oversight

Limited Review - Golden Home Mortgage and Its Direct Endorsement Sponsors, Section 203(b) and 203(k) Mortgage Loan Insurance Programs, Concord, California

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-09-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                            U.S. Department of Housing and Urban Development
                                                                           Office of Inspector General
                                                                                            Pacific/Hawaii District
                                                                             450 Golden Gate Avenue, Box 36003
                                                                             San Francisco, California 94102-3448



                                                                                      Audit Memorandum
                                                                                        2001-SF-1806


       September 28, 2001


       TO:           D. Jackson Kinkaid
                     Secretary, Mortgagee Review Board, VD


                     //SIGNED//
       FROM:         Mimi Y. Lee
                     District Inspector General for Audit, 9AGA

       SUBJECT:      Limited Review – Golden Home Mortgage and Its Direct Endorsement Sponsors
                     Section 203(b) and 203(k) Mortgage Loan Insurance Programs
                     Concord, California


       We completed a limited review of Golden Home Mortgage’s origination process for Federal
       Housing Administration (FHA) insured loans to nonprofit organizations low and moderate-
       income first-time homebuyers. The purpose of our review was to determine whether Golden
       Home Mortgage and its direct endorsement sponsors ensured that the loan amounts and property
       sales prices were proper.

       Neither Golden Home Mortgage nor its sponsors, SCME Mortgage Bankers (according to
       company officials, the mortgage company changed its name from Southern California Mortgage
       Exchange to SCME in the mid-nineties) and Western Sunrise Mortgage DBA Crossland
       Mortgage, prevented nonprofit mortgagors from exceeding the Department of Housing and
       Urban Development’s (HUD’s) 10 percent profit limitation on properties purchased from HUD
       at a 30 percent discount. The nonprofits had purchased the properties from HUD through a
       program that gave them 30 percent off the list price and made FHA’s 203(k) loans available for
       the properties’ purchase and rehabilitation. HUD’s stated purpose for giving the discounts was
       that the nonprofits pass the discount on to low and moderate-income homebuyers. The
       homebuyers, however, paid an average of $10,500 more for their homes than HUD intended.
       This also increased HUD’s mortgage insurance risk and the homebuyers’ liability an average of
       $10,800. Further, the price and mortgage increases also resulted in higher fees for Golden Home
       and its associates.




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       Audit Memorandum 2001-SF-1806                                       Limited Review − Golden Home Mortgage



       BACKGROUND

       HUD’s Single Family Mortgage Insurance Programs help low and moderate-income families
       purchase homes by reducing downpayments and lender fees. Under these programs, HUD
       insures approved mortgages against losses on mortgage loans. In the past, the FHA has
       administered the programs.1

       HUD acquires single-family properties as a result of foreclosure of FHA insured mortgages.
       Following foreclosure, mortgage lenders have the right to deed the properties to the Secretary of
       HUD in exchange for the mortgage insurance benefits.

                                                    HUD disposes of acquired properties through its
           HUD provided a 30 percent
                                                    Property Disposition Program, administered by the
           discount for homes located in a
                                                    Office of Single Family Housing, Real Estate Owned
           revitalization area.                     (REO) Division. Its mission is to reduce the property
                                                    inventory in a manner that expands homeownership
       opportunities, strengthens neighborhoods and communities, and ensures a maximum return to the
       mortgage insurance funds.         In line with those goals, HUD offered qualified nonprofit
       organizations the opportunity to purchase certain properties directly (that is, without bidding)
       from HUD at a discount off the list price. The discounted properties were those the REO
       Division had determined were not eligible for mortgage insurance because they required more
       than $5,000 worth of repairs to meet HUD’s minimum property standards (MPS). If the
       properties were located in an area HUD had designated as a revitalization area, HUD offered
       nonprofits a 30 percent discount. Otherwise, the discount was 10 percent.

                                                  To meet its mission, HUD put restrictions on
           Discounted properties cannot be
                                                  properties it sold at a 30 percent discount. The
           resold for more than 110 percent of
                                                  nonprofits agreed to rehabilitate the properties, ensure
           discounted purchase price.             they met MPS, and then resell them to low and
                                                  moderate-income families whose incomes did not
       exceed 115 percent of the median income for the area. To ensure affordability, HUD required
       the nonprofits sell the properties for no more than 110 percent of their net development cost.
       HUD’s goal generally required two separate mortgage loans. HUD made funding available for
       the nonprofits’ purchase and rehabilitation by allowing the nonprofits to obtain insured 203(k)
       rehabilitation loans. HUD also offered standard insured 203(b) loans to the low and moderate-
       income families. In cases where the same lender made both the 203(k) and the 203(b) loan on
       the same property, HUD required the lender ensure the nonprofit sold the properties to income
       eligible families for no more than 110 percent of its net development cost.

       In order to participate in HUD’s discounted direct sales program and mortgage insurance
       program, nonprofits had to be approved. One of the items they had to submit with their
       applications was an affordable housing plan describing how they were going to implement the
       program. Each of the nonprofits in our review stated in their affordable housing plan they would
       only sell the homes purchased from HUD to first-time homebuyers.


       1
           The abbreviations FHA and HUD are often used interchangeably.
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       Audit Memorandum 2001-SF-1806                                    Limited Review − Golden Home Mortgage


       Golden Home Mortgage was a loan correspondent. A loan correspondent may participate in
       direct endorsement of FHA mortgages in a limited way, provided a direct endorsement lender
       approved by HUD sponsors it. Under this arrangement, the loan correspondent will take the
       initial loan application, handle the appraisal assignment with HUD, procure verifications of
       deposit and employment and the credit report, close the loan after it has been underwritten, and
       submit the loan package to HUD for insurance endorsement.

       The direct endorsement approved sponsor must perform the underwriting of the property and the
       borrower and complete the underwriter certification. SCME and Western Sunrise Mortgage
       DBA Crossland Mortgage were direct endorsement lenders and sponsored loans originated by
       Golden Home Mortgage. In January 2001, Wells Fargo Mortgage bought Western Sunrise
       Mortgage DBA Crossland Mortgage. The purchase occurred subsequent to the endorsement of
       the loans included in this review.

                                                      Based on a complaint we received, we initiated a
        We initiated a review of Golden
                                                      review of Golden Home Mortgage, then located at
        Home Mortgage due to a complaint.             Concord, California.     We planned to perform a
                                                      comprehensive review of the mortgagee’s processing
       of FHA loans. While our review was in process, a parallel review was undertaken by HUD’s
       Department of Enforcement, Quality Assurance Division. The Quality Assurance team found
       the same types of processing problems we were noting. As a result of its review, HUD’s
       Mortgagee Review Board (MRB) has withdrawn Golden Home’s approval to process FHA
       loans. In addition, the MRB is seeking civil money penalties from Golden Home.

       The Quality Assurance team and our initial review work identified numerous violations of HUD
       requirements by Golden Home. In its letter to the Mortgagee Review Board, the Quality
       Assurance team said Golden Home:

          §   Failed to ensure there were only arms length transactions between the nonprofit
              mortgagors, the real estate agent, and the loan officer;

          §   Did not ensure the nonprofit mortgagors did not exceed the 10 percent profit limit on
              properties purchased from HUD with a 30 percent discount;

          §   Miscalculated maximum mortgage amounts, causing HUD to over-insure FHA loans;

          §   Miscalculated maximum mortgage amounts, causing HUD to over-insure FHA loans;

          §   Prepared misleading closing instructions that resulted in inaccurate and misleading
              HUD-1 closing statements;

          §   Caused borrowers to sign blank loan documents;

          §   Provided false housing counseling certifications;

          §   Provided false information concerning face-to-face interviews with borrowers;


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       Audit Memorandum 2001-SF-1806                                     Limited Review − Golden Home Mortgage




          §   Failed to resolve discrepancies in the sales contracts and other loan documents; and

          §   Obtained multiple appraisals on properties, and failed to question or explain rapid and
              substantial increases in property value.

                                                Because of the efforts of the Quality Assurance team
        We limited our review due to
                                                and action by the MRB, we modified our review
        actions already taken by the MRB.       objectives. Instead of documenting each of Golden
                                                Home’s loan processing deficiencies, we limited
       further work to determining the effect on homebuyers when the mortgage company failed to
       ensure the sales price did not exceed HUD’s limit and the effect on HUD when the resulting
       loans were insured.

       OBJECTIVES AND METHODOLOGY OF LIMITED REVIEW

       Thus, the objectives of our review were to determine if the mortgage companies: (1) ensured
       properties HUD sold to nonprofit organizations at a 30 percent discount were resold to eligible
       low and moderate-income homebuyers at no more than 110 percent of the nonprofits’
       development costs, and (2) correctly calculated the maximum mortgage amounts for the insured
       loans. To accomplish our objectives we:

          ü Reviewed pertinent laws, regulations, HUD Handbooks, Mortgagee Letters, and other
            directives related to Property Disposition and loan processing;

          ü Interviewed the executive directors and other officers at participating nonprofit
            organizations;

          ü Discussed issues with officials at Golden Home Mortgage, SCME Mortgage Bankers and
            Western Sunrise Mortgage DBA Crossland Mortgage;

          ü Reviewed quality assurance plans for loan processing at Golden Home Mortgage and
            SCME Mortgage Bankers;

          ü Reviewed processing files from HUD REO, Golden Home Mortgage, SCME Mortgage
            Bankers, and Western Sunrise Mortgage DBA Crossland Mortgage; and

          ü Recalculated maximum mortgage amounts and maximum allowed sale prices for selected
            properties HUD sold at 30 percent off list price.

                                                Golden Home Mortgage provided a list of 418 loans it
        We reviewed loans related to ten
                                                had originated for nonprofit organizations between               APPENDIX D
        sampled properties.                     October 1, 1997 and October 7 1999. We used
                                                HUD’s Single Family Insurance System (SFIS) to
       identify 37 properties where the same lender funded the nonprofits’ 203(k) loans and the first-
       time homebuyers’ 203(b) loans. From those, we selected a non-statistical sample of ten
       properties to review.
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       Audit Memorandum 2001-SF-1806                                Limited Review − Golden Home Mortgage




       For each property, we obtained the necessary files and calculated the net development cost and
       the maximum sales price. HUD’s property disposition file provided documentation of the
       nonprofit’s purchase price and costs associated with purchasing the property. This information
       was also in the lender’s loan origination file for the nonprofit’s mortgage. The lender also
       provided the rehabilitation file documenting money spent on rehabilitation from loan proceeds.
       The lender’s loan origination file for the new mortgage obtained by the homebuyer provided the
       sales price and the seller’s and buyer’s associated costs.

       Because of our limited scope, we did not test or assess management controls, nor did we rely on
       them. The review generally covered the period September 3, 1997 through May 3, 1999. We
       accomplished the file reviews intermittently between January 2000 and December 2000. The
       review was conducted in accordance with generally accepted government auditing standards.

       FINDING

                      THE LOAN CORRESPONDENT AND ITS SPONSORS DID NOT ASSURE
                        PURCHASE DISCOUNTS WERE PASSED ON TO HOMEBUYERS.

       Neither Golden Home Mortgage nor its sponsors, SCME Mortgage Bankers and Western Sunrise
       Mortgage DBA Crossland Mortgage, prevented nonprofit mortgagors from exceeding the
       Department of Housing and Urban Development’s HUD’s limitation on resale prices for
       properties purchased from HUD at a 30 percent discount. The nonprofits had purchased the
       properties from HUD through a program that gave them 30 percent off the list price and made
       FHA’s 203(k) loans available for the properties’ purchase and rehabilitation. HUD’s stated
       purpose for giving the discounts was that the nonprofits pass the discount on to low-and-
       moderate-income homebuyers. To meet its purpose, HUD restricted the nonprofits from selling
       the properties for more than 110 percent of each property’s net development cost. The
       homebuyers, however, paid an average of $10,500 more for their homes than HUD intended.
       This also increased HUD’s mortgage insurance risk and the homebuyers’ liability an average of
       $10,800. Further, the price and mortgage increases also resulted in higher fees for Golden Home
       and its associates.

       We believe Golden Home knowingly inflated the home prices and mortgages to increase profits
       for itself and its associates. Although Golden Home processed the loan applications and
       originated the mortgages, the loans were underwritten and funded by direct endorsement
       sponsors SCME and Western Sunrise. The sponsors were ultimately responsible for ensuring the
       sales prices did not exceed 110 percent of the nonprofits’ development costs and the maximum
       mortgage calculations were in accordance with HUD requirements. However, the sponsors’
       quality control procedures were not effective in preventing these errors.

                                                HUD’s written procedures and policies clearly
        HUD put restriction on properties
                                                disclose the restrictions HUD imposed when it sold
        sold to nonprofit organizations at a
                                                properties to nonprofits at a 30 percent discount. To
        30 percent discount in order to pass
                                                qualify for a 30 percent discount, the properties had to
        on     savings     to    low-income
                                                be in a designated redevelopment area.              The
        homebuyers.
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       Audit Memorandum 2001-SF-1806                                             Limited Review − Golden Home Mortgage


       properties also had to be in need of at least $5,000 worth of repairs to meet HUD’s minimum
       property standards.2 The nonprofits had to agree they would rehabilitate the properties and then
       sell them to owner/occupants with low and moderate incomes. HUD limited the sales price so
       the bulk of the discount would be passed on to the buyers. This was done by restricting the price
       to 110 percent of net development costs as defined by HUD. The 10 percent overage was
       expected to cover the nonprofits’ overhead costs.

       HUD Handbook 4310.5−Rev-2, Property Disposition Handbook – One to Four Family
       Properties, provides program policy and processing requirements for HUD’s Single Family
       Property Disposition Program (SFPD).          Chapter 10 of the handbook discusses direct
       (noncompetitive) sales to governmental entities and private nonprofit organizations. Under the
       discounted sales program, approved nonprofit organizations could purchase certain distressed
       properties from SFPD at 30 percent below the list price. When the nonprofits purchased the
       properties, they agreed to rehabilitate the properties and resell them to first-time homebuyers
       whose incomes did not exceed 115 percent of median income for their area.

       Resale restrictions on 30 percent discount properties were expanded in Housing Notice 94-74,
       Revisions to SFPD Sales Procedures which stated: “…it is reasonable to expect that a nonprofit
       sponsor, like any other developer, is entitled to a fee which covers costs. This fee should include
       overhead and staffing related to the project. Some fluctuation in the developer’s fee is to be
       expected, however, as a general rule, it is not anticipated that a nonprofit should realize more
       than a six to 10 percent rate of return on HUD properties purchased at the 30 percent
       discount….”

       Subsequent Mortgagee Letters (ML) strengthened and clarified the resale price restriction. ML
       96-21 and ML 97-5 restrict nonprofit agencies from selling properties for more than 110 percent
       of their net development cost, if the nonprofits purchased the properties from HUD at a 30
       percent discount.

       ML 96-21 defined the net development cost as “…the total cost of the project including items
       such as acquisition cost (including the cost of rehabilitation), fees to prepare the work write-ups
       and cost estimates, permits and survey expenses, insurance and taxes, excluding overhead and
       any developer’s fee. Basically, the nonprofit organizations recoup their legitimate costs while, at
       the same time, keep the property affordable to the income level of their target buyers.”

       ML 97-5 defined the net development cost as “…the total cost of the project including items
       such as acquisition cost, architectural fees, permits and survey expenses, insurance,
       rehabilitation, and taxes. Total costs incurred by the purchaser, including those for acquisition
       financing, management fees and selling expenses related to the project can also be included, but
       are expected to be reasonable and customary for the area in which the property is located. The
       purchaser can also include up to three months mortgage payments (principal and interest only),
       less all rents received. The net development cost cannot include gifts to the eventual purchaser
       for the down payment, financing or closing costs, nor any other related expenses associated with
       that buyer’s purchase of the property.”
       2
         Properties needing repairs estimated at under $5,000 could be offered with FHA insured financing. If needed
       repairs exceeded $5,000 the properties were offered without Section 203(b) financing and the regulations referred to
       them a “uninsurable.” However, they were still eligible for Section 203(k) financing.
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       Audit Memorandum 2001-SF-1806                                   Limited Review − Golden Home Mortgage




       ML 97-5 stated, “the lender is responsible for analyzing the closing documents to assure the
       nonprofit or government entity is not making in excess of a 10 percent profit…. If the sales price
       exceeds 110 percent of the net development cost, then the excess profit must be used to pay
       down the existing mortgage. Supporting documentation must be reviewed by the underwriter
       prior to closing the loan. The lender is not required to recalculate the profit if the nonprofit or
       government entity sells the house on a new loan that the lender does not originate (since the
       lender is not in control of the new loan); however, it is the nonprofit or government entities’
       responsibility to make sure they are in full compliance with all HUD requirements. The profit on
       the sale of one property cannot be offset by the lesser profit or loss on another property.”
       (Emphasis added.)

                                                   For the ten 203(k) financed property sales we
        The nonprofit organizations did not
                                                   reviewed, homebuyers paid a total of $104,993, or an
        pass discounts on to homebuyers.           average of $10,500 each in excess of the amounts
                                                   HUD intended (as detailed in Appendix A). Only one
       property did not exceed 110 percent of the nonprofit’s net development cost. Prices for the other
       nine properties exceeded 110 percent of the net development costs by amounts ranging from
       $5,409 to $17,540. The profit percentage ranged from 16 percent to 32 percent.

                                                    The nonprofits relied on a real estate broker and
        Golden Home’s loan manager
                                                    Golden Home’s loan manager to oversee all aspects
        monitored profits from sale of
                                                    of their affordable housing programs.        The loan
        properties.                                 manager kept records on the properties and project
                                                    costs, and calculated the net development costs for the
       nonprofits. The loan manager calculated the profits realized and prepared the annual reports
       HUD required. The annual reports contained certifications that all 30 percent discount properties
       were sold to income eligible people. The reports also contained incorrect purchase and
       rehabilitation and sales information to show the profits did not exceed an average of 10 percent
       for the 30 percent discount properties. The loan manager and the real estate broker told the
       nonprofits they were experts on HUD programs. The loan manager said that profits were not
       restricted to 10 percent on individual properties (which is clearly contrary to ML 97-5), but that
       annual profits could not exceed an average of 10 percent. We spoke to two of the nonprofits’
       directors who said they relied on the knowledge of the real estate agent and the loan manager.
       They were unable to explain the annual reports prepared by the loan manager.

       How the loan manager arrived at net development costs was not clear from the reports he
       submitted to HUD. Nevertheless, we can identify at least one error in his profit calculations. He
       improperly included an amount for overhead cost, one of the items HUD expected nonprofits to
       absorb and was specifically to be excluded from net development cost. Because of the loan
       manager’s role in administering the nonprofits’ affordable housing programs, it is clear Golden
       Home Mortgage should have been aware HUD’s resale restrictions were violated.

                                                   Excessive sales prices increased maximum mortgage
        Golden     Home’s     calculations
                                                   amounts for all respective homebuyers.    Golden
        improperly   inflated   mortgage
                                                   Home inflated the mortgage amounts further by
        amounts.                                   failing to follow HUD’s procedures and including

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       Audit Memorandum 2001-SF-1806                                  Limited Review − Golden Home Mortgage


       amounts labeled “borrower-paid closing costs” in six of ten maximum 203(b) mortgage
       calculations. These costs should not have been included because the nonprofit sellers provided         APPENDIX B
       the money for closing costs. As detailed in Appendix B, the excessive sales prices and the
       improper inclusion of closing costs increased the mortgage amounts by an average of $10,772.

       The six 203(b) loans including “borrower paid closing costs” were initiated prior to
       December 21, 1998, when HUD allowed the maximum mortgage to include them. Under the
       regulations then in effect, the closing costs could be included even if the borrower obtained the
       money to pay them as a gift from a relative or from a nonprofit agency. In the cases we
       reviewed, however, the funds did not meet HUD’s criteria for gift funds. Although the
       nonprofits referred to the money they provided for closing costs as “equity gifts,” they did not
       meet HUD’s definition of gift funds.

       ML 96-18, Section IV, addressed the issue of gifts from nonprofit agencies to assist homebuyers.
       It stated, “…we do not believe it to be appropriate to approve quid pro quo arrangements
       whereby assistance is only available if the buyer obtains financing with a particular lender or
       buys a particular builder’s property…. The source of funds for a gift must be totally unrelated to
       the loan transaction. If the homebuyer may only use the builder, developer, lender, real estate
       firm, etc. that contributed the funds, the program will, in all likelihood, be unacceptable for FHA
       mortgage insurance.” In all of the cases we reviewed, the homebuyers had no discretion to
       choose the real estate agent or lender, and the nonprofits only provided the closing funds for
       properties they were selling.

       The source of funds to close was not an issue for the four loans initiated after December 21,
       1998. After that date, Mortgagee Letter 98-29 eliminated borrower paid closing costs from the
       maximum mortgage calculation. Golden Home complied with the rule change.

                                                     Higher sales prices resulted in larger mortgage
        The higher sales prices and
                                                     amounts, higher fees for Golden Home Mortgage (as
        mortgage      amounts      benefited
                                                     detailed in Appendix C), and higher commissions for
        Golden Home and its associates
                                                     the loan officers and the real estate broker. Golden
        while increasing HUD’s risk.                 Home earned an origination fee of one percent of the
                                                     mortgage amount on each loan. For the 203(k) loans,
       it received a supplemental origination fee for the additional work involved in processing the
       rehabilitation loan. The sponsors paid Golden Home a yield spread premium (YSP) on 18 out of
       20 loans and a service release premium (SRP) on 10 out of the 20 loans (two loans per property).
       For the 20 loans (ten 203(k) loans to nonprofits and ten 203(b) loans to first-time homebuyers),
       the total percentage based fees totaled $86,155.

       There were two loan officers working in the Golden Home branch office that processed these
       loans. One was the loan manager who, along with the real estate broker, administered the
       affordable housing programs for at least eight nonprofits. The other was engaged to marry the
       real estate broker. Golden Home confirmed the loan officers were paid commissions, but did not
       disclose the rates. The real estate broker earned a six percent commission on each of the sales,
       so the $104,993 cumulative increase in the sales price for the 10 sales to first-time homebuyers
       earned him an additional $6,300.


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       Audit Memorandum 2001-SF-1806                                     Limited Review − Golden Home Mortgage


                                                     The first-time homebuyers paid for the increases in
        In addition, homebuyers were
                                                     sales prices and mortgage amounts. This negated or
        burdened with higher sales prices,
                                                     reduced HUD’s intent to help people with low and
        resulting in higher mortgage
                                                     moderate-incomes in becoming homeowners. HUD
        amounts and payments.                        intended nonprofit organizations would pass most of
                                                     the 30 percent discount on to these homebuyers. The
       targeted homebuyers were not necessarily very knowledgeable about the real estate industry.
       They responded to advertisements placed by the real estate broker, who offered the chance to
       purchase a HUD home with no downpayment. The broker provided a list of properties available
       from the nonprofits he worked with and arranged the financing through Golden Home. We
       believe the homebuyers trusted HUD was involved and would ensure their interests were
       protected. They also felt this was a unique opportunity to become a homeowner.

                                                     The lender is not required to monitor the profit if the
        The loan sponsors were responsible
                                                     nonprofit organization sells the house on a new loan
        for monitoring profits if it
                                                     the lender does not originate (since the lender is not in
        underwrote both loans.                       control of both loans). The Single Family Acquired
                                                     Asset Management System (SAAMS) shows that
       during 1998 and 1999, HUD sold a total of 314 properties at a 30 percent discount just to the
       nonprofits with programs administered by Golden Home’s loan manager and the same real estate
       broker. In most of those cases, although both loans were originated by Golden Home, the loans
       to the nonprofits and the loans to the first-time homebuyers were underwritten by different
       sponsors. In those cases, HUD puts the sole responsibility for ensuring the profits do not exceed
       10 percent with the nonprofits. However, it may be difficult or impossible for homebuyers who
       were overcharged to obtain relief, since many nonprofits do not have significant resources.
       Nevertheless, we identified 37 cases where the lender was the same for both the nonprofit and
       the first-time homebuyer, but there could be more.

       Current HUD regulations offer a remedy for homebuyers when the sales price exceeds the limit
       of 110 percent of net development costs and both the rehabilitation loan and the homebuyer’s
       loan were funded by the same lender. The lender is required to use the excess profit to pay down
       the mortgage. HUD does not currently offer a regulatory remedy to homebuyers when different
       lenders make rehabilitation loans and homebuyers’ loans.

       AUDITEE COMMENTS FROM SCME MORTGAGE BANKERS

       SCME Mortgage Bankers provided written comments dated August 3, 2001. We held an exit
       conference with officials from SCME on September 27, 2001.

       SCME acknowledged the criteria cited in the draft memorandum that restricted profits on 30
       percent discount properties to 10 percent. However, SCME said it did not restrict the profits
       because the former Director of the San Francisco Single Family Loan Division instructed
       participants not to monitor the profits because the restriction would not apply on a per property
       basis, but on an aggregate to all properties purchased at a 30 percent discount and resold during a
       calendar year. SCME provided a statement from its former Vice President describing a meeting
       where she heard the instructions from the former Director. The Vice President said the former
       Director acknowledged the per property requirement, but said it would not be followed in the
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       Audit Memorandum 2001-SF-1806                                  Limited Review − Golden Home Mortgage


       San Francisco jurisdiction. SCME also said that, prior to issuance of Mortgagee Letter 97-5 in
       March 1997, it believed HUD requirements were that aggregate profits should not exceed 10
       percent. In addition, SCME officials said it is common practice to ask the local office for
       clarification or interpretation of HUD regulations, and it would be unreasonable to expect every
       answer in writing.

       SCME did not agree 203(b) loans were improperly inflated by the inclusion of gift funds in the
       maximum mortgage calculation. SCME cited Mortgagee Letter 97-5, which said, “As a
       reminder, non-profit borrowers are allowed to provide a gift for the cash investment in the
       property to assist a low- or moderate- income family or a first-time homebuyer in obtaining a
       new FHA insured mortgage.”

       Finally, SCME does not agree there was any harm to either homebuyers or HUD. SCME
       believes homebuyers who paid more than HUD intended for their homes were not harmed
       because they did not pay more than the appraised market values and because they did not have to
       provide the cash for the down payments or closing costs. SCME does not recognize any harm to
       HUD because the objective of promoting homeownership was achieved, and HUD was able to
       move foreclosed properties out of its inventory.

       OIG EVALUATION OF SCME MORTGAGE BANKERS’ COMMENTS

       We found no evidence the 10 percent profit restriction for each property was waived. HUD
       officials do not have the authority to waive regulations verbally. We do not suggest the
       mortgage company should ask HUD to answer every question or clarification in writing.
       However, if the mortgage company believes an individual at HUD is instructing them to ignore a
       clear requirement, they should obtain clarification from Headquarters, and they should certainly
       obtain written evidence of any waivers.

       Regarding the gift funds, we agree HUD allowed nonprofit organizations to gift money for
       downpayments and closing costs to certain homebuyers. However, despite the fact the funds
       were labeled gifts, the nonprofits included these amounts in their calculation of net development
       costs and in the sale price of the homes. As discussed in the finding, the homebuyers were also
       required to obtain their loans through Golden Home Mortgage, contrary to HUD’s requirement
       of free choice.

       Our evaluation of Wells Fargo’s comments addresses the no-harm issue.

       AUDITEE COMMENTS FROM WELLS FARGO HOME MORTGAGE

       Wells Fargo Home Mortgage provided written comments dated September 2, 2001. We held an
       exit conference with officials from Wells Fargo on September 20, 2001.

       Wells Fargo officials reviewed our calculations of net development cost and profits realized on
       the sale of homes to first-time homebuyers. As a result, Wells Fargo agreed the sales prices
       exceeded HUD’s guidelines.        Wells Fargo disagreed, however, the homebuyers suffered
       financial losses. An official said Wells Fargo found one homebuyer had subsequently sold the

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       Audit Memorandum 2001-SF-1806                                    Limited Review − Golden Home Mortgage


       property for more than the purchase price paid to the nonprofit organization and the other three
       properties in our sample were assessed for amounts far in excess of the purchase prices.

       Wells Fargo stressed it realizes the importance of meeting HUD/FHA regulations and believes it
       has effective quality control policies and procedures. All of the transactions in the report
       occurred prior to Wells Fargo’s purchase of Western Sunrise/Crossland Mortgage. Nevertheless,
       Wells Fargo staed it was willing, in order to facilitate resolution of these issues, to indemnify the
       remaining active loans.

       OIG EVALUATION OF WELLS FARGO’S COMMENTS

       We were gratified by Wells Fargo’s comments although we do not agree homebuyers suffered no
       harm. Both the homebuyers and HUD suffered harm when nonprofit organizations failed to pass
       the discounts provided by HUD on to the intended recipients. Regardless of future home values,
       people paid thousands of dollars more for their homes than they should have leaving them with
       less money to apply to other needs.

       RECOMMENDATION

       We recommend you take appropriate action on the issues presented in this report.




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                                                                                                        Appendix A

                 NONPROFITS' RESALES TO FIRST-TIME HOMEBUYERS
                                                Net                                           NP's profit   Broker's
                              Nonprofit     Development                      Excess Resale     % per      Commission on
       Property Address        Buyer           Cost         Resale Price        Price           audit      Excess Price

   2050 101st Av.,         Agape Villages    $     94,309      $   114,732       $   10,922         22%       $   659.52
   Oakland, CA
   546 S 19th St.,         Agape Villages    $    139,298      $   161,091       $    7,863         16%       $   471.78
   Richmond, CA
   617 22nd St.,           NCLT              $     90,409      $   104,859       $    5,409         16%       $   324.54
   Richmond, CA
   333, 335, 337,          Aim To Please     $    155,989      $   182,697       $   11,109         17%       $   666.55
   339 29th St.
   Richmond, CA
   46 Delta Dr.,           Clara's Cove      $     79,450      $   104,935       $   17,540         32%       $ 1,052.40
   Bay Point, CA 94565
   1618 Emeric Rd.,        Agape Villages    $     81,589      $   102,275       $   12,527         25%       $   751.62
   San Pablo, CA
   57 Manville Av.,        Shelter           $     81,900      $   102,275       $   12,185         25%       $   731.10
   Pittsburg, CA
   1427 Rice St.,          VNH               $    103,766      $   111,670       $       0           8%       $      0.00
   Vallejo, CA
   665 Stone Harbor Dr.,   Aim To Please     $    109,139      $   128,558       $    8,505         18%       $   510.30
   Pittsburg, CA
   716 Sycamore St.,       Clara's Cove      $    101,034      $   130,000       $   18,863         29%       $ 1,131.78
   Oakland, CA
                           TOTAL             $ 1,036,883       $ 1,243,092       $ 104,993                    $ 6,299.59

                           AVERAGE           $    103,688      $   124,309       $   10,499                   $   629.95




                                                                                                                   PAGE 7




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                                                                                                      Appendix B

          EXCESS MORTGAGE AMOUNTS FOR FIRST-TIME HOMEBUYERS
                                                                                                   Overcharge
                                                           Closing Costs             Excess 203(b)  on Loan
                             DE Lender                      Included in Excess Resale Mortgage     Origination
       Property Address      (sponsor)    Nonprofit Seller   Mortgage      Price       Amount          Fee

       101st Av.,          Crossland     Agape Villages        $      0    $   10,992    $    8,760       $    88
       Oakland, CA
       S 19th St.,         Crossland     Agape Villages        $      0    $    7,863    $    7,638       $    76
       Richmond, CA
       22nd St.,           SCME          NCLT                  $   2,895   $    5,409    $    7,475       $    75
       Richmond, CA
       29th St.            Crossland     Aim To Please         $      0    $   11,109    $   10,792       $   108
       Richmond, CA
       Delta Dr.,          SCME          Clara's Cove          $   2,839   $   17,540    $   19,048       $   190
       Bay Point, CA
       Emeric Rd.,         SCME          Agape Villages        $   2,685   $   12,527    $   14,213       $   142
       San Pablo, CA
       Manville Av.,       SCME          Shelter               $   2,743   $   12,185    $   13,887       $   139
       Pittsburg, CA
       Rice St.,           SCME          VNH                   $   2,839   $        0    $    2,697       $    27
       Vallejo, CA
       Stone Harbor Dr.,   SCME          Aim To Please         $   3,200   $    8,505    $   10,781       $   108
       Pittsburg, CA
       Sycamore St.,       Crossland     Clara's Cove          $      0    $   18,863    $   12,424       $   124
       Oakland, CA
                                         TOTAL                 $ 17,201    $ 104,993     $ 107,715        $ 1,077
                                         AVERAGE               $ 1,720     $ 10,499      $ 10,772         $   108



                                                                                                                 PAGE 8




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                                                                                                           Appendix C

                            FEES PAID TO GOLDEN HOME MORTGAGE

                                                                                       Broker
                                 Supplemental                                          Total to                 Percent
                Loan Origination Origination Processing                                Golden                   of Loan
   Sponsor      Type     Fee         Fee        Fee            YSP         SRP          Home        Loan Amount Amount

   Western       K      $     858        $   369    $   400    $   1,394   $     215   $    3,235    $      85,800   4%
   Sunrise
   Western        B     $   1,101        $   N/A    $   400    $   2,240   $   1,400   $    5,140    $     110,062   5%
   Sunrise
   Western       K      $   1,339        $ 1,320    $   400    $   2,343   $     335   $    5,737    $     133,900   4%
   Sunrise
   Western        B     $   1,565        $   N/A    $   400    $   2,400   $   4,772   $    9,138    $     156,499   6%
   Sunrise
   SCME          K      $     899        $ 1,068    $   400    $   1,460   $       0   $    3,827    $      89,900   4%
   SCME          B      $   1,025        $ N/A      $   400    $   2,086   $   1,304   $    4,814    $     104,859   5%
   Western       K      $   1,540        $ 1,271    $   400    $   2,694   $     385   $    6,289    $     153,950   4%
   Sunrise
   Western        B     $   1,775        $   N/A    $   400    $   1,588   $   2,495   $    6,258    $     177,490   4%
   Sunrise
   SCME          K      $     803        $    926   $   400    $   1,104   $       0   $    3,232    $      80,260   4%
   SCME          B      $   1,026        $   N/A    $   400    $   1,826   $   1,044   $    4,296    $     102,573   4%
   SCME          K      $     794        $    600   $   400    $   1,191   $       0   $    2,985    $      79,400   4%
   SCME          B      $   1,000        $   N/A    $   400    $   2,034   $   1,017   $    4,451    $      99,973   4%
   SCME          K      $     786        $    792   $   400    $   1,179   $       0   $    3,157    $      78,600   4%
   SCME          B      $   1,000        $   N/A    $   400    $   1,399   $   1,017   $    3,816    $      99,973   4%
   SCME          K      $     999        $    688   $   400    $   2,996   $       0   $    5,082    $      99,850   5%
   SCME          B      $   1,093        $   N/A    $   400    $   1,390   $   1,223   $    4,106    $     109,283   4%
   SCME          K      $   1,031        $    378   $   400    $   1,804   $       0   $    3,613    $     103,100   4%
   SCME          B      $   1,253        $   N/A    $   400    $   1,753   $   1,785   $    5,192    $     125,331   4%
   Western       K      $     974        $    888   $   400    $   1,825   $     243   $    4,330    $      97,350   4%
   Sunrise
   Western        B     $   1,209        $   N/A    $   400    $   2,307   $   1,538   $    5,455    $     120,949   5%
   Sunrise
       Totals           $ 22,067         $ 8,300    $ 8,000    $ 37,015    $ 18,773    $ 94,155      $ 2,209,102     4%
                      TOTAL OF % BASED FEES                    $ 86,155

   ORIGINATION FEE: 1% of the loan amount
   SUPPLIMENTAL ORIGINATION FEE: 1.5% of the portion of the loan allocated for rehabilitation
   YSP: The lender paid a Yield Spread Premium to the broker for negotiating an above par interest rate.
              It was a varying percentage of the loan amount depending on the terms.
   SRP: The lender paid the broker a Service Release Premium for the right to service the loan.
              It was a varying percentage of the loan amount depending on the terms.




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                                                                                                        Appendix D

                       PROPERTIES WITH THE SAME SPONSOR FOR BOTH LOANS

                                                                                        (k)             (b)
                                                                       DE Lender    Endorsement     Endorsement
                                    Property Address                    (sponsor)      Date            Date
       1*      2050                  101st Av., Oakland, CA            Crossland             2/5/99         4/16/99
       2       2514                  108th Av., Oakland, CA            SCME                  5/7/98         7/30/98
       3       925 W                 17th St., Pittsburg, CA           SCME                 9/22/99       12/29/99
       4*      546 S                 19th St., Richmond, CA            Crossland            5/26/99         7/17/00
       5*      617                   22nd St., Richmond, CA            SCME                 5/18/98         10/7/98
       6*      333, 335, 337, 339    29th St. Richmond, CA             Crossland             3/3/99         4/28/99
       7       1369                  64th Av., Oakland, CA             SCME                 1/15/99         4/27/99
       8       3350                  68th Av., Oakland, CA             SCME                 6/18/98         9/16/98
       9       8                     Amelia Way, Pittsburg, CA         SCME                 6/26/98       10/30/98
       10      301                   Baltic Sea Court, Pittsburg, CA   SCME                 2/24/99          5/7/99
       11      91                    Bella Monte Av., Pittsburg, CA    SCME                 7/20/98         1/22/99
       12      56 S.                 Bella Monte Av., Pittsburg, CA    SCME                 9/18/98       12/28/98
       13      1170                  Columbia St., Pittsburg, CA       SCME                 3/26/99       11/12/99
       14*     46                    Delta Dr., Bay Point , CA         SCME                 7/20/98          2/9/99
       15      910                   Donner Pass Rd., Vallejo, CA      SCME                 2/23/98         6/16/98
       16      1831                  Dunn Av., Richmond, CA            SCME                 7/10/98         9/14/98
       17      4520                  Ellen St., Oakland                SCME               10/15/98          1/19/99
       18*     1618                  Emeric Rd., San Pablo, CA         SCME                 8/25/98         9/30/98
       19      827                   Florida Av., Richmond, CA         SCME                  4/2/98         6/22/98
       20      3525                  Florida Av., Richmond, CA         SCME               10/26/98           4/1/99
       21      2115                  Georgia St., Vallejo, CA          SCME                 1/27/98          4/1/98
       22      2600                  Giant Rd. #46, San Pablo, CA      SCME                 7/20/98          9/9/98
       23      320                   Homeacres Av., Vallejo, CA        SCME                  5/3/99          8/9/99
       24      727                   Illinois St., Vallejo, CA         SCME                 9/27/99          1/4/00
       25      516                   Laurel St., Vallejo, CA           SCME                 8/31/99       11/12/99
       26      14 W                  Leland Rd., Pittsburg, CA         SCME                 6/26/98       12/28/98
       27      20                    Lou Ann Ct., Pittsburg            SCME                 7/16/98       12/23/98
       28      276                   Madison Av., Pittsburg, CA        SCME                  5/3/99         9/13/99
       29      2335-37               Maine Av., Richmond, CA           Crossland          11/25/98           5/7/99
       30      637                   Maine St., Vallejo, CA            SCME                 1/14/98         8/13/99
       31*     57                    Manville Av., Pittsburg, CA       SCME                 8/10/98       12/29/98
       32      118                   Polaris Dr., Pittsburg, CA        SCME                 1/29/98         3/31/98
       33*     1427                  Rice St., Vallejo, CA             SCME                 1/14/98         3/31/98
       34      26                    Salisbury Dr., Pittsburg, CA      SCME                 7/17/98          4/2/98
       35      515                   Steffan St., Vallejo, CA          SCME                  4/3/98         7/21/98
       36*     665                   Stone Harbor Dr., Pittsburg, CA   SCME                 4/29/98         7/13/98
       37*     716                   Sycamore St., Oakland, CA         Crossland             3/1/99         7/15/99
       * Properties selected for review and discussed in this report



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                                                                                               Appendix E

                   SCME MORTGAGE BANKERS’ WRITTEN RESPONSE




                                                August 3, 2001



       VIA FACSIMILE AND FEDERAL EXPRESS

       Mimi Y. Lee
       District Inspector General for Audit
       U.S. Department of Housing and Urban Development
       Office of Inspector General
       Pacific/Hawaii District
       450 Golden Gate Ave, Box 36003
       San Francisco, CA 94102-3448

       Dear Ms. Lee:

               This is in response to your letter of June 25, 2001, in which you provided SCME
       Mortgage Bankers, Inc. (“SCME”) with a draft audit memorandum (the “Draft Memorandum” or
       the “Memorandum”) resulting from your recent audit of Golden Home Mortgage (“Golden”),
       and invited us to respond to the findings that relate to SCME. In particular, the Memorandum
       indicates: (i) SCME should have ensured that the properties HUD sold to nonprofit organizations
       at a 30 percent discount were resold for no more than 110 percent of the nonprofit’s development
       costs, and (ii) Golden Home Mortgage (“Golden” or “Golden Home”) incorrectly calculated the
       maximum mortgage amounts for insured loans.

               As detailed herein, SCME did not restrict nonprofit organizations from making more than
       a 10 percent profit on individual transactions involving properties that they had acquired at a 30
       percent discount, because HUD’s Field Office Director instructed all San Francisco area 203(k)
       lenders to apply the 10 percent limit on an aggregate basis. Furthermore, Golden Home correctly
       calculated the maximum mortgage amounts on the loan transactions in which SCME was the
       sponsor. A brief background discussion and our response to the Memorandum follows.

       I.     Background

              A.       SCME Mortgage Bankers

                SCME is a residential mortgage lender headquartered in San Diego, California. SCME
       was founded in 1984 under the name Southern California Mortgage Exchange. The company
       originally focused on government lending in the San Diego area. In the late 1980s, the company



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       expanded its lending operations throughout California. Expansion continued in throughout the
       mid 1990s, and the company’s name was changed to SCME.

               Currently, SCME is licensed to operate in 14 states, operates on a wholesale and retail
       basis, and has offices in Phoenix, AZ, Anaheim Hills, CA, Concord, CA, Rancho Cucamonga,
       CA and San Diego, CA. SCME is an approved Ginnie Mae issuer and Fannie seller/servicer.
       The company also is approved by the Department of Veteran’s Affairs under the Automatic
       Lender Program and by the Federal Housing Administration under the Direct Endorsement
       Program.

               B.       The Draft Memorandum

               In January 2000, the Department of Housing and Urban Development’s (“HUD” or the
       “Department”) Quality Assurance Division and Office of Inspector General (“OIG”) visited
       SCME’s offices, interviewed our staff and reviewed a number of 203(k) loan files. In January
       2001, the Office of Inspector General visited our office and performed a second review of the
       loan files. We understand that the Department’s review of SCME was related to its review of
       FHA loan correspondent Golden Home Mortgage. The Department initiated its review of
       Golden based on a complaint it had received about the company. The purpose of the
       Department’s review was to determine whether Golden Home and its sponsors ensured that loan
       amounts and property prices were proper.

               On June 25, 2001, the OIG provided SCME with a copy of the Draft Memorandum. The
       Memorandum describes several issues that the OIG identified in connection with Golden Home’s
       203(k) loan origination activities. Because SCME is one of Golden Home’s sponsors, the OIG
       has invited SCME to comment on the Memorandum.

               The Draft Memorandum describes findings in connection with a number of loans
       originated by Golden Home. This response only addresses those loans with respect to which
       SCME was the sponsor.3

       II.     SCME’s Response To The Draft Memorandum

               The Draft Memorandum contains two major findings. The Memorandum indicates : (i)
       SCME should have ensured that the properties HUD sold to nonprofit organizations at a 30
       percent discount were resold for no more than 110 percent of the nonprofit’s development costs,
       and (ii) Golden Home incorrectly calculated the maximum mortgage amounts for insured loans.
       SCME’s response to each of these findings is set forth below.

                A.       HUD Instructed San Francisco 203(k) Program Participants To Use An
                         Aggregate Calculation

              The Memorandum indicates that when HUD sells properties to nonprofit developers at a
       30 percent discount, the developers must comply with certain requirements in connection with

       3
                In particular, SCME was the sponsor for both the 203(k) and 203(b) loans associated with the following six
       properties: 617 22nd Street, Richmond, CA; 46 Delta Drive, Bay Point, CA; 1618 Emerle Road, San Pablo, CA; 57
       Manville, Avenue, Pittsburg, CA; 1427 Rice Street, Vallejo, CA; and 665 Stone Harbor Drive, Pittsburg, CA.

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       the resale of such properties. For example, the developers may not resell such properties for
       more than 110 percent of their “net development costs.” According to the Draft Memorandum,
       Golden Home and SCME did not ensure that nonprofits complied with this restriction. The
       Memorandum indicates that in cases where the same lender makes the 203(k) and subsequent
       203(b) loan on the same property, the “[l]ender is responsible for analyzing the closing
       documents to ensure the nonprofit or government entity is not making in excess of a 10% profit .
       . .” The Memorandum cites to Housing Notice 94-74, Mortgagee Letter 96-21 and Mortgagee
       Letter 97-5 in connection with this finding.

                SCME did not restrict nonprofit developers’ profits as described above because HUD’s
       San Francisco Field Office Director instructed 203(k) program participants that the 10 percent
       profit limitation did not apply on a per transaction basis, but rather applied on an aggregate basis
       to all properties that a nonprofit purchased at a 30 percent discount and resold during a calendar
       year.

               As indicated in the Draft Memorandum, HUD’s requirements originally provided that “as
       a general rule, it is not anticipated that a nonprofit should realize more than a six to 10 percent
       rate of return on HUD properties purchased at the 30 percent discount . . .” Mortgagee Letter 94-
       74.     This requirement was commonly interpreted as meaning that any given nonprofit
       organization should not earn an aggregate profit of more than 10 percent on discounted
       properties in any given year.

               In March 1997, HUD issued a mortgagee letter that revised this requirement to indicate
       that the 10 percent profit limitation applied on a per transaction rather than an aggregate basis.
       Mortgagee Letter 97-5. In response to this new guidance, SCME revised its policies and
       procedures to reflect the new requirement. We learned, however, that HUD’s San Francisco
       Field Office had informed 203(k) program participants that the new, “per transaction”
       requirement would not apply in the San Francisco area. Because we were concerned about this
       departure from Mortgagee Letter 97-5, Pam Gallardi, SCME’s Vice President of Operations and
       Underwriting, flew to San Francisco and attended the San Francisco Field Office’s April 1997
       203(k) meeting.

             Ms. Gallardi has provided a written statement in connection with the Draft
       Memorandum.4 Exhibit A. As detailed in Ms. Gallardi’s statement, at the April 1997 meeting,:

                 . . .which was standing room only, the topic was Mortgagee Letter 97-05. The director
               of the San Francisco field office (James McClanahan) was in charge of the meeting. In
               this meeting Mr. McClanahan stated that the San Francisco office would not be changing
               the method in which nonprofits’ development costs were handled.                (Previous to
               [Mortgagee letter 97-5], an aggregate of the 10% profit was allowed, rather than each
               transaction standing alone.)       When Mr. McClanahan was asked by a sponsor’s
               representative to clarify, as his instructions were in direct conflict with the mortgagee
               letter, he again stated that the San Francisco field office would be proceeding in the same



       4
                 Ms. Gallardi no longer is employed with SCME, but agreed to provide a written statement in connection
       with this matter.

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                manner as before. . . . All sponsors that wanted to originate 203(k) loans had no choice
                except to comply with the directives of the field office.

                We note that it is not uncommon for HUD’s requirements to vary by geographic region,
       or for a Field Office to adopt its own interpretation of HUD’s guidelines. SCME’s management
       did believe that it was important to verify that HUD’s San Francisco Field Office had opted to
       continue the aggregate profit requirement after HUD issued Mortgagee Letter 97-5. However,
       once our Vice President of Operations and Underwriting heard HUD’s Field Office Director
       instruct all of the 203(k) lenders attending the April 1997 meeting to continue with the aggregate
       approach, we believed that we were in compliance with HUD’s requirements in using that
       approach.

              SCME has always been committed to following all of the Department’s rules, regulations
       and guidance. In this instance, when we were uncertain about HUD’s position on an issue, we
       sought clarification from the applicable Field Office, and then followed that office’s instructions.
       Under these circumstances, we do not believe that HUD should impose liability on SCME.

                B.       Loan Amounts Were Calculated Correctly

                The Draft Memorandum also alleges that Golden Homes did not properly calculate the
       maximum mortgage amounts. In particular, the Memorandum states that Golden Home (i)
       calculated the nonprofits’ mortgages when they purchased properties from HUD by basing the
       mortgage amounts on HUD’s list prices instead of using the actual prices paid by the nonprofits
       after deducting their discounts, and (ii) improperly included closing costs in mortgage
       calculations when the nonprofits provided gift funds to borrowers on their transactions. Each of
       these findings is at variance with the facts.

                         1.        HUD Auditors Used Incorrect Purchase Price When Calculating
                                   Loan Amounts

               Contrary to the allegation set forth in the Draft Memorandum, Golden Home calculated
       the maximum mortgage amounts on the nonprofits’ loans using the actual prices paid by the
       nonprofits after deducting their discounts. Attached for your review are the 203(k) maximum
       mortgage worksheets for each of the six 203(k) loans with respect to which SCME was the
       sponsor. Exhibit B. As documented on the attached worksheets, in each of these transactions,
       the actual, discounted property prices were used to calculate the maximum mortgage amount.
       This finding is in error.

                         2.        Golden Homes Did Not Use Improper Gift Funds

               The Draft Memorandum states that in six 203(b) loan transactions, the loans included
       closing costs when such costs were paid for using gift funds that did not meet HUD’s criteria for
       gift funds.5 According to HUD, in these six transactions, the nonprofit developer provided gift

       5
                Each of the six loans at issue in this finding were originated prior to Decemb er 21, 1998, when HUD
       allowed the maximum mortgage amount to include closing costs even if the borrower received the money to pay
       them as a gift from a relative or nonprofit agency. After December 21, 1998, HUD did not permit closing costs to
       be included in the maximum mortgage calculation.

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       Audit Memorandum 2001-SF-1806                                      Limited Review − Golden Home Mortgage


       funds to the borrower, even though Mortgagee Letter 96-18 states that “[t]he source of funds for
       a gift must be totally unrelated to the loan transaction. If the homebuyer may only use the
       builder, developer, lender, real estate firm, etc. that contributed the funds, the program will, in all
       likelihood, be unacceptable for FHA mortgage insurance.”

               In this case, the auditors are mistaken about the applicability of Mortgagee Letter 96-18.
       In contrast to this case, in which the nonprofit developer is also the seller of the property selected
       by the borrower, Mortgagee Letter 96-18 addresses situations in which a builder or developer
       provides contributions to nonprofit agencies, which, in turn, provide funds to borrowers who are
       required to buy properties owned by the builder or developer who contributed the funds.
       Accordingly, Mortgagee Letter 96-18 states :

               . . . in evaluating downpayment and other assistance plans administered by non-profit
              agencies and units of government, lenders and the local FHA office will consider whether
              there is an identity-of-interest between the donor (e.g., builder, developer, etc.) and the
              recipient of the funds (e.g., non-profit agency) . . . If the homebuyer may only use the
              builder, developer, lender, real estate firm, etc., that contributed the funds, the program
              will in all likelihood be unacceptable for FHA mortgage insurance.

       (emphasis added).

               In short, Mortgagee Letter 96-18 does not apply in cases where the nonprofit owns the
       property the consumer has decided to purchase. This finding is in error.

                      *                       *                       *                        *

              We believe that the foregoing should resolve the Department’s concerns in connection
       with SCME. However, after you have reviewed this response, we would appreciate an
       opportunity to meet with the OIG to further discuss the Memorandum as it applies to SCME.

              If you have any questions about the foregoing response, or need any additional
       information, please contact our counsel on this matter, Melanie Hibbs, at 202-778-9203.

              Thank you for your consideration.



                                                              Sincerely,
                                                              SCME Mortgage Bankers, Inc.




       Enclosures

                                            Statement of Pamela Galardi




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       Audit Memorandum 2001-SF-1806                                   Limited Review − Golden Home Mortgage


              I was the Vice President of Operations and Underwriting at SCME Mortgage Bankers
       from November 5, 1984 through August 25, 2000. My job responsibilities included supervising
       SCME’s loan origination and underwriting policies for loans originated under the Department of
       Housing and Urban Development’s 203(k) loan program.

               While I was employed at SCME, I worked primarily out of the company’s corporate
       headquarters in San Diego. However, when SCME opened its San Francisco branch in June
       1996, I visited that branch at least once a month to supervise its loan origination policies and
       procedures. Additionally, I acted as the San Francisco office’s interim branch manager for
       several weeks in early 1997.

                In March, 1997, HUD issued a mortgagee letter addressing issues pertaining to non
       profit’s, and their participation in the 203k program. The memo was a change in the way the San
       Francisco field office had previously directed Lenders to handle Non-Profit’s and the 203k loan
       originations. The San Francisco field office held weekly Lender meetings and I attended the
       next one schedule for 203k Lenders, (held the first Wednesday in April, 1997) so that I could
       hear how the field office would be addressing these issues. The meeting was widely attended by
       ALL Lenders and Correspondents that were then involved with originating 203k loans, and
       processing Non Profit borrowers.

                In this meeting, which was standing room only, the topic was of course, the mortgagee
       letter 97-05. The director of the San Francisco field office (James McClanahan) was in charge of
       the meeting. In this meeting he stated that the San Francisco office would not be changing the
       method in which Non Profit’s development costs were handled. (Previous to this mortgagee
       letter, an aggregate of the 10% profit was allowed, rather than each transaction standing alone.)
       When Mr. McClanahan was asked by a Sponsor’s representative to clarify, as this comment was
       in direct conflict with the mortgagee letter, he again stated that the San Francisco field office
       would be proceeding in the same manner as before. During this meeting, Mr. McClanahan also
       stated that when a nonprofit organization provides gift funds to a consumer in connection with a
       property that had been rehabilitated using 203(k) funds, the gift funds should not be excluded
       from the net development costs.

                 All other Sponsor’s had no choice if hey wanted to originate 203k loans, except to
       comply with the directives of the field office. I can’t speak for all present, but I know that our
       company’s belief was that Mr. McClanahan had knowledge of information not available to
       Lenders, such as the Mortgagee Letter was to be rescinded, or modified. (which would not be
       the first time a Mortgagee Letter was rescinded in part of in it’s entirety)

                 In regards to the issue of the mortgage amounts being inflated, due to closing costs being
       added to the acquisition cost, this is an incorrect interpretation by the auditors. A Gift given by a
       non profit has always been allowed. (Per 4155-1 rev 4 section 2-10C. Gift Funds. An outright
       gift of the cash investment is acceptable if the donor is a relative of the borrower, the borrower’s
       employer or labor union, a charitable organization, a governmental agency or public entity that
       has a program to provide homeownership assistance to low and moderate income families or first
       time homebuyers . . . ) Further down into this section, it states. “Only family members may
       provide equity credit as a gift on a property being sold to other family members. The above
       restrictions for gifts and equity credit may be waived by the local FHA office provided the seller

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       Audit Memorandum 2001-SF-1806                                 Limited Review − Golden Home Mortgage


       is operating or contributing to an acceptable affordable housing program. The only Non Profits
       that were approved to purchase the HUD REO properties had to be involved in providing
       affordable housing to low to moderate income borrowers.

               The auditors are confusing “gift” money provided by the non profits, with “seller credit”
       of closing costs, and attempting to use the latter’s guidelines. Each of these files contained a
       bona fide gift letter, acknowledged by the designated signatory of the Non Profit Seller.




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       Audit Memorandum 2001-SF-1806                                     Limited Review − Golden Home Mortgage


                                                                                                  Appendix F

              WELLS FARGO HOME MORTGAGE’S WRITTEN RESPONSE



       800 LaSalle Avenue
       Suite 1000
       Minneapolis, MN 55402-2021
       612-343-3400


       September 7, 2001

       Mimi Y. Lee
       District Inspector General for Audit
       U.S. Department of Housing and Urban Development
       Office of Inspector General
       450 Golden Gate Avenue, Box 36003
       San Francisco, CA 94102-3448

       Re:    Limited review – Golden Home Mortgage

       Dear Ms. Lee:

       We are in receipt of your letter dated June 25, 2001 pertaining to the above referenced
       review. In your audit of FHA insured loans originated by Golden Home Mortgage, you
       identified issues for which Wells Fargo Home Mortgage has responsibility due to the
       acquisition of Crossland Mortgage. We are responding to the draft report provided for
       our review and comment. We understand that final action has not been determined at
       this time but the issue may be considered for the Mortgagee Review Board after your
       review of our response and comments.

       The June 25th letter states, neither Golden Home Mortgage nor its direct endorsement
       sponsors (SCME Mortgage Bankers and Western Sunrise Mortgage DBA Crossland
       Mortgage) prevented non-profit mortgagors from exceeding HUD’s 10% profit limitation
       on properties purchased from HUD at a 30% discount. The non-profits had purchased
       the properties from HUD through a program that gave them 30% off of the list price and
       made FHA’s 203(k) loans available for the properties’ purchase and rehabilitation. To
       ensure affordability, HUD required the non-profits sell the properties for no more than
       110% of their net development cost. In cases where the same lender made both the
       203(k) and the 203(b) loan on the same property, HUD requires the lender to ensure the
       non-profit sold the properties to income eligible families for no more than 110% of its net
       development costs.

       Of the ten properties identified by HUD where the non-profit organizations realized a gain in
       excess of HUD’s guidelines, Western Sunrise Mortgage DBA Crossland Mortgage Company
       underwrote both the non-profit loan as well as the subsequent borrower loan on four properties.


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       Audit Memorandum 2001-SF-1806                                        Limited Review − Golden Home Mortgage




       WFHM has reviewed the detail on the four properties and agree that the sales price on the
       second transaction exceeded HUD guidelines. Although we agree that the sales prices were in
       excess of the HUD requirements for non-profits, it does not appear that the borrowers have
       suffered financial losses as a result of Golden Home’s actions. As part of our investigation into
       the issues identified, we reviewed the disposition and approximate values of all four properties
       underwritten by WFHM. The current assessed value (typically lower than the current market
       value) for all three active loans is greater than the original sales price paid by the borrowers.
       The fourth property (716 Sycamore), has been sold for $16,500 more than the purchase price
       paid to the non-profit organization.

       All of the transactions occurred prior to the acquisition of Crossland Mortgage by Wells Fargo
       Home Mortgage (WFHM). While WFHM continues to provide 203k loans to non-profit entities,
       the processing and underwriting of these loans is centralized in one location. We believe this
       centralization provides better controls and oversight of the 203k non-profit transactions.


       As part of our on-going training, communication will be provided to all appropriate personnel
       including an overview of the program to reiterate HUD’s guidelines and increase awareness of
       the program. WFHM is also proposing an additional notification on our non-profit loans
       regarding the re-sale guidelines as it pertains to the 203k properties. While we acknowledge the
       lender has the responsibility to ensure the final underwriting/sales price is acceptable, we also
       agree with HUD’s comment that the non-profits must pass the discount on to the buyers, making
       only enough ‘profit’ to cover costs. We believe the non-profits bear responsibility to administer
       their programs according the HUD’s guidelines, just as WFHM has the responsibility to adhere
       to HUD’s guidelines.


       WFHM Quality Control processes include sampling and review of HUD insured properties
       according to HUD’s guidelines. We utilize statistical sampling of loan production, which
       includes transactions involving non-profit organizations. All loans included in our statistical
       sampling are reviewed for compliance to HUD origination guidelines. The sampling
       methodology and testing is in accordance with the Quality Control requirements set forth by
       HUD. In addition, WFHM also has additional controls in place to monitor production,
       performance and quality of our correspondent lenders.


       Our relationship with Golden Home was terminated March 7, 2001 as a result of the
       administrative action taken by HUD on Golden Home. WFHM is aggressive in the termination
       of clients when their performance does not meet HUD and/or WFHM criteria.

       We believe that WFHM centralized processing and underwriting of the non-profit loans and the
       proposed disclosure to the non-profit organizations will address the issue of compliance with the
       profit limits of this program. WFHM agrees with HUD’s intent to help people with low and
       moderate-incomes in becoming homeowners. As a company, we have undertaken many
       initiatives to provide loans to those who may otherwise not qualify. We clearly do not agree with
       the actions of the broker and we no longer have a business relationship with Golden Home.



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       Audit Memorandum 2001-SF-1806                                     Limited Review − Golden Home Mortgage


       Although this issue occurred prior to the acquisition to facilitate resolution we would be willing to
       indemnify the three remaining active loans.

       We realize the importance of meeting HUD/FHA regulations and thank you in advance
       for your consideration concerning this matter.

       Sincerely,




       Kevin Buechler
       Group Vice President
       Credit Risk Management


       cc:    James Engelhardt, EVP Credit Risk Management
              Eric Malchodi, Sr VP Risk Management
              Denise Peters Brennan, VP Deputy General Counsel




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       Audit Memorandum 2001-SF-1806                                     Limited Review − Golden Home Mortgage


                                                                                                  Appendix G

                                                 DISTRIBUTION


       Secretary, Mortgagee Review Board, VD
       Secretary, S
       Deputy Secretary, SD
       Chief of Staff, S
       Acting Associate General Deputy Assistant Secretary for Administration, HR
       Acting Assistant Secretary for Congressional and Intergovernmental Relations, J
       Deputy Assistant Secretary, Office of Public Affairs, W
       Deputy Assistant Secretary for Administrative Services, Office of the Executive Secretariat, AX,
       Deputy Assistant Secretary for Congressional and Intergovernmental Relations, JI
       Deputy to the Chief of Staff for Policy & Programs, S
       Deputy to the Chief of Staff for Operations and Intergovernmental Relations, S
       Special Counsel to the Secretary, C
       Senior Advisor to the Secretary, C
       Director, Center for Faith-Based and Community Initiatives, K
       Chief Executive Officer for Administrative Operations and Management, S
       Assistant Secretary for Housing/Federal Housing Commissioner, H
       General Counsel, C
       Deputy General Counsel for Housing Finance and Operations, CA
       General Deputy Assistant Secretary for Housing, H
       Assistant Secretary for Policy Development and Research, R
       Assistant Secretary for Community Planning and Development, D
       Assistant Deputy Secretary for Field Policy and Management, SDF
       President, Office of Government National Mortgage Association, T
       Assistant Secretary for Fair Housing and Equal Opportunity, E
       Director, Office of Departmental Equal Employment Opportunity
       Chief Procurement Officer, N
       Assistant Secretary for Public and Indian Housing, P
       Director, Office of Departmental Operations and Coordination, I
       Office of the Chief Financial Officer, F
       Chief Information Officer, Q
       Acting Director, Enforcement Center, V
       Acting Director, Real Estate Assessment Center, X
       Director, Office of Multifamily Assistance Restructuring, Y
       Assistant to the Secretary and White House Liaison, S
       Press Secretary/Senior Communications Advisor to the Secretary, S
       Director, Office of Healthy Homes and Lead Hazard Control, L
       Director, National Office of Labor Relations, I
       Secretary’s Representative, 9ES
       Departmental Audit Liaison Officer, FM
       Deputy Assistant Secretary, Office of Native American Programs, PI
       Acquisitions Librarian, Library, AS


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       Audit Memorandum 2001-SF-1806                                  Limited Review − Golden Home Mortgage


       Mr. Armando Falcon, Director, Office of Federal Housing Enterprise Oversight, 1700 G Street,
              NW, Room 4011, Washington, DC 20552
       Ms. Sharon Pinkerton, Senior Advisor, Subcommittee on Criminal Justice, Drug Policy &
              Human Resources, B373 Rayburn House Office Building, Washington, DC 20515
       Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neil House
              Office Building, Washington, DC 20515
       Mr. Stanley Czerwinski, Associate Director, Housing and Telecommunications Issues, United
              States General Accounting Office, 441 G Street, NW, Room 2T23, Washington, DC
              20548
       Mr. Steve Redburn, Chief Housing Branch, Office of Management and Budget, 725 17th Street,
              NW, Room 9226, New Executive Office Building, Washington, DC 20503
       Mr. Andy Cochran, Senior Counsel, House Committee on Financial Services, 2129 Rayburn
              House, Office Building, Washington, DC 20515
       The Honorable Fred Thompson, Ranking Member, Committee on Governmental Affairs, 340
              Dirksen Senate Office Building, United States Senate, Washington, DC 20510
       The Honorable Joseph Lieberman, Chairman, 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 Raybur
              Building, House of Representatives, Washington, DC 20515
       The Honorable Henry A. Waxman, Ranking Member, Committee on Government Reform, 2204
              Rayburn Building, House of Representatives, Washington, DC 20515
       SCME Mortgage Bankers, 6265 Greenwich Drive, Suite 200, San Diego, CA 92122
       Wells Fargo Home Mortgage, 800 LaSalle Ave., Suite 1000, Minneapolis, MN 55402




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