Henry Mukasa, Director of Portfolio Management MassHousing NCHSA 2017 Asset Management Innovations Financial Statements Review -Risk Based Approach- Henry Mukasa, Director of Portfolio Management MassHousing

Goals of Risk Management Process in MassHousing’s Portfolio Proactivity: Proactively identify and manage risks Comprehensiveness: Conduct thorough analysis where key risk factors appear Dynamic: Risk scores are revisited and may change throughout the year Focus: Tailor review to key risk categories Efficiency: Limit analysis on low risk properties Objectivity: Eliminate unnecessary subjectivity and drive consistency Accountability: Periodic, comprehensive reporting to responsible staff, managers, and the Board Customer Service: Eliminate process burdens on properties lacking meaningful risks

MassHousing Risk Management Annually: Receive Audited Financial Statements Conduct Site Inspections Rate performance on: Financial performance Managerial Capital Needs

Risk Based Financial Statements Review Workflow ManagerialRisk Scores Capital Risk Scores Audits Received Log Financial Risk Scores Tier 1 All Projects - Review Ends here for AAA Tier II Less than AAA -Review Continues for Less than AAA

Purpose of Review Monitor the financial viability of the development Verify debt service payments to MH Scrutinize payments to Partners Assess compliance with contract documents; and Evaluate the sufficiency of the development’s cash and reserves.

Previous Process Conducted as a “one size fits all” process Performed following the same parameters regardless of Risk rating Program type History of financial performance Not adequately taking into account Changing business environment New lending products Tenant assistance programs.

Summary of New Process Risk Based Approach S&T will provide Capital and Managerial risk scores Financial risk scores will be calculated upon receipt of annual audits. *These will become the risk ratings used to determine the level of financial statement review for each development. Note: “AAA” rating is defined as: Financial- Debt Service Coverage of 1.15 Capital – Reserves are sufficient for 10 years or more; or through the remaining term of the mortgage Managerial – Satisfactory AMR + Pass all Performance indicators

Summary cont.. Tier I –Low Risk Applied to all portfolio properties regardless of risk rating. Steps applied based on program and subsidy type for consistency. Tier II-High Risk Applied only to developments that score less than AAA. A *ratio analysis and Income Statement Comparison report is generated to determine operational issues. 2015 Stats: 430 Developments submitted audited financial statements. 192 Scored a “AAA” risk rating 238 Scored less than a “AAA” risk rating *Ratios based on portfolio performance and underwriting standards.

Tier I (Low Risk) Applicable to all Projects: Review auditor’s Opinion. Follow up on issues identified in Notes and Schedule of Findings and Questioned Costs. Verify MassHousing debt service Replacement reserve obligations Process fast track distribution requests and complete distribution worksheet. Generate modified Financial Analysis Program.

Tier I continued…. Identify and follow up on Due To/ Due From issues. Identify and collect: Flexible subsidy payments due to HUD Recap obligations Residual receipts payments Excess equity payments Payments on cash flow notes; and Arrearage note obligations. Develop “Issues Report” to document operational and compliance issues. Generate Action Plans. Refer projects to Risk Report and Watch List. Generate audit close out letter Have package scanned.

Tier II (High Risk-Less than AAA rating) Determine reason for Tier II status Conduct automated ratio analysis and compare performance against benchmarks. Compare new audit to audit from prior year. Look for significant variances and follow up with management. Use ratio analysis and income statement comparison reports to determine if further review is required. Incorporate findings into the “Issues Report” and Action Plan, as applicable.

Stats Pie: AAA 2015 Audits *Tier I Reduces Workload for ≈ 45% of Portfolio

Other Changes Revise Timeline: Process will begin on April 1 and end May 31 -Efficient for staff and agents Implement: Ratio Analysis to measure key performance indicators Program specific benchmarks Financial Analysis Program (FAP) System to document adjustments Outstanding issues workflow Procedure to close out audits Eliminate Audit Review Spreadsheet (ARS) Develop “Issues Report” to document operating issues and a plan for ongoing asset management activities.

Financial Statement Review Process RECAP Financial Statement Review Process Previously Now “One size fits all” approach, following parameters regardless of risk rating, program type, or history of financial performance.  This led to a lengthy analysis and unnecessary follow up questions to high-performing owners/agents If AAA, Tier I Review (approx. 45%) Basic analysis of the financial statement Does not require specific line item analysis  asset manager is not required to contact manager If NOT AAA, Tier II Review Tier I review with two additional steps: A ratio analysis to measure key performance indicators An income statement variance analysis Substantial change in operation and significant line item variances are addressed (deep dive)

Financial Statement Review Process RECAP Financial Statement Review Process Borrower Impact Implementation of the Fast Track Distribution process has allowed staff to be very responsive to Borrower requests for distribution. All requests are now addressed within 14 days of receipt. We have directed staff to focus on the notes to the financial statements and the controlling documents in order to research issues first rather than engaging the management agents to respond to questions that can be answered using documents available to staff. All questions for management agents are reviewed by the portfolio manager prior to contacting the agent. The portfolio manager may have additional information that will answer the questions therefore reducing the need to contact the management agent.