transmittal letters

Republic of the Philippines

COMMISSION ON AUDIT

Commonwealth Ave., Quezon City

ANNUAL AUDIT REPORT

on the

NATIONAL HOME MORTGAGE FINANCE

CORPORATION

For the Year Ended December 31, 2014

i

EXECUTIVE SUMMARY INTRODUCTION

The National Home Mortgage Finance Corporation (NHMFC) was created by virtue of Presidential Decree (PD) No. 1267 dated December 21, 1977, as amended by Executive Order (EO) No. 90 on December 17, 1986 identifying NHMFC as one of the key agencies in the implementation of the National Shelter Program that was tasked as the major government home mortgage institution. EO No. 357 dated May 24, 1989 placed NHMFC under the administrative supervision of the Housing and Urban Development Coordinating Council (HUDCC). The primary objectives of the Corporation are:(1) to develop and provide for a secondary market for home mortgages granted by public and/or private home financing institutions; (2) to develop a system that will attract private institutional funds into long-term housing mortgages; and (3) to provide amortization support to borrowers during the first five years of the term of their housing loans under the Abot – Kaya Pabahay Fund (AKPF). The governing board of NHMFC, which exercises corporate powers and determines policies, is composed of the following:

1. The Vice-President of the Philippines and Chairman, HUDCC 2. The President, NHMFC 3. The Secretary, Department of Finance 4. The Secretary, Department of Budget and Management 5. The Governor, Bangko Sentral ng Pilipinas

Chairman Vice-Chairman Member Member Member

The President is assisted in the management of the Corporation by the Executive Vice-President, four Vice-Presidents and 10 Department Managers. The personnel complement as at December 31, 2014 consisted of 389 employees, 237 of which are regular employees and 152 agency-hired employees. The registered office of the Corporation is located at Filomena Building III, 104 Amorsolo Street, Legaspi Village, Makati City. The Corporation has satellite offices located in the provinces of Laguna and Cavite, cities of Bacolod and Cagayan de Oro, a zonal office in Davao City and desk offices in the cities of Cebu and General Santos. The approved corporate operating budget of NHMFC during the calendar year 2014 totalled P5.305 billion, which included among others, the following:

Budget Utilization Variance

Personal services 176,183,000 175,695,442 487,558 Maintenance and other operating

expenses 371,158,000 295,029,528 76,128,472 Capital outlay 51,448,000 31,721,163 19,726,837

598,789,000 502,446,133 96,342,867

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FINANCIAL HIGHLIGHTS (In Philippine Peso) I. Consolidated Financial Position

2014

2013

Increase (Decrease)

Assets 38,304,335,653 36,016,508,898 2,287,826,755 Liabilities 38,554,186,127 37,955,050,821 599,135,306

Capital deficiency 249,850,474 1,938,541,923 (1,688,691,449)

II. Consolidated Results of Operations

2014

2013

Increase (Decrease)

Gross income 2,500,275,969 2,046,848,194 453,427,775 Expenses 1,002,831,497 952,331,024 50,500,473

Net income before tax 1,497,444,472 1,094,517,170 402,927,302 Provision for income tax 59,238,452 27,265,864 31,972,588

Net income after income tax 1,438,206,020 1,067,251,306 370,954,714

OPERATIONAL HIGHLIGHTS

Performance Indicators

2014 Scorecard Rating Targets Accomplishments

Purchase of Quality Mortgages and other Housing Receivables under Housing Loan Receivables Purchase Program (HLRPP)

1.1 Absolute value of housing receivables approved by Credit Committee for purchase

P 1.00 B

P 353.71 M

3.53%

1.2 Number of applications for provision of housing finance with complete documentation that are released within the turn-around time over Number of applications for provision of housing finance with complete documentation

100.00%

100.00%

4.00%

Securitization of Home Mortgages and Other Housing Receivables

2.1 Absolute value of underlying assets of mortgage backed securities approved for issuance by the Board - CMP BONDS

P 2.00 B

P 2.00 B

10.00%

2.2 Absolute value of financial engagement for other government agencies/private entities with NHMFC as financial advisor/arranger

P 6.00 B

P3.00 B

2.00%

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Performance Indicators 2014 Scorecard

Rating Targets Accomplishments

2.3 Percentage net proceeds from securitization issue over the indicative structure size; where: Net proceed is equal to the target issue less the sum of estimated subordinated notes to be held by issuer execution cost, and the required balance of reserves at the closing date.

65.00%

70.00%

4.00%

Provision of Financial Advisory/Consultancy and Other Services/Engagements

3.1 Absolute number

At least three

e-Payment for Juan and Juana Geographical

Mapping System

Forms Standardization

3.00%

Master Servicer of Securitized Accounts/Management of Accounts

4.1 Percentage of the amount remitted to the Trustee within due date over total collections due to Special Purpose Trust

100.00% 100.00% 9.00%

4.2 Value of actual collection over target collection for the year

91.00% 91.29% 8.00%

4.3 Value of reduction in NPLs over total Value of NPLs as of end of the year

P0.700 B (at least 6% reduction)

P 0.702 B

8.00%

Provision of Affordable Instruments for Target Investors

5.1 Percentage of the indicative size of retail notes to be issued over the indicative issue size

60.00% 70.00%

Quality of Bonds

6.1 Rating ≥AA AA 20.00%

General Administrative Services 10.00%

TOTAL OF WEIGHTS 91.53%

SCOPE OF AUDIT

The audit covered the examination, on a test basis, of the accounts and financial transactions of the NHMFC including the transactions of the liquidity support and subsidy income component of the AKPF, for the calendar year 2014. It was aimed to ascertain the accuracy of financial records and reports and the fairness of presentation of the financial statements in accordance with the generally accepted accounting principles in the Philippines. It was also made to assess the propriety of financial transactions and NHMFC’s compliance with laws, rules and regulations.

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AUDITOR’S OPINION

The Auditor rendered an unqualified opinion with emphasis of matter on the fairness of presentation of the financial statements of NHMFC as at December 31, 2014 in accordance with the generally accepted accounting principles in the Philippines. Without qualifying our opinion, we draw attention to Notes 7 and 7.14 to the financial statements on the accounts for clearing, presented as deductions from the Long –Term Receivable account. Accounts for clearing represents collections on amortization that have not yet been posted to individual borrowers account due to timing differences. These unposted payments are mostly due to collections from borrowers whose accounts are yet to be set up in the database and those resulting from late updating and verification with corresponding bank reports and remittances. The verification unit continually focuses on the cleansing of the accounts for clearing. We also draw attention to Note 16.1b which discloses the Corporation’s advances from borrowers (formerly Undistributed collection) which represents the substantial payments made by borrowers which will be applicable to future amortizations. The account is actually a reduction from the Receivable accounts, which if not accordingly distributed will render the balances of the individual accounts inaccurate. OTHER SIGNIFICANT AUDIT OBSERVATIONS AND RECOMMENDATIONS The absence of a subsidiary ledger and supporting schedules/documents to substantiate the Accrued expense payable amounting to P87.91 million as at December 31, 2014 is contrary to Section 111 (2) of PD No.1445 and Paragraph 15 of Philippine Accounting Standards (PAS) 1 and casts doubt on the accuracy and validity of the account balance. We recommended that Management:

a. Create subsidiary ledgers and provide supporting schedules/documents to

support the accrued expense payable accounts to comply with procedural guidelines under Section 114 of PD No.1445 and PAS 1.

b. Prepare aging schedules periodically basis to facilitate monitoring and evaluation of the accounts, indicating the status thereof; and

c. Prepare adjusting entries to correct the accounts, if necessary. STATUS OF IMPLEMENTATION OF PRIOR YEARS’ AUDIT RECOMMENDATIONS

Out of the 35 audit recommendations embodied in the prior years’ Annual Audit Reports, five were fully implemented, 30 were partially implemented.

TABLE OF CONTENTS Page Part I AUDITED FINANCIAL STATEMENTS

Independent Auditor’s Report 1 Statement of Management’s Responsibility for the Financial Statements 3 Consolidated Statement of Financial Position 4 Consolidated Statement of Income and Expenses 5 Consolidated Statement of Changes in Capital Deficiency 6 Consolidated Statement of Cash Flows 7 Consolidated Notes to Financial Statements 8

Part II OBSERVATIONS AND RECOMMENDATIONS 35

Part III STATUS OF IMPLEMENTATION OF PRIOR YEARS’AUDIT RECOMMENDATIONS 44

Part IV ABOT-KAYA PABAHAY FUND Statement of Financial Position 60 Statement of Income and Expenses 61 Statement of Changes in Fund Balance 62 Statement of Cash Flows 63 Notes to Financial Statements 64

PART I -

AUDITED FINANCIAL STATEMENTS

PART II -

OBSERVATIONS AND RECOMMENDATIONS

PART III -

STATUS OF IMPLEMENTATION OF PRIOR YEARS’ AUDIT RECOMMENDATIONS

PART IV -

ABOT KAYA PABAHAY FUND

Note 2014 2013

ASSETS

Current Assets

Cash and cash equivalents 3 4,451,803,858 3,330,412,750

Receivables, net 4 666,223,889 722,713,780

Other short term investments - government

securities 5 981,012,348 1,040,818,426

Other current assets 6 110,051,815 44,778,451

6,209,091,910 5,138,723,407

Non-current Assets

Long - term receivables 7 27,447,002,318 26,640,859,449

Long - term investments 8 1,611,550,028 1,611,550,028

Other garnished/foreclosed assets, net 9 1,017,581,927 1,132,725,225

Property and equipment, net 10 289,389,591 281,257,847

Intangible assets 11 1,169,504 1,742,404

Deferred tax asset 12 1,362,192 15,554,928

Other assets 13 1,727,188,183 1,194,095,612

32,095,243,743 30,877,785,493

TOTAL ASSETS 38,304,335,653 36,016,508,900

LIABILITIES AND CAPITAL DEFICIENCY

Current Liabilities

Payable accounts 14 1,662,106,650 1,204,945,312

Interagency payables 15 55,482,601 36,329,121

Other current liabilities 16 2,013,278,630 1,740,454,154

3,730,867,881 2,981,728,587

Long-term Liabilities

Loans payable - domestic 17 27,952,753,191 28,301,980,480

Due to National Treasury 18 820,079,907 811,912,252

Other long-term liabilities 19 1,345,578,932 1,349,068,073

30,118,412,030 30,462,960,805

Deferred Credits 20 4,704,906,216 4,510,361,429

TOTAL LIABILITIES 38,554,186,127 37,955,050,821

CAPITAL DEFICIENCY 249,850,474 1,938,541,921

TOTAL LIABILITIES AND CAPITAL DEFICIENCY 38,304,335,653 36,016,508,900

The Notes on pages 8 to 34 form part of these financial statements.

NATIONAL HOME MORTGAGE FINANCE CORPORATION AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

December 31, 2014

(In Philippine Peso)

4

Note 2014 2013

INCOME

Subsidy income 25 1,306,919,084 1,011,300,710

Interest income 655,277,463 717,223,627

Service income 30,928,645 32,687,852

Other income

Miscellaneous income 518,599,457 276,589,451

Unrealized loss on government securities (11,448,680) 9,046,554

2,500,275,969 2,046,848,194

EXPENSES

Personal Services

Salaries and wages 170,749,981 167,107,764

Other compensation 83,702,551 76,647,991

Other personnel benefits 62,820,165 49,153,104

Personnel benefit contributions 26,237,578 26,218,583

343,510,275 319,127,442

Maintenance and Other Operating Expenses

Professional services 111,253,305 82,213,592

Bad debts 57,129,116 46,405,668

Rent expenses 52,715,384 46,537,622

Taxes, insurance premiums and other fees 45,917,854 41,662,657

Depreciation 22,751,520 22,938,662

Repairs and maintenance 22,186,529 22,102,443

Utility expenses 21,626,538 24,435,608

Representation expenses 16,608,415 13,471,959

Supplies and materials expenses 16,057,269 12,740,333

Travelling expenses 10,581,274 6,784,532

Communication expenses 9,221,717 7,895,307

Training and scholarship expenses 5,911,961 4,639,038

Confidential, intelligence, extraordinary and miscellaneous expenses 4,509,253 9,037,965

Amortization of origination fee and intangible asset 4,137,776 1,698,921

Advertising expenses 3,921,425 3,603,440

Printing and binding expenses 2,242,013 2,109,049

Subscription expenses 315,839 301,303

Subsidies and donations 69,000 4,857,495

Transportation and delivery expense 49,541 29,883

General services - 10,280,279

Contribution to organization - 3,129,149

Others 37,936,196 38,330,012

445,141,925 405,204,917

Financial Expenses

Interest expense 181,536,744 201,083,108

Bank charges 3,390,368 4,316,201

Origination and appraisal cost 24,801,626 20,440,564

Other financial charges 497,323 2,158,792

Financial expense-technical assistance 22,559 -

210,248,620 227,998,665

Other Expenses

Loss on sale on non-current assets held for disposal 1,629,139 -

Realized loss on sale of securities 2,301,538 -

3,930,677 -

INCOME BEFORE INCOME TAX 1,497,444,472 1,094,517,170

Income tax 59,238,452 27,265,864

NET INCOME AFTER INCOME TAX 1,438,206,020 1,067,251,306


CONSOLIDATED STATEMENT OF INCOME AND EXPENSES




5

Paid-in Government

Note Capital Equity Deficit Total

Balance at

December 31, 2012 4,270,509,783 108,195,062 (7,273,692,089) (2,894,987,244)

Prior period errors - - (29,602,664) (29,602,664)

As restated 4,270,509,783 108,195,062 (7,303,294,753) (2,924,589,908)

Dividends to NG - - (81,203,319) (81,203,319)

Net income - - 1,067,251,306 1,067,251,306

Balance at

December 31, 2013 4,270,509,783 108,195,062 (6,317,246,766) (1,938,541,921)

Balance at

December 31, 2013 4,270,509,783 108,195,062 (6,317,246,766) (1,938,541,921)

Prior Period Errors 24.1 - - 282,847,679 282,847,679

As restated 4,270,509,783 108,195,062 (6,034,399,087) (1,655,694,242)

Dividends to NG - - (32,362,252) (32,362,252)

Net income - - 1,438,206,020 1,438,206,020

Balance at

December 31, 2014 4,270,509,783 216,390,124 (4,628,555,319) (249,850,474)



CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL DEFICIENCY



6

Note 2014 2013

CASH FLOWS FROM OPERATING ACTIVITIES

Cash receipts from borrowers 3,022,960,830 3,315,030,400

Other income 102,531,414 1,120,785,056

Subsidy for CMP from national government 2,056,919,084 1,011,300,710

Other receipts 256,377,991 113,083,752

Cash paid to funders, suppliers and employees (3,046,939,157) (3,356,787,239)

Purchase of receivables under HLRPP (202,691,317) (529,750,635)

Payment of dividend (31,886,308) (166,112,892)

Receivables from subsidiaries/other GOCCs (13,854,517) (121,384,065)

Advances from officers and employees - (500,000)

Net cash generated from operating activities 2,143,418,020 1,385,665,087

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from matured short-term investments 2,097,348,911 996,778,518

Excess spread from securitized accounts 6,283,408 16,890,421

Receipt of payment for liquidity reserve from AKPF - 3,552,200

Receipt of payment for commingle reserve from AKPF - 1,149,381

Investment in government securities/investment in

high yield/retail treasury bond (1,965,897,829) (1,847,219,498)

Investment in SHFC, subsidiary corporation (750,000,000) (750,000,000)

Purchase of property and equipment (409,738,843) (14,373,939)

Net cash used in investing activities (1,022,004,353) (1,593,222,917)

CASH FLOWS FROM FINANCING ACTIVITIES

Financial expense for technical assistance (22,559) -

Net cash used in financing activities (22,559) -

Net increase (decrease) in cash and cash equivalents 1,121,391,108 (207,557,830)

Cash and cash equivalents at beginning of year 3,330,412,750 3,537,970,580

CASH AND CASH EQUIVALENTS AT END OF YEAR 3 4,451,803,858 3,330,412,750



CONSOLIDATED STATEMENT OF CASH FLOWS



7

8

NATIONAL HOME MORTGAGE FINANCE CORPORATION AND ITS SUBSIDIARY NOTES TO FINANCIAL STATEMENTS

(All amounts in Philippine Peso unless otherwise stated)

1. GENERAL INFORMATION

The National Home Mortgage Finance Corporation (NHMFC) was created by virtue of Presidential Decree (PD) No. 1267 dated December 21, 1977, as amended by Executive Order (EO) No. 90 on December 17, 1986 identifying NHMFC as one of the key agencies in the implementation of the National Shelter Program that was tasked as the major government home mortgage institution. EO No. 357 dated May 24, 1989 placed NHMFC under the administrative supervision of the Housing and Urban Development Coordinating Council (HUDCC). The NHMFC’s original mandate was transformed by EO No. 90 into one serving as a major government home mortgage institution to operate a viable mortgage market, utilizing long-term funds principally provided by the Social Security System (SSS), the Government Service Insurance System (GSIS) and the Home Development Mutual Fund (HDMF), to purchase mortgages originated by both private and public institutions that are within government-approved guidelines. On January 24, 1990, RA No. 6846 was enacted creating the Abot-Kaya Pabahay Fund (AKPF), otherwise known as the Social Housing Support Fund, which mandated NHMFC to administer the developmental loan financing assistance and amortization support components of the fund. Later, RA No. 7279 was approved on March 24, 1992 mandating NHMFC to administer the Community Mortgage Program (CMP).

On January 20, 2004, EO No. 272 was signed by the President of the Philippines mandating the NHMFC to organize and establish the Social Housing Finance Corporation (SHFC). The creation of the SHFC, a NHMFC wholly owned subsidiary, was in accordance with the Corporation Code and pertinent rules and regulations issued by the Securities and Exchange Commission (SEC). Its main mandate is to be the lead government agency to undertake financing of social housing programs that will cater to the formal and informal sector in the low-income bracket. Thus, in October 2005, the NHMFC transferred to SHFC the funds and assets of the CMP, the amortization support fund and developmental financing program of the AKPF. Only the liquidity support and interest subsidy component of the AKPF was left under the trusteeship of the NHMFC.

The governing board of NHMFC which exercises corporate powers and determines policies is composed of the following:

1. The Vice-President of the Philippines and Chairman, HUDCC 2. The President, NHMFC 3. The Secretary, Department of Finance 4. The Secretary, Department of Budget and Management 5. The Governor, Bangko Sentral ng Pilipinas

Chairman Vice-Chairman Member Member Member

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The President is assisted in the management of the Corporation by the Executive Vice-President, four Vice-Presidents and 10 Department Managers. The personnel complement as at December 31, 2014 consisted of 389 employees, 237 of which are regular employees and 152 agency-hired employees. The registered office of the Corporation is located at Filomena Building III, 104 Amorsolo Street, Legaspi Village, Makati City. The Corporation operates within the Philippines. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies used are consistent with those used in the previous financial year. 2.1 Basis of preparation

a. Adoption of New Government Accounting System (NGAS) Revised Chart of Accounts

A new chart of accounts have been adopted to comply with the requirements of the NGAS – Revised Chart of Accounts for Corporations prescribed under COA Circular Nos. 2004-002 dated April 29, 2004 and 2004-008 dated September 20, 2004.

b. Statement of compliance

The accompanying financial statements of NHMFC were prepared and presented in accordance with generally accepted accounting principles in the Philippines as set forth in the Philippine Financial Reporting Standards.

2.2 Basis of consolidation

The consolidated financial statements include the FS of SHFC and NHMFC are presented separately as at December 31, 2014 and 2013. The financial statements of SHFC are fully consolidated and will continue to be consolidated until the date when the Corporation's control over it ceases. The financial statements of the subsidiary are prepared for the same reporting period as the Corporation, using uniform and consistent accounting policies. All intra-group balances and transactions are eliminated in full. On the other hand, the separate financial statements of the AKPF are not consolidated line-by-line with the financial statements of NHMFC, but are instead taken up under the assets and liabilities held in trust and fund balance accounts of the Corporation.

2.3 Accounting basis The Corporation uses the accrual basis of accounting in the preparing its financial statements, except for cash flow information. The effects of transactions and events on assets and liabilities are recognized in the periods to which they relate.

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Accrual of interest income is computed on accounts with zero to three months arrearages following the provisions of Circular No. 202, Series of 1999, issued by the Bangko Sentral ng Pilipinas (BSP). 2.4 Currency of presentation The financial statements are presented in Philippine peso, which is the Corporation's functional and presentation currency. All amounts are rounded to the nearest peso, unless otherwise indicated.

2.5 Going concern basis

The financial statements are prepared on historical cost and going concern basis. Despite the transfer of the CMP to NHMFC’s wholly-owned subsidiary, the SHFC, effective October 16, 2005 pursuant to EO No. 272 and the formal closing of the non-performing loans (NPLs) sale on November 10, 2005, the financial statements are prepared on a going concern basis for the following reasons:

a. NHMFC shall endeavor to become the premiere government secondary mortgage institution (SMI) through programmed securitizations of selected mortgages/assets in order to develop an active secondary market for home mortgages; b. It shall continue to manage and service Unified Home Lending Program (UHLP) accounts with low to moderate delinquencies until such time that securitization of mortgages shall be in place; and c. It shall strive to aggressively implement a collection system that will enable itself to comply with the amortization payment requirements under the loan restructuring agreement.

2.6 Related party disclosures

PAS 24 - Related Party Disclosure ensures that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may be affected by the existence of related parties and by transactions and outstanding balances with such parties. Related party transactions are transfer of resources, services or obligations between related parties, regardless of whether a price is charged.

2.7 Allowance for impairment loss In conformity with the PAS 39 – Financial Instruments: Recognition and Measurement, NHMFC assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. If such evidence exists, an impairment loss is recognized. Based on the study of the Folio II receivable portfolio and sample costs of foreclosed accounts, the provision for impairment loss for CY 2012 was computed at two per cent for current accounts and 20 per cent for past due accounts of gross loan portfolio. The corresponding amount of the receivable was reduced through the use of allowance

11

account and the amount of impairment loss was recognized in the statement of income and expenses.

2.8 Property and equipment

Property and equipment are recorded at cost and are depreciated using the straight line method based on the estimated life of the property with 10 per cent salvage value. Repairs and maintenance and minor replacements are charged to expense as incurred. Major repairs and betterments are capitalized. Leasehold improvements are amortized over five years or the actual length of lease contract using the straight-line method with 10 per cent salvage value. 3. CASH AND CASH EQUIVALENTS

The account consists of the following:

2014 2013

Cash on hand 3.1/ 17,021,999 27,113,168 Cash in bank – local 3.2/

Cash in bank - time deposit 4,051,230,612 3,125,352,705 Cash in bank - combo account 358,504,532 169,051,828 Cash in bank - savings account 24,111,087 7,965,419

Cash in bank – foreign 3.3/ 935,628 929,630

4,451,803,858 3,330,412,750

3.1 Cash on hand

The account represents collections of Cash Collecting Officers and Supervising Tellers, cash advances granted to Cash Disbursing Officers, and Petty Cash Fund established at the Head Office and Regional/Satellite Offices to defray immediate or emergency minimal disbursements.

3.2 Cash in bank - local The account consists of the following:

a. Funds deposited with government banks for payroll and corporate operating funds; and b. Cash in bank earns interest at prevailing interest rates of 0.25 per cent per annum for savings account and graduated interest rates per annum for time deposits as follows: 1 per cent for 31-90 days, 1.125 per cent for 91-180 days and 1.25 per cent for 181-364 days.

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3.3 Cash in bank - foreign The account represents the dollar account opened to accommodate dollar payment (non-refundable) by participating bidders for bid documents during the sale of NPL accounts. The account earns interest at 2.5 per cent per annum.

4. RECEIVABLES


2014 2013

Notes receivables 4.1/ 257,738,512 257,738,512 Interest receivables 4.2/ 247,093,930 320,958,292 Loans receivables 4.3/ 57,731,846 53,920,118 Due from officers and employees 4.4/ 26,313,337 16,445,991 Due from GOCCs 4.5/ 6,943,618 6,277,430 Housing Loan Receivable Purchase

Program (HLRPP) receivable 4.6/ 470,135 427,468 Due from subsidiaries/affiliates 4.7/ 28,480 28,480 Other receivables 4.8/ 88,996,264 88,887,295

685,316,122 744,683,586 Allowance for impairment loss 19,092,233 21,969,806

666,223,889 722,713,780

4.1 Notes receivable The account represents Subordinated Debt Series B which earns interest at 18 per cent per annum and the Junior Subordinated Capital made to Balikatan Housing Finance, Inc. (BHFI) by NHMFC in accordance with the Junior Subordinated Capital Facility Agreement with interest rate of 20 per cent per annum.

4.2 Interest receivable The account represents accrual of interest income and consists of the following:

2014 2013

Folio II 220,534,028 306,831,678 HLRPP 6,381,407 4,349,728 Sales contract 4,607,186 4,897,326 CMP 4,325,709 2,958,398 Refinanced loans 104,923 104,923 Folio I 16,239 16,239 Others 11,124,438 1,800,000


242,560,553 314,634,294

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4.3 Loans receivable The account pertains to the current portion of the loans extended to the borrowers under the UHLP of the Corporation. The loans are amortized monthly for a maximum period of 25 years with a rate ranging from nine per cent to 16 per cent depending on the loan package availed of.

4.4 Due from officers and employees The account represents cash advances granted to officers and employees on official travel within the Philippines or abroad which must be liquidated in full upon completion of travel. Included also in this account are the car loans of officers.

4.5 Due from GOCCs

The account is composed of the following:

2014 2013

AKPF 3,318,782 1,863,941 Home Guaranty Corporation (HGC) a/ 1,375,427 1,375,427 SSS 301,939 157,009 HUDCC - 933,583 Others b/ 1,947,470 1,947,470

6,943,618 6,277,430

a. HGC represents the balance of the aggregate loan value of mortgages assigned pursuant to the credit insurance agreement between HGC and NHMFC. b. Others represent the part of the assets/liabilities acquired by NHMFC upon absorption of the Private Sites and Services Projects Office in 1988.

4.6 HLRPP receivable The account represents the current portion of purchased mortgages/receivables originated by public/private financial institutions and developers in accordance with the terms, conditions and standards of NHMFC to serve as the underlying collaterals for accounts eligible for securitization.

4.7 Due from subsidiaries/affiliates The account represents advances made by NHMFC for various expenses incurred by BHFI.

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4.8 Other receivables The account consists of the following:

2014 2013

Claims for disallowed payments a/ 66,331,754 66,331,754 Bahayan Mortgage Participation Certificates (BMPCs) b/ 13,700,000 13,700,000 Claims from accountable officers 50,000 - Accounts receivable - others c/ 8,914,510 8,855,541


74,437,408 74,328,439

a. Claims for disallowed payments consist of the disbursements/transactions disallowed in audit by the COA debited to the above account and credited to Contingent Surplus – Claims for disallowed payments. The former account is presented in the statement of financial position under Receivables while the latter is presented as Government Equity in the Statement of Changes in Capital Deficiency. b. BMPCs represents sales of BPMCs in 1980 to 1981, net of two per cent discount, which have not been paid within the 60 or 90 days credit terms. The provision for doubtful accounts has brought down its value to P1. c. Accounts receivable - others refers to loan amortization collections made by collecting banks that have not been remitted to NHMFC as verified by the Treasury Department.

5. OTHER SHORT TERM INVESTMENTS - GOVERNMENT SECURITIES

This account represents the investments in government securities under series RTB 25-01, RTB 10-4 and FXTN 20-17. These are investments in debt securities acquired principally for trading purposes. These investments are initially recorded at cost- that is, the total amount paid for the securities, including any brokerage fees. However, when the statement of financial position is prepared in subsequent periods, this type of investment is written up or down to its fair value, or “marked to market” and any unrealized gain or loss for trading securities are included in the net income.

6. OTHER CURRENT ASSETS


2014 2013

Rentals and other deposits 99,028,750 34,267,927 Office supplies inventory 4,409,649 3,918,250 Prepaid rent 4,092,355 3,552,282 Prepaid insurance 2,429,512 2,419,220 Other prepaid expenses 91,549 620,772

110,051,815 44,778,451

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Rentals and other deposits The account refers to guarantee fee for various lessors for office space rental and services in the amount of P34,508,351. This also refers to amount paid in advance by SHFC as mobilization fee to contractors for High Density Housing (HDH) projects which shall be deducted from the progress billing based on the percentage of completion of the project. 7. LONG - TERM RECEIVABLES

Previously termed as Loan Installment Receivables (LIR), Long-term Receivables (LTR) account represents mortgages purchased from the accredited originating institutions/ developers/community mortgage associations consisting of the following:

2014

2013

Regular LTR CMP-SHFC 6,239,629,768

5,934,782,294

HLRPP receivable 7.1/ 2,009,255,733

1,826,478,420

Folio II 7.2/ 1,288,799,477

1,332,917,893

Folio I 7.3/ 582,997,792

579,420,143 Loans receivables BB1 repurchased 7.4/ 214,284,791

-

Loans receivable-PRA 7.5/ 138,083,463

141,928,428

Folio II Buy Back 7.6/ 82,723,805

91,729,861

CMP 7.7/ 80,000,000

80,000,000 Installment sale-DL/refinanced 45,483,042

48,106,054

10,681,257,871

10,035,363,093

Past due loans receivables 7.8/ 17,251,864,305

17,450,273,467

Items in litigation 7.9/ 1,853,396,900

1,894,262,901 Insurance receivable 7.10/ 709,402,258

719,499,621

Sales contract receivable 7.11/ 686,503,219

425,327,212

Commingle reserve7.12/ 132,947,645

126,902,324 Liquidity reserve 7.13/ 96,813,857

109,358,325

31,412,186,055 30,760,986,943 Less: Allowance for impairment loss 3,563,226,332 3,570,691,310

27,848,959,723

27,190,295,633

Less: Accounts for clearing 7.14/ 401,957,405

549,436,184

Long term receivable, net 27,447,002,318 26,640,859,449

LTRs are presented net of Allowance for impairment loss and Accounts for clearing to reflect the most conservative balance of the account.

7.1 HLRPP receivable

The account represents the non-current portion of purchased mortgages/receivables originated by public/private financial institutions and developers in accordance with the terms, conditions and standards of NHMFC to serve as the underlying collaterals for accounts eligible for securitization.

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7.2 Regular LTR - Folio II The account refers to the loans extended to the borrowers under the UHLP of the Corporation. The loans are also amortized monthly for a maximum period of 25 years with a rate ranging from nine per cent to 16 per cent depending on the loan package availed of.

7.3 Regular LTR - Folio I The account pertains to receivables retained by NHMFC under the old program after the outright assignment of P4.42 billion to HDMF as payment for trust liabilities due to the latter. The loans are amortized monthly up to a maximum term of 25 years with interest rates ranging from nine per cent to 16 per cent depending on the classification as well as amount of financing availed of.

7.4 Loans receivable BB1 repurchased

The account represents the 1,736 Bahaybonds1 defective/restructured residential loans which were repurchased due to non-compliance with Eligibility Criteria.

7.5 Loans receivable – Philippine Reclamation Authority (PRA), formerly Public

Estate Authority

The account refers to mortgage take-outs under the PRA Pabahay 2000 Project.

7.6 Folio II buy back

The account represents the 486 Defective Loans and Social Put Loans repurchased/buy-back from BHFI. Pursuant to the provisions of the Loan Sale and Purchase Agreement between NHMFC and BHFI on defective mortgages as specifically stated in Section 4.01(b) and Section 10.01, BHFI is entitled to return to NHMFC 500 accounts per year for three consecutive years starting 2006 as Social Putback. Under the same agreement, BHFI can also return accounts that breached the representation and warranties under the Loan Sale and Purchase Agreement or the so called “Defective Accounts”.

7.7 Community Mortgage Program

The account pertains to the retained CMP project originated by National Housing Authority (NHA) for loans extended to qualified borrowers under the community association of BASECO. The loans bear six per cent interest and are amortized for a maximum period of 25 years.

7.8 Past due loans receivables The account consists of the following:

2014 2013

Folio II - regular LTR 13,241,048,921 13,952,214,499

CMP 3,906,387,904 3,371,051,300

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2014 2013

Folio I - regular LTR 104,275,449 126,855,637 LIR - refinanced 152,031 152,031

17,251,864,305 17,450,273,467 Allowance for impairment loss 3,450,372,861 2,815,844,433

13,801,491,444 14,634,429,034

The past due loans reported under Folio I, Folio II and LIR - Refinanced represent the total outstanding balance of borrowers account which were more than three months in arrears as at December 31, 2014. The segregation and classification of the entire outstanding balance of these delinquent accounts to past due are in compliance with BSP Circular No. 143, s. of 1997, amending Section 1. Item e of Subsection 304.1 (Books I and II) and 4304 Q.1 (Book IV) and Item c of Section 3304 (Book III) quoted as follows:

“Loans/receivables payable in installments - the total outstanding balance thereof shall be considered past due in accordance with the following schedule:

Mode of Payment Minimum Number of Installments in Arrears

Monthly 3 Quarterly 1 Semestral 1 Annually 1

Provided, however, that when the total amount of arrearages reaches 20 per cent of the total outstanding balance of the loan/receivable, the total outstanding balance of the loan/receivable shall be considered as past due, regardless of the number of installments in arrears.”

7.9 Items in litigation The account pertains to the actual outstanding balance of delinquent loans of home borrowers transferred to the Legal Department of the Corporation for foreclosure or with petitions already filed in court.

7.10 Insurance receivable The account pertains to the mortgage redemption insurance premium component of the borrowers monthly loan amortizations advanced by the Corporation for accounts with more than 12 months in arrears.

7.11 Sales contract receivable (SCR)

The account pertains to the Sale of Mortgage Rights (SAMOR) under the 1998 SAMOR program for Acquired Asset Department (AAD) accounts with approved installment payments of five years and above and under 2008 SAMOR III Program with approved installment sale under Remedial Accounts Unit. This program intends to move the Corporation's non-performing assets to become regular accounts and thus enable it to

18

recover its investment at minimum cost. Amortization payments of borrowers for SCRs are recorded as Deposit on Rights Sold (see Note 15.1h).

7.12 Commingle reserve The account pertains to the bank account of the Issuer established with the relevant Account Bank into which amount equal to expected Collections for three months is deposited from the proceeds of the Senior Notes issuance to cover the lagging time between the Collection Period and the Monthly Servicer Report. The Commingle Reserve Account shall be used upon the occurrence of a Servicer Termination Event. In 2011, this account was reclassified under Long Term Receivable – Commingle reserve account.

7.13 Liquidity reserve The account pertains to the reserve account established to cover any shortfall, Issuer expenses and coupon payments of the Senior Notes from the time lag of the start of delinquency of a current account until the receipt of cash flow from both delayed Collections and the Guaranty. In 2011, this account was reclassified under Long Term Receivable – Liquidity reserve account.

7.14 Accounts for clearing

2014 2013

UHLP Folio II 30,021,683 142,460,361 SAMOR 22,901,787 3,247,825 HLRPP 4,489,197 9,852,151 Folio I 396,241 9,739,840 CMP 344,148,497 384,136,007

401,957,405 549,436,184

The accounts for clearing represent undistributed collections on amortization that have not yet been posted to individual borrowers account due to timing differences. These unposted payments are mostly due to collections from borrowers whose accounts are yet to be set up in NHMFC database and those resulting from late updating and verification with corresponding bank reports and remittances. The application of these amounts to the corresponding borrowers’ loan accounts is done at a later date that is why the undistributed collection always carries a balance at the end of any given period. As collections from borrowers’ amortization, this account is actually a reduction on the Receivable accounts, which if not accordingly distributed will render the balances of the affected accounts inaccurate. The verification unit continually focuses on the cleansing of the accounts for clearing. The NHMFC further enhance its computer programs and systems to address the various posting issues. Other projects such as the Application Support, Maintenance, Enhancement and Development (ASMED) of NHMFC IT System and Network Management Project were also started this year to expedite the reconciliation of these accounts. To ensure that the borrowers’ account reflect the correct balances and not prejudiced on the corresponding charges such as penalties and interest, the accounts are manually reconciled, corrected and adjusted upon updating of the borrowers.

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8. LONG-TERM INVESTMENTS The account is composed of the following:

2014 2013

Investment in BHFI 8.1/ 1,225,636,830 1,225,636,830 Investment in Bahay Bonds-Junior Notes 8.2/ 310,898,053 310,898,053 Investment in Bahay Bonds2-Class C Notes 183,744,442 183,744,442 Investment in PLDT Stocks 8.3/ 285,500 285,500 Investment in Balikatan Holdings Two (BHT) 8.4/ 147,276 147,276 Investment in Balikatan Property Holdings,

Incorporated (BPHI) 8.5/ 62,500

62,500

1,720,774,601 1,720,774,601 Allowance for Impairment Loss 109,224,573 109,224,574

1,611,550,028 1,611,550,028

8.1 Investment in BHFI The account represents NHMFC’s equity as a joint venture partner in BHFI consisting of P746.451 million preferred shares, P4.900 million common shares and P3,372.61 million mortgage receivables. In pursuance of the implementation structure and strategy designed to effect the transfer of assets to a Special Purpose Entity (SPE), NHMFC incorporated and registered with the SEC the BHFI (formerly Balikatan Housing, Inc.) pursuant to Board Resolution No. 3349 dated November 30, 2004 and authorized by the Office of the President of the Philippines thru the Executive Secretary’s Memorandum dated December 28, 2004. This corporation was organized as a financing company under the Finance Company Act.

This is the corporation where NHMFC transferred all of the high delinquency NPLs in exchange for shares and debt. Initially, NHMFC owned 100 per cent of BHFI but on closing date of NPL sale, only 49 per cent of the equity was retained and Deutsche Bank Global Opportunities (DBGO) owning 51 per cent. Thus, NHMFC became a minority partner in BHFI. With the formal closing of the sale of NPLs to DBGO in November 2005, the Final Purchase Price was P5.173 billion with total cash proceeds of P4.263 billion and P0.910 billion NHMFC equity in BHFI broken down as: Investment in BHFI in the amount of P0.751 billion and P0.159 billion Subordinated Debt B under Notes Receivable. NHMFC remitted P3.299 billion and P0.463 billion to SSS and HDMF, respectively, as payment of the High Delinquency Funder Loan Payable. Per COA recommendation, NHMFC adopted the equity method of accounting for its equity investment in BHFI in accordance with the PAS 28, Investment in Associate:

“An associate is an entity over which the Corporation has significant influence and that is neither a subsidiary nor an interest in a joint venture.”

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Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

The results of assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with PFRS 5, Non-current Assets Held for Sale and Discontinued Operations. Under the equity method, an investment in an associate is initially recognized in the balance sheet at cost and adjusted thereafter to recognize the Corporation’s share of the profit or loss and other comprehensive income of the associate. When the corporation’s share of losses of an associate exceeds the Corporation’s interest in that associate (which includes any long-term interests that, in substance, form part of the Corporation’s net investment in the associate), the Corporation discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Corporation has incurred legal or constructive obligations or made payment on behalf of the associate. The Corporation assesses whether there is any objective evidence that the investment in associate is impaired. If such evidence exists, the Corporation determines the amount of any impairment loss. The investment account was increased by the share in the profit or loss for the calendar years 2006 to 2011. The financial statements of BHFI as parent company was the basis in the computation of the share in a loss of P191.170 million in 2011 and a profit aggregating P665.456 million from 2006 to 2010. 8.2 Investment in bahay bonds – Junior notes

On March 23, 2009, the NHMFC launched its maiden securitization (BB1) issue using more than 12,000 prime residential mortgage loans. The NHMFC issued P2.060 billion worth of asset-backed securities called Bahay Bonds. Again, in August 2012, BB2 dubbed as the first ever retail mortgage backed securities in the Philippine market was issued. This BB2 successfully raised P603.7 million. 8.3 Investment in PLDT stocks

The account pertains to NHMFC’s PLDT trunk line and direct lines.

8.4 Investment in BHT

The account represents NHMFC’s equity as a joint venture partner in BHT where NHMFC owns 81.82 per cent common equity interest while DBGO owns 18.18 per cent. The purpose of BHT is to own and hold the share of Balikatan Holdings One (BHO).

8.5 Investment in BPHI

Since the high delinquency NPLs are collateralized by real estate mortgages, the BHFI may need to foreclose on some of the underlying mortgages. Under the law, foreign equity in corporations who can own land is limited to 40 per cent. Since the foreign equity component of the BHFI is 51 per cent, then the BHFI cannot own the land. Thus, there is a need to create BPHI as a separate corporation that will own the land. To

21

qualify BPHI under the law on foreign equity restrictions, the capital stock of this corporation must be layered (or “grandfathered”) through additional corporations – BHO and BHT. Such layering will mirror a 51 per cent - 49 per cent capital structure in the BPHI between DBGO and NHMFC, respectively. The purposes of the BPHI are to foreclose and bid on the underlying real estate mortgages and to own, refurbish and sell real estate after foreclosure. 9. OTHER GARNISHED/FORECLOSED ASSETS

The account pertains to property acquired by NHMFC judicially or extra-judicially on the settlement of loans/receivables and/or other reasons. Valuation of the asset includes outstanding principal, six months accrued interest, unpaid insurances and capitalized foreclosure expenses. The breakdown according to programs is as follows:

2014 2013 Folio II 814,257,128 929,963,959 Developmental loans 174,630,788 175,536,029 Community Mortgage Program 50,031,752 50,319,068 Folio I 52,500 26,250

1,038,972,168 1,155,845,306 Allowance for impairment loss 21,390,241 23,120,081

1,017,581,927 1,132,725,225

10. PROPERTY AND EQUIPMENT

The account consists of the following: Office

Building &

Other Structures

Leasehold Improve-

ments

Office Communica-

tion & Other Equipment

Office Furniture

and Fixtures

Transpor-tation

Equipment

IT Equipment

& Software

Library Materials

Tools Semi Expen-

dable

Total

Cost

January 1, 2014 201,330,000 18,365,741 17,247,851 22,406,554 39,353,247 155,440,632 246,974 8,650 702,550 455,102,199 Additions - 1,535,894 1,847,085 862,643 10,634,000 14,111,676 72,888 - 903,774 29,967,960 Adjustment - - 458,050 - - 28,250 - - - 486,300 Retirement/Adjustment - - (970,520) (593,060) (1,056,000) (3,965,774) - - - (6,585,354)

December 31, 2014 201,330,000 19,901,635 18,582,466 22,676,137 48,931,247 165,614,784 319,862 8,650 1,606,324 478,971,105

Accumulated depreciation

January 1, 2014 46,113,744 9,759,213 15,131,847 16,570,111 27,417,402 58,620,171 183,611 7,785 40,468 173,844,352

Depreciation 6,781,868 1,489,820 1,126,119 915,789 2,924,470 9,489,940 23,514 - - 22,751,520 Retirement/Adjustment - - (949,963) (129,360) (1,055,998) (4,879,037) - - - (7,014,358)

December 31, 2014 52,895,612 11,249,033 15,308,003 17,356,540 29,285,874 63,231,074 207,125 7,785 40,468 189,581,514

Net Book Value, December 31, 2014 148,434,388 8,652,602 3,274,463 5,319,597 19,645,373 102,383,710 112,737 865 1,565,856 289,389,591

Net Book Value, December 31, 2013 155,216,256 8,606,528 2,116,004 5,836,444 11,935,845 96,820,461 63,362 865 662,082 281,257,847

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11. INTANGIBLE ASSETS

Computer Software

Cost

January 1, 2014 3,951,374 Adjustments 172,383 Additions 138,998

December 31, 2014 4,262,755

Accumulated Amortization January 1, 2014 (2,208,970) Amortization (884,281)

December 31, 2014 (3,093,251)

Net Book Value, December 31, 2014 1,169,504

Net Book Value, December 31, 2013 1,742,404

12. DEFERRED TAX ASSET

Deferred tax asset refers to the set up for excess/overpayment of NHMFC's Corporate income taxes in 2012. The excess/overpayment arose due to recognition of interest expense for World Bank (WB) loans advanced by the Bureau of Treasury (BTr) which NHMFC received only after confirmation made by COA with BTr. NHMFC effected the adjustment per COA findings and observation which caused the amendment of financial statements. This in effect was applied until third quarter payment of corporate income taxes in 2013 together with the payment for September 2013 in the amount of P5 million. However, in December 2013 after recording the accruals of expenses and recognition of loss in investment in government this resulted a decrease in net income which causes the overpayment of taxes in 2013. 13. OTHER ASSETS

The account includes the following:

2014 2013

Other assets held in trust - AKPF NHMFC (Note 19) 13.1/ 1,116,478,853 1,105,682,631

Other resources 13.2 529,678,256 - Unamortized mortgage origination cost 13.3/ 73,721,841 85,935,627 Application system development cost 6,550,000 - Sundry debits 644,191 644,191 Non-current assets held for disposal (net)13.4/ 73,049 1,791,170 Project investment 41,993 41,993

1,727,188,183 1,194,095,612

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13.1 Other assets held in trust - AKPF The account pertains to the interest subsidy and liquidity support components of the AKPF of NHMFC and the amortization and developmental components of the AKPF of SHFC that were transferred in October 2005 pursuant to EO No. 272. At the time of transfer to SHFC in October 2005, the Interest Subsidy and Liquidity support components has a balance of P501.90 million and the amortization and developmental financing components amounted to P601.164 million in assets and P5.383 million in liabilities as at September 30, 2005.

A separate set of books is maintained and separate financial statements are prepared by the NHMFC for AKPF as presented in Part IV of this report.

13.2 Other resources The account represents land acquired by SHFC for building construction and site development intended for sale or to enter into a usufruct arrangement to high density housing program beneficiaries. These are carried at acquisition costs plus cost incurred for site development and home building.

13.3 Unamortized mortgage origination cost

Previously termed as Deferred Charges, this account includes unamortized mortgage origination and appraisal costs paid to originators of UHLP mortgages up to March 31, 1992 and on CMP mortgages. These costs are amortized over the term of the mortgage contract. Commitment cost of ¾ of one per cent per annum charged by the International Bank for Reconstruction and Development on the principal amount of the housing sector loan is also included in this account. 13.4 Non-current assets held for disposal (net)

This account pertains to Property, Plant and Equipment reclassified under Other Asset account required under Paragraph 67 of PAS 16 which provides that the carrying amount of an item of property, plant and equipment shall be derecognized on disposal or when no future economic benefits are expected from its use or disposal. 14. PAYABLE ACCOUNTS


2014 2013

Accounts payable-vouchers 1,457,477,891 1,030,184,639 Dividends payable 14.1/ 98,159,476 97,683,532 Interest payable 14.2/ 53,928,110 53,928,110 Accounts payable 44,241,444 15,992,266 Due to officers and employees 8,299,729 7,156,765

1,662,106,650 1,204,945,312

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14.1 Dividends payable

The account represents the accrual of dividends on net earnings for prior years based on the repayment schedule agreed upon by Department of Finance (DOF) and NHMFC.

14.2 Interest payable

The account represents the accrued interest expense on loans payable to the funders as shown below:

2014 2013

GSIS 52,296,502 52,296,502 HDMF 86,722 86,722 Others 1,544,886 1,544,886

53,928,110 53,928,110

Interest payable GSIS represents accrued interest expense on loans payable to GSIS under the GSIS NHMFC Restructuring Agreement dated April 11, 2012. 15. INTER-AGENCY PAYABLES


2014 2013

Due to other NGAs 15.1/ 25,065,998 25,065,998 Due to BIR 24,286,966 5,693,328 Due to HUDCC 2,610,189 2,500,000 Due to GOCC 1,313,445 1,232,501 Due to GSIS 1,211,158 794,253 Due to HDMF 659,500 745,542 Due to SSS 224,781 186,807 Due to PhilHealth 110,564 110,692

55,482,601 36,329,121

15.1 Due to Other NGAs

The account represents NHA deposit under the special take out arrangement for accounts without titles. As a result of the review, the titles amounting to P25.060 million was determined to be fully paid and was reclassified under Due to Other NGAs.

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16. OTHER CURRENT LIABILITIES


2014 2013

Other payables 16.1/ 1,859,541,547 1,601,118,549 Guaranty deposit payable 152,125,931 136,751,580 Tax refund payable 1,611,152 2,584,025

2,013,278,630 1,740,454,154

16.1 Other payables

Breakdown of this account follows:

2014 2013

Other payable AKPF a/ 543,433,167 474,471,915 Advances from borrowers b/ 176,186,249 144,755,025 Insurance payable c/ 297,901,086 305,512,412 Deposit option money d/ 272,807,809 227,875,016 Deferred income 219,696,649 - Guarantee fee payable e/ 72,151,335 72,151,335 Accrued other expense payable 63,225,090 80,884,417 Other liabilities - SAMOR III deposits 42,940,021 21,410,173 Due to financial advisor f/ 32,560,335 - Deposit Buyer Initiated Disposal of Asset (BIDA) g/ 27,181,190 - Origination fee payable 25,242,023 18,747,360 Deposit on rights sold h/ 21,947,705 89,507,569 Miscellaneous liabilities 18,717,776 13,979,083 Other liabilities 12,427,274 12,852,643 Transaction registration deposit 6,598,072 6,598,072 Deposit Sale of Non-performing Assets thru Power

of attorney (SNAP) i/ 5,899,500 - Deposit acquired asset-housing fair 5,671,564 5,665,261 Insurance claims payable 4,964,086 30,842,299 Sundry credits j/ 3,694,758 5,419,296 Deposit - SRP 2,977,430 2,977,430 Other payables - Meralco k/ 2,183,822 6,551,466 Other payables - professional fees 413,798 413,798 Due to contractors 311,270 347,353 Provident fund payable 164,303 2,019,328 Fund held in trust 118,641 - Home mortgage employees association, inc. 96,141 226,077 Home mortgage multipurpose cooperative 30,453 177,440 Due to SPT - 77,626,781 Deposits - procurement - 107,000

1,859,541,547 1,601,118,549

a. Other payable AKPF represents amount of loan released by AKPF to fund Commingle and Liquidity Reserve accounts.

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b. Advances from Borrowers pertains to substantial payment made by borrowers which will be applicable to future amortizations, details follow:

2014 2013

Advances from borrowers CMP 107,912,161 76,273,953 SAMOR 40,750,213 39,226,483 Folio II 19,831,362 22,076,975 HLRPP 4,667,356 4,180,406 PRA 2,899,889 2,899,487 SPD 125,268 97,721

176,186,249 144,755,025

c. Insurance payable account is credited for the receipt of the Mortgage Redemption (MRI) premium composed of the borrower’s monthly loan and debited upon payment of the insurance premiums to the MRI Pool. d. Deposit option money is the consideration given by any interested third party in exchange for the privilege to be considered as the buyer of the mortgage receivables. The option money tendered shall be credited to and form part of the down payment equivalent to 20 per cent of the selling price. e. Guaranty fee (GF) payable pertains to the guaranty by the NG on NHMFC’s UHLP loans with GSIS, HDMF, and SSS equivalent to one per cent of the 22 per cent of GF based on the outstanding loan balance pursuant to the Memorandum of Agreement entered into by and among the Republic of the Philippines, represented by the Secretary of Finance, the HUDCC, the SSS, GSIS and HDMF and the NHMFC on February 4, 1994. On December 11, 2008, the NHMFC submitted a proposal to the BTr with the computation of the GF based on the declining balance of the loan, to amortize the arrears (Y1989-2007 unpaid GF) up to Y2018, and to compute the current GF at the end of each year based on actual loan balance payable of the following year. The proposal was for a GF payable of P678.559 million as at December 31, 2009. This was accepted by the DOF subject to the reconciliation of GF payable balances by and between BTr and NHMFC. On the other hand, under the Letter of Guarantee dated April 12, 1995 issued by the DOF, the computation of GF obligation consisted of the following:

The loans outstanding as at December 31, 1994 were covered by full and unconditional NG Guarantee to the extent of 22 per cent of P8.91 billion;

The borrowings by NHMFC in 1995 up to the maximum amount of

P11.80 billion shall be covered by the full and unconditional guarantee of the NG to the extent of 22 per cent thereof while the loans are outstanding; and

27

The guarantee cover shall be subject to a one per cent Guarantee fee to be paid by NHMFC to the NG.

Based on the above stated DOF Letter of Guarantee, the GF payable would only be P88.527 million. NHMFC had already paid a total of P692.705 million as at December 31, 2010. It appeared an overpayment of GF in the amount of P604.178 million as at December 31, 2010. In 2011, the reconciliation with the BTr based on the Letter of Guarantee resulted in an agreed GF payable of P183.916 million. Having paid a total GF of P746.781 million as at December 31, 2011 and an agreed GF payable of P183.916 million, there is an excess payment of P562.865 million. This excess payment of P562.865 million was agreed in principle and accepted by the DOF as can be gleaned upon their letter dated February 1, 2012. However, BTr confirmed the GF obligation of NHMFC in the amount of P578.438 million as at December 31, 2011. The BTr confirmation further stated that their recomputation of guarantee fee due from NHMFC amounted to P562.865 million but adjustments was not effected in their books pending confirmation/instruction from the DOF whether NHMFC’s loans from CY 1996 and onwards will be subjected to guarantee fee. Therefore, until the DOF formally accepts the reconciled figures resulting in excess payment of P562.865 million, the NHMFC recorded the GF payable in the amount of P72.151 million only in 2011. To date, NHMFC requested for reconsideration for exemption on paying 50% of dividends due considering the financial condition of NHMFC and waiting the refund of excess payment on guarantee fee. f. Due to financial advisor pertains to the obligation arising from the contract for the engagement of financial advisor (Ernst and Young Transaction Advisory Services Inc.) for the fund raising and transformation of NHMFC into a secondary mortgage institution. g. Deposit BIDA pertains to the earnest money tendered by interested buyers of acquired assets equivalent to at least 20 per cent of his/her offer price but in no case shall it be less than twenty thousand pesos (P20,000). h. Deposits on right sold pertains to the down payment and amortization payments of buyers of Acquired Assets sold under the SAMOR program, cash sale and sheriff sale temporarily lodged to this account since distribution as to proper accounts cannot be determined at the time of receipt. This balance will be distributed to its proper accounts upon full implementation of NHMFCs Information Technology Road Maps under the Acquired Asset Management System. i. Deposit to SNAP pertains to the earnest money tendered by interested buyers of non-performing assets surrendered by the borrower/s by way of dacion/waiver of rights with power of attorney in favor of NHMFC. j. Sundry credit is the account used to record all collections/receipts from collection partners which cannot be classified under any of the existing housing programs due to the absence of inter-branch credit advice identifying the

28

borrowers' name, account number, etc., invalid name and/or invalid account numbers indicated in the remittance report k. Other payables - Meralco represents unpaid billing adjustment for electricity bills adjusted due to a verified metering installation error (interchanged meter) from July 2002 to July 2004 in the amount of P17,470,576.50 to be paid monthly in the amount of P727,940.69.

17. LOANS PAYABLE – DOMESTIC

The account represents obligations to Funders of the UHLP with details as follows:

2014 2013

SSS 23,533,182,423 23,677,452,444

HDMF 3,423,041,666 3,522,908,031

GSIS 996,529,102 1,101,620,005

27,952,753,191 28,301,980,480

In March 2003, the NHMFC Board, SSS and HDMF approved the Restructuring and Disposition Strategy for UHLP portfolio. The GSIS opted not to participate in the said strategy but instead negotiated for a separate agreement with NHMFC in settlement of its GSIS loans. In view of the approval of the loan restructuring the balances of NHMFC’s obligations with SSS and HDMF were adjusted to conform to the amounts reflected in the agreement. As a consequence, total liabilities to SSS and HDMF were increased by P7.27 billion and P0.54 billion, respectively and segregated into: a) Allocated Low Delinquency Funder Loan; b) Allocated Moderate Delinquency Funder Loan; c) Allocated High Delinquency Funder Loan; d) Allocated Accrued Interest; and e) Allocated Accrued Penalties. The approval of the restructuring agreement made the contingent liabilities a real obligation. The said approval yielded NHMFC the benefit of a much lower interest rate of only four per cent per annum compared to the previous annual rates charged by SSS and HDMF of 11.32 per cent and 12.17 per cent, respectively. In addition, interest shall be computed on the outstanding principal balance of the Allocated Low and Moderate Delinquency Funder Loans only. The balances of Loans payable to SSS and HDMF as at December 31, 2014 are as follows:

Restructured Loan SSS HDMF

Low delinquency 374,989,177 - Moderate delinquency 1,990,613,212 225,884,721 High delinquency 8,592,059,104 1,164,858,659 Allocated accrued interest 11,961,415,991 1,524,283,148 Allocated accrued penalties 614,104,939 508,015,138

23,533,182,423 3,423,041,666

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The loan agreement between NHMFC and GSIS was deemed terminated in December 2002 based on communications between the two parties. The effect of the termination was reflected in the books in December 2003. However, because of the lack of a formal settlement of the loan, COA recommended to restore the GSIS principal loan obligation in the books of NHMFC by reversing previous entries recording the termination of the loan. On April 11, 2012, a Restructuring Agreement was made and entered between NHMFC and GSIS relative to the GSIS loans extended to NHMFC for the UHLP from 1988 to 1995. As provided for in the restructuring agreement, the total amount of loans payable to GSIS was P6.495 billion and the restructured obligations payable under said agreement is P1.886 billion. To date the remaining obligation with GSIS is P996.529 million. The expected final repayment date shall be on December 31, 2021 or earlier. 18. DUE TO NATIONAL TREASURY

The account represents by the BTr for the payment of the WB loans released to NHMFC through the BTr. The amount due includes interest on advances charged by the BTr as of December 2014. The NHMFC has a total obligation of P820.0806 million to BTr on the WB loan as at December 31, 2014 in which a remaining principal balance amounting to P709.956 million and an interest amounting to P116.123 million remained recorded in the books of NHMFC. 19. OTHER LONG-TERM LIABILITIES


2014 2013

AKPF (Note 13.1) 1,116,478,853 1,105,682,631 Notes payable - PRA 114,642,119 118,687,460 Other long-term liability 114,457,960 124,697,982

1,345,578,932 1,349,068,073

Notes payable - PRA

The account pertains to the guaranty transfer price of the PRA special housing loan program as agreed upon by NHMFC and PRA.

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20. DEFERRED CREDITS The account consists of the following: 2014 2013

Unrealized income from

Capitalized arrearages of Restructured Loans - Folio II 4,397,710,509 4,240,979,984

Folio I accounts returned by HDMF 20,186,742 20,186,742

12 per cent unrealized service fee income from remittance of GSIS Collections 86,324,571 86,058,143

Take out of PRA accounts against payable to BTr 28,361,152 28,336,114

Capitalized interest income from commingle and liquidity reserve 32,550,866 38,398,684

Negotiated sale and service fee from renewal of MRI coverage with more than 12 months in arrears 117,890,506 77,053,248

Principal portion of amortization payment paid by SHFC to office space occupied by HUDCC 21,881,870 19,348,514

4,704,906,216 4,510,361,429

21. CAPITAL STOCK

The account represents the amount received from the NG in payment of capital. Originally, as embodied in its charter, the Corporation had an authorized capital stock of 500,000 shares divided into at P1,000 par value per share. The authorized capital was fully subscribed and paid up by the Government of the Republic of the Philippines (GRP) as at December 31, 1986 with the release of P305 million appropriations for the NHMFC for that particular year. With the passage into law of RA No. 7835, also known as the Comprehensive and Integrated Shelter Finance Act on December 22, 1994, the Corporation’s authorized capital stock is now P5,500,000,000 divided into 5,500,000 shares of common stock with par value of P1,000 per share, to be fully subscribed and paid up by the GRP. 22. PAID-IN CAPITAL

The paid in portion of the authorized capital stock consists of the following:

Amount

Original paid in capital 500,000,000 Additional paid in capital a/ 900,000,000 Released in August 1995 900,000,000 NHMFC’s loan from WB - IBRD converted to equity b/ 1,582,005,642 Released in June 1996 as equity support to NHMFC 135,000,000 Released in August 1996 representing 10 per cent annual

contribution of PCSO to Socialized Low-Cost Housing pursuant to Section 6 of RA No. 1169 73,504,141

Programmed equity in 1997 180,000,000

4,270,509,783

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a. The additional paid in capital in the amount of P400 million represents equity for 2010 released in 2012. b. The Department of Justice Opinion No. 18 Series of 1996 dated January 24, 1996 states that the principal loan of US $76.73 million from the WB - IBRD is ipso jure or by operation of law, which means that it is an outright conversion, and therefore, the full amount of the loan thus converted to equity should be deemed part of the fully paid capital of the NHMFC as provided for under Section 6 of RA No. 7835.

23. GOVERNMENT EQUITY


2014 2013

Contingent surplus-claims for disallowed payment 23.1/ 66,331,754 66,331,754 Equity in sites and services 23.2/ 39,840,799 39,840,799 Donated capital 23.3/ 2,022,509 2,022,509

108,195,062 108,195,062

23.1 Contingent surplus - claims for disallowed payments

The account consists of disbursements/transactions disallowed in audit by COA which was debited to the Other receivables-Claims for disallowed payments account and credited to Contingent Surplus – Claims for disallowed payments. The former account is presented in the statement of financial position under Receivables while the latter is presented in the Statement of Changes in Capital Deficiency.

23.2 Government equity in sites and services

The account covers the Government of the Philippines’ counterpart fund and the fund from the World Bank which were used for the construction of the civil works in various Private Sites and Service Projects Office projects absorbed by NHMFC.

23.3 Donated capital The account pertains to furniture and fixtures and other assets acquired through the World Bank Technical Fund for the regionalization of NHMFC operations. It also includes donations from government agencies and other individuals. 24. DEFICIT

The Deficit account consists of the following:

2014 2013

Deficit at beginning of year 6,317,246,766 7,273,692,089 Add/(Less): Prior period errors 24.1/ (282,847,679) 29,602,664

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2014 2013

Add: Dividend to NG 32,362,252 81,203,319 Less: Net income 1,438,206,020 1,067,251,306

Deficit at end of year 4,628,555,319 6,317,246,766

24.1 Prior period errors


Amount

Interest income from long-term receivables 119,235,472 Adjustment on loan loss provision 69,201,507 Miscellaneous income from long-term receivables 32,300,629 Various adjustments to income and expenses (NHMFC) 12,576,763 Various adjustments to income and expenses (SHFC) 49,533,308

282,847,679

25. SUBSIDY INCOME

The account pertains to funds released by the NG to cover the implementation of the CMP. 26. RELATED PARTY TRANSACTIONS

SHFC, a wholly-owned subsidiary of the NHMFC was created primarily to be the lead agency to undertake social housing programs. Subsidies received by NHMFC from the NG for the implementation of the CMP are released to SHFC. Presently, SHFC is merely a trustee of the transferred CMP Funds. The NHMFC remains in control of the affairs of SHFC and did not abandon its obligation to use its ownership under a trust relationship having retained its full ownership over the subject funds. 27. COMPLIANCE WITH TAX LAWS

In compliance with the requirements set forth by Revenue Regulation Nos. 19-2011 and 15-2010, hereunder are the information on taxes, licenses and fees paid or accrued during the taxable year:

2014 2013

A. National

BIR Registration 1,500 1,500

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2014 2013

B. Withholding taxes paid/accrued for the year: Corporate income tax 97,504,000 36,077,932 Taxes on compensation and benefits/creditable

withholding taxes 72,851,936 47,799,161 Final tax 26,401,142 13,609,485 Percentage tax 22,814,251 16,932,512 Capital gains tax 7,063,948 10,409,145 Realty tax 3,983,180 4,512,162

230,618,457 129,340,397

28. OFF-BOOKS DISCLOSURES Payment of Monetary Award On October 22, 2002, Florentino Caja filed a case against NHMFC with the RTC, Branch 147, Makati City for specific performance with damages praying for the return of 66 Transfer of Certificate of Titles (TCTs). On November 4, 2010, the Makati RTC ruled in favor of Mr. Caja and directed NHMFC to:

1. To turn over to Mr. Caja TCT Nos. T-46707, T-46697. T-46716, T-46698 and T-47002;

2. To pay Mr. Caja the value of the properties covered by TCT Nos. T-45765, T-46714, T-47001, T-46715 and T-47004;

3. To pay Mr. Caja expenses for the issuance of new TCTs with respect to TCT Nos. T-47003 and T-46321; and

4. To turn over the amount paid by Bautista to Mr. Caja. On December 2, 2010, NHMFC Legal Department filed a manifestation to the Court stating that the previous submission and turn-over of the 5 TCTs on May 13, 2010, be deemed complete satisfaction of Item No. (1) above. Settlement of Items (2), (3) and (4) entailed a total disbursement of P1,012,764.65 which was fixed by parties during a court hearing on Mr. Caja’s Motion for Execution. On August 28, 2003, Mr. Caja formally made formal representations at the COA for his money claims which were subsequently granted on September 11, 2014. Due to recent development pertaining to the retrieval/recovery by the Special Projects Division of the two lost TCTs (T-47003 and T-46321), the agreed expenses of P40,000 for the intended re-issuance of titles proceedings were deducted from the monetary claims of Mr. Caja. On December 17, 2014 NHMF issued Check No. 1524893 to Mr. Caja in the amount of P972,764.65 to comply with RTC decision and upon recommendation of Legal Department coupled with the decision of COA.

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29. CONTINGENCIES The NHMFC has various contingent liabilities arising in the ordinary conduct of business which are either pending decision by the courts or being contested, the outcome of which are not presently determinable. One of the cases pending against NHMFC is the notice to arbitration given by the BHFI which stemmed from the disputes/issues regarding alleged defective loans and social put loans arising out of the Loan and Sale Purchase Agreement dated May 18, 2004, in relation to the Joint Investment Agreement dated May 18, 2004 and the Closing Agreement dated April 22, 2005 of claims of BHFI. NHMFC is optimistic of getting favorable results for the case. NHMFC is also a party to numerous complaints received regarding accounts previously assigned to/handled by Atty. Frances E. Ramon wherein substantial amounts have been received by the latter from the complainants, but their transaction were either not recorded in the Corporation's database, or not processed in accordance with NHMFC rules and regulations. In the opinion of the management and its legal counsel, the eventual liability under these lawsuits or claims, if any will not have a material or adverse effect on NHMFC's financial position and results of operation. No provision was made during the year.

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OBSERVATIONS AND RECOMMENDATIONS

1. The absence of a subsidiary ledger (SL) and supporting schedules/ documents to substantiate the Accrued expense payable amounting to P87.907 million as at December 31, 2014 casts doubt on the accuracy and validity of the account balance and is contrary to Section 111 (2) of PD 1445 and Paragraph 15 of PAS 1.

1.1 Section 111 (2) of PD No. 1445 provides that the highest standard of honesty, objectivity and consistency should be observed in the keeping of accounts to safeguard against inaccurate or misleading information.

Paragraph 15 of PAS 1 on Presentation of Financial Statements states that:

"xxx Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out xxx"

1.2 As of December 31, 2014, details of the Accrued expense payable is as follows:

Account Amount

Advertising expense 80,000.00 Communication expense 477,139.89 Confidential, intelligence, extraordinary & misc. expense 210,916.49 Salaries and wages 414,755.74 Other compensation 103,163.15 Other maintenance & operating expenses 1,401,146.20 Other personal benefits 472,138.85 Printing and binding 40,892.97 Professional services 33,321,235.23 Rent expense 217,891.89 Repair and maintenance 88,320.00 Representation expense 22,965.00 Subscription expense 5,664.00 Supplies and materials expense 29,225.56 Training expense 50,399.98 Travelling expense 6,000.00 Utility expense 2,890,195.90

39,832,050.85

Set up of accrual for CY 2014 48,074,850.68

87,906,901.53

1.3 Our audit revealed that there were no subsidiary ledgers and supporting schedules/documents to substantiate the Accrued expense payable accounts contrary to Section 111 (2) of PD No. 1445 and Paragraph 15 of PAS 1, thus, casts doubt on the accuracy and validity of the account.

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1.4 We recommended that Management:

a. Create subsidiary ledgers to support accrued expense payable accounts to comply with procedural guidelines under Section 114 of PD 1445 and PAS 1.

b. Prepare aging schedules periodically to facilitate monitoring and evaluation of the accounts, indicating the status thereof; and c. Prepare adjusting entries to correct amount, if necessary.

1.5 Management prepared Journal entry voucher to adjust/reclassify the 2013 accrued expense payable amounting to P39,382,050.85. 1.6 Further validation will be undertaken by the audit team on the adjusting entries made since partial subsidiary ledger balances were submitted to substantiate the adjustments.

2. The actual Gender and Development (GAD) expenses of NHMFC for CY 2014 was only P114,724.36 or 28.68 per cent of the allocated budget of P400,000, resulting in very limited programs, activities and projects (PAPs) implemented and reducing the opportunity of NHMFC women and other concerned parties to participate and benefit therefrom.

2.1 The approved Corporate Operating Budget (COB) of the NHMFC for CY 2014 amounted to P5.30 million, which includes an allocation of P400,000 for GAD- related activities. 2.2 For CY 2014, the following are NHMFC’s GAD planned programs, activities and projects:

a. Promotion of GAD awareness within NHMFC; b. Conduct of seminar/workshop on violence against women/men/child; c. Conduct raining programs on gender and development; d. Learning Skills Program; and e. Development of career advancement program for women in government

service.

2.3 However, our review disclosed that the actual GAD expenses of the NHMFC for CY 2014 was only P114,724.36 or 28.68 per cent of the allocated budget of P400,000, to wit:

Programs, activities and projects Amount

1. Physical Fitness Program 96,382.36

2. Training\workshop on Annual GAD in the Housing Sector 18,342.00

114,724.36

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2.4 It was also noted that NHMFC did not include/identify any client-focused programs, activities and projects contrary to Sections 5.0 on the steps in formulating the GAD plan of Philippine Commission on Women-National Economic Development Authority-Department of Budget and Management (PCW-NEDA-DBM) Joint Circular No. 2012-01. 2.5 We recommended that Management through its GAD Committee:

a. Exert extra effort on the implementation of GAD programs, activities and projects; b. Maximize the use of the budget allocated for GAD activities; and c. Comply with Section 5.0 of the PCW-NEDA-DBM Joint Circular No. 2012-01.

2.6 The Management commented that the General Accounting Division prepared Journal Entry No. 14-12-0625 to reflect some adjustment relative to GAD expenses which would show actual utilization of P373,771.86 or 93.94% of the allocated budget. 2.7 We acknowledged the actions taken by Management, however, we still maintain our position that NHMFC should comply with the PCW-NEDA-DBM Joint Circular No. 2012-01.

3. Disbursements made on the Grocery Subsidy (Corporate Give-Aways) of NHMFC amounting to P24.272 million have no approved budget contrary to Section 4 Paragraph 1 of PD No. 1445 and to the provision of NHMFC-Corporate Operating Budget (COB) for CY 2014 thus, the P24.272 million disbursed constitute an illegal expenditures.

3.1 Section 4 of paragraph 1 of the PD 1445 provides that:

“No money shall be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority.”

3.2 The approved Corporate operating budget for CY of the NHMFC disclosed the following:

PARTICULARS

PROPOSAL

(a)

APPROVED

(b)

VARIANCE

(c=b-a)

TOTAL USES: 6,867,330,000 5,304,973,000 (1,562,357,000)

Personal Services (PS) 247,678,000 c/ 176,183,000 (71,495,000) e/

Maintenance & Other Operating

Expense (MOOE) 462,020,000

d/

371,158,000

(90,862,000)

Capital Outlays (CO) 51,448,000 51,448,000 -

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PARTICULARS

PROPOSAL

(a)

APPROVED

(b)

VARIANCE

(c=b-a)

Footnotes:

c/ Includes P21.198 million transferred from MOOE – Other Services representing Board Council

Allowance/Per Diem and grocery subsidy which are PS items

d/ Excludes P21.198 million transferred to PS

e/ The PS variance of P71,495,000 refers to:

e.3 No Legal Basis

13th Month Pay P 2,755,000

Grocery Subsidy 21, 000,000

3.3 In CY 2014, grocery subsidy (Corporate Give-Aways) was granted to each NHMFC employees whether regular, casual and direct-hired contractual and agency-hired personnel. Two Guidelines on the distribution of Corporate Give-Aways were issued dated May 22 and October 15, 2014. Following are the conditions in each guidelines authorizing the disbursement of the grocery subsidy:

Guidelines Dated May 22, 2014 Guidelines Dated October 15, 2014

NHMFC Employees Amount NHMFC Employees Amount

Employees who have rendered at least 6 mos. Of continuous service as of May 15, 2014 50,000.00

Employees who have rendered at least 6 mos. continuous services as of October 15, 2014 50,000.00

Employees who have rendered less than 6 mos. as of May 2014

equivalent to length of service over 12 months period

Employees who have rendered less than 6 mos. As of Oct 15, 2014

5 mos. but less than 6 months

25,000.00

4 mos. but less than 5 months 20,000.00



less than two months 5,000.00 Transferee, retiree or employees to be separated from the service before the end of end of the current year

shall refund to NHMFC amount proportionate to the number of months no longer connected to the corporation over 12 mo. period

Agency-Hired Employees Amount Agency-Hired Employees Amount

1 year or more 4,000.00 6 month or more 8,000.00

8 months but less than 1 year 3,000.00 4 months but less than 6 months 6,000.00

4 months but less than 8 months 2,000.00 2 months but less than 4 months 4,000.00

3.4 Schedule of Corporate Give-Aways given were as follows:

Date DV # Check # Amount Remarks

5/22/2014 2014-002408 1514699 11,101,041.67 220 regular and 6 newly hired NHMFC employees 1/


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Date DV # Check # Amount Remarks


05/29/2014 2014-002489 2014-551 676,000.00 Agency-Hired employees 1/



Total 24,272,041.67 1/ Supporting document is the Guidelines dated May 22, 2014

2/ Supporting document is the Guidelines dated October 15, 2014

3.5 Our audit revealed that the disbursements made on the Grocery Subsidy (Corporate Give-Aways) of NHMFC amounting to P24.272 million have no approved budget contrary to Section 4 paragraph 1 of PD 1445 and to the provision of Corporate Operating Budget (COB) for CY 2014. It was also noted that the grocery subsidy account is still presented under the line item -Other Maintenance and Operating Expenses despite reclassification made by DBM.

3.6 Further verification disclosed that no accrual was made on the P12.495 million grocery subsidy taken up as prior year’s adjustment – extraordinary expenses which is contrary to paragraph 15 of Philippine Accounting Stardards (PAS) 1 which provides: xxx. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out xxx.

Particulars

Amount

Debit Credit

DV 2014-005041 Prior Year's Adjustments 5,487,500.00

Accounts Payable - Vouchers

5,487,500.00

DV 2014-005594 Prior Year's Adjustments 5,517,500.00


5,517,500.00

DV2014-005040 Prior Year's Adjustments 749,000.00


749,000.00

DV 2014-005595 Prior Year's Adjustments 741,000.00


741,000.00

12,495,000.00 12,495,000.00


a. Strictly adhere to the DBM approved COB; and b. Require justification/legal basis on the P24.272 million grocery subsidy granted.

3.8 Management commented that the grocery subsidy (corporate give-aways) was given to the employees in good faith as it is included in the NHMFC’s Collective Bargaining Agreement. A letter for reconsideration/clarification on the matter was referred to Department of Budget and Management.

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4. The procurement of Clerical Services of NHMFC done through direct contracting is contrary to Section 50 of Rule XVI of Revised Implementing Rules and Regulations (IRR) of R.A. No. 9184 because the conditions for the use of direct contracting are not present. Thus, the payment to Home Mortgage Multi-Purpose Cooperative (HMMPC) in the amount of P7.086 million constitutes an illegal payment.

4.1 Section 50 of IRR of R.A. 9184 povides that: “Direct Contracting or single source procurement is a method of

procurement of goods that does not require elaborate Bidding Documents.The supplier is simply xxx. Direct contracting may be resorted to by concerned Procuring Entities under any of the following conditions;

a. Procurement of goods of proprietary nature, which can be obtained only from the proprietary source, i.e. when patents, trade secrets and copyrights prohibit others from manufacturing the same item; b. When the procurement of critical components from a specific manufacturer, supplier or distributor is a condition precedent to hold a contractor to guarantee its project performance, in accordance with a provisions of his contract; or, c. Those sold by an exclusive dealer or manufacturer, which does not have subdealers selling at lower prices and for which no subitable substitute can be obtained at more advantageous terms to the government."(Underscoring ours)

4.2 In 2014, NHMFC hired the services of the Cooperative for its Clerical services and the payments made were as follows:

Check Disbursement Voucher No.

Amount Date Number

4/28/2014 1514480 2014-001870 60,947.52 4/28/2014 1514479 2014-001869 45,535.32 4/28/2014 1514764 2014-001868 29,526.74 4/28/2014 1514765 2014-001871 7,433.59 7/9/2014 1515276 2014-003337 180,598.84 7/9/2014 1515277 2014-003334 50,733.89 7/9/2014 1515278 2014-003358 238,118.45

7/15/2014 1515318 2014-003405 282,799.67 7/15/2014 1515275 2014-003361 260,807.69

7/18/2014 1515383 2014-003497 107,018.50 8/8/2014 1515557 2014-003775 119,177.61

8/14/2014 1515651 2014-003839 235,834.45 9/2/2014 1515855 2014-004230 497,728.40 9/2/2014 1515856 2014-004232 615,458.51 9/3/2014 1515887 2014-004259 550,592.27

9/11/2014 1515997 2014-004368 613,082.71 9/30/2014 1516180 2014-004771 539,547.82

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Check Disbursement Voucher No.

Amount Date Number

10/27/2014 1516462 2014-005134 4,780.02 10/27/2014 1516468 2014-005132 495,497.40 10/27/2014 1516469 2014-005133 474,786.70 10/28/2014 1516475 2014-005136 4,703.35

12/9/2014 1524805 2014-005737 606,317.01 12/15/2014 1524857 2014-005783 546,428.04 12/29/2014 1525013 2014-005982 518,484.12

Total 7,085,938.62

4.3 Our audit disclosed that the conditions for the use of direct contracting as the method of procurement of Clerical services are not present:

a. Clerical Services is not proprietary in nature, it cannot be provided only by a particular person or company that has an exclusive legal right to do so.

b. There was no precedent contract executed between NHMFC and HMMPC to signify that there is a condition for NHMFC to hold the Cooperative in guarantee of its project performance.

c. There is no indication that Clerical Services can only be provided by an exclusive dealer which does not have subdealers selling at lower prices or/and no suitable substitute can be obtained at more advantageous terms to the government.


a) Submit justification as to why the direct contracting method was used in the procuring of Clerical services despite not meeting any conditions conditions set fold in section 50 of the Revised IRR of R.A. No. 9184;

b) Submit copy of the contract agreement between NHMFC and HMMPC for further evaluation; and

c) Stop making any payments to HMMPC relative to the subject contract.

4.5 The Management commented the following:

a. In the exercise of best business judgment and its desire to alleviate the economic plight of its outsourced staff, improve their morale and at the same time lower its costs, NHMFC arranged for them to be engaged through HMMPC. NHMFC determined that such arrangement would be cost-effective to HMMPC.

b. Based on projections, the shift would not only redound to greater financial benefit of the staff, it would also result to lower costs on the part of NHMFC, because HMMPC enjoys an intrinsic advantage as a cooperative.

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c. The arrangement with HMMPC has been more advantageous to the government in terms of savings resulting from lower costs. Also, on the humanitarian aspect, the personnel hired through such arrangement have been able to enjoy higher compensation without negatively impacting on the overall costs incurred by NMHFC.

d. It is respectfully offered that the real intent and spirit of R.A. No. 9184 is to ensure that transactions entered into are more advantageous to the government. NHMFC believed that they have achieved such goal and at the same time ensured the welfare of its workers.

4.6 We acknowledged the explanations of Management. However, as a rejoinder, the cost-saving benefit to NHMFC and greater financial benefit to the outsourced staff, would not justify why provision/condition provided under Section 50 of the Revised Implementing Rules and Regulation (IRR) was not followed. It should be noted that Section 2. Declaration of Policy of Rule I – General Provisions of the revised IRRstates that:

“The provisions of this IRR are in line with the commitment of the GOP to promote good governance and its effort to adhere to the principle of transparency, accountability, equity, efficiency, and economy in its procurement process. It is the policy of the GOP that procurement of infrastructure, goods and consulting services shall be competitive and transparent, and therefore shall go through public bidding, except as otherwise provided in this IRR.” (Underscoring ours)

5. Summary of Notices of Disallowance and Charge issued and Notices of Finality of Decision as at December 31, 2014

a) Notices of Disallowances and Charge

Beginning Balance 1/1/2014

This period

Settlement this period

Ending Balance

12/31/2014

Notice of Disallowance

63,779,022.85

14,038,016.81

1,103,939.37

76,713,100.29

Notice of Charge 130,421.54 - - 130,421.54

63,909,444.39 14,038,016.81 1,103,939.37 76,843,521.83

b) Notices of Finality and Decision

Particulars Quantity Amount Remarks

Issued by Commission Proper

Notice of Finality of Decision dated August 12, 2014 on COA Decision 2008-011 dated January 30, 2008 on the back payments of 13

th month pay.

1 14,038,016.81 The disallowance of the 13th

month pay granted to incumbent NHMFC personnel as of July 1, 1989 was lifted thus the total amount of

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Particulars Quantity Amount Remarks

Issued by Commission Proper

disallowance of P57,293,620.51 was re-computed to P14,038,016.81.

COA Decision No. 96-484 dated August 29, 1996 denying the Motion for Reconsideration filed on COA Decision No. 2700 dated February 19,1993.

1 36,696,711.55 Request for the lifting of disallowance due to disposal of the property amounting to P35,000,000. Endorsement was already forwarded to the Office of the General Counsel for the decision. Proceeds of the sale is not yet considered as settlement,

2 50,734,728.36

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STATUS OF IMPLEMENTATION OF PRIOR YEARS’ AUDIT RECOMMENDATIONS

The 35 audit recommendations (five in CY 2013, five in 2012, five in 2011, seven in 2010, five in 2009, five in 2008 and three in 2007) embodied in the prior years’ Annual Audit Report, five were fully implemented and 30 were partially implemented.

OBSERVATIONS AND RECOMMENDATIONS ACTIONS TAKEN / COMMENTS

2013 1. Absence of individual subsidiary ledger (SL) and the dormant /abnormal balances of various receivable and payable accounts totalling to P1.13 billion and P1.72 billion, respectively, are contrary to Sections 111 and 114 of PD 1445, thus, casting doubt on the reliability of the account balances as at December 31, 2013. Create subsidiary ledgers to support various receivable and payable accounts to comply with procedural guidelines under Section 114 of PD 1445; Prepare aging schedule on a periodic basis to facilitate monitoring and evaluation of the accounts, indicating the status thereof; and Establish reason/s for negative balances and adjust them accordingly.

Partially Implemented. The General Accounting Division submitted subsidiary ledgers for Receivable and Payable accounts as required by COA for their year-end audit as of December 31, 2014. Continuing activity of General Accounting Division.

2. The accountable officer did not present and cannot account for one TCT mortgaged as security/collateral to a loan in the amount of P10.92 million granted to a Community Associations contrary to Section 101 of PD 1445.

Conduct further investigation and inquiry on the whereabouts of the subject TCT; determine whether the TCT was cancelled and eventually transferred to another name; and coordinate with the Land Registration Authority on the status of the title and the property; Determine the person/s liable for the lost TCT and hold them administratively and criminally liable for their failure to perform their function. Any additional cost that the Corporation would

Partially Implemented. With decision on quieting of title. Awaiting resolution of the Court of Appeals and Regional Trial Court of Branch No. 76 of San Mateo, Rizal. Reissuance of lost title is also pending with the Regional Trial Court of San Mateo, Rizal.

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incur for the reissuance of title shall be on their account; and Disclose in the notes to financial statements the nature and effect of the lost title and the case filed for quieting of said title.

3. The total variance of P1.895 million between the account balances and the amounts remitted to the BIR and three government corporations in 2014 cast doubt on the accuracy and reliability of the account balances as at December 31, 2013 and contrary to the IFRS Conceptual Framework. Instruct the General Accounting Division to reconcile the P1,895,452.64 and prepare the necessary adjusting entries; and Regularly monitor the amount withheld and the remittances to avoid discrepancy.

Partially Implemented. Partial adjustment per Journal Entry Voucher (JEV) No. 14-05-0223 dated May 31, 2014. The remaining balance of P662,057.79 is still subject for further reconciliation. The variance will be adjusted after further reconciliation and also based on the clearances issued by concerned government agencies. Time bound to reconcile: July 2015.

4. The variance of P8.68 million between the Cash in bank - time deposit balance and the reported balance of the Cash Division, Cash and Custodianship Department understated the Cash in bank and the related accounts as at December 31, 2013. Require the General Accounting Division to review/reconcile the P8,682,063.69 noted discrepancy and prepare the necessary adjusting entries to correct the Cash in bank -time deposit balance as at December 31, 2013; and Prepare regularly monthly reconciliation report to establish the correct balances every month.

Partially Implemented. Adjusted per Journal Entry Voucher Nos. 14-01-002, 14-06-078 and 14-08-0377 resulting to a net adjustment of P795,284.66. The remaining balance of P35,811.17 to be reconciled in 2015.

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5. The variance of P1.89 million between the ledger balance of Cash-Collecting Officer and the Daily Collection and Deposit Report of Cash on hand Collecting Officer casts doubt on the accuracy and reliability of the Cash on hand account balance as at year end and contrary to Section 74 of PD No. 1445 and IFRS Framework. Review/reconcile the variance of P1,888,470.19 between the ledger balance of Cash-Collecting Officer and the Daily Collection and Deposit Report and prepare the necessary adjusting entries to correct the discrepancies noted; and Prepare regularly the monthly reconciliation report to establish the correct balances every month.

Partially Implemented. The remaining balance of P64,300.88 was already reconciled in May 2015 with GL balances based on the reports submitted by regional offices verified by General Accounting Division.

2012

6. The Undistributed Collections not posted in the borrower’s subsidiary ledgers resulted in the variance between the general and subsidiary ledger balances as at December 31, 2012, thereby casting doubt on the validity of the Loans Receivable and other affected account balances totaling P393.018 million. Establish and formulate guidelines on the proper and timely allocation of undistributed collections to the appropriate accounts by concerned departments. Evaluate the existing billing and collection system currently utilized for Folio 1 accounts to address the delay in the posting of loan amortization payments of the borrower to their subsidiary ledgers; and Conduct continuous reconciliation of accounts to minimize the accumulation of undistributed collections and to identify the reasons for the abnormal balances of UC accounts.

Partially implemented. Variance between general and subsidiary ledgers was already reconciled. Submitted to COA the aging balances of Undistributed Collections (UC). Adjusted and forwarded to COA various entries for distribution and restructuring of Folio I accounts. Partially Implemented. MACIS for Folio I was stopped by Information Systems Division (ISD). To date Undistributed Collection account is now presented in the Financial Statement as Accounts for Clearing and deducted from Long – Term Receivable after allowance for impairment as these accounts represent undistributed collections on amortization that have not yet been posted to individual borrowers account due to timing differences.

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These unposted payments are mostly due to collections from borrowers whose accounts are subject to verification with the corresponding bank reports and remittances. The verification unit continually focuses on the cleansing of the accounts for clearing.

7. Default or missed payments of securitized BahayBonds series 1 and 2 accounts have significantly reached 1 to 51 months and 1 to 12 months, respectively, during the year, resulting in the total under collection of loan receivables totaling to P569.845 million, equivalent to 34.87 per cent of the total outstanding diminishing principal of P1.634 billion for the 12,225 accounts for both series of issuances as at December 31, 2012.

Demand, immediately the payment of the under collection of loan receivables totaling P454.863 million for BB1 and P114.982 for BB2 or a total of P569.845 million for both issuances; Undertake more aggressive collection strategies for correcting delinquency shown in the aging analysis and strictly monitor the performance of these collections strategies; and Formulate a well-written and up-to-date monitoring processes and procedures on receivables to improve collections of securitized accounts.

Partially Implemented. The Loan Advisory Office (LAO) now under Collection Group monitors the securitized accounts (BB1 and BB2) as well as the accounts under the Housing Loan Receivables Purchase Program (HLRPP). Furthermore, we have referred these accounts to our collection partners for remediation of NPL accounts.

8. Reconciling items totaling P38.996 million were debited as collections of PNB for NHMFC during the months of March, April and May 2009 even without the corresponding bank credit memo, contrary to IFRS Framework for the Preparation and Presentation of Financial Statements and casts doubt on the accuracy of the balance of Sundry Credit account of P6.684 million as at December 31, 2012. Reverse the entry made in the basis of reconciliation only. Record all the transactions

Partially Implemented.

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based on the credit memo identifying the borrower’s name and account number provided by PNB; Require the depository bank to provide the NHMFC with all the reports and documents, in conformity with Section 74, P D No. 1445; All credits to Sundry Credit account should be reviewed on a timely basis, and all debits to clear the account should be approved by authorized official of the corporation; and Revisit and re-assess the Memorandum of Agreement with the bank to ensure the proper and timely submission of remittance reports, credit advices and other necessary documents to address the delay in the posting of loan amortization payments of the borrowers to their subsidiary ledgers.

The balance of Sundry credit account of P3.695 million includes balance pertaining to PNB account in the amount of P3.122 million and the remaining balance for Salded in the amount of P.571 is being monitored by our Cash Verification Unit. The General Accounting Division submitted schedule for Sundry Credit Account as required by COA for their year-end audit as of December 31, 2014. The Sundry Credit Account is fully accounted for. The Cash Management Division continually focuses in monitoring this account.

9. Discrepancy of P26.896 million between the total balance of Physical Inventory and the balance per General Ledger, consisting of unaccounted property and unserviceable property not included the inventory report and were not reclassified under Other Assets account at year-end as required under Paragraph 67 of Philippine Accounting Standard 16. Include in the inventory report the unserviceable property not disposed of in the total amount of P17.912 million; The General Services Division to locate the missing property totaling P8.984 million. For this purpose, implement the following measures:

Determine the persons liable for the items that were not located during the conduct of inventory.

Issue memorandum to the persons liable to produce immediately the item under their accountability. In case of failure to produce, require a written explanation. If from the explanation, it would appear that the cause for the loss of the item is due to negligence of the

Partially Implemented. The discrepancy was reduced to P1.795 million upon submission of Physical inventory report for the calendar year 2014. This will be further reduced to P1.05 million upon inclusion in the Physical Inventory Report of additional unserviceable fixed assets recorded in the books but not reflected in the inventory report in 2015 to wit: Office Equipment and Furniture and Fixtures in the amount of P414,200

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accountable officer, demand immediate payment of the appraised value of the property. On the other hand, if the cause of the loss is not through negligence but due to fortuitous event, require the accountable officer to file request for relief to COA pursuant to Section 73 of P.D. 1445. The request should be supported by relevant documents enumerated under COA Cir. No. 92-751 dated February 24, 1992.

Conduct physical inventory of property at least once a year and accordingly reconcile the results of inventory with the accounting records maintained by General Accounting Division; Require the Property Custodian to maintain detailed property (subsidiary) record for each category of property and reconcile the same with the accounting and property records to ensure the validity, accuracy and completeness of detailed property and accounting records; Reclassify unserviceable property worth P17.912 million to Other Asset account in accordance with Paragraph 67 of PAS 16; and Facilitate the immediate appraisal and disposal of all unserviceable property to maximize the benefits that could be derived therefrom.

recorded in the books of NHMFC positioned/deployed in HUDCC, hence, not recorded in the physical inventory report.(with schedule submitted by HUDCC). Other Equipment not included in the physical inventory report but recorded in the books P325,754.23. On-going reconciliation.

10. Seven hundred twenty five (725) accounts were not secured by original copy of owner’s duplicate copy of TCTs. Further, erroneous information on the number of TCTs not in custody and TCTs temporarily released to Legal Services and Documentation Division, among others, casts doubt on the accuracy of the inventory report of TCTs of UHLP accounts, as well as other housing programs/accounts. Require the Custodianship Division to reconcile the results of inventory of Transfer Certificates of Title with the concerned offices handling the housing programs to determine the precise number of loan portfolio and accuracy of inventory; Require the TCT custodian to adjust its records to conform to the correct actual number of

Partially Implemented. Custodianship Division forwarded updated report to Internal Audit which this office will validate with NHA and various DBP branches if original TCT or mother Title is in their possession.

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TCT’s; Determine the persons liable for the accounts without titles and hold them administratively liable for their failure to perform their function. Any additional cost that the corporation would incur for the reissuance of Transfer Certificates of Title should be on their account; and Establish clear lines of responsibilities and accountabilities for both the Custodianship Division and the Legal Services and Documentation Division in their custody and safekeeping of Transfer Certificates of Title.

The result of reconciliation and validation by Internal Audit and Custodianship Division for the inventory of TCTs are as follows:

TCT not secured by original copy per COA AOM 725 Less: Fully paid accounts

135

Folio I accounts (with Tax Declaration of Property 115 For reconstitution 2 For Correction of Technical description 1 With RD electronic title 15

NHA originated with certified true copy of TCT 59

327

Balance 398

Accounted for as follows:

NHA originated accounts for verification 360

For verification 38

Continuing activity of Custodianship Division, Special Accounts Servicing Division and Legal Department in coordination with NHA. NHA also committed to fast track their accounts with NHMFC.

On-going reconciliation.

2011

11. The accuracy of the balance of Long-Term Receivables (LTR) – Regular LTR, Folio I and Folio II and other affected accounts cannot be ascertained due to the temporary distribution of the current year’s balance of Undistributed Collections account using the average percentage of actual distribution of collections made during the year and reversal of the distribution made at the beginning of the following year in the amount of P880.255 million, of which P585.588 million pertained to prior years and remained unposted in the borrowers’ subsidiary ledgers. Revisit the present policy adopted of temporarily allocating the amount of undistributed collections as of year-end based on the average percentage of actual distribution of collection made during the year; Establish and formulate guidelines on the proper and timely allocation of undistributed collections to the appropriate accounts by concerned

Partially Implemented. Still not included in the MACIS. Individual Folio I account balances as of December 31, 2013 have already been endorsed to be encode in the MACIS Folio I system ledger. MACIS will help in

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departments. Evaluate the existing billing and computation system currently utilized for Folio I accounts to address the delay in the posting of loan amortization payments of the borrowers to their subsidiary ledgers; and Conduct continuous reconciliation of accounts to minimize the accumulation of undistributed collections and to identify the reasons for the abnormal balances of Undistributed Collections account.

the automatic distribution of collections in the general and subsidiary ledgers. Thus, the general and subsidiary ledgers of Folio I accounts will automatically be reconciled. Reconciliation between Folio I Servicing Unit and the General Accounting Division (GAD) is now undertaken every 15th day of the month.

12. The balances per general ledger and the listings of Other garnished/foreclosed assets account as at year-end showed variance totaling P19.469 million due to the absence of regular reconciliation between the two records thus creating doubt on the accuracy and validity of the account balance. 13. Titles of 6,731 acquired properties with accumulated book value of P552.951 million were not yet consolidated in the name of the Corporation notwithstanding the lapse of one to twenty years after the expiration of the one-year redemption period resulting in the delay in the disposal of these properties and recovery of investment. The delay also exposed the property to further depreciation and deterioration thus, the Corporation may not recover its actual investment. 14. Deficiencies in the management of acquired properties were noted: a) illegal occupants/informal dwellers; b) abandoned property/unoccupied; and c) unlocated property.

Management requires the General Accounting Department and Special Project Division Task Force to conduct a regular reconciliation of balances to identify the cause(s) of the variances and if necessary, appropriate adjusting entries be made to bring the balances in agreement.

Partially Implemented. Reconciliation still on going. Partially Implemented. To date, it has disposed 263 acquired properties with an equivalent value of P65.62 million. Because of the costs entailed in the consolidation of title in the name of NHMFC, management opted to dispose the properties even prior to consolidation. The buyers are responsible for the transfer of the title in their name upon full payment after they are issued the Deed of Sale. Partially Implemented To date, it has disposed 2,400 acquired properties with Certificate of Sale with an equivalent value of P809,481,459.00. Because of the costs entailed in the consolidation of title in the name of NHMFC,

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Expedite the consolidation of titles in the name of the NHMFC. In order to expedite the consolidation of ownership, immediately register the Certificate of Sale with the proper Registry of Deeds and annotate the said Certificate of Sale on the Transfer Certificate of Title; Dispose immediately acquired/foreclosed assets to recover exposure. Develop strategies to expedite the disposition of non-performing assets to prevent accumulation thereof; Establish guidelines on the proper and timely recording and accounting in the books of accounts the sale of acquired properties through Housing Fair Program and SAMOR Program. Pending disposal of the acquired/foreclosed assets, a lease agreement may be entered into by and between the former owners occupying the property with the condition that this would be terminated upon sale of the acquired asset; Enforce legal remedies against the illegal occupants of the property or enter into a lease agreement to protect the interest of the Corporation; and Locate the missing property.

Management opted to dispose the properties even prior to consolidation. The buyers are responsible the transfer of the title in their name upon full payment after they are issued the Deed of Sale. For unlocated properties NHMFC engaged the services of the Surveying Firm and final output already forwarded to NHMFC. They were plotted, mapped and conducted a relocation survey based on the data (TCT) submitted, however, there are discrepancies found in the technical description of Titles which should be referred to Land Registration Authority (LRA).

2010

Several deficiencies were observed in the repurchase of 486 Defective Loans and Social Put Loans which formed part of the 52,289 non-performing loan accounts previously sold at a loss of P7.665 billion.

15. Repurchase price of 486 Defective Loans and Social Put Loans (SPL) at P100.531 million was higher than its selling price during the 2005 sale of non-performing loans resulting in a further loss of P39.696 million.

16. The P19.585 million unreimbursed operating expenses included in the final repurchase price of the 486 Defective Loans and SPLs were not duly supported by documents to establish the reasonableness of the expenses contrary to Section 4(6) of PD No. 1445.

Partially Implemented. Management has reiterated their request to BHFI to submit the necessary documents to support their claim for the operating expenses they incurred.

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17. No document showing validation has been conducted by the Corporation to verify the alleged breach of warranties/representations stated in the Defective Loan Certificate/Social Put Notice for the 486 accounts subject of repurchase, contrary to Section 5.03 of the LSPA. 18. Corporation would likely incur additional losses due to the onerous provisions of the LSPA if the collection and/or rehabilitation of these Defective Loans and Social Put Loans are not closely monitored.

Revisit and re-assess the provisions of the Loan Sale and Purchase Agreement (LSPA) particularly on the recourse period, interest on unreimbursed operating expenses and penalty interest from the original due date of the repurchase price to the date when the repurchase price is paid, that could manifest high risk of loss on operations; Require BHFI to submit all documents necessary to support their claim for unreimbursed operating expenses and this has to be validated by the Corporation; Document the validation of the alleged breach warranties/representations; and Undertake aggressive collection strategies to minimize, if not eliminate the loss incurred on the repurchase of the defective loan accounts.

Partially Implemented. The alleged breach of warranties/ representations are currently being validated. The balance of UHLP Folio II Buy back was reduced to P82.7 million from the original amount of P101.35 million. This was due to disposal thru Sheriff Auction Sale of buyer. Partially Implemented. The relevant provisions of the LSPA have been revisited and re-assessed although the same still constitute binding contractual obligations at this time.

19. The appraisals of 3,246 out of 3,555 foreclosed properties were not updated, thus these properties were not stated at their fair value necessary in the estimation of their recoverable amount and determination of whether or not impairment loss has to be recognized, contrary to PAS 40.

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Assess at every reporting date whether there are indications that the foreclosed properties are impaired. If there are indications that these assets are impaired, the Corporation has to estimate the recoverable amount of the asset in accordance with the International Accounting Standard 36 on Impairment of Assets. If the recoverable amount is less than carrying amount, then appropriate journal entries has to be drawn to recognize impairment loss.

Partially Implemented. Out of 3,246 accounts, 1,669 were already appraised as of May 2015. The appraisal for the remaining accounts is on-going.

20. The result of confirmation of the balance of Investments with Subsidiary and Affiliates and related accounts compared with the balance reported in the NHMFC’s books showed variances totaling P136.942 million creating doubt on the accuracy of the account balances presented in the financial statements. Conduct a regular reconciliation with its subsidiary/affiliates to identify the cause(s) of the variances and if necessary, appropriate adjusting entries be made to bring the accounts in agreement.

Partially Implemented. NHMFC and SHFC have reconciled balances in their books as of December, 2014. Ongoing reconciliation for the variance of P23 million.

2009 21. Deposits for taken-out mortgages in 1994 and 1995 delivered by the National Housing Authority (NHA) to the NHMFC without the corresponding Transfer Certificates of Title (TCTs) amounting to P48.172 million and those pertaining to bid/performance bonds aggregating P0.826 million on expired/terminated contracts were still included in the Guaranty Deposits Payable account, resulting in the misstatement of the payable and other related accounts. Coordinate with NHA for the delivery of TCTs and make the necessary entries in the books for delivered TCTs and applied deposits; and

Adjust the books for various deposits which should have already been applied or served, as the case maybe.

Partially Implemented. A letter was sent to NHA to request for the delivery of titles to the 468 accounts. A guaranty deposit was paid by the NHA to NHMFC as assurance of their commitment to deliver the titles.

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NHMFC has adjusted its books P25.07 million as Due Other National Government Agencies (NHA) representing the fully paid NHA originated accounts per JEV No.12-12-0646. NHA also committed to fast track their accounts with NHMFC.

22. The Collection Efficiency Ratio (CER) of 31.92 per cent as at November 2009 for Long Term Receivables - Past Due - Folio II accounts totaling P20.573 billion aging 25 to over 48 months overdue did not improve significantly, as compared to last year’s 32.62 per cent, thus, indicating that collection strategies being adopted are not effective under existing conditions. Undertake more aggressive collection strategies to improve collection efficiency on LTR past due Folio II accounts; and Inform the borrowers on the extension of penalty condonation, housing loan payment incentives, and restructuring programs in order to encourage them to pay regularly.

Partially Implemented. As of December 2014, the regular accounts posted the cumulative collection efficiency as follows:

AGE #of

ACCTS BILLING COLLECTION %

0-3 mos. 6,357 2,347.57 2,211.08 94.19% Over 3-24 mos. 6,854 2,379.13 2,036.93 86.87% 25 mos. to over 48

mos.in arrears 43,260 20,893.41 5,481.19 52.33%

Overall 56,471 25,620.11 9,729.20 77.79%

23. Non-compliance with the computation of the documentary stamp tax (DST) on restructured loans under Section 183 of the National Internal Revenue Code as amended resulted in overpayment of said tax to the Bureau of Internal Revenue by at least P4.11 million for 2009 alone to the detriment of the NHMFC borrowers. Strictly follow the computation of the DST payments based on the National Internal Revenue Code of 1997 as amended; and Request Pag-ibig MRI Pool Inc. (PMRI) to submit list of DST payments/remittances made to BIR in behalf of NHMFC to determine the amount that should be refunded to housing loan

Partially Implemented. Management will follow-up on the reiteration of their request for refund. This will include in the arbitration/compromise agreement with PMRI.

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borrowers.

24. Failure to update the borrowers’ records on Long-Term Receivables – Past Due Folio II account resulted in low turn-over of confirmation requests, thereby rendering said account doubtful of accuracy and reliability. Reconcile their records with individual borrower’s account and correct variances, if any, in order to determine the validity and accuracy of Long-term Receivables-Past Due Folio II accounts; and Update the addresses and whereabouts of the borrowers and evaluate the status/condition of collaterals to determine what courses of action should be taken.

Partially Implemented. CAMG conducts an on-site counselling to confirm the correct property/mailing address of the borrowers and advice EDPD for any changes. Continuing activity by NHMFC's Collection Group.

2008

25. NHMFC did not institute foreclosure proceedings on 43,321 past due long-term receivable Folio II accounts amounting to P8.991 billion with installment arrearages ranging from over five to twenty years, resulting in the delayed recovery of exposure. Submit a report to the Legal Department on past due accounts which are outstanding for long period of time to monitor collectability and initiate, if warranted, litigation/ foreclosure action on these accounts.

Partially Implemented. As of June, 2015, the highly delinquent accounts referred for foreclosure (excluding restructured and foreclosed / auctioned accounts), 1,197 are still pending broken down as follows: a. 116 accounts - filed & waiting for

auction; and b. 1,081 for documentation/filing. Still on-going activity by NHMFC’s Legal Department.

26. The NHMFC has not disposed, for 5 to 13 years, the collaterals on the 10 CMP accounts totaling P95.185 million due to delayed registration/annotation of the Certificates of Sale

57


and consequently the non-consolidation of titles, thereby depriving the Corporation of the opportunity to recover its exposure. Issue clear-cut policies regarding the disposition of past due long-term receivables and strictly implement such policies to insure immediate recovery of exposure.

Partially Implemented. The Special Servicing Division continuously disposes the collaterals of the CMP loans with the informal settlers occupying the properties.

Item # Project Name

Sold Accounts

2014

Installment Basis

Cash Basis

SHDLP

1 Refarville Subdivision 2

2 Mt. Claire Village 6 1

3 Green Meadows Subdivision 2

4 Esguerra Village 1

5 Tahanan sa Family Haven 4

6 Villa Alegre Subd. 7

7 Villa La Prinza 27 4

8 CM Homes 28 2

CMP

9 WEA Homes 8 7

TOTAL 84 15

Item # Project Name

Sold Accounts (as of May 2015)

Installment Basis

Cash Basis

SHDLP

1 Esguerra Village 2

2 Villa Alegre Subd. 1

3 Villa La Prinza 3

CMP

4 WEA Homes 2 53

5 Kapitbahayan sa Balanga Homeowners Association Inc. 30 1

TOTAL 36 56

Continuing activity being monitored by the Special Servicing Division.

27. Payments of P11 million made by NHMFC’s Folio II housing loan borrowers who are Not in the Masterlist (NIM) accounts and lodged in the Undistributed Collections account as at December 31, 2008 resulted in the non-posting of these payments to individual borrower’s ledgers thereby subjecting them to penalties/surcharges and the non-distribution of said payments to affected general ledger accounts.

58


Verify the unpostable balances per borrower to insure that only bonafide NHMFC borrowers are being considered in the distribution of UC. Once confirmed to be NHMFC borrowers, ascertain which accounts are for Folio I, Folio II, CMP, PEA, etc so that distribution of UC could be recorded and posting of payments to subsidiary ledgers per program can be facilitated to reflect their correct balances as at December 31, 2008; and As to collections which were intended for other government institutions like HDMF, GSIS, SSS, etc., remit the collections to the proper institution.

Partially Implemented. To date, the total Not in Masterfile (NIM) accounts was reduced to P6,893,940.64 for 1,673 accounts. Continuing activity being monitored by Cash Management Division.

2007

28. Collections / payments received during the year still remained undistributed and lodged to Deposit on Rights Sold (DORS). Make an adjustment on the Deposits on Rights Sold whenever the property is redeemed by the original borrower, cancellation of the buyer’s intention to purchase NHMFC’s rights over the mortgage or the application of the deposit by the buyer.

Partially Implemented. There were various recording of transactions for booking of installment sale under Other Garnished/Foreclosed accounts from January to December, 2014 bringing the balance from P89.51 million to P21.95 million.

29. The general and subsidiary ledger balances of the liability accounts, Advances from Borrowers – Folio II and Advances from Borrowers – Philippine Reclamation Authority (PRA) showed a P4.106 million difference. Reconcile the difference between the general and subsidiary ledger balances of the Advances from Borrowers – Folio II and Advances from Borrowers – PRA accounts to reflect the correct balance of these accounts and other affected accounts; and Review the existing system to ensure that all financial transactions affecting the accounts are captured and recorded properly, both on the

Partially Implemented. The balances of Advances from Borrowers-Folio II account will be addressed upon full operational of our MACIS-Folio II.

59


general and subsidiary ledgers. 30. Security and other deposits entrusted by the Corporation to various lessors/service providers as a result of lease or service agreements amounting to P5.059 million at year-end remained uncollected for so many years despite the termination of NHMFC’s contracts with these lessors and service providers. Demand from the concerned lessors/service providers the immediate refund of these security and other deposits. Write-off in the books the recorded deposit accounts which can no longer be recovered and where the corresponding contracted services have already been served and/or terminated, after approval have been secured from proper authorities. Monitor the expired lease/service agreements in order to immediately collect or refund the corresponding deposits.

Partially Implemented. Still on-going activity of General Accounting Division and various units concerned.

Note 2014 2013

ASSETS

Current Assets

Cash in bank 3 19,278,372 4,722,163

Short-term investments 4 24,102,738 236,440,930

Receivables 5 508,012,040 293,727,250

Accrued interest receivable 6 11,318,388 8,310,211

562,711,538 543,200,554

Non-current Assets

Long-term investments 7 3,004,331 19,119,692

Property and equipment 8 - 11,379

3,004,331 19,131,071

TOTAL ASSETS 565,715,869 562,331,625

LIABILITIES & FUND BALANCE

Liabilitites

Accounts payable 2,412,828 120,269

Due to NHMFC 9 - 2,156,575

Accrued tax on receivables 602,931 1,295

TOTAL LIABLITIES 3,015,759 2,278,139

FUND BALANCE 10 562,700,111 560,053,486

TOTAL LIABILITIES AND FUND BALANCE 565,715,869 562,331,625

ABOT-KAYA PABAHAY FUND

NATIONAL HOME MORTGAGE FINANCE CORPORATION (as Trustee)

LIQUIDITY SUPPORT AND INTEREST SUBSIDY COMPONENTS

STATEMENT OF FINANCIAL POSITION

As of December 31, 2014


60

Note 2014 2013

OPERATING AND MISCELLANEOUS INCOME

Interest income-LBP-IMA - 2,578,670

Interest income on commingle and liquidity reserve 3,014,653 2,389,678

Interest income on RTB - 2,140,598

Interest income on bonds 509,286 673,056

Interest income on investment managed by NHMFC 2,420,969 587,629

Interest income-LBP-HYSA 9,063 44,829

Interest income-savings account 31,695 12,947

5,985,667 8,427,407

ADMINISTRATIVE AND OPERATING EXPENSES

Personal services 2,266,249 2,165,445

Securitization/execution costs - 18,373,630

Trustee fee - 208,398

Transaction cost - RTB - 49,920

Depreciation 2.2 11,379 22,758

Bank service charge (liquidity reserve BB2) - 550

Maintenance and other operating expenses 65,500 36,000

2,343,128 20,856,701

INCOME (LOSS) BEFORE TAX 3,642,539 (12,429,294)

Final tax paid on income 1,116,184 1,098,114

NET INCOME (LOSS) 2,526,355 (13,527,408)



NATIONAL HOME MORTGAGE FINANCE CORPORATION (as Trustee)


STATEMENT OF INCOME AND EXPENSES



61

Note Total

Balance at December 31, 2012 573,580,894

Net Income (13,527,408)



Prior period errors 120,269

As restated 560,173,756

Net income 2,526,355

Balance at December 31, 2014 10 562,700,111




NATIONAL HOME MORTGAGE FINANCE CORPORATION



STATEMENT OF CHANGES IN FUND BALANCE

62

Note 2014 2013

CASH FLOWS FROM OPERATING ACTIVITIES

Interest received 104,537 6,392,571

Loan releases to reserve accounts - (91,729,090)

Purchase of BB1 defective/restructured account (214,284,791) -

Payment of salaries and wages (2,039,496) (808,030)

Payment of MOOE (36,000) -

Taxes paid on interest (20,907) (1,169,083)

Other accrued income 3,260 -

Other accrued expense (652) (268,006)

Interest on savings 31,695 -

Taxes paid on savings account (6,339) -

Net cash used in operating activities (216,248,692) (87,581,638)

Redemption of investment 16,520,110 110,191,832

Proceeds from investment 214,284,791 (18,373,630)

Net cash provided by investing activities 230,804,901 91,818,202

Net increase(decrease) in cash in bank 14,556,209 4,236,564

Cash in bank at beginning of year 4,722,163 485,599

CASH IN BANK AT END OF YEAR 3 19,278,372 4,722,163


NATIONAL HOME MORTGAGE FINANCE CORPORATION


STATEMENT OF CASH FLOWS

For the year ended December 31, 2014

LIQUIDITY SUPPORT AND INTEREST SUBSIDY COMPONENT

(in Phillippine Peso)

63

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NOTES AND SCHEDULES TO FINANCIAL STATEMENTS ABOT-KAYA PABAHAY FUND

LIQUIDITY SUPPORT AND INTEREST SUBSIDY COMPONENTS NOTES TO FINANCIAL STATEMENTS

(All amounts in Philippine Peso unless otherwise stated)

1. GENERAL INFORMATION

The Abot-Kaya Pabahay Fund (AKPF) was created under Republic Act (RA) No. 6846 under the trusteeship of the National Home Mortgage Finance Corporation (NHMFC) and was amended under RA 7835. The fund shall be exclusively for the objectives of enhancing affordability of low-cost housing by low income families through the amortization component and by providing developmental financing for low-cost housing projects, and, interest subsidy and liquidity support. In October 2005, the Abot-Kaya Pabahay Fund’s amortization support and developmental financing components were transferred to the newly created Social Housing Finance Corporation (SHFC), a wholly-owned subsidiary of the National Home Mortgage Finance Corporation by virtue of Executive Order 272 which was signed and approved by the President of the Republic of the Philippines. NHMFC retains the interest subsidy and liquidity support, the twin component of Abot-Kaya which serve as alternative mechanism to the secondary mortgage market operation of NHMFC.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2. 1 Basis of Preparation The financial statements of AKPF were prepared in accordance with generally accepted accounting principles. 2.2 Property and equipment Property and equipment are carried at cost less accumulated depreciation. Significant improvements and accessories are capitalized while cost of maintenance and repairs is treated as expense. The straight-line method of depreciation is adopted with a residual value equivalent to ten per cent of the total cost recognized. Straight line depreciation results in constant charge over the useful life of the asset. This method is applied consistently from period to period. Depreciation of an asset begins when it is available for use.

2.3 Income and expense recognition The Fund uses the accrual basis of accounting. All expenses are recognized when incurred and reported in the financial statements in the period to which they relate.

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2.4 Taxation Twenty per cent (20%) final tax is imposed on interest from investment in government securities and bank deposits. 3. CASH IN BANK

This account represents cash balance deposited in the Land Bank of the Philippines (LBP) amounting to P19,278,371.59 and P4,722,163.23 as of December 31, 2014 and December 31, 2013, respectively. 4. SHORT TERM INVESTMENT

This account represents investments in treasury bills and high-yield savings account (HYSA) with the Bureau of Treasury and LBP, respectively, with maturities of more than three months to one year.

2014 2013

Investment managed by NHMFC 24,102,738 226,440,930 Investment in LBP-high yield savings account - 10,000,000

24,102,738 236,440,930

5. DUE FROM NHMFC

Previously termed as Receivables, Due from NHMFC, the account represents the amount of loan released to NHMFC as support funds to NHMFC secondary mortgage operations consisting of Commingle, Liquidity, Tax and Financial Assistance. The Commingle reserve covers the lagging time between the collection period and monthly servicer report which is equal to three monthly expected collections. The Liquidity reserve covers any shortfall, senior expenses and coupon payments from the time lag of the start of the delinquency of a current account until the receipt of cash flow from both delayed collections and the guaranty. The Tax reserve covers the provisions for any taxes due to National Government. The Financial Assistance shall be used to repurchase residential loan accounts in accordance with the warranty provided by NHMFC in relation to the eligibility criteria used in the selection of accounts for securitizations.

2014 2013

BB1 Liquidity reserve 71,639,381 71,639,381

Commingled reserve 77,788,185 77,788,185

Financial assistance 214,284,791 -

BB2 Liquidity reserve 78,574,683 78,574,683

Commingled reserve 34,000,000 34,000,000

Tax reserve 31,725,000 31,725,000

508,012,040 293,727,249

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6. ACCRUED INTEREST RECEIVABLE This account consists of the following:

2014 2013

Receivables from NHMFC 11,318,388 8,303,735 Investment in Agrarian Reforms Bonds - 3,260 Investment in LBP- Investment management account - 3,216

11,318,388 8,310,211

7. LONG-TERM INVESTMENTS This account represents the investments in LBP Agrarian Reform Ten-Year Bonds with interest rates aligned with that of the 91-day Treasury Bills and payable six months from date of issue and every six months thereafter. Ten percent of the bond’s original face value matures every year and is paid to the bondholder until the tenth year/maturity date.

2014 2013

Investment in AR bonds 3,129,521 19,649,631 Less: Discount on bond investment 125,190 529,939

3,004,331 19,119,692

8. PROPERTY AND EQUIPMENT This account represents the book value of the Information Technology equipment net of accumulated depreciation. 9. DUE TO NHMFC

This account represents AKPF’s share on personal services and other administrative operating expenses advanced by National Home Mortgage Finance Corporation.

10. FUND BALANCE

This represents the fund balance of the AKPF’s third component which is interest subsidy and liquidity support component including its total earnings from October 2005 to December 2014. This amount is reflected under “Other Assets” in the NHMFC’s Financial Statements.