slide #1 annie stevenson assets and asset income

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Annie Stevenson

Assets and Asset Income

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Welcome to Lunch N Learn!

Today’s Topics:• Calculating income from assets

Asset market valueNet cash value

• Verification issues• HUD FAQs

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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 updates

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Today’s topics• Market value and cash value• Calculation of asset income• Inclusions and exclusions• Verification

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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

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PHA must identify and verify• Assets• Market value of asset• Expenses involved to convert asset to

cash • Actual anticipated income from assets

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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

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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

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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

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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 cashReal property: broker fees, closing costsCertificate of deposit: penalty for early withdrawalStocks: broker feesSavings accounts

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Net Cash Value

Net cash value of assets • Formula:

Market value- Expenses to convert to cash= Net cash value

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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

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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

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Actual Anticipated Income from Assets

When an asset earns interest or dividends the formula is:

Market value X Interest/dividend rate = Actual anticipated income

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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

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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

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Section 6: AssetsMarket Value- Expenses = Cash value

Market Value x interest/div =

CD 7,000 - 400 6,600 280

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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)

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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

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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.

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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

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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

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Section 6: Assets

CD 7,000 - 400 6,600 280

6,600 280

.015

99

280

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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

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Answers

1080155

124124

8000 108

8000

John Svgs1

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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

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Answers

60105

0

6

500 6

500

Mary Svgs1

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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?

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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

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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

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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.)

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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

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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

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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

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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

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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

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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

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What Assets Include

Assets held in the name of more than one person that allow unrestricted access • Count full value of the asset

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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

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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

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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

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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

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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

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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

Slide #45Assets 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 #46Assets 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

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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

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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

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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

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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%

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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

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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

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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%.

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Calculation on HUD-50058

Carly 1 Savings

19,4000115223361

Carly 1 Stocks 18,500 350

361

900 1120,000 - 1500

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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

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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%

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Rent $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

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2,650

70,000 2,650014

9802,650

Harold 1 Rental 70,000

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Assets Do Not Include

Personal property (not held as investment) –necessary items such as cars, clothing, furniture

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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

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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

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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

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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…

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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

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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.

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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

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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?

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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

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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

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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/programs/ph/rhiip/faq_gird.cfm (RHIIP)

• http://www.hud.gov/offices/pih/programs/ph/rhiip/faq_ris.cfm (Rental Integrity Summit)

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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?

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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

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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?

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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

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Sample FAQ #2

Example:• Account 1: $5000• Account 2: $3000

Count $8000 for EACH sister

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NMA Lunch ‘n’ Learn Seminar

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NMA Lunch ‘n’ Learn Seminar

slide #1 annie stevenson assets and asset income

Documents

assets slide

income income

asset income slide

asset slide

assets assets

asset cash value

net cash value slide

assets imputed income