Slide #62 Assets Do Not Include  Family Self-Sufficiency (FSS) escrow accounts and Individual Savings Accounts (ISAs) held by the PHA for the family Do not count the income from interest accrued on these accounts  Assets of live-in aides, foster children or foster adults

63. Slide #63 Verification of Assets  Generally follow the same guidelines as for verifying income  However, there are exceptions to third party verification requirements that are unique to assets and expenses…

64. Slide #64 Exceptions to Third Party  If it is not cost-effective or reasonable to obtain third party verification  If the item to be verified is an insignificant amount that would have minimal impact on TTP AND the PHA is able to verify through original documents provided by family

65. Slide #65 Exceptions to Third Party  NOTE: This does NOT mean the PHA can exclude small assets from the calculation of annual income. It only means that it is not necessary to use third party verification in some cases.

66. Slide #66 Documenting the Absence of Third-Party Verification  When third-party verification is not attempted, a family’s file should contain documentation of the reasoning used to justify the decision.  All file notations made by staff should be: CompleteLimited to facts DatedSigned or initialed

67. Slide #67 Third-Party Verification Not Cost-Effective  Eugene reports a savings account with a balance of $1,000 earning 1.25% interest. Bank statements were provided to PHA by Eugene. Bank charges $10 fee for third-party verification. Staff time for processing a third-party verification is estimated at $9.  Is this cost effective?

68. Slide #68 Third-Party Verification Not Cost-Effective Reasoning:  3 rd party costsDocument review costs $10 bank fee$0 $9 admin time  Interest: $1000 x.0125 = $12.50  Answer: No – but document reasoning!  And - PHA must verify with review of family- supplied documents

69. Slide #69 Other Verification Concerns  Sometimes there are costs involved with the verification of assets and asset income Bank charges for third party or copies of documents Appraisal fees  The PHA may never pass the costs of verifying asset information on to the family

70. Slide #70 HUD FAQs  Three websites for FAQs http://www.hud.gov/offices/pih/phr/about/ao_faq.cfm (Admission & Occupancy)http://www.hud.gov/offices/pih/phr/about/ao_faq.cfm http://www.hud.gov/offices/pih/programs/ph/rhii p/faq_gird.cfm (RHIIP)http://www.hud.gov/offices/pih/programs/ph/rhii p/faq_gird.cfm http://www.hud.gov/offices/pih/programs/ph/rhii p/faq_ris.cfm (Rental Integrity Summit)http://www.hud.gov/offices/pih/programs/ph/rhii p/faq_ris.cfm

71. Slide #71 Sample FAQ #1  Question: If a tenant puts $10,000 in an IRA, and 10 years later the IRA is worth $15,000 and the tenant begins withdrawing monthly amounts from the IRA, are the amounts withdrawn considered income?

72. Slide #72 Sample FAQ #1  Answer: Withdrawals from an investment that are received as periodic payments are counted as income, unless the family can document that amounts withdrawn are reimbursement of amounts invested Withdrawals count as income after amount invested has been paid out

73. Slide #73 Sample FAQ #2  Question: If 2 sisters are on the program, living separately, and have their names on each other’s savings accounts, what balances are counted as assets for each sister?

74. Slide #74 Sample FAQ #2  Answer: If both sisters have access to the balance of both accounts, count both accounts for each sister In this instance, the guidance in Handbook 4350.3 is not applicable

75. Slide #75 Sample FAQ #2  Example: Account 1: $5000 Account 2: $3000  Count $8000 for EACH sister

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