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Slide #3 © Copyright 2008 Nan McKay & Associates Welcome to Lunch N Learn! Upcoming topics for the occupancy series: 11/7/08: RFTA & HAP contract (HCV) 11/21/08: Community service & self-sufficiency (PH) 12/5/08: Interviewing & fraud prevention (HCV & PH)
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Slide #1 © Copyright 2008 Nan McKay & Associates
Annie Stevenson
Assets and Asset Income
© Copyright 2008 Nan McKay & Associates
Slide #2 © Copyright 2008 Nan McKay & Associates
Welcome to Lunch N Learn!
Today’s Topics:• Identifying family assets• Calculating income from assets
Asset market valueNet cash value
• Verification issues• HUD FAQs
Slide #3 © Copyright 2008 Nan McKay & Associates
Welcome to Lunch N Learn!
Upcoming topics for the occupancy series:• 11/7/08: RFTA & HAP contract (HCV)• 11/21/08: Community service & self-sufficiency
(PH)• 12/5/08: Interviewing & fraud prevention (HCV &
PH)
Slide #4 © Copyright 2008 Nan McKay & Associates
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
Slide #5 © Copyright 2008 Nan McKay & Associates
Assets and Asset IncomePHA must identify and verify
• Assets• Market value of asset• Expenses involved to convert asset to
cash • Actual anticipated income from assets
Slide #6 © Copyright 2008 Nan McKay & Associates
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.)
Slide #7 © Copyright 2008 Nan McKay & Associates
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
Slide #8 © Copyright 2008 Nan McKay & Associates
What Assets Include
Stocks, 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
Slide #9 © Copyright 2008 Nan McKay & Associates
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
Slide #10 © Copyright 2008 Nan McKay & Associates
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
Slide #11 © Copyright 2008 Nan McKay & Associates
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
Slide #12 © Copyright 2008 Nan McKay & Associates
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
Slide #13 © Copyright 2008 Nan McKay & Associates
What Assets Include
Assets held in the name of more than one person that allow unrestricted access • Count full value of the asset
Slide #14 © Copyright 2008 Nan McKay & Associates
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
Slide #15 © Copyright 2008 Nan McKay & Associates
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
Slide #16 © Copyright 2008 Nan McKay & Associates
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
Slide #17 © Copyright 2008 Nan McKay & Associates
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
Slide #18 © Copyright 2008 Nan McKay & Associates
Assets Do Not Include
Personal property (not held as investment) –necessary items such as cars, clothing, furniture
Slide #19 © Copyright 2008 Nan McKay & Associates
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
Slide #20 © Copyright 2008 Nan McKay & Associates
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
Slide #21 © Copyright 2008 Nan McKay & Associates
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
Slide #22 © Copyright 2008 Nan McKay & Associates
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
Slide #23 © Copyright 2008 Nan McKay & Associates
Assets and Asset Income
The market value is the amount the asset is worth
We must also find the cash value of each asset
Slide #24 © Copyright 2008 Nan McKay & Associates
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 assets for the HUD 50058
Slide #25 © Copyright 2008 Nan McKay & Associates
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
Slide #26 © Copyright 2008 Nan McKay & Associates
Net Cash Value Reasonable costs to convert to cash:
• Real propertyBroker fees, closing costs
• Certificate of depositPenalty for early withdrawal
• StocksBroker fees
Slide #27 © Copyright 2008 Nan McKay & Associates
Net Cash Value
Net cash value of assets • Formula:
Market Value- expenses to convert to cash= net cash value
Slide #28 © Copyright 2008 Nan McKay & Associates
Net Cash Value
Dave’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
Slide #29 © Copyright 2008 Nan McKay & Associates
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
Slide #30 © Copyright 2008 Nan McKay & Associates
Actual Anticipated Income from Assets
When an assets earns interest or dividends the formula is:
Market Value X interest/dividend rate = Actual anticipated income
Slide #31 © Copyright 2008 Nan McKay & Associates
Quiz
Dave’s CD has a $ 7,000 market value Early withdrawal penalty is $ 400 Dave will earn 4% interest on the CD What is the actual anticipated income from
this asset?A. $ 325 B. $ 275 C. $280
Slide #32 © Copyright 2008 Nan McKay & Associates
Quiz Answer
When an assets earns interest or dividends the formula is:
Market value X interest= Actual anticipated income
Slide #33 © Copyright 2008 Nan McKay & Associates
Section 6: AssetsMarket Value- Expenses = Cash value
Market Value x interest/div =
CD 7,000 - 400 6,600 280
Slide #34 © Copyright 2008 Nan McKay & Associates
Income from Assets
When net cash value of all assets is $5000 or less, use the actual anticipated income from assets
Slide #35 © Copyright 2008 Nan McKay & Associates
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)
Slide #36 © Copyright 2008 Nan McKay & Associates
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
Slide #37 © Copyright 2008 Nan McKay & Associates
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
Slide #38 © Copyright 2008 Nan McKay & Associates
Imputed Asset Income Do not apply the passbook rate to each
individual asset with a cash value over $5000 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
Slide #39 © Copyright 2008 Nan McKay & Associates
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
Slide #40 © Copyright 2008 Nan McKay & Associates
Section 6: Assets
CD 7,000 - 400 6,600 280
6,600 280.015 99280
Slide #41 © Copyright 2008 Nan McKay & Associates
Calculating on the HUD-50058
John has a savings account with a current balance of $8000. The bank pays 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
Slide #42 © Copyright 2008 Nan McKay & Associates
Answers
1080155
124124
8000 108
8000
John Svgs1
Slide #43 © Copyright 2008 Nan McKay & Associates
Calculating on the HUD-50058
Mary has a savings account with a current balance of $500. The bank pays 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
Slide #44 © Copyright 2008 Nan McKay & Associates
Answers
60105
06
500 6
500
Mary Svgs1
Slide #45 © Copyright 2008 Nan McKay & Associates
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?
Slide #46 © Copyright 2008 Nan McKay & Associates
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
Slide #47 © Copyright 2008 Nan McKay & Associates
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
Slide #48 © Copyright 2008 Nan McKay & Associates
Assets Disposed of For Less Than Fair Market Value
Imputed Assets: Assets disposed of within two years prior to admission or reexamination for less than fair market value
Slide #49 © Copyright 2008 Nan McKay & Associates 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 = $ 225,000Fees incurred 7,000Actual Cash value $218,000
- Amount received 150,000Imputed Cash Value $ 68,000
Slide #50 © Copyright 2008 Nan McKay & Associates 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 = $ 225,000Fees incurred 7,000Actual Cash value $218,000
- Amount received 1Imputed Cash Value $217,999
Slide #51 © Copyright 2008 Nan McKay & Associates
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
Slide #52 © Copyright 2008 Nan McKay & Associates
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
Slide #53 © Copyright 2008 Nan McKay & Associates
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
Slide #54 © Copyright 2008 Nan McKay & Associates
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%
Slide #55 © Copyright 2008 Nan McKay & Associates
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
Slide #56 © Copyright 2008 Nan McKay & Associates
Calculation of Imputed Assets
313015
840840
78,000 -47,000 31,000 0
56,000
Denise 1 prop (disp)
Denise 1 svg 25,000 313
Slide #57 © Copyright 2008 Nan McKay & Associates
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%.
Slide #58 © Copyright 2008 Nan McKay & Associates
Calculation on HUD-50058
Carly 1 Savings
19,4000115223361
Carly 1 Stocks 18,500 350
361
900 1120,000 - 1500
Slide #59 © Copyright 2008 Nan McKay & Associates
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
Slide #60 © Copyright 2008 Nan McKay & Associates
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%
Slide #61 © Copyright 2008 Nan McKay & Associates
Income from a Rental PropertyRent $675/mo = $8100Expenses: Maintenance $10/wk = 520 Insurance $40/mo = 480 Taxes $175/half = 350 Interest on Mortgage $325/mo = 3900 Utilities $50/quarter = 200TOTAL EXPENSES 5450Net Rental Income $2650
Slide #62 © Copyright 2008 Nan McKay & Associates
Income from a Rental Property
2,650
70,000 2,650014
9802,650
Harold 1 Rental 70,000
Slide #63 © Copyright 2008 Nan McKay & Associates
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…
Slide #64 © Copyright 2008 Nan McKay & Associates
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
Slide #65 © Copyright 2008 Nan McKay & Associates
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.
Slide #66 © Copyright 2008 Nan McKay & Associates
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:• Complete Limited to facts• Dated Signed or initialed
Slide #67 © Copyright 2008 Nan McKay & Associates
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?
Slide #68 © Copyright 2008 Nan McKay & Associates
Third-Party Verification Not Cost-Effective
Reasoning: 3rd party costs Document 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
Slide #69 © Copyright 2008 Nan McKay & Associates
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
Slide #70 © Copyright 2008 Nan McKay & Associates
HUD FAQs
Three websites for FAQs• http://www.hud.gov/offices/pih/phr/about/ao_faq.cf
m (Admission & Occupancy)
• http://www.hud.gov/offices/pih/programs/ph/rhiip/faq_gird.cfm (RHIIP)
• http://www.hud.gov/offices/pih/programs/ph/rhiip/faq_ris.cfm (Rental Integrity Summit)
Slide #71 © Copyright 2008 Nan McKay & Associates
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?
Slide #72 © Copyright 2008 Nan McKay & Associates
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
Slide #73 © Copyright 2008 Nan McKay & Associates
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?
Slide #74 © Copyright 2008 Nan McKay & Associates
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
Slide #75 © Copyright 2008 Nan McKay & Associates
Sample FAQ #2
Example:• Account 1: $5000• Account 2: $3000
Count $8000 for EACH sister
Slide #76 © Copyright 2008 Nan McKay & Associates
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