The commission said the absence of an effective housing strategy meant the council had not been able to attract social housing grants, despite the fact other councils in the area had attracted high levels of investment.
A statement from the Audit Commission said: 'As a consequence of the continued failings and the lack of capacity to improve services, the Audit Commission has referred the council's housing service to the secretary of state for consideration for direct intervention.'
Inspectors said the council could have attracted housing development resources worth around£2m.
The council was criticised for forcing tenants to bear the full cost of closed circuit television cameras, which benefit everyone living in the area.
The report added: 'The framework for improvement planning is weak and incomplete, and the council is still failing to respond effectively to recommendations from both our inspection work as well as by the external auditor.'
Leader Malcolm Pratt (Lab) said the council had appointed a housing services manager, two extra members of staff and external consultants.
He added: 'We publish details of the performance of all our services in our performance plan every year.
'As part of this process we survey customer satisfaction. The results of our customer satisfaction survey, using questions required by the government, showed that we had a 78% satisfaction rating.'