1. 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

2. 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

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

4. 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

5. 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.

6. 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.

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

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

13. 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.

14. 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)

15. 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.