EXECUTIVE SUMMARY

INTRODUCTION

The Home Development Mutual Fund (HDMF) was created on June 11, 1978 by
virtue of P.D. No. 1530 primarily to generate savings through membership in an
integrated nationwide savings and to help the Filipino family in achieving its dream “a
home for every Filipino family”. With the issuance of P.D. No. 538 on June 4, 1979,
the funds for private and government workers which were previously administered by the
Social Security System (SSS) and the Government Service Insurance System (GSIS)
were merged into what is now known as Pag-IBIG Fund which stands for Pagtutulungan
sa Kinabukasan: Ikaw, Bangko, Industriya at Gobyerno.

Executive Order No. 35 issued on July 30, 1986 marked the return, effective
January 1, 1987, of mandatory membership to the Fund that was temporarily suspended
by then President Corazon C. Aquino. With the passage of E.O. No. 90 on December
17, 1986, membership with the Fund became voluntary. Republic Act No. 7742 issued
on June 17, 1994 reverted mandatory membership to the Fund for all SSS and GSIS
members, effective January 1, 1995.

In July 21, 2009, Republic Act No. 9679 otherwise known as the Home
Development Mutual Fund Law of 2009 was approved for the furtherance and
strengthening of the goals and objectives of HDMF.

Thus, Section 2 of the said Act expressly states the policy of the State upon
which HDMF was created which is a mutual provident saving system suitable to the
needs of the employed and other earning groups and to motivate them to better plan and
provide for their housing needs.

The corporate power of the Fund was vested in its Board of Trustees. The
policies of the Board are implemented into action by the senior management team
headed by the Chief Executive Officer (CEO) with the assistance of three Deputy Chief
Executive Officers (DCEOs), five Senior Vice-Presidents (SVPs) and 24 Vice-Presidents
(VPs). As at December 31, 2009, HDMF has a total of 4,959 employees from Head
Office, 34 branches and 16 extension offices. The Fund operates on a total corporate
budget of P17.320 billion for CY2009.

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FINANCIAL HIGHLIGHTS (In Million Pesos)

I. Comparative Financial Position

Increase/
Particulars 2009 2008 (Decrease)
Assets 256,344.861 227,421.554 28,923.307
Liabilities 47,531.815 41,051.603 6,480.212
Members’ equity 184,369.035 165,497.942 18,871.093
Retained earnings 24,364.983 20,894.733 3,470.250

II. Comparative Results of Operations

Increase/
Particulars 2009 2008 (Decrease)
Income 20,059.382 17,568.243 2,491.139
Expenses
Lending cost 5,511.628 5,646.327 (134.699)
Fund administration cost 2,439.249 2,324.301 114.948
Other expenses 104.949 90.885 14.064
Total expenses 8,055.830 8,061.513 (5.683)
Net Income 12,003.557 9,506.730 2,496.827

SCOPE OF AUDIT

The audit covered the examination on test basis, the accounts and financial
transactions of the HDMF for the period January 2 to December 31, 2009 in accordance
with the Philippine Standards in Auditing.

INDEPENDENT AUDITOR’S OPINION

The Auditor rendered a qualified opinion on the fairness of presentation of the

financial statements for CY2009. Two developers did not undergo the required post
take-out validation and audit of selected 2009 transactions revealed irregularities such
as: (a) breach of warranties, (b) documentation deficiencies, and (c) fictitious borrowers.

SIGNIFICANT AUDIT OBSERVATIONS AND RECOMMENDATIONS

1. Globe Asiatique Realty Holdings Corporation (GARHC) committed breach of

warranties under Items IV and V of HDMF Circular No. 259 dated April 20, 2009,
covering at least 277 housing loan borrowers with a total loan value of P193.671 million
resulting in fraudulent loan take outs.

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We recommend that Management:

 Blacklist the developer, including its officers from any future

availment or participation under Pag-IBIG lending programs
pursuant to Item IV, HDMF Circular No. 259;

 File appropriate charges against the developer for breach of

warranties under the terms and conditions of HDMF Circular No.
259 and the MOA of July 13, 2009.

2. The Pampanga Branch Office failed to enforce HDMF Circular No. 259, which
requires post-validation of borrowers (Item II No. 2.5); post-inspection of units within 30
days from loan “take-outs” (Item III No. 5.1) and issuance of Notice of Buyback (Item
VIII-B) resulting in the non-detection by HDMF of the continued violations by GARHC of
the housing loan program guidelines.

3. The officers of the HDMF Pampanga Branch failed to suspend the granting of the
Funding Commitment Line (FCL) to GARHC and to stop the processing of loan take outs
in the pipeline based on the reported violations of Items IV and V of HDMF Circular No.
259 and Section 2 of the MOA dated July 13, 2009.

We recommend for the filing of appropriate charges against the HDMF officers
determined to be liable.

4. Weaknesses in some of the provisions of HDMF Circular No. 259 dated April 20,
2009 otherwise known as the Omnibus Guidelines Implementing the Pag-IBIG Takeout
Mechanism Under the Developers’ CTS/REM Scheme expose to high risk the interest of
HDMF.

We recommend that Management revisit the Window 1 facility and the Collection
Servicing Agreement of HDMF Circular No. 259 and all existing MOAs with developers
to address the high risks exposure of the Fund. CSA with the developers at present
must be discontinued since there are various infrastructures available on the collection
system of the Fund and special arrangements with banks are in place.

5. Thirty-one (31) Disbursement Vouchers on loan takeouts of P138.047 million

from GARHC lacked the required approving and certifying signatures which are contrary
to Section 4(5) of PD 1445, COA Circular No. 97-004 dated July 1, 1997 and COA
Circular No. 85-55 A dated August 8, 1985.

We recommend that Management require the persons concerned/liable to settle the

disallowances within six months from receipt of notice of disallowance.

6. Developmental loan in the amount of P20 million was released to a developer

despite of not being eligible under HDMF Circular No. 184-D and HDMF Circular No.
212 dated May 11, 2006; the same developer committed breach of warranties under
Item V of HDMF Circular No. 212 as amended by HDMF Circular No. 237 in loan
evaluation, documentation, compliance with laws and regulations and misrepresentation
of 47 housing loan borrowers with a total loan value of P33.371 million resulting in
fraudulent loan releases.

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We recommend that management: a. require the persons concerned/liable to settle the
disallowance within six months from receipt of notice of disallowance; and b. comply
strictly with HDMF Circular No. 212 dated May 11, 2006 as amended by HDMF Circular
No. 237 dated March 27, 2008.

7. Lapsed accounts of Loans Receivable-Multi Purpose Loans amounting to

P372,775,396 from 55,853 borrowers were not offset against Total Accumulated Value
(TAV) which is not in consonance with the provisions of HDMF Circular No. 56-H.

We recommend immediate offsetting of MPL lapsed accounts against the TAV of the
concerned borrowers pursuant to Section 11 of HDMF Circular No. 56-H.

8. Failure to require developers to buy back defaulted accounts in compliance with

the provisions of the Memorandum of Agreement (MOA) and HDMF Circular Nos. 196
and 196A on housing receivables under the Housing Receivable Financing Facility
(HRFF) resulted in non-recovery of investments in the amount of P60,364,796 and total
interest income of P36,126,154.

We recommend that Management require the developer to buy back defaulted accounts
to recover investment on housing receivables and realize interest income.

9. The level of Special Reserves Fund decreased significantly from P33.657 billion
in 2008 to P17.285 billion or by 49 per cent in 2009 due to investments in housing
operations thus, may affect the members’ claims of their total accumulated value.

We recommend that Management:

 Review and re-evaluate the Fund’s housing operations in terms of the various
housing programs, loan approval criteria, terms and conditions, and implementing
rules and guidelines since the defaulting loans have been increasing resulting to
increased acquired and foreclosed accounts, which ultimately are non-performing
assets.

 Rationalize the release for housing loan programs considering that these are long-
term investments.

 We reiterate our previous recommendation to spin off the provident operations from
that of the housing operations to protect the provident fund in case of financial losses
of the housing operations.

STATUS OF IMPLEMENTATION OF PRIOR YEAR’S AUDIT RECOMMENDATIONS

Of the eight audit recommendations embodied in the prior year’s Annual Audit
Report, three were fully implemented and five were partially implemented. Details are
presented in Part II of the report.

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