1. Assets and Asset Income Annie Stevenson

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

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 updates

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

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. 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. 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. 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. 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. 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. Net Cash Value • Net cash value of assets • Formula: Market value - Expenses to convert to cash = Net cash value

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. 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. 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. 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. 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. Section 6: Assets Market Value x interest/div = Market Value - Expenses = Cash value CD 7,000-400 6,600 280

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. 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. 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. 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. 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. Section 6: Assets CD 7,000 - 400 6,600 280 280 6,600 .015 99 280

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. Answers 108 John 1 Svgs 8000 8000 108 0155 124 124

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. Answers 6 Mary 1 Svgs 500 500 6 0105 0 6

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

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

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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%