Take away PHA's management of federal rent subsidies and assign the task to an outside contractor.
And the worst option for Philadelphia: HUD could go to federal court to put the agency into receivership, with the government temporarily assuming total control. It happened in Miami in 2007.
"HUD has the authority to come in and say, 'You're done,' " said Orlando Cabrera, HUD's assistant secretary of public and Indian housing from 2005 to 2007.
Cabrera said PHA's five-member board - led by former Mayor John F. Street - could challenge such a takeover in federal court. But he added, "I have enough faith in Mayor Street that he knows that that is not a place he wants to go - choosing to go to court, spending more legal fees to defend this situation."
On Tuesday, HUD Secretary Shaun Donovan is likely to face tough questions about the situation in Philadelphia during a budget hearing before the House Financial Services Committee. HUD, like all federal agencies, is facing budget cuts next year, and the Philadelphia agency has gained national attention for out-of-control spending.
Darren Smith, a spokesman for U.S. Rep. Michael Fitzpatrick (R., Pa.), who sits on the committee, said recent media reports "have made it clear that there were serious problems at the Philadelphia Housing Authority."
He said the committee would expect "a full and frank discussion about how these problems occurred and how they can be prevented in the future."
PHA was once a star of public housing, but its reputation began to unravel after September's departure of Executive Director Carl R. Greene. The board fired Greene after discovering that PHA secretly settled three sexual-harassment complaints against him for $648,000 and had begun negotiations to put to rest a fourth.
After Greene's firing, HUD began scrutinizing PHA's finances. On Monday morning, a team of auditors from the global firm KPMG arrived at the authority's headquarters to begin a six-month forensic audit.
Also on Monday, HUD spokesman Jereon M. Brown said his agency was "weighing our next step" in Philadelphia. He said the HUD inspector general was expected to release two reports on the Philadelphia authority soon that could affect the forensic audit.
The inspector general has examined PHA's scattered properties and possible conflicts of interest involving private companies owned by PHA employees. The office also analyzed spending by PHA on outside legal services.
PHA pays more for outside lawyers than any other major public housing authority, a review by The Inquirer found - $38.3 million since 2007. On Sunday, the paper also reported that Street voted for several contracts for the law firm Wolf, Block, Schorr & Solis-Cohen between 2004 and 2008, when his son, Sharif Street, worked for the firm.
HUD has much say in how the PHA operates because it provides virtually all the agency's funding.
Although PHA is a state-chartered agency governed by a locally appointed five-member board of commissioners, it will receive $371 million from HUD this year and expects to earn $25 million from rents, interest income, and development fees.
On Friday, HUD Deputy Secretary Ron Sims publicly asked the PHA commissioners to step down, arguing that a recovery "will proceed much faster" under interim director Michael P. Kelly.
Mayor Nutter on Monday called HUD's announcement "an extraordinary action."
"I cannot imagine that HUD took this step lightly," he told reporters.
Nutter said PHA board members "need to be responsive," but he did not urge them all to step down. Instead, he said it was "an individual decision" for each member.
In addition to Street, who appointed himself when he was mayor, the PHA board is composed of City Councilwoman Jannie L. Blackwell, a Nutter appointee; two members appointed by City Controller Alan Butkovitz - Debra Brady, wife of the city's Democratic Party boss, U.S. Rep. Bob Brady, and Patrick Eiding, president of the Philadelphia council of the AFL-CIO; and resident leader Nellie Reynolds, who was selected by other board members.
The last time HUD took over a housing agency was in Miami-Dade County in 2007. After news reports about politically connected developers failing to build promised low-income housing, HUD placed the agency in receivership for a year.
Contact staff writer Jennifer Lin at 215-854-5659 or firstname.lastname@example.org.