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AUDIT REPORT
NATIONAL CITY MORTGAGE COMPANY
NON-SUPERVISED MORTGAGEE
BUFFALO, NEW YORK
2001-NY-1004
AUGUST 23, 2001
OFFICE OF AUDIT
NEW YORK/NEW JERSEY
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Issue Date
August 23, 2001
Audit Case Number
2001-NY-1004
TO: Engram Lloyd, Director, Homeownership Center
Philadelphia, Pennsylvania, 3AHH
FROM: Alexander C. Malloy, District Inspector General for Audit, 2AGA
SUBJECT: National City Mortgage Company
Non-Supervised Mortgagee
Buffalo, New York
We completed an audit of the books and records of National City Mortgage Company, (National)
a non-supervised mortgagee. The objective of the audit was to determine whether National
originated loans in accordance with the requirements of the U.S. Department of Housing and
Urban Development/Federal Housing Administration (HUD/FHA), which require adherence to
prudent lending practices. The review covered the period between December 1, 1998 and
November 30, 2000.
Our review concluded that for seven of the 33 loans we reviewed, National did not adhere to
prudent lending practices during the underwriting process. In addition, we found that National
did not properly account for prepaid items paid on behalf of the borrower and did not have
adequate controls to ensure that appraisals were completed in accordance with the Uniform
Standards of Professional Appraisal Practice (USPAP).
Within 60 days, please provide us for each recommendation in this report, a status report on: (1)
the corrective action taken; (2) the proposed corrective action and the date to be completed; or
(3) why action is not considered necessary. Also, please furnish us copies of any correspondence
or directives issued related to this audit.
Should you or your staff have any questions, please contact William H. Rooney, Assistant
District Inspector General for Audit, on (212) 264-8000, extension 3976.
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Management Memorandum
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2001-NY-1004 Page ii
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Executive Summary
We completed an audit of the books and records of the Buffalo Branch Office of National City
Mortgage Company, (National) a non-supervised mortgagee. The objective of the audit was to
determine whether National originated loans in accordance with regulations and requirements of
the U.S. Department of Housing and Urban Development/Federal Housing Administration
(HUD/FHA), which require adherence to prudent lending practices. The review covered the
period between December 1, 1998 and November 30, 2000, and consisted of a review of 33
HUD/FHA insured loans. A summary of the results of our review is provided below.
Our review concluded that for seven of the 33 loans we
Four loans in default
reviewed, National did not adhere to prudent lending
practices during the underwriting process. Our review
disclosed that each of the seven loans had at least one
significant processing deficiency and that four were in
default. The specific processing deficiencies were: earnest
money was not verified, minimum investments were not
provided, income was overstated, sources of gift funds
were not verified, loan ratios exceeded HUD/FHA
standards, and funds from an unsecured loan was used as
an earnest money deposit. We believe these deficiencies
occurred because National’s personnel did not assure that
those loans were processed in accordance with HUD/FHA
requirements. Consequently, mortgages were approved for
unqualified borrowers causing HUD/FHA to assume an
unnecessary insurance risk.
Our review also disclosed that National did not properly
accounted for prepaid items that were paid on behalf of the
Prepaid items not properly
borrowers. In this regard, National failed to identify the
accounted
premium pricing credits and the seller contributions on both
the Good Faith Estimate and the HUD-1 Settlement
Statement. For 21 of the 33 loans we reviewed, we found
that National or the sellers paid prepaid items on behalf of
the borrowers, but the amounts paid were not itemized on
neither the Good Faith Estimate nor the HUD-1 Settlement
Statement. Also, for 18 of those loans, National provided a
premium pricing credit to the borrowers, however, the
amount was only shown as a lump sum on the HUD-1
Settlement Statement. We believe these deficiencies
occurred because National did not adequately review loan
closing documents to ensure that all requirements were met.
As a result, we found four loans where the borrowers did
not meet the minimum required cash investment.
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Executive Summary
Additionally, our review disclosed that for six of the 33
Appraisals not properly
loans reviewed the appraisal did not indicate that there was
completed
a prior sale of the property. This occurred because
National did not have adequate controls to ensure that
appraisals were completed in accordance with the Uniform
Standards of Professional Appraisal Practice (USPAP). As
a result, HUD/FHA based its decision to insure the loans on
incomplete and/or inaccurate information.
Regarding the first finding (inadequate loan origination
Recommendations practices), we recommend that you indemnify HUD/FHA
against future losses on five of the seven loans in question.
Regarding the second and third findings, we made specific
recommendations for your action.
The results of the audit were discussed with representatives
Exit Conference of National during the course of the audit and at an exit
conference held on July 10, 2001, at National’s Buffalo
Branch Office. National provided documentation, which
supported that the minimum cash investment had been met
by the borrower in one of the cases in our review.
Therefore, we revised Finding 1 to reflect the correction
supported by the documentation provided. National
indicated that they would provide a written response to the
findings upon request from the Philadelphia
Homeownership Center.
2001-NY-1004 Page iv
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Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1. Inadequate Loan Origination Practices Resulted in
Approval of HUD/FHA Insured Loans for Unqualified
Borrowers 3
2. National Did Not Comply With Prepayment
Requirements Pertaining to Prepaid Items 5
3. National Did Not Ensure That Appraisals Were
Properly Completed 9
Management Controls 13
Follow Up On Prior Audits 15
Appendices
A Summary Of Loan Origination Deficiencies 17
B Narrative Case Presentations 19
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Table of Contents
C Distribution 29
Abbreviations
FHA Federal Housing Administration
HUD U.S. Department of Housing and Urban Development
OIG Office of Inspector General
USPAP Uniform Standards of Professional Appraisal Practice
2001-NY-1004 Page vi
Introduction
National City Mortgage Company (National) is a non-supervised mortgagee with its headquarters
located in Miamisburg, Ohio. The Buffalo Branch Office originates loans in the western area of
the State of New York and is located at 5500 Main Street, Suite 210, Williamsville, New York,
14221. National’s Regional Office for underwriting and closings loans is located at 60 Hickory
Drive, Waltham, Massachusetts.
During our audit period, from December 1, 1998 to November 30, 2000, National’s Buffalo
Branch Office originated 238 HUD/FHA loans under the Direct Endorsement Program. At May
1, 2001, the mortgages for 15 of the 238 loans were in default. National originates and services
HUD/FHA insured loans, Veterans Administration insured loans, and conventional loans.
Our audit objectives were to determine whether National
Audit Objectives originated its HUD/FHA mortgages in accordance with
HUD requirements, which required adherence to prudent
lending practices, and to determine whether National's
quality control plan, as implemented, meets HUD
requirements.
Audit Scope and The purpose of our examinations were to confirm the
Methodology accuracy of all material information used as a basis for
originating and closing the loans. We obtained background
information by:
• Reviewing relevant HUD regulations, requirements and
Mortgagee Letters.
• Examining records and reports maintained on HUD’s
Single Family Insurance System, Neighborhood Watch
Early Warning System, Single Family Acquired Asset
Management System and Computerized Home
Underwriting Management System.
• Interviewing HUD’s Philadelphia Homeownership
Center Staff.
To accomplish our audit objectives, we performed an
examination of 33 loans. We review the files of 12 loans
that had gone into default. The remaining 21 loans
consisted of 17 loans that were randomly selected using
Audit Command Language (ACL) software and four loans
that involved the same seller who sold the properties after
holding them for less than a year.
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Introduction
Our audit procedures included: (a) a reconfirmation of the
borrowers’ income and assets, (b) a verification of selected
data on the settlement statements; and (c) interviews with
the borrowers, members of HUD and National staff,
Appraisers, and Closing Agents.
Audit Period We performed the audit field work between March 2001
and June, 2001. Our audit pertained to loans generally
originated between December 1, 1998, and November 30,
2000. However, as necessary, we reviewed loan activity
prior and subsequent to our audit period. Our audit work
was performed at National’s Buffalo, New York and
Waltham, Massachusetts Offices, in accordance with
generally accepted governmental auditing standards.
.
A copy of this report was provided to National.
2001-NY-1004 Page 2
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Finding 1
Inadequate Loan Origination Practices Resulted
in Approval of HUD/FHA Insured Loans for
Unqualified Borrowers
Our review disclosed that National did not adhere to prudent lending practices when processing
seven of the 33 loans that we examined during our audit. We noted that processing deficiencies
occurred because National personnel did not assure that the loans were processed in accordance
with HUD/FHA requirements. As a result, mortgages were approved for unqualified borrowers
causing HUD/FHA to assume an unnecessary insurance risk.
Section 2-1 of HUD Handbook 4000.4 REV-1, Single Family Direct Endorsement Program
requires mortgagees to develop HUD/FHA insured loans in accordance with accepted sound
mortgage lending practices. Also, HUD Handbook 4000.4 REV-l, Chapter 2, Section 2-5,
provides that the mortgagee must obtain and verify information with at least the same care that
would be exercised in originating the loan in which the mortgagee would be entirely dependent
on the property as security to protect its investment.
In our opinion, National did not adhere to the above requirements, as discussed below, when it
underwrote seven of the 33 loans we reviewed.
Our examination of 33 loans originated by National between
Examined 33 loans May 1, 1998, and November 30, 2000, disclosed that in
seven cases National either did not follow HUD
requirements or did not exercise the care expected of a
prudent lender in underwriting the loans. Consequently, we
found significant origination deficiencies in seven cases, as
shown below:
Deficiency Number of Loans
Earnest Money Not Verified 2 of the 7 loans
Minimum Investment Not Provided 6 of the 7 loans
Overstated Income and Understated Ratio 1 of the 7 loans
Source of Gift Not Verified 2 of the 7 loans
Ratios Exceeded HUD/FHA Standards 1 of the 7 loans
Unsecured Loan Used for Earnest Money 1 of the 7 loans
Additionally, the mortgages of four of the seven cases were
in default as of May 1, 2001 (See Appendix A).
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Finding 1
Appendix A to this report provides a summary of the loan
origination deficiencies noted during our review, while
Appendixes B-1 through B-7 provide an individual
description of the origination deficiencies for each of the
seven loans1 that National did not adhere to prudent lending
practices. The deficiencies occurred because National
representatives did not adhere to HUD/FHA requirements,
nor comply with prudent lending practices. In our opinion,
the deficiencies resulted in the approval of mortgages for
unqualified borrowers, which have caused HUD/FHA to
assume an unnecessary risk.
Recommendations We recommend that the you require National to:
1A. Indemnify HUD/FHA against future losses on five
of the seven loans in question (FHA Case Nos. 372-
2942863, 372-2800182, 372-2840385, 372-2864510
and 372-2889830).
1B. Provide your office with an explanation and a
corrective action plan to assure that all HUD/FHA
guidelines regarding origination and underwriting
are followed by its loan processing, underwriting
and closing employees.
1
When we provided draft copies to the HUD Philadelphia Homeownership Center for comment, we were advised
that if a deficiency is less than $500, the deficiency would not warrant indemnification but would require corrective
action regarding future cases. Because two of our seven cases involved deficiencies that were less than $500, we
recommended that five of the seven cases be indemnified.
2001-NY-1004 Page 4
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Finding 2
National Did Not Comply With Requirements
Pertaining to Prepaid Items
National did not properly accounted for prepaid items paid on behalf of the borrowers. National
failed to identify the premium pricing credits and seller contributions on both the Good Faith
Estimate and the HUD-1 Settlement Statement. We attribute this to National’s failure to
adequately review loan closing documents to ensure that all requirements were met. As a result,
we found four1 loans where the borrowers did not meet the minimum required cash investment.
According to Handbook 4155.1 Rev-4, CHG-1, Paragraph
Criteria 1-9, the Good Faith Estimate and the HUD-1 must provide
an itemized statement indicating which items are being paid
on the borrowers’ behalf. The disclosure of only a lump
sum amount is not acceptable. Also, Mortgagee Letter 98-
29, Single Family Loan Production - Mortgage Calculation
Simplification, provides that the National Housing Act
requires the minimum cash investment to be 3 percent of
the estimated cost of the property’s acquisition. HUD/FHA
has determined that the minimum cash investment should
be based on the property’s sales price without considering
loan closing costs.
Reviewed 33 Loans We conducted a review of prepaid items for all 33 loans in
our sample. We reviewed the Mortgage Credit Analysis
Worksheet to determine whether any premium pricing
credits or seller contributions were identified. Also, we
examined the HUD-1’s to determine if any prepaid items
existed that were not identified on the Mortgage Credit
Analysis Worksheet. For those loans in which we
identified prepaid items, we reviewed the Good Faith
Estimate and the HUD-1 Settlement Statement to determine
if the items paid on behalf of the borrowers were itemized.
21 loans where prepaid
There were 25 loans in which National or the seller paid
amounts were not
prepaid items on behalf of the borrowers. In 21 of those
itemized
loans, the amounts paid were not itemized on neither the
1
In Finding 1, we mentioned six loans did not meet the minimum cash investment requirement. As addressed in this
Finding; four of the six loans did not meet the minimum cash investment requirement because of premium pricing
credits and seller contributions. The four cases were HUD/FHA case numbers 372-2800182,372-2707963,371-
2805940 and 372-2864510.
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Finding 2
Good Faith Estimate nor the HUD-1 Settlement Statement.
There were 18 loans that National provided a premium
pricing credit to the borrower. In all of these loans, the
amount was shown as a lump sum on the HUD-1
Settlement Statement.
We discussed this situation with National’s Regional
Underwriting Manager. The Underwriting Manager
examined 11 of the loans to determine if they were in fact
loans containing premium pricing credits. After consulting
several other National staff, the Underwriting Manager
concluded that any time National pays any of the
borrowers’ costs it should be considered premium pricing
credits.
Borrowers did not meet Next, we explained that for four of the loans that National
the minimum cash paid costs on behalf of the borrowers, the borrowers did not
requirement meet the minimum cash investment requirement. The
Underwriting Manager explained that the underwriters
calculate the minimum investment requirement on the
Mortgage Credit Analysis Worksheet. However, it is the
responsibility of the Closing Department to make the
underwriters aware of any items recorded on the HUD-1
that would affect the minimum cash investment.
When we spoke with the Regional Operations Manager,
who is responsible for the Closing Department, the
Manager explained that the underwriters generally verify
the minimum cash investment requirement. We asked the
Operations Manager about items that occur at closings such
as funds returned to the borrower. The Operations Manager
was unsure of whether the post closing review that is
performed at National’s headquarters would check to
determine if the minimum cash investment had been met.
Subsequent to our conversation with the Operations
Closing Department Manager, we followed-up with the Underwriting Manager
responsible for ensuring and were told that the Operations Manager agreed that it is
minimum cash investment the responsibility of the Closing Department to ensure that
is met the minimum cash investment requirement is met.
2001-NY-1004 Page 6
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Finding 2
In addition, during our review we determined that the
Closing instructions did
Closing Department provided the closing attorneys with
not include procedures on
loan closing instructions. The instructions included
costs paid on borrowers
procedures regarding the sellers contribution. However, the
behalf
instructions did not include procedures regarding the costs
National pays on behalf of the borrowers. Furthermore, the
loan closing instructions for the four loans where the
borrowers did not meet the minimum cash investment did
not include any instructions regarding the required
minimum cash investment.
We explained to the Underwriting Manager that it is
National’s responsibility to ensure that items paid on behalf
of borrowers are itemized on the Good Faith Estimate and
the HUD-1 Settlement Statement. Also, National must
ensure that each borrower meets the minimum cash
investment. The Underwriting Manager claimed that
National was aware of this, but after talking to the loan
closing staff it became apparent that the closing staff was
not paying as much attention to these items as they should
have been.
Recommendations We recommend that you require National to:
2A. Ensure that all items prepaid by either National or
the sellers on behalf of borrowers are itemized on
both the Good Faith Estimate and the HUD-1
Settlement Statement.
2B. Include minimum cash investment instructions as
part of the loan closing instructions to the closing
attorneys and ensure that each borrower has met the
minimum cash requirement.
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Finding 2
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2001-NY-1004 Page 8
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Finding 3
National Did Not Ensure That Appraisals Were
Properly Completed
Our review disclosed six cases that the appraisal did not indicate that a prior sale of the property
occurred less than a year before the appraisal. National has not developed adequate controls to
ensure that appraisals are completed in accordance with Uniform Standards of Professional
Appraisal Practice (USPAP). As a result, HUD/FHA based its decisions to insure the loans on
incomplete and /or inaccurate information. Mortgagee Letter 94-54 states that a mortgagee that
selects its own appraiser must accept responsibility, equally with the appraiser for the integrity,
accuracy and thoroughness of the appraisal.
Mortgagee Letter 96-26 provides that each appraisal shall
Criteria conform to the USPAP and further states that each appraisal
shall analyze and report in reasonable detail all prior sales of
the property being appraised that occurred within one year
preceding the date when the appraisal is prepared.
Standard Rule 1-5(b) of the USPAP states that when
developing a real property appraisal, an appraiser must
analyze any prior sale of the property that occurred within
one year for the one to four-family residential property.
Further, under the comments to Standard rule 2-2 (a) (xi), it
states that when the purpose of the assignment is to develop
an opinion of market value, a summary of the results of the
information required by Standards Rule 1-5 is required. If
such information was unobtainable, a statement of the
efforts undertaken by the appraiser to obtain the
information is required.
Appraisals Failed to Disclose Prior Sales
Prior sales not disclosed Our review disclosed that appraisals for six loans in our
sample did not disclose that a prior sale had occurred less
than a year before the appraisal. In each case, the property
had been purchased and then resold within a short period of
time at a higher price with a FHA/HUD insured borrower
as shown below:
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Finding 3
Case Number Date of Prior Prior Sale Date of HUD/FHA
Sale Purchase HUD/FHA Mortgage
Price Mortgage Sale Purchase Price
371-2805940 12/7/99 $44,000 2/2/00 $61,064
372-2800182 5/4/98 $21,500 7/31/98 $44,500
372-2811728 5/15/98 $23,500 8/28/98 $48,000
372-2839341 8/14/98 $18,000 11/5/98 $42,900
372-2885477 10/30/98 $23,250 4/9/99 $48,900
372-2889830 10/16/98 $22,000 4/26/99 $46,000
For five of the six properties, the same entity originally purchased
the properties and then resold the properties within 6 months. In
fact the sales contract for 372-2800182 was dated April 30, 1998,
which was four days prior to the entity purchasing the property.
None of the appraisals disclosed the prior sale and the date that the
prior sale occurred.
National did not Adequately Review Appraisals
National’s staff indicated that if they had been aware of the prior
Appraisals not adequately sale they would have based the loan amount on the prior sales
reviewed price. Our review disclosed that the same loan officer processed all
five cases where the entity referred to above was the seller. The
loan officer, who is no longer employed by National, stated that the
entity selling the properties was in the business of purchasing and
reselling properties and that National’s staff knew that these
properties had been involved in prior sales.
Mortgagee Letter 94-54 states that a mortgagee that selects its own
appraiser must accept responsibility, equally with the appraiser for
the integrity, accuracy and thoroughness of the appraisal. Further.
Section 3-3 G of HUD Handbook 4000.4, Single Family Direct
Endorsement Program requires the mortgagee’s underwriter to
review the appraisal to determine whether or not the appraiser’s
conclusions are acceptable. In our opinion, National did not use due
diligence when reviewing the appraisals to ensure that appraisers
were complying with USPAP requirements, especially since a
member of its staff was aware that the seller was involved in
properties being resold in short periods of time. As a result, the
appraisals did not provide complete information; thus, this may have
prevented an accurate valuation of the properties, which would have
affected the maximum insurable mortgage amounts.
2001-NY-1004 Page 10
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Finding 3
Recommendations We recommend that National be instructed to:
3A. Implement adequate controls to ensure that appraisal
are in compliance with all USPAP Standards.
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Finding 3
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2001-NY-1004 Page 12
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Management Controls
In planning and performing our audit, we obtained an understanding of the management controls
that were relevant to our audit. Management is responsible for establishing effective
management controls. Management controls, in the broadest sense, include the plan of
organization, methods and procedures adopted by management to ensure its goals are met.
Management controls include the processes for planning, organizing, directing and controlling
program operations. They include the systems for measuring, reporting and monitoring program
performance.
We determined the following management controls were
Relevant Management relevant to our audit objective:
Controls
• Program operations - Policies and procedure that
management has implemented to reasonably ensure that
a program meets its objectives.
• Validity and Reliability of Data - Policies and
procedures that management has implemented to
reasonably ensure that valid and reliable data are
obtained, maintained and fairly disclosed in reports.
• Compliance with Laws and Regulations - Policies and
procedure that management has implemented to
reasonably ensure that resource use is consistent with
laws and regulations.
• Safeguarding Resources - Policies and procedure that
management has implemented to reasonably ensure that
resources are safeguarded against waste, loss and
misuse.
We assessed all of the relevant controls identified above.
It is a significant weakness if management controls do not
provide reasonable assurance that the process for planning,
organizing, directing, and controlling program operations
will meet an organization’s objectives.
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Management Controls
Based on our review, we believe that significant
Significant Weaknesses weaknesses exist in the following management
controls. These weaknesses are described in the
findings section of this report.
• National did not develop adequate procedures
regarding origination of HUD/FHA loans and
conducting underwriter reviews of loans
proposed for HUD/FHA mortgage insurance,
Finding 1 (Program Operations).
• National did not develop adequate closing
policies, Finding 2 (Compliance with Laws and
Regulations).
• National did not implement adequate procedures
to ensure accurate mortgage information,
Finding 1 (Validity and Reliability of Data),
(Compliance with Laws and Regulations).
• National did not implement adequate controls
regarding appraisers, Finding 3 (Validity and
Reliability of Data).
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2001-NY-1004 Page 14
Follow Up On Prior Audits
Ernst & Young LLP, Certified Public Accountant, audited National City Mortgage Company for
the Year ended December 31, 1999. The accounting firm’s audit report on National did not
contain any findings related to the Buffalo Office.
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Follow Up On Prior Audits
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Appendix A
Summary of Loan Origination Deficiencies
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Appendix A
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Appendix B-1
Page 1 of 1
Narrative Case Presentations
FHA Case Number: 372-2942863
Loan Amount: $90,286
Settlement Date: 12/22/99
Status: Default - last payment made 2/1/00
Summary
National approved the mortgage without resolving a significant discrepancy that existed between
the amount of earnest money held by the broker and the amount reported on the HUD-1. Without
the earnest money the borrower would not have had sufficient funds to meet the minimum cash
investment requirement. Therefore, HUD/FHA’s decision to insure the loan was based on
National’s inaccurate representation that the borrower met HUD/FHA requirements.
Pertinent Details
A. Source of Earnest Money Deposit Funds Not Verified
B. Borrower Did Not Provide the Minimum Required Cash Investment
National did not resolve a significant discrepancy regarding the amount of earnest money on
deposit. On the application, earnest money was listed as $650 and the seller/builder provided
verification in the form of a check from the borrower that $650 in earnest money was being held
as a deposit. The Mortgage Credit Analysis Worksheet did not list any earnest money; however,
the HUD-1, Settlement Statement listed $3,000 as the amount of earnest money that was on
deposit. In this regard, there was no documentation in the file to verify that the borrower
provided the $3,000, in earnest money. During an interview, the borrower stated that only $650
was provided as earnest money, not the $3,000, as stated on the HUD-1. In addition, the HUD-1
listed $203.40 as cash due from the borrower at the loan closing. Pertaining to this, the
borrower stated that no additional funds were provided at the closing. Neither National nor its
closing agent verified that the $3,000 of earnest money existed or that the borrower provided the
$203.40 due at the loan closing. As a result, the borrower did not provide the minimum required
cash investment.
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Appendix B-2
Page 1 of 2
FHA Case Number: 372-2800182
Loan Amount: $44,928
Settlement Date: 7/31/98
Status: Current
Summary
National approved the mortgage although the borrower did not meet the minimum cash
investment requirement. Our review disclosed that the borrower invested $497.67 less than the
required minimum cash investment. Also, National incorrectly calculated the borrower’s
income regarding a bonus. As a result of this miscalculation, the total fixed payment to determine
the income ratio was 47.61 percent, not 44.65 percent as indicated on the Mortgage Credit
Analysis Worksheet. Therefore, HUD/FHA’s decision to insure the loan was based on
National’s inaccurate representation that the borrower met HUD/FHA requirements.
Pertinent Details
A. Borrower Did Not Provide the Minimum Required Cash Investment
The borrower made a deposit of $1,300 and paid $255 for a credit and appraisal report. At the
loan closing National returned $499.43 to the borrower; thus, the borrower’s total cash
investment was $1,055.57. The $1,055.57 is $497.67 less than the required minimum cash
investment of $1,553.24 The National Housing Act requires the minimum cash investment to be
3 percent of the Secretary's estimate of the cost of the acquisition of the property. HUD/FHA
determined that the minimum cash investment was to be based on the property’s sales price
without considering loan closing costs (Mortgagee Letter 98-29, October 22, 1998). A review
of the loan closing file did not disclose any documentation indicating that National identified or
instructed the Closing Attorney as to the amount of minimum cash investment that was to be
made by the borrower.
B. Overstated Income and Understated Credit Ratios
National indicated on the Mortgage Credit Analysis Worksheet that the borrower’s monthly
bonus wages were $759. Handbook 4155.1 REV-4 CHG 1, Paragraph 2-7A, allows for the use
of bonus income, if the borrower has received such income during the past two years and there
are reasonable prospects of its continuance.
2001-NY-1004 Page 20
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Appendix B-2
Page 2 of 2
In such cases the mortgagee must develop an average estimate of the bonus amount or overtime
income for the past two years. Based on the information on the Verification of Employment
form, the borrower averaged $7,258.43 in bonuses each year. This would amount to $604.87 per
month, not $759 per month as computed by National. As a result, National approved the loan
using inaccurate income amounts, which understated the fixed payment used to determine the
income ratio. The correct ratio amount was 47.61 percent not the 44.65 percent as indicated on
the Mortgage Credit Analysis Worksheet. More importantly, the total fixed payment to the
effective income ratio had already exceeded the 41 percent standard that was in effect at the time
the loan was approved.
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Appendix B-3
Page 1 of 1
FHA Case Number: 371-2707963
Loan Amount: $84,918
Settlement Date: 6/3/99
Status: Current
Summary
National approved the mortgage although the borrower did not meet the minimum cash investment
requirement. Our review disclosed that the borrower invested $447.29 less than the minimum
required cash investment. Therefore, HUD/ FHA’s decision to insure the loan was based on
National’s inaccurate representation that the borrower met HUD/FHA requirements.
Pertinent Details
A. Borrower Did Not Provide the Minimum Required Cash Investment
The borrower’s earnest money deposit of $500, plus the $1,602.71 paid at the loan closing
totaled $2,102.71 as the borrower’s investment. The $2,102.71 is $447.29 less than the minimum
required cash investment of $2,550. The National Housing Act requires the minimum cash
investment to be 3 percent of the Secretary’s estimate of the cost of acquisition of the property.
HUD/ FHA determined that the minimum required cash investment was to be based on the
property’s sales price without considering loan closing costs. (Mortgagee Letter 98-29, October
22, 1998)
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2001-NY-1004 Page 22
Appendix B-4
Page 1 of 1
FHA Case Number: 371-2805940
Loan Amount: $60,634
Settlement Date: 2/28/00
Status: Default – Last payment made 7/1/00
Summary
National approved the mortgage although the borrower did not meet the minimum cash investment
requirement. Our audit disclosed that the borrower invested $30.84 less than the required minimum
cash investment. Therefore, HUD/ FHA’s decision to insure the loan was based on National’s
inaccurate representation that the borrower met HUD requirements.
Pertinent Details
A. Borrower Did Not Provide the Minimum Required Cash Investment
The borrower’s earnest money deposit of $2,000, less the $198.92 returned to the borrower at
loan closing, left a total of $1,801.08. The $1,801.08 is $30.84 less than the required minimum
cash investment of $1,831.92 . The National Housing Act requires the minimum cash investment
to be 3 percent of the Secretary’s estimate of the cost of acquisition of the property. HUD/FHA
determined that the minimum cash investment was to be based on the property’s sales price
without considering loan closing costs. (Mortgagee Letter 98-29, October 22, 1998)
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Page 23 2001-NY-1004
Appendix B-5
Page 1 of 2
FHA Case Number: 372-2840385
Loan Amount: $64,969
Settlement Date: 1/21/99
Status: Default – Last payment made 11/1/99
Summary
National approved the mortgage without verifying the source of gift funds deposited into the
borrower’s account. Furthermore, the borrower's 35.26 percent ratio of mortgage payment to
effective income exceeded HUD/FHA's standard of 29 percent. Therefore, HUD/FHA's decision
to insure the loan was based on National's inaccurate representation that the borrower met HUD
requirements.
Pertinent Details
A. Source of Gift Not Verified
National did not verify the source of gift funds as required by Handbook 4155.1 Rev-4,
Paragraph 2-10C. The file contains a gift letter form, copies of a official bank check for $1,150,
and a money order for $400, totaling $1,550, along with a letter from the borrower's bank
statements identifying $1,150 as being deposited into the borrower’s bank account. The file did
not contain documentation showing the donor's source of the funds. National's gift letter form
requests information as to the donor's source of funds, such as the depository name and address,
and the account number, however, that information was not provided. Without the $1,550 gift,
the borrower would not have had sufficient assets to close the loan and would not have been
eligible for the $5,000 Home Buyer Equity Funds Grant that the borrower received.
B. Credit Analysis Ratio Exceeded HUD/FHA Standard
National approved the loan despite the fact that the Mortgage Credit Analysis Worksheet showed
an excessive 35.26 percent ratio of mortgage payment to effective income. The HUD/FHA
standard in effect at the time specified a 29 percent limit on the mortgage payment to effective
income ratio (Handbook 4155.1 REV-4 CHG 1, Paragraph 2-12).
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2001-NY-1004 Page 24
Appendix B-5
Page 2 of 2
The compensating factors used by National to justify using the higher ratio were that the net
housing payment decreased and the borrower had little debt. Our review indicated that the
borrower’s housing payments would increase from $595 to $670.89. In addition, the level of debt
does not effect the mortgage payment to effective income ratio. In our opinion, the compensating
factors did not provide adequate justification for approving a loan that exceeded the HUD/FHA
standard.
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Page 25 2001-NY-1004
Appendix B-6
Page 1 of 2
FHA Case Number: 372-2864510
Loan Amount: $43,143
Settlement Date: 12/31/98
Status: Default – Last payment made 2/1/00
Summary
National approved the mortgage without properly verifying the source of gift funds deposited
into the borrower's account. Furthermore, the borrower used funds from an unsecured loan as the
earnest money deposit. Thus, the borrower did not meet the minimum cash investment
requirement. Consequently, HUD/FHA’s decision to insure the loan was based on National’s
inaccurate representation that the borrower met HUD requirements.
Pertinent Details
A. Source of Gift Not Verified
National did not verify the source of gift funds as required by Handbook 4155.1 Rev-4,
Paragraph 2-10C. The file contains a gift letter, a copy of an official check, and the borrower’s
bank deposit slip showing $1,700 as going into the borrower’s account. The file did not contain
documentation showing the source of the funds. National's gift letter form requests information
as to the donor's source of funds, such as depository name and address, and the account number,
however, that information was not provided. Without the $1,700 gift, the borrower would not
have had sufficient assets to close the loan.
B. Unsecured Loan Funds Used For Earnest Money
The borrower’s earnest money of $500 was obtained from the proceeds of a $2,500 unsecured
loan. National should have been aware of this since the file contained a copy of the borrower’s
bank statement showing that the earnest money had been paid with a check from the borrower’s
account on 10/5/98, at which time the only funds in the account were from the $2,500 unsecured
loan. In addition, on the loan application the borrower checked that no part of the downpayment
was borrowed. The Mortgage Credit Analysis Worksheet did not list any earnest money deposit;
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2001-NY-1004 Page 26
Appendix B-6
Page 2 of 2
however, the $500 was listed on the HUD-1. National approved this loan with knowledge that
the borrower had not met the earnest money requirements.
C. Borrower Did Not Provide the Minimum Required Cash Investment
The borrower’s earnest money deposit of $500, plus the $470 paid by the borrower at loan
closing totaled $ 970 as the borrower’s investment. The $970 is $317 less than the required
minimum investment of $1,287. The National Housing Act requires the minimum cash
investment to be 3 percent of the Secretary's estimate of the cost of acquisition of the property.
HUD/ FHA determined that the minimum cash investment was to be based on the property’s
sales price without considering loan closing costs (Mortgagee Letter 98-29, October 22, 1998) .
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Page 27 2001-NY-1004
Appendix B-7
Page 1 of 1
FHA Case Number: 372-2889830
Loan Amount: $46,447
Settlement Date: 4/26/99
Status: Current
Summary
National approved the mortgage without resolving a significant discrepancy that existed with the
source of the earnest money deposit. Without the earnest money the borrower did not have
sufficient funds to meet the minimum cash investment requirement. Therefore, HUD/FHA’s
decision to insure the loan was based on National’s inaccurate representation that the borrower
met HUD/FHA requirements.
Pertinent Details
A. Source of Earnest Money Deposit Funds Not Verified
B. Borrower Did Not Provide the Minimum Required Cash Investment
The HUD-1 Settlement Statement showed that the earnest money deposit was $1,250, which is
2.7 percent of the sales price. If the amount of the earnest money deposit exceeds 2 percent of
the sales price or appears excessive based on the borrower's history of accumulating savings, the
mortgagee must verify the amount deposited and the source of funds (HUD Handbook 4155.1
REV-4 CHG 1, paragraph 2-10A). The borrower did not have a history of savings based on the
information contained in the file. The file contained a note signed by the borrower stating that the
borrower planned to give $300 a week from the borrower’s paychecks to the seller as the earnest
money deposit. The support for the earnest money deposit was four money orders. The money
orders had dates of issuance of 2/5/99, 2/12/99, 2/26/99, and 3/11/99 and totaled $1,200.
However, our review disclosed that the money orders were in consecutive numeric order between
02464551 and 02464554. It is apparent that the money orders were obtained all at one time. In
addition, the information submitted to HUD pertaining to the earnest money deposit had
discrepancies. The HUD-1 Settlement Statement indicated the amount was $1,250. The sales
contract indicated that it was $1,500. Lastly, the Loan Application showed $1,200. National did
not adequately verify the source of funds for the earnest money deposit. Without the $1,200 of
earnest money funds the borrower would not have had sufficient assets to close, and would not
have met the minimum cash investment requirement.
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2001-NY-1004 Page 28
Appendix C
Distribution
President, National City Mortgagee Co., Miamisburg, OH
Principal Staff
(Acting) Secretary’s Representative, New York/New Jersey, 2AS
Senior Community Builder, Buffalo Office
Director, HOC, Philadelphia Office, 3AHH
Assistant General Counsel, New York/New Jersey, 2AC
CFO, Mid-Atlantic Field Office, 3AFI
Office of Housing Of Housing/Federal Housing Commissioner, (Attention: Senior
Management Analyst, HQC, Room 6232)
Acquisitions Librarian, Library, AS, Room 8141
Secretary, Mortgagee Review Board, VD, Portals Building, Suite 200, 250 Maryland
Avenue, SW, Washington, DC 20024
Michael Flachta, AIGA,
Department of Veteran Affairs, OIG (52A)
810 Vermont Avenue, NW
Washington, DC 20410
Armando Falcon, Director
Office of Federal Housing Enterprise Oversight
1700 G. Street, NW, Room 4011
Washington, DC 20515
Sharon Pinkerton, Staff Director
Subcommittee on Criminal Justice, Drug Policy & Human Resources
B373 Rayburn Housing Office Building
Washington, DC 20515
Cindy Fogleman
Subcommittee on Oversight and Investigations, Room 212
O’Neill House Office Building
Washington , DC 20515
Stanley Czerwinski, Associate Director
Resources, Community and Economic Development Division
US General Accounting Division Office, 441 G Street, NW, Room 2T23
Washington, DC 20515
Steve Redburn, Chief Housing Branch
Office of Management and Budget
725 17th Street, NW, Room 9226
New Executive Office Building
Washington, DC 20503
Page 29 2001-NY-1004
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Appendix C
The Honorable Fred Thompson, Chairman
Committee on Governmental Affairs
340 Dirksen Senate Office Building
United States Senate
Washington, DC 20510
The Honorable Joseph Lieberman
Ranking Member
Committee on Government Affairs
706 Hart Senate Office Building
United States Senate
Washington, DC 20510
The Honorable Dan Burton
Chairman
Committee on Government Reform
2185 Rayburn Building
House of Representatives
Washington, DC 20515-6143
The Honorable Henry A. Waxman
Ranking Member
Committee on Governmental Reform
2204 Rayburn Building
House of Representatives
Washington, DC 20515-4305
Andy Cochran
House Committee on Financial Services
2129 Rayburn, H.O.B
Washington, DC 20515
2001-NY-1004 Page 30
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National City Mortgage Company, Non-Supervised Mortgagee, Buffalo, New York
Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-08-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)