AUDIT REPORT DECATUR MORTGAGE COMPANY, L.L.C. NON-SUPERVISED LOAN CORRESPONDENT INDIANAPOLIS, INDIANA 2004-CH-1009 September 23, 2004 OFFICE OF AUDIT, REGION V CHICAGO, ILLINOIS Exit Table of Contents Issue Date September 23, 2004 Audit Case binder 2004-CH-1009 TO: John C. Weicher, Assistant Secretary for Housing-Federal Housing Commissioner and Chairman of Mortgagee Review Board, H Margarita Maisonet, Director of Departmental Enforcement Center, CV FROM: Tom Towers, Acting Regional Inspector General for Audit, 5AGA SUBJECT: Decatur Mortgage Company, L.L.C. Non-Supervised Loan Correspondent Indianapolis, Indiana We completed an audit of Decatur Mortgage Company, L.L.C., a non-supervised loan correspondent approved to originate FHA single-family mortgage loans. We selected Decatur for audit because it had a high loan default rate. Our audit objectives were to determine whether: Decatur acted in a prudent manner and complied with HUD’s regulations, procedures, and instructions in the origination of FHA loans; and Decatur’s Quality Control Plan as implemented met HUD’s requirements. The audit resulted in two findings. In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each recommendation without management decisions, 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 considered unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for any recommendation without a management decision. Also, please furnish us copies of any correspondence or directives issued because of the audit. Should you or your staff have any questions, please contact me at (313) 226-6280 extension 8062. Exit Table of Contents Management Memorandum THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1009 Page ii Exit Table of Contents Executive Summary We completed an audit of Decatur Mortgage Company, L.L.C., a non-supervised loan correspondent approved to originate FHA mortgage loans under HUD’s Single Family Direct Endorsement Program. The audit was part of the activities in our Fiscal Year 2003 Annual Audit Plan. We selected Decatur for audit because of its high loan default rate. Our audit objectives were to determine whether: (1) Decatur acted in a prudent manner and complied with HUD’s regulations, procedures, and instructions in the origination of FHA loans; and (2) Decatur’s Quality Control Plan as implemented met HUD’s requirements. We concluded that Decatur Mortgage Company did not adhere to prudent lending practices and comply with HUD’s regulations, procedures, and instructions when it originated FHA-insured loans. This was due in part to Decatur’s reliance on its managing owner to perform management oversight and a failure to ensure that its Quality Control Plan was adequately implemented. We cited the sponsor’s responsibilities, as well as Decatur’s, and recommended appropriate corrective actions. HUD’s Quality Assurance Division reviewed Decatur’s loan originations in September 2002 and cited similar issues. Eight of the 41 loans we reviewed were included in HUD’s review and are identified in Appendix B of this report. Decatur did not originate FHA-insured loans in accordance Improvements Needed In with HUD’s requirements and prudent lending practices. The Origination Of FHA- Decatur did not exercise due diligence to: (1) verify or support Insured Loans borrowers’ income level and stability; (2) ensure unbiased appraisals were provided; (3) investigate credit inquiries and additional Social Security Numbers shown on credit reports; (4) establish the borrower’s ability and willingness to pay; (5) document the source of deposits and gift funds—and not use gift funds to pay-off borrower’s debts; (6) estimate borrower’s expenses and property taxes; and (7) not allow interested third parties to handle key documentation. Decatur did not ensure that Quality Control Reviews were Management Oversight completed on FHA loans as required. Specifically, Decatur And Inadequate Quality did not: (1) perform Quality Control Reviews on early Control Reviews default FHA loans as required; (2) document work done to determine if loans were originated properly; and (3) identify origination deficiencies and corrective actions needed for its loan originations. We recommend that HUD’s Assistant Secretary for Housing- Recommendations Federal Housing Commissioner and Chairman of the Mortgagee Review Board require Decatur’s sponsors to indemnify HUD/FHA for any losses. We also recommend that HUD’s Director of Departmental Enforcement Center Page iii 2004-CH-1009 Exit Table of Contents Executive Summary take appropriate administrative actions against the owners of Decatur. We provided our draft audit report to Decatur’s Chief Executive Officer and its two sponsors, and HUD’s staff during the audit. We held an exit conference with Decatur’s Chief Executive Officer on August 13, 2004. Decatur’s owners provided written comments to our draft report on August 13, 2004. Decatur’s owners generally disagreed with the findings in this report. The complete text of Decatur’s comments is included in Appendix E of this report. We removed borrower names from Decatur’s comments as necessary. 2004-CH-1009 Page iv Exit Table of Contents Table Of Contents Management Memorandum i Executive Summary iii Introduction 1 Findings 1. Improvements Needed In The Origination Of FHA-Insured Loans 5 2. Inadequate Management Oversight And Quality Control Reviews 19 Management Controls 25 Follow Up On Prior Audits 27 Appendices A Schedule Of Questioned And Recommendation For Funds To Be Put To Better Use 29 B Loan Processing Deficiencies Chart 31 C Narrative Case Summaries 33 Page v 2004-CH-1009 Exit Table Of Contents D Status Of Claims Paid 105 E Auditee Comments and OIG’s Evaluation 107 2004-CH-1009 Page vi Exit Introduction Section 203(b)(1) of the National Housing Act, as amended, authorizes HUD to provide mortgage insurance for single-family homes. HUD must formally approve a mortgagee that originates, purchases, holds, or sells FHA-insured loans. Mortgagees must follow the statutory and regulatory requirements of the National Housing Act and HUD’s instructions, guidelines, and regulations when originating insured loans. Mortgagees that do not follow these requirements are subject to administrative sanctions. In March 2000, HUD approved Decatur Mortgage Company as a non-supervised loan correspondent mortgagee to originate FHA loans. As a condition for its HUD approval, Decatur was required to have and maintain a Quality Control Plan for the origination and servicing of insured loans. The Quality Control Plan must be a prescribed function of Decatur’s operations and assure that it maintains compliance with HUD’s requirements and its own policies and procedures. As a loan correspondent, Decatur must send the FHA loans it originates to a HUD-approved Direct Endorsement sponsor(s) for underwriting approval prior to loan closing and submission to HUD for insurance endorsement. The loan origination process includes taking initial loan applications, initiating the appraisal assignment, obtaining the credit report, and procuring verifications of deposit and employment. Based on the information gathered by the loan correspondent, the sponsor mortgagee underwrites the loan and makes a decision whether the borrower represents an acceptable credit risk for HUD. Since the sponsor bases its underwriting approval, in large part, on information gathered by the loan correspondent, it is critical that the loan correspondent exercises due care and follows prudent lending practices and HUD’s requirements when originating the loan. Decatur had a home office and a branch office in Indianapolis, Indiana. Decatur was part owned by Dura Homes, Incorporated (affiliated with Dura Builders who built and sold all of the mortgaged properties) and Homebuilders Financial Network (who managed Decatur as well as other similar loan correspondents established and owned by various homebuilders across the nation). HUD terminated Decatur’s home office on June 23, 2003 due to its high default rate. Decatur voluntarily closed its branch office in November 2003, at the direction of Homebuilder’s Financial Network. Decatur originated 506 FHA-insured single-family loans totaling about $70 million during the period September 2001 through August 2003. The Chief Executive Officer of Decatur was Thomas H. Meyer (President of Homebuilders Financial Network). The President of Decatur was Paul Shoopman (President of Dura Builders, Incorporated and Dura Homes, Inc.). Our audit objectives were to determine whether: Decatur Audit Objectives acted in a prudent manner and complied with HUD’s regulations, procedures, and instructions in the origination of Page 1 2004-CH-1009 Exit Table of Contents Introduction FHA loans; and Decatur’s Quality Control Plan, as implemented, met HUD’s requirements. We conducted the audit at Decatur’s branch office and Audit Scope And HUD’s Detroit Field Office. We performed our audit work Methodology from September 2003 through May 2004. To accomplish our objectives, we interviewed: HUD’s staff; Decatur’s management and employees; and loan borrowers. We also contacted the employers of the loan borrowers. In addition, we spoke to a representative of one of the sponsors (National City Mortgage) regarding the defaulted loans originated by Decatur. We reviewed HUD’s loan origination, Quality Control Plan, and Quality Control Review requirements. We also reviewed Decatur’s Quality Control Plan for adequacy and consistency with HUD’s requirements. We analyzed all 14 loans identified as early default cases to determine if Decatur conducted the required Quality Control Reviews. We also reviewed the three defaulted loans that Decatur’s managing owner performed Quality Control Reviews on as of October 1, 2003, to determine if Decatur performed the Reviews in accordance with its Quality Control Plan and HUD’s requirements. We tested Decatur’s loan origination process using all loans that closed during the period September 2001 through August 2003 that subsequently went into default as of October 2003. Using HUD’s Neighborhood Watch System, we selected a non-representative sample of all 41 loans that went into default from a universe of 506 FHA-insured loans. We tested Decatur’s origination process through a review of HUD’s FHA Case Binders and Decatur’s loan origination files related to our sample. The audit covered the period from September 2001 through August 2003. The period was adjusted as necessary. We conducted the audit in accordance with Generally Accepted Government Auditing standards. We provided copies of this report to Decatur’s President and Chief Executive Officer. We also furnished copies to Decatur’s sponsors—the President of National City 2004-CH-1009 Page 2 Exit Table of Contents Executive Summary Mortgage and the Office Manager at Prime Mortgage Company. Page 3 2004-CH-1009 Exit Table of Contents Introduction THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1009 Page 4 Exit Table of Contents Finding 1 Improvements Needed In The Origination Of FHA-Insured Loans Decatur Mortgage Company, L.L.C. did not originate FHA-insured loans in accordance with HUD’s requirements and prudent lending practices. In all 41 loans reviewed, Decatur did not exercise due diligence to: 1) verify or support borrowers’ income level and stability; 2) obtain unbiased appraisals; 3) investigate credit inquiries and additional Social Security Numbers on credit reports; 4) establish the borrower’s ability and willingness to pay; 5) document the source of deposits and gift funds, and not allow the use of gift funds to pay-off borrower debts; 6) estimate borrower expenses and property taxes; and 7) not allow interested third parties to handle key documentation. The deficiencies associated with Decatur’s loan origination activities stemmed from: Decatur’s partial ownership by the builder of homes for whose loans Decatur was established to handle; a lack of management oversight; and a failure to implement an adequate Quality Control process. These deficiencies contributed to the high loan default and claim rate, putting at risk over $5.1 million in FHA-insured loans. Under Section 203 of the National Housing Act (Title 12 of HUD’s Requirements United States Code Section 1709), HUD insures mortgages made by private lending institutions. Depending on their designation by HUD, the institutions have the authority to originate, purchase, sell, or service HUD/FHA-insured mortgages. As a loan correspondent, Decatur’s principal activity is the origination of mortgages for sale or transfer to an approved sponsor under HUD’s Single Family Direct Endorsement Program. The Federal Register dated March 1, 1999, addressing HUD’s Fourteen regulation 24 CFR Part 3500 (Real Estate Settlement Services/Functions Procedures Act), referred to HUD’s letter to the Independent Performed During Loan Bankers Association of America, dated February 14, 1995. Origination The letter identified 14 services/functions normally performed in the origination of a loan. The services/functions entail, but are not limited to the following: Obtain information from the borrower and complete the mortgage loan application/comparable activity; Analyze the prospective borrower’s income and debt, and pre-qualification to determine the maximum mortgage amount the borrower can afford; Educate the prospective borrower in the home buying and financing process; Page 5 2004-CH-1009 Exit Table of Contents Finding 1 Collect financial information (tax returns, bank statements) and other related documents that are part of the application process; Initiate/order verifications of employment and verifications of deposit; Initiate/order requests for mortgage and other loan verifications; Initiate/order appraisals; Initiate/order inspections of engineering reports; Provide disclosures (truth in lending, good faith estimate, others) to borrower; Assist the borrower in understanding and clearing credit report problems; Maintain regular contact with the borrower, realtors, and lender between application closing; Order legal documents; Determine whether the property is located in a flood zone or order such service; and Participate in the loan closing. Paragraph 2-5 of HUD Handbook 4000.4 REV-1, Single Family Direct Endorsement Program, provides that the mortgagee must obtain and verify information with at least the same care that would be exercised in originating the loan where the mortgagee would be entirely dependent on the property as security to protect its investment. Based on the information contained in the loan package received from the loan correspondent, the underwriter (sponsor) will approve or reject the loan, or approve the loan if certain conditions are met. Therefore, it is critical that the loan correspondent exercises due diligence and follows prudent lending practices during the loan origination process. Decatur Mortgage Company did not originate FHA-insured Deficiencies In Loan loans in accordance with HUD’s requirements and prudent Originations lending practices. We reviewed 41 FHA loans originated by Decatur with a total dollar value of $5,827,404. We selected our non-representative sample from a universe of 506 FHA loans with closing dates between September 2001 and August 2003. Decatur Mortgage did not properly verify or support Income Was Not Properly borrower’s income on 18 FHA loans by not obtaining the Verified Or Supported income documentation required by HUD Handbook 4155.1 2004-CH-1009 Page 6 Exit Table of Contents Finding 1 REV-4 CHG-1, paragraph 2-7. These deficiencies included use of rental income of other properties owned that was not verified (3 of 18 loans) and use of overstated or unstable borrower income (17 of 18 loans). Two cases had both issues. For FHA Case number 151-6605466, Decatur did not adequately verify rental income on the borrower’s current residence. Decatur provided a copy of a rental agreement for the borrower’s current address dated the same day as the subject sales agreement. The rental agreement showed monthly rent payments of $650 and a copy of an August 2000 check was provided, but no cancellation was shown. A Credit Union Draft History in the loan file through August 30, 2000 did not show any deposits of $650 to support that the rent payments were actually being received. The initial Loan Application, dated June 20, 2002, did not show rental income despite the June 16, 2002 rental agreement. In an interview, the borrower said the seller's sales staff provided her with a lease form. The borrower filled out the lease form and had her son's girlfriend sign the lease and provide a rent check. The sales staff knew the lease was invalid. After the sales staff copied the rent check, the borrower threw the check out. The borrower never actually received rent for her prior residence. The borrower just stopped making the mortgage payments on her prior residence. The borrower said no one at Decatur asked her about her income, debts, or the lease for the prior residence. For FHA Case number 151-6542156, Decatur included social security benefits received as other income for the borrower's two children, ages 16 and 17. The social security benefit letter was provided in both the HUD and mortgage files showing that total social security benefits were $716. However, Decatur and the underwriter used an amount that was increased (grossed up) 25 percent without documentation on why they did so. Income verification or documentation issues for the remaining 16 FHA cases are explained in Appendix C of this report. It was Decatur’s responsibility to verify and support borrower incomes but the sponsor’s responsibility for the actual loan approvals. Page 7 2004-CH-1009 Exit Table of Contents Finding 1 Decatur Mortgage Company did not provide adequately Appraisal Reports Were documented and unbiased appraisal reports acceptable in Not Properly Analyzed Or accordance with HUD Handbook 4150.2, Sections 4-1, 4-6 Supported and 7-1. We noted 32 cases where appraisers used comparable properties that were either: 1) over a mile from the subject property; 2) were sold more than six months prior to the appraisal without adequate explanation; or 3) comparable properties selected from the same subdivision as the subject property, and were manufactured and sold by the same builder as the subject property. The same appraiser was used in 39 of the 41 cases reviewed. In five cases, (151-6486054, 151-6567251, 151-6561313, 151-6485246, and 151-6589970) the appraiser adjusted the appraised value upwards when the sales price of the subject property was increased. We discuss the remaining 27 cases in Appendix C of this report. It was Decatur’s responsibility to obtain proper and unbiased appraisals for submission to the sponsor’s underwriters. It was the responsibility of the underwriter to evaluate the appraisals to ensure that the value supported the mortgage. In 27 of the 41 cases, we identified issues relating to credit Credit Inquiries And reports that were not adequately investigated by Decatur Additional Social Security Mortgage’s employees. These issues related to credit Numbers On Credit inquiries shown on the credit report or credit reports Reports Were Not identifying additional Social Security numbers for one of the Investigated borrowers that was not investigated. Three cases (151- 6550730, 151-6443404, and 151-6838872) had both issues. In 10 of 27 cases, additional Social Security numbers were identified but not investigated, and in 20 of the 27 cases, credit inquiries were not investigated. The 27 cases are discussed in Appendix C of this report. Paragraph 2-3 of HUD Handbook 4155.1 REV-4 CHG-1, states when reviewing the borrower’s credit report, the lender must pay particular attention to recent and/or undisclosed debts. The borrower must explain all inquiries shown on the credit report. Paragraph 3-2 (c) requires that lenders obtain Social Security evidence for each borrower and co-borrower. It was Decatur’s responsibility to investigate credit inquiries and additional Social Security numbers during the processing 2004-CH-1009 Page 8 Exit Table of Contents Finding 1 of the loan applications. It was the sponsor’s underwriters’ responsibility to review the documentation provided by Decatur and not approve loans until such discrepancies were adequately resolved. In 36 of the 41 loans, we identified issues relating to the Borrower’s Ability And borrowers ability to afford the mortgage and living Willingness To Pay Not expenses, and 22 cases had more than one of these issues. Established These issues included: (1) the underwriter not providing adequate compensating factors for loans with credit ratios exceeding HUD’s guidelines (12 of 36 cases); (2) underwriters not adequately explaining how borrowers would be expected to meet mortgage obligations as buy- down agreements expired (23 of 36 cases); and (3) not adequately establishing how borrowers improved their credit worthiness other than having delinquencies paid off from closing proceeds (28 of 36 cases). These 36 cases are discussed in Appendix C of this report. Paragraph 2-1 of HUD Handbook 4155.1 REV-4 CHG-1, Mortgage Analysis for Mortgage Insurance on One-to-Four Family Properties, requires mortgagees to determine the borrower’s ability and willingness to repay the mortgage debt, and thus limit the probability of default or collection difficulties. Four major elements are typically evaluated in assessing a borrower’s ability and willingness to repay the mortgage debt. These include the stability and adequacy of income, funds to close, credit history, and qualifying ratios and compensating factors. Paragraph 3-1 of the Handbook states HUD expects the application package to contain sufficient documentation to support the lender’s decision to approve the mortgage loan. It was Decatur’s responsibility to obtain and provide documentation and information to the sponsor’s underwriter. Decatur submitted loans to the underwriters with understated property taxes and where delinquent debts were being paid off out of closing proceeds. It was the underwriter’s responsibility to analyze the loans and document the compensating factors used to approve loans exceeding HUD’s guideline ratios. The underwriters were also responsible for approving borrowers with bad payment histories and using understated expenses in the mortgage credit analysis. Inadequate Page 9 2004-CH-1009 Documentation Of Deposits Exit Table of Contents Finding 1 Decatur Mortgage lacked support to show it properly verified the borrowers’ sources of funds to close. In 40 of the 41 cases reviewed, we noted issues relating to the lack of adequate documentation of deposits provided by the borrowers and provision of gift funds by non-profit donors. In 34 of 41 cases, Decatur did not adequately verify the actual source of deposits provided by the borrowers. Decatur did not provide cancelled checks and bank statements to show the cash deposits coming out of the borrowers' accounts. In 39 of 41 Cases, Decatur did not document the timing of the gift wire transfers from non-profit donors to the settlement agent and the timing of the contribution from seller’s proceeds back to the nonprofit donor to ensure that the gift funds were not actually provided by the seller. The settlement agent was not able to provide us actual documentation of the wire transfers. The settlement agent's bank provided us with the wire transfer documentation. The documentation we obtained showed that in one case (151-6463779), the settlement agent transferred $9,181 of the seller's proceeds to the Housing Action Resource Trust on September 14, 2001—the day of closing—but did not receive the $8,231 gift from the Trust until September 17, 2001 (three days later). The seller provided the gift funds in violation of HUD's requirements. For FHA Case number 151-6510827, receipts in Decatur's loan file show that the borrower gave a $10,000 earnest money deposit which was not reflected on the HUD-1 Settlement Statement or otherwise explained. In 23 cases, the settlement agent paid off more of the borrowers' delinquent debts than cash provided by the borrowers. This caused part of the gifts provided by nonprofit donors to be used to pay off delinquent accounts rather than being used for the home purchase transactions. The sales prices and mortgages were not reduced due to the gift funds being used to pay off the borrower’s delinquent debts. Paragraph 2-10, Funds To Close, HUD Handbook 4155.1 REV-4 CHG-1, requires that all funds for the borrower’s investment in a property be verified. Lenders are required to verify the deposit amount and source of funds if earnest money deposits are excessive based on the borrower’s 2004-CH-1009 Page 10 Exit Table of Contents Finding 1 savings history. For gifts, the lender must document the transfer of funds from the donor to the borrower. If the funds are not deposited to the borrower's account prior to closing, the lender must obtain verification that the closing agent received the funds from the donor for the gift amount. The donor of the gift may not be a person or entity with an interest in the sale of the property such as the seller, real estate agent or broker, builder, or entity associated with them. Gifts from these sources are considered inducements and must be subtracted from the sales price. Sponsors rely on information prepared and collected by loan correspondents in determining the eligibility of borrowers to qualify for loans. When irregularities occur with respect to gift funds due to lenders not complying with HUD’s requirements, there may be grounds for administrative action and referral to HUD’s Mortgagee Review Board for imposition of administrative sanctions or civil money penalties against loan correspondents and/or sponsors. It was Decatur’s responsibility to determine and document the source of funds provided on behalf of the borrowers during loan processing. This includes determining how the gift funds were being provided at closing. It was the responsibility of the sponsor’s underwriters to not approve loans when Decatur had not properly demonstrated the source of the funds provided, and for allowing gift funds to be used at closing to pay off borrower’s bad debts. In 37 of the 41 Cases reviewed, Decatur Mortgage Borrower Expenses And Company and the underwriter underestimated the Property Taxes Were borrower’s expenses and property taxes. Twelve of the 37 Underestimated cases had an expense indicated in a file document not considered in the mortgage credit analysis. In 36 cases, Decatur and the underwriter estimated a monthly figure for property taxes that was based on the taxes for the undeveloped land. The actual taxes to be assessed after sale to the buyers were significantly higher and were not figured in to the borrowers’ ability to afford the mortgage. Generally, the estimate Decatur used for property taxes was either $25 or $40 per month, but the actual taxes ranged between $72 and $279 per month based on information obtained from the counties where the properties were located. Page 11 2004-CH-1009 Exit Table of Contents Finding 1 Paragraph 2-12 of HUD Handbook 4155.1 REV-4 CHG-1 requires lenders to compute two ratios to determine if the borrower can reasonably be expected to meet the expenses of home ownership and provide for the family: 1) mortgage payment expense to effective income (29 percent limit unless significant compensating factors are present); and 2) total fixed payment to effective income (41 percent limit unless significant compensating factors are present). It was Decatur’s responsibility to identify and disclose all liabilities and expenses of the borrowers to be provided to the sponsor for underwriting. This included reasonable estimates of property taxes and other expenses that borrowers would be expected to pay. In the loan applications, Decatur provided an unreasonably low estimate of property taxes. It was the underwriter’s responsibility to review the documentation provided and adjust it as necessary for mortgage credit analysis based on the documentation available. In 10 cases, Decatur obtained wage information, Interested Third Parties verification letters, and letters of explanations about Handled Key income and debts from interested third parties. These Documentation documents in the loan files (151-6605466, 151-6561313, 151-6485246, 151-6574687, 151-6476579, 151-6482988, 151-6589970, 151-6507102, 151-6415426, and 151- 6584264) showed that they were faxed either from one of the seller's sales offices or from the borrowers’ place of employment rather than directly from the source. In three cases (151-6605466, 151-6574687, and 151-6589970), explanation letters were provided that were created for the borrowers by the seller's sales staff and contained incorrect information according to the borrowers. HUD Handbook 4155.1 REV-4 CHG-1, paragraph 3-1, states verification forms must pass directly between the lender and the provider without being handled by any third party. These include explanatory statements or additional documentation needed for a sound underwriting decision. As a loan processor, it was Decatur’s responsibility to obtain documentation directly from borrowers, employers or other sources directly without the documents passing through the hands of interested parties such as the seller. It was the sponsor’s responsibility to not accept documents that show evidence that an interested party provided them. 2004-CH-1009 Page 12 Exit Table of Contents Finding 1 The deficiencies associated with Decatur Mortgage’s loan Lack Of Management origination activities stemmed from: Decatur’s partial Oversight And A ownership by the builder of the homes for whose loans Deficient Quality Control Decatur was formed to handle; a lack of management Process oversight; and a failure to implement an adequate Quality Control Plan. Decatur was responsible for its own management oversight, but failed to take this responsibility seriously. Decatur also failed to implement an adequate Quality Control Plan and conduct effective Quality Control Reviews of its loan origination practices (see Finding 2). Had it been implemented, Decatur could have prevented various loan origination deficiencies that ultimately resulted in loans going into default. Additionally, it would have allowed Decatur to correct deficiencies in its loan origination process and prevent repeated occurrences of problems. Decatur’s loan origination deficiencies contributed to the high loan default and claim rate of 8.1 percent during the period September 2001 through August 2003. These deficiencies increased the risk to the FHA insurance funds by $5,101,822 ($675,063 in ineligible, $356,723 in unsupported costs, and $4,070,036 in funds at risk that could be put to better use). The status of the 41 loans in default—as of September 3, Current Status Of Loans 2004—is reflected in the following table: With Deficiencies Mortgage Number Status Amount of Loans Currently in Default $4,070,036 28 Claim Paid & Property Resold at Loss $675,063 11 Claim Paid but Property Not Resold $336,706 2 Partial Claims Paid on 8 loans in default (non foreclosure) 1/ $20,017 1/ Totals $5,101,822 41 1/ Included in the 28 loans in default. As of September 3, 2004, HUD paid claims on 13 FHA loans totaling $1,904,495 and incurred a total loss of $675,063 on the resale of 11 of these 13 properties. The remaining two properties accounted for $336,706 of the claims paid. HUD had not resold these properties as of our audit date, so the total loss to HUD was unknown. HUD Page 13 2004-CH-1009 Exit Table of Contents Finding 1 also paid non-foreclosure partial claims on eight loans totaling $20,017. The following table shows the 11 loans with ineligible costs due to losses incurred by HUD after foreclosure resale. FHA Sponsor Foreclosure Loan Number Number Sale Loss 151-6531249 38092 $60,944 151-6550730 38092 $67,282 151-6415426 38092 $59,696 151-6463779 38092 $67,530 151-6476579 38092 $64,912 151-6482988 38092 $51,981 151-6486185 38092 $56,963 151-6507102 38092 $58,437 151-6527323 38092 $70,131 151-6584264 38092 $55,089 151-6584501 38092 $62,098 Total $675,063 The following table shows the two loans with unsupported costs due to full claim filed but property not yet sold. FHA Sponsor Claim Paid Loan Number Loss Not Number Determined 151-6483461 38092 $174,454 151-6567251 38092 $162,252 Total $336,706 The following are the eight loans in default where HUD paid partial non-foreclosure claims to the loan servicer to avoid foreclosure. FHA Loan Partial Sponsor Claim Number Number Paid Type Of Claim Loan Modification 151-6907158 73850 $750 Fee Loan Modification 151-6561313 38092 650 Fee 151-6574687 38092 12,233 Partial Claim 2004-CH-1009 Page 14 Exit Table of Contents Finding 1 Loan Modification 151-6471089 38092 650 Fee 151-6443404 38092 100 Forbearance Fee Loan Modification 151-6649076 38092 850 Fee Partial Claim & Special 151-6476419 38092 4,034 Forbearance Loan Modification 151-6486054 38092 750 Fee Total $20,017 HUD Handbooks 4000.4 REV-1 and 4060.1, and 24 CFR Decatur and Sponsor Part 202.8 state sponsors are responsible to HUD for the Responsibilities actions of its loan correspondents. Sponsors can rebut the presumption that they have specific knowledge of the actions of the loan correspondent when there is evidence of fraud, for example. In the deficiencies we cited, only the failure to provide compensating factors for excessive mortgage credit ratios, and approval of loans for borrowers with pre-existing bad debt was solely the responsibility of the sponsors. Decatur was responsible for: 1) failing to adequately verify or support income; 2) acceptance of questionable appraisal practices; 3) failure to investigate credit inquiries; 4) failure to demonstrate credit worthiness; 5) failure to show the timing of gift transfers to and from nonprofit donors; 6) the use of gift funds to pay off bad debts; 7) failing to document the source of funds provided; 8) understating living expenses and property taxes; and 9) allowing interested third parties to provide wage information and explanatory letters. These deficiencies represent actions by Decatur that its sponsors should have had specific knowledge of. As such, the sponsors were responsible to HUD for giving underwriter approval to the loans originated and processed by Decatur, and should be pecuniarily responsible for loans that were not processed in accordance with HUD’s requirements and prudent lending practices. In September 2002, HUD’s Quality Assurance conducted a review of Decatur and identified many of the same deficiencies we identified. In fact, eight of the loans were included in our scope of 41 loans. National City Mortgage agreed to indemnify HUD on losses Page 15 2004-CH-1009 Exit Table of Contents Finding 1 associated with these eight loans. HUD should seek indemnification agreements on the remaining loans, except where we are recommending reimbursement for any claims already paid by HUD/FHA. On March 20, 2003, HUD notified Decatur that its home Decatur’s Operations office was having its lender approval status terminated due to Were Terminated an excessive loan default rate. Decatur’s home office terminated operation on June 23, 2003. In October 2003, Decatur’s managing owner, Homebuilders Financial Network, informed us that it was voluntarily closing its remaining branch office by the end of 2003. Decatur’s managing owner terminated the office staff at the end of October and closed its office in November 2003. Auditee Comments Decatur’s owners disagreed with this finding. The owners asserted that they provided adequate management oversight and never submitted documentation that they knew to be deficient. The owners stated that as a loan correspondent, Decatur did loan processing by obtaining information and the sponsor’s underwriters were responsible for the analysis of the documentation provided. The owners maintain that the issues we cited were underwriting issues that should be addressed with the sponsors. The complete response as provided by Decatur’s owners is included in its entirety in Appendix E of this report. We removed the names of individual borrowers from the response. OIG Evaluation Of We disagree that Decatur’s owners adequately oversaw Auditee Comments operations as we discussed in the second finding of this report. We agree that the sponsors are primarily responsible to HUD/FHA for the actions of its loan correspondents and for the underwriting approval decisions. As a loan correspondent, Decatur Mortgage Company was responsible to HUD/FHA and the sponsors for the application process and obtaining and processing documentation in accordance with FHA requirements and prudent lending practices. To a large degree, the sponsors rely on information 2004-CH-1009 Page 16 Exit Table of Contents Finding 1 provided by loan correspondents in performing the underwriting analysis. As we cited in the first finding, Decatur processed loan applications that overstated or provided unverified income and understated expenses. Decatur also did not adequately document the actual source of borrower funds and allowed gift funds provided by non-profit donors to be used to pay-off delinquent debts of the borrowers. Decatur allowed interested third parties to provide documentation and tended to use the same appraiser for its loans. Although the sponsor is primarily responsible to HUD, our analysis of Decatur’s delinquent loans as a whole did not show that Decatur’s staff used prudent loan origination practices to gather information for the sponsor’s underwriters. We modified our finding to clarify lender responsibilities and our recommendations. Our full analysis of Decatur’s response to our report is included in Appendix E of this report. Recommendations We recommend that HUD’s Assistant Secretary for Housing- Federal Housing Commissioner and Chairman of the Mortgagee Review Board: 1A. Requires Decatur Mortgage’s sponsors to reimburse HUD for $675,063 in losses on the 11 resold properties. 1B. Requires Decatur Mortgage’s sponsors to reimburse the appropriate amount of $20,017 for the eight partial claims as well as any losses incurred on the two properties for which HUD paid foreclosure claims totaling $336,706, but had not yet resold. 1C. Requires Decatur Mortgage Company’s sponsors to indemnify HUD/FHA against future losses on the 28 loans totaling $4,070,036 that are in default, but not yet foreclosed. 1D Notifies HUD’s Office of Lender Approval and Recertification Division of the determination by the Mortgagee Review Board regarding Decatur Mortgage Company and its owners as to violations of HUD’s requirements and prudent lending practices. Page 17 2004-CH-1009 Exit Table of Contents Finding 1 If determined that Decatur’s owners can reapply for a new FHA license as a non-supervised loan correspondent, then HUD’s Assistant Secretary for Housing-Federal Housing Commissioner and Chairman of the Mortgagee Review Board should: 1E. Ensures that Decatur’s owners implement adequate procedures and controls to comply with HUD’s requirements for the origination of FHA-insured single-family mortgage loans. We recommend that HUD’s Director of Departmental Enforcement Center: 1F. Takes appropriate administrative action against the owners of Decatur Mortgage Company. 1G Obtains a qualified review of the appraisals done for the 41 cases cited in this report to determine if the appraiser properly arrived at a fair property valuation and appropriately raised values when the sale prices changed due to changing gift amounts. If the appraisals are found to be deficient, take appropriate administrative action against the appraiser. 2004-CH-1009 Page 18 Exit Table of Contents Finding 2 Inadequate Management Oversight And Quality Control Reviews Decatur Mortgage Company failed to adequately implement its Quality Control process according to HUD’s requirements. Decatur Mortgage did not review 14 loans that defaulted within the first six payments after closing. In addition, Decatur did not adequately document what procedures it performed for the FHA mortgage loans reviewed. We attribute these deficiencies to Decatur’s inability to access HUD’s Neighborhood Watch system, an ownership relationship with the seller of the subject properties, and a disregard of HUD’s and its own quality control requirements. As a result, Decatur was unable to ensure the accuracy, validity, and completeness of its loan origination operations that contributed to an increased risk of loss to HUD’s FHA insurance fund. HUD Handbook 4060.1 REV-1, Mortgagee Approval HUD Requirements Handbook, includes the requirements for a mortgagee’s Quality Control Plan for the origination and servicing of FHA-insured mortgages. Chapter 6 of the Handbook provides the general requirements along with mortgagee type specific requirements for Quality Control plans. The Handbook requires mortgagees to: • Establish an adequate written Quality Control Plan that provides for an independent review by the mortgagee’s management/supervisory personnel who are knowledgeable of the required procedures, and do not have direct loan processing, underwriting, or servicing responsibilities; • Analyze loans that go into default within six months after closing; • Retain for a period of one year the results of quality control reviews, whether by the mortgagee or an outside firm; • Report violations of law or regulation to HUD; and • Include in their Quality Control Plan a provision for written verification of a mortgagor’s employment, deposits, gift letter, or other sources of funds. Page 19 2004-CH-1009 Exit Table of Contents Finding 2 Decatur Mortgage Company, L.L.C., was owned by two entities in partnership. The managing owner was Homebuilders Financial Network. The other owner—Dura Homes, Inc., also known as Dura Builders—built and sold all of the homes financed through Decatur Mortgage. Decatur Mortgage Company and its managing owner— Deficient Quality Control Homebuilders Financial Network—did not conduct Quality Reviews Done Control Reviews for 14 early payment default loans as shown in the table below. Included In FHA Loan Mortgage Closing HUD’s Number Amount Date Review 151-6605466 $152,605 9/5/2002 151-6647913 $167,779 5/28/2002 151-6387115 $164,328 10/19/2001 151-6957663 $127,585 11/27/2002 151-6531249 $126,672 11/30/2001 151-6471089 $148,291 8/1/2002 151-6415426 $119,922 9/14/2001 X 151-6476419 $167,779 11/19/2001 X 151-6476579 $130,935 11/19/2001 X 151-6482988 $120,785 11/8/2001 X 151-6486054 $143,115 11/21/2001 X 151-6486185 $110,229 9/19/2001 X 151-6542156 $153,924 11/5/2001 151-6567251 $151,539 12/31/2001 Totals $1,985,488 6 Six of the 14 early default loans in the table above were included in HUD’s September 2002 Quality Assurance review. In accordance with HUD Handbook 4060.1 REV-1, all loans going into default within the first six months must be reviewed as part of the Quality Control Plan’s requirements. Until Decatur terminated operations in November 2003, it had relied on its managing owner to conduct the required Quality Control Reviews of its 14 early defaulted loans, but this was not done for any of the loans. For reviews that were done, neither Decatur Mortgage nor its managing owner, Homebuilders Financial Network, were able to provide documentation on the procedures or 2004-CH-1009 Page 20 Exit Table of Contents Finding 2 analyses performed, or what documentation was analyzed or verified. Decatur’s managing owner did Quality Control Reviews on three out of the 41 mortgage loans we reviewed. In the three cases, the Reviews did not identify the origination issues that we found or recommend actions to resolve the deficiencies. These cases are shown in the following table (loan 151-6584501 was cited in HUD’s September 2002 Quality Assurance review). Inadequate Quality Control Review Documentation For Reviews Done HUD's FHA Loan Mortgage Closing Claim Paid Computed Number Amount Date By HUD Sale Loss 151-6510827 $158,796 10/16/2001 $0 $0 151-6527323 $134,842 11/5/2001 $144,970 $70,131 151-6584501 $134,893 2/21/2002 $145,898 $62,098 Totals $428,531 $290,868 $132,229 Decatur’s managing owner prepared a Quality Control Plan for Decatur Mortgage, but Decatur did not ensure that reviews were done in accordance with the Plan. Decatur did not perform Quality Control Reviews of its loans because it stated that its managing owner— Homebuilders Financial Network—was responsible for conducting all of their quality control reviews based on information Decatur sent to them. This included loans originated during our audit scope—September 1, 2001 to August 31, 2003. Therefore, Decatur Mortgage was unable to ensure the accuracy, validity, and completeness of its loan origination operations. The Branch Operations Manager for Decatur Mortgage Access To Information On Company said Decatur’s staff did not have access to Problem Loans HUD’s Neighborhood Watch system to identify delinquent loans. He said Decatur did not monitor its own loans because it did not service them, and its sponsors did not report information on loan defaults back to Decatur. The staff at Homebuilders Financial Network also indicated that until mid 2002, they only had limited access to HUD’s Neighborhood Watch system so they were not able to get detailed information about loans going into default. Page 21 2004-CH-1009 Exit Table of Contents Finding 2 We do not believe that these reasons relieved Decatur of its responsibility for ensuring that Quality Control Reviews were conducted on its originated loans. Absent of any knowledge of problem loans, Decatur should still have ensured that reviews were done. As a consequence, improper practices were allowed to continue, increasing the risk that more loans would go into default as discussed in Finding 1. Auditee Comments Decatur's owners disagreed with the second finding of this audit report. Decatur's owners asserted that Decatur's Branch Manager oversaw the operations of Decatur's staff with management support of the managing owner Homebuilders Financial Network. The owners indicated that Homebuilders Financial Network performed quality control reviews over at least 10 percent of Decatur's loan originations each quarter in accordance with its approved Quality Control Plan. Decatur's owners stated that they followed the requirements of the Quality Control Plan in all cases reviewed, but were not required by HUD to record the list of items reviewed or show the analysis done and documents verified in each case reviewed. HUD only requires quality control reports to identify any deficiencies noted. The owners asserted that the deficiencies we identified in this report were underwriting issues that Decatur was not responsible for, and the Quality Control Reviews were not deficient because they did not identify these same issues. Decatur's owners also assert that they were not given access to early default information in HUD's Neighborhood Watch System until mid 2002. We included Decatur's complete response to our report and the findings in Appendix E of this report. We deleted borrower’s names from the response. OIG Evaluation 2004-CH-1009 Of Page 22 Auditee Comments Exit Table of Contents Finding 2 Although Decatur's owners state that they followed their approved Quality Control Plan, they provided no documentation to show that they did for the cases they reviewed. HUD's Mortgagee Approval Handbook 4060.1 REV-1, dated September 1993, paragraph 6-3(D) requires the quality control reviewers to obtain new credit reports. Paragraph 6-3(E) requires the quality control plan to provide for the written reverification of the mortgagor's employment, deposits, gift letter, or other sources of funds. These requirements indicate that the quality control reviewer will be obtaining documentation needed to perform the reviews. The sole documentation that Decatur's owners were able to provide for each loan reviewed was a one-page summary report showing that Decatur did a good job, or showing what minor problems were identified and corrected. Decatur's owners stated that they did everything required by the Quality Control Plan for all loans reviewed, but provided no support for any of the loans reviewed. If a lender does not document what they did to verify whether the loan origination and processing was done correctly, HUD and the lender lack any real assurance that the lender was prudent in conducting its reviews. We included our analysis of Decatur's complete response in Appendix E of this report following Decatur's response. Recommendations We recommend that HUD’s Assistant Secretary for Housing- Federal Housing Commissioner and Chairman of the Mortgagee Review Board: 2A. Determines whether Decatur’s deficiencies related to the Quality Control Reviews warrant any actions against Decatur’s sponsors for not ensuring the required plan and reviews were effectively implemented by Decatur. If determined that Decatur Mortgage Company is able to reapply for approval as an FHA lender, then HUD’s Assistant Secretary for Housing-Federal Housing Commissioner should: Page 23 2004-CH-1009 Exit Table of Contents Finding 2 2B. Require Decatur Mortgage Company to take the needed actions to ensure the required Quality Control Plan reviews are conducted and corrective actions are taken and documented for all reported deficiencies. 2004-CH-1009 Page 24 Exit Table of Contents Management Controls Management controls include the plan of organization, methods, and procedures adopted by management to ensure that 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 that the following management controls Relevant Management were relevant to our audit objectives: Controls • Program Operations - Policies and procedures 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 procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. • Safeguarding Resources - Policies and procedures 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 during our audit of Decatur Mortgage Company’s loan origination practices and quality control process. 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. Based on our review, we believe the items on the following Significant Weaknesses page are significant weaknesses: • Program Operations Page 25 2004-CH-1009 Exit Table of Contents Management Controls Decatur Mortgage Company did not operate its loan origination activities in accordance with HUD’s Single Family Housing Program requirements. Specifically, Decatur did not: originate FHA-insured loans in accordance with HUD’s requirements and prudent lending practices; and adequately implement its quality control process according to HUD’s requirements (see Findings 1 and 2). Validity and Reliability of Data Decatur violated HUD’s requirements regarding FHA loan origination process (see Finding 1). Decatur did not adequately implement its policy for doing Quality Control Reviews (see Finding 2). • Safeguarding Resources Decatur failed to originate FHA-insured loans in accordance with HUD’s requirements and prudent lending practices that exposed HUD to a risk to the FHA insurance fund (see Finding 1). 2004-CH-1009 Page 26 Exit Table of Contents Follow Up On Prior Audits This is the first audit of Decatur Mortgage Company, L.L.C. by HUD’s Office of Inspector General. The latest Independent Auditor’s Report for Decatur covered the period ending December 31, 2002. The report did not contain any findings. In September 2002, HUD’s Quality Assurance Division conducted a Title II origination review of Decatur’s home office in Indianapolis, Indiana. The review resulted in 10 findings to include: having a non-conforming Quality Control Plan; not performing Quality Control Reviews on early default loans; unverified source and adequacy of funds; documents being handled by interested third parties; inadequate documentation of gift transfers; failure to demonstrate the adverse affect of buy down expirations; inadequate income and employment documentation; not establishing borrower income stability; omitting liabilities and using unrealistic tax figures; and prudent underwriting not done in evaluating borrower credit histories. On May 5, 2003, the two findings relating to the Quality Control Plan were resolved. Eight of the 41 cases we reviewed were included in the September 2002 Quality Assurance Review. HUD and the sponsor for the eight loans, entered into an indemnification agreement including the eight loans we cited that were included in the Quality Assurance review. The indemnification agreement covering the eight loans was effective August 12, 2004. Page 27 2004-CH-1009 Exit Table of Contents Follow Up On Prior Audits THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1009 Page 28 Exit Table of Contents Appendix A Schedule Of Questioned Costs And Recommendation For Funds To Be Put To Better Use Recommendation Type of Questioned Cost Funds Put To Number Ineligible 1/ Unsupported 2/ Better Use 3/ 1A $675,063 1B $356,723 1C $4,070,036 Totals $675,063 $356,723 $4,070,036 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law, contract or Federal, State or local policies or regulations. 2/ Unsupported costs are costs charged to a HUD-financed or HUD-insured program or activity and eligibility cannot be determined at the time of audit. The costs are not supported by adequate documentation or there is a need for a legal or administrative determination on the eligibility of the costs. Unsupported costs require a future decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of Departmental policies and procedures. 3/ Funds To Be Put To Better Use are quantifiable savings that are anticipated to occur if an OIG recommendation is implemented, resulting in a reduced expenditure in subsequent periods for the activity in question. Specifically, this includes an implemented OIG recommendation that causes a non-HUD entity not to expend Federal funds for a specific purpose. These funds could be reprogrammed by the entity and not returned to HUD. Page 29 2004-CH-1009 Exit Table of Contents Appendix A THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1009 Page 30 Exit Table of Contents Appendix B Loan Processing Deficiencies Chart In HUD’s Credit Ability Deposit/ Under Third September FHA Loan Mortgage Closing Income Appraisal Report To Pay Gift Stated Party 2002 Number Amount Date Issue Issue Issue Issue Issue Costs Support Sponsor Review 151-6605466 $152,605 9/5/2002 X X X X X X X 73850 151-6647913 $167,779 5/28/2002 X X X X 73850 151-6387115 $164,328 10/19/2001 X X X X 38092 151-6396198 $132,559 9/24/2001 X X X X X X 38092 151-6907158 $117,080 9/27/2002 X X X X X 73850 151-6957663 $127,585 11/27/2002 X X X 73850 151-6610262 $153,772 12/31/2001 X X X X 38092 151-6442972 $144,637 9/24/2001 X X X X 38092 151-6561313 $154,686 1/30/2002 X X X X X X X 38092 151-6485246 $150,727 11/19/2001 X X X X X X 38092 151-6510827 $158,796 10/16/2001 X X X X 38092 151-6531249 $126,672 11/30/2001 X X X X X 38092 151-6537560 $141,288 10/30/2001 X X X X 38092 151-6550730 $133,980 11/15/2001 X X X X X X 38092 151-6574687 $160,014 3/11/2002 X X X X X X 38092 X 151-6611721 $136,720 12/27/2001 X X X X X 38092 151-6471089 $148,291 8/1/2002 X X X 38092 151-6443404 $142,607 10/15/2001 X X X X 38092 151-6838872 $167,728 8/30/2002 X X X X X X 38092 151-6688221 $139,156 5/15/2002 X X X 38092 151-6415426 $119,922 9/14/2001 X X X X X X 38092 X 151-6649076 $164,886 4/24/2002 X X X X X 38092 151-6642980 $149,306 2/18/2002 X X X X X 38092 151-6589970 $167,576 2/22/2002 X X X X X X 38092 151-6463779 $138,852 9/14/2001 X X X X X X 38092 151-6476419 $167,779 11/19/2001 X X X 38092 X 151-6476579 $130,935 11/19/2001 X X X X X X X 38092 X 151-6477778 $128,651 11/7/2001 X X X X 38092 151-6482988 $120,785 11/8/2001 X X X X X X X 38092 X 151-6483461 $165,800 12/3/2001 X X X X X 38092 151-6486054 $143,115 11/21/2001 X X X X X X 38092 X 151-6486185 $110,229 9/19/2001 X X X X 38092 X 151-6490797 $111,954 9/21/2001 X X X X 38092 151-6494487 $105,864 11/28/2001 X X 38092 151-6507102 $132,660 10/31/2001 X X X X X X 38092 151-6527323 $134,842 11/5/2001 X X X X X X 38092 151-6542156 $153,924 11/5/2001 X X X X X X 38092 151-6567251 $151,539 12/31/2001 X X X X 38092 151-6584264 $156,259 1/8/2002 X X X X X 38092 151-6584501 $134,893 2/21/2002 X X X 38092 X 151-6588010 $116,623 3/11/2002 X X X X 38092 Totals $5,827,404 18 32 27 36 40 37 10 8 Page 31 2004-CH-1009 Exit Table of Contents Appendix B THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1009 Page 32 Exit Table of Contents Appendix C Narrative Case Presentations FHA Case Number: 151-6605466 Mortgage Amount: $ 152,605 Section of Housing Act: 203B Date of Loan Closing: 09/05/02 Current Status: Active – Currently in default Prior Status: Foreclosure Started 6/01/03 (Default Status Date: 07/30/04). No claim or loss determined. Payments Before First Default Reported: 5 Unpaid Principal Balance: $151,583 Summary: The appraisal report issued by Appraiser VIDEWC dated January 11, 2002 was more than six months prior to the closing. The report was amended June 27, 2002, but the appraisal report does not indicate what was amended. Decatur Mortgage did not verify the source of the earnest money deposit. On the date the $1,000 check was written, the bank statement balance was less than $10. The source of a $1,000 deposit to the borrower’s account two days later was not determined. The borrower informed us that the sales person provided her with the $1,000 earnest money deposit since she did not have it. Decatur did not document the timing of the $4,652 gift fund transfer from the nonprofit donor, Nehemiah, to the Settlement Agent and the $5,152 seller contribution back to the donor. The undocumented transfer from the donor occurred first. Decatur did not verify rental income receipt for the prior residence not sold. The underwriter considered $603 per month as the mortgage on the prior residence, but a Credit Union draft history indicated an automatic withdrawal for the mortgage of $715. The rental agreement was dated the same day as the subject sales agreement. Monthly rental per the agreement and an un- cancelled check copy were not deposited per bank statements. The borrower informed us the sales staff gave her a blank lease form that she filled out and had her son’s girlfriend sign. The lease and the rent check used as support for not using the mortgage on the borrower’s prior residence were not genuine documents. The borrower said she just quit paying the mortgage on her prior residence. The borrower also said she was not questioned about income, debts, or the lease by Decatur’s staff. Page 33 2004-CH-1009 Exit Table of Contents Appendix C The underwriter (#8968) estimated property taxes at $144 per month. A March 9, 2002 tax bill in Decatur’s file showed property taxes of $1,456 for six months or approximately $243 per month. Decatur did not ascertain that the borrower had established good credit after a 1997 Chapter 7 Bankruptcy and the borrower would not be adversely affected as the buy down period expired. The credit reports showed 14 delinquent accounts after bankruptcy and the borrower was using a credit counselor to deal with delinquent accounts. Two delinquent accounts were paid off out of closing proceeds. The ratios computed by the underwriter were just under HUD’s guidelines using the first year payment of the buy down period. A credit union draft history did not show any ability to save. Decatur did not document any inquiry of the six credit inquiries on two credit reports. Decatur did not verify a credit union account from which transfers were indicated on a credit union statement in Decatur’s file. Letters from a credit counseling agency and the borrower’s insurance company were faxed from the borrower’s place of employment. The borrower informed us that she faxed the letters from the counseling agency and the insurance company, and she provided her W-2 forms and pay statements to the sales staff. The borrower informed us the sales staff had her sign blank pieces of paper that the sales staff used to write explanatory letters. The borrower said the explanatory letters were incorrect. The underwriter used $3,818 per month as income, but the verification of employment only supported $3,668 per month. This loan went into default after only five mortgage payments were received. Decatur’s management did not identify this case as an early default and perform a quality control review on this loan. 2004-CH-1009 Page 34 Exit Table of Contents Appendix C FHA Case Number: 151-6647913 Mortgage Amount: $ 167,779 Section of Housing Act: 203(b) Date of Loan Closing: 05/28/02 Current Status: Delinquent, but reinstated by mortgagor (As of July 30, 2004). Prior Status: Delinquent Payments Before First Default Reported: 3 Unpaid Principal Balance: $165,037. Summary: The Appraiser (JWM17R) did not adequately explain why she used two comparable properties that were older homes over a mile from the subject property and were sold more than six months earlier than the appraisal. Decatur Mortgage did not verify the source of the earnest money deposit of $1,718. The savings account did not show the funds coming out of the borrower’s account. Decatur also did not adequately document the source of the $5,000 money order gift funds from the borrower’s Sister. No bank statements were provided to show where the cash came from to buy the bank cashiers check provided. Decatur did not adequately establish that the borrower had established good credit after a 1996 bankruptcy. Credit reports showed derogatory credit and lack of money management ability since the bankruptcy. Delinquent borrower debt was paid from borrower proceeds at closing. Decatur did not document the timing of the wire-transferred gift of $5,154 from a non-profit donor, Nehemiah, and the seller’s contribution of $5,654 back to the donor. The gift transfer from the donor actually occurred first. Decatur’s file documents indicated that the co-borrower was receiving disability income prior to closing, but the underwriter (#8968) used the higher income from the co-borrower’s employment. Decatur did not document the co-borrower’s most recent pay stub. This mortgage went into default after only three payments were received. Decatur’s management did not identify this loan as an early default and perform a quality control review. Page 35 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6387115 Mortgage Amount: $ 164,328 Section of Housing Act: 203(b) Date of Loan Closing: 10/19/01 Current Status: Default – First legal action to foreclose started 10/1/02. Prior Status: Not Applicable (status date July 30, 2004) Payments Before First Default Reported: 5 Unpaid Principal Balance: $163,299 Summary: Decatur Mortgage did not verify the source of funds for the three Travelers Express Money Orders totaling $1,748 for the earnest money deposit. Decatur did not adequately show that the borrower established good credit after a June 1999 Chapter 13 Bankruptcy. Various delinquent accounts of the borrower were paid off at closing. More than $1,051 in bad debts was paid off at closing than funds provided by the borrower so gift funds were partly used to pay off bad debts. The underwriter (#V175) did not explain how the borrower would be expected to make the higher mortgage payments as the buy down period expired. The mortgage credit ratios calculated by the underwriter exceeded HUD’s guidelines and no compensating factors were provided. The underwriter used a $325 per month child support income, but Decatur did not provide documentation showing that the payments were being received and were expected to continue. Decatur did not document any investigation into various credit inquiries reported on the credit report. Decatur did not document the timing of the gift wire transfer of $7,407 from the Housing Action Resource Trust and the contribution by the seller back to the Trust of $8,357. The gift funds were actually received first. This loan defaulted after only five payments were received, but Decatur’s management did not identify this loan as an early default and perform a quality control review. 2004-CH-1009 Page 36 Exit Table of Contents Appendix C FHA Case Number: 151-6396198 Mortgage Amount: $ 132,559 Section of Housing Act: 203(b) Date of Loan Closing: 09/24/01 Current Status: Delinquent but reinstated (as of 7/30/04). Prior Status: In Default Payments Before First Default Reported: 13 Unpaid Principal Balance: $128,619 Summary: Decatur Mortgage did not document the timing of the $4,041 wire transfer gift from a non-profit donor, Nehemiah, or the $4,841 wire transfer of the seller’s contribution back to the donor. The gift actually was transferred first. Decatur did not adequately show that the borrower established good credit since a Chapter 13 Bankruptcy discharge in 1999. The borrower had a judgment satisfied in February 2001 and had three delinquent accounts. Credit reports showed the borrower just under his credit limits; however, Decatur did not show the borrower had improved his use of credit and his attitude towards debt. The bank statements in Decatur’s file do not show an ability to save. Decatur did not verify the actual source of funds for the earnest money deposits totaling $1,125. According to documents in Decatur’s file, the initial earnest money check of $500 was replaced by a money order but Decatur did not document the source of those funds. Bank statements showed only a $38 balance. Decatur did not adequately verify rental income from the borrower’s prior residence to justify lowering the debts in the income sufficiency analysis. Decatur obtained a lease from the borrower dated the same day as the sales agreement showing rental income of $414 per month. Decatur did not provide any documentation showing that any of the rent payments required by the lease were actually received by the borrower. The bank statements did not show deposits of the rent receipts. The borrower told us that Decatur had him get his sister (who was living in the former residence without a lease) to sign a formal lease agreement, but that Decatur never required him to provide evidence that he was actually receiving the rental payments. The underwriter (#3248) calculated mortgage credit analysis ratios that exceeded HUD’s guidelines, but did not provide compensating factors. Page 37 2004-CH-1009 Exit Table of Contents Appendix C Decatur did not document any investigation of two credit inquiries identified on the credit reports. The Appraiser (JWM17R) stated that sales in the area occurred within three months, but no explanation was provided to justify why two comparable properties were sold eight months and 11 months prior to the appraisal. The other two appraisals were FHA insured properties from the Appraiser’s own files. Three of the four properties used were in the subject property’s subdivision and may have been built by the same builder/seller as the subject property. 2004-CH-1009 Page 38 Exit Table of Contents Appendix C FHA Case Number: 151-6907158 Mortgage Amount: $ 117,080 Section of Housing Act: 203(b) Date of Loan Closing: 09/27/02 Current Status: Delinquent (as of 7/30/04) – Loan modification claim of $750.00 paid by HUD on 5/2/04. Prior Status: Not Applicable Payments Before First Default Reported: 12 Unpaid Principal Balance: $123,113 Summary: The Appraiser (PWE2TC) used two comparable properties within six blocks in the same subdivision as the subject property that may have been built by the same builder/seller. The other two comparable properties used were over a mile from the subject property. The Appraiser stated that supply and demand were in balance, but lacked current sales in the area. Decatur did not verify the source of the $1,190 earnest money deposit. Bank statements did not show the borrower provided the money and the statements do not indicate an ability to save. The borrower told us that she provided a $500 earnest money check, which was given back, and of the $800 she gave at closing, she received $746 back. Decatur did not document the timing of the $3,569 gift wire transferred from a non-profit donor, Nehemiah, or the $4,069 in seller contribution wire transferred to the donor. The gift actually occurred first. The underwriter (ZLPR Loan Prospector) computed mortgage analysis ratios exceeding HUD’s guidelines, but did not provide adequate compensating factors. The underwriter also did not explain how the borrower would not adversely be affected as the buy down period expired. Decatur and the underwriter used an unrealistically low figure of $90 per month for property taxes based on unimproved land. The County provided us with the actual taxes assessed to the borrower of $1,689 or approximately $141 per month. Decatur did not show that the borrower established good credit. The borrower owed $18,830 in debts. The credit reports showed three delinquent accounts. Decatur did not document investigation of three credit inquiries shown on the credit report. Page 39 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6957663 Mortgage Amount: $ 127,585 Section of Housing Act: 203(b) Date of Loan Closing: 11/27/02 Current Status: In Default (as of 7/30/04). Prior Status: In Default Payments Before First Default Reported: 5 Unpaid Principal Balance: $126,400 Summary: Decatur Mortgage did not document that the borrower actually provided the $500 earnest money deposit. Decatur did not adequately show that the borrower was an acceptable credit risk. The credit reports identified $2,574 in delinquent borrower debt that was paid off at closing from borrower proceeds. One of the borrower’s explanations for delinquent accounts was that his wife didn’t pay them and didn’t tell him (not a circumstance out of the borrower’s control). Decatur did not document the timing of the $3,889 wire transfer gift from a non-profit donor (Nehemiah) and the seller contribution of $4,389 wire transferred back to the donor. The gift actually was sent first. Decatur did not document any investigation of a credit inquiry reported on the credit report. This loan defaulted after only five payments had been received but Decatur’s Management did not document a Quality Control Review being done for this loan as required. The underwriter (W430) did not show how the borrower would not adversely be affected as the buy-down period expired. 2004-CH-1009 Page 40 Exit Table of Contents Appendix C FHA Case Number: 151-6610262 Mortgage Amount: $ 153,772 Section of Housing Act: 203(b) Date of Loan Closing: 12/31/01 Current Status: Default (as of 7/30/04) Prior Status: Not Applicable Payments Before First Default Reported: 15 Unpaid Principal Balance: $149,094 Summary: Decatur Mortgage did not document the actual provision of the $1,562 earnest money deposit. The borrower’s only investment was the $1,562 indicated on the settlement statement. At closing the settlement agent paid $6,009 in settlement proceeds, which exceeded the borrowers’ investment by $4,447. The excess debt payment was covered out of the $10,687 gift from the non-profit donor. Decatur did not document the timing of the $10,687 gift wire transferred from the Housing Action Resource Trust or the $11,637 seller contribution wire transferred back to the Trust. The gift was actually wire transferred first. The seller added the amount of the contribution to the non-profit donor into the calculation of the sales price according to documents in Decatur’s file. Decatur and the underwriter (AF58) used an unreasonably low estimate of property taxes in the mortgage credit analysis to qualify the borrower. The underwriter estimated $40 per month. The County Treasurer actually assessed $1,874 against the property, or approximately $156 per month. Decatur did not document any investigation of a credit inquiry shown on the credit report. Decatur and the underwriter did not show how the borrower would not be adversely affected as the buy down period expired. Decatur did not show how the borrowers were acceptable credit risks. The co-borrower had a Chapter 13 Bankruptcy discharged in April 1998. The credit report showed a delinquent $12 medical bill. Gift funds from a non-profit donor were used to pay off a mobile home mortgage and an IRS lien at closing. Bank statements do not show a pattern of savings. The Appraiser (VIDEWC) used two out of three comparable properties from the subject property’s subdivision, which may have been built and sold by the same builder/seller. Page 41 2004-CH-1009 Exit Table of Contents Appendix C HUD’s file contained two sales agreements with the same date. The higher sales amount was used and included a higher gift figure from the non-profit donor. The higher price covered the extra contribution to the non-profit donor that the seller would have to make. 2004-CH-1009 Page 42 Exit Table of Contents Appendix C FHA Case Number: 151-6442972 Mortgage Amount: $ 144,637 Section of Housing Act: 203(b) Date of Loan Closing: 09/24/01 Current Status: Default (as of 7/3004) – First legal action to start foreclosure 9/1/03 Prior Status: Not applicable Payments Before First Default Reported: 17 Unpaid Paid Balance: $142,694 Loss on Property Sale: Summary: Decatur Mortgage did not document the timing of the $4,409 wire transfers from the non-profit donor (Nehemiah) and the wire transfer of $5,209 from the seller's proceeds back to the donor. The gift was actually transferred first. Decatur did not show how the borrowers were acceptable credit risks. The credit report showed 11 debts transferred to collection agencies, and five judgments. The borrower paid off two judgments before closing but Decatur did not document how they were paid. Two of the delinquent accounts were paid off at closing. Bank statements do not show a pattern of saving. Decatur did not show how the borrowers improved their attitude towards debt but merely paid off delinquent accounts. Decatur and the underwriter (V175) did not show how the borrowers would not be adversely affected as the buy down period expired. Decatur and the underwriter used an unreasonably low estimate of property taxes for mortgage credit analysis. The underwriter estimated $40 per month for taxes. The actual taxes assessed by the County Treasurer were $3,120, or approximately $260 per month. Three of the five comparable properties were not sold within six months of the appraisal and the Appraiser did not adequately justify that. The Appraiser (JWM17R) did not adequately justify using two comparable properties that were over a mile from the subject property. Page 43 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6561313 Mortgage Amount: $ 154,686 Section of Housing Act: 203(b) Date of Loan Closing: 01/30/02 Current Status: Delinquent (as of 7/30/04) Reinstated 2/1/04 HUD paid a Loan Modification Claim of $650 on 4/22/04. Payments Before First Default Reported: 11 Unpaid Principal Balance: $153,475 Summary: Decatur Mortgage did not document the timing of the wire transfer of the $9,214 gift from the Housing Action Resource Trust to the settlement agent, and the seller contribution wire transferred back to the Trust. The gift was actually transferred first. Decatur did not adequately support the earnest money deposit of $1,523. The borrower’s bank statements showed the earnest money checks being cashed but showed large unexplained deposits to the account just before the checks were issued. The bank statements did not show a pattern of savings. The underwriter (Y471) did not adequately consider the borrowers’ credit worthiness. The borrower was discharged from Chapter 7 Bankruptcy in February 1996. The credit report showed judgments and collection accounts since the bankruptcy. According to the HUD-1 Settlement Statement, the borrowers paid $1,523 as earnest money and gave another $749 at closing—for a total investment of $2,272. The settlement agent paid a total of $5,891 out of closing proceeds to pay off the borrowers’ delinquent accounts. The non-profit donor paid this negative investment of the borrower out of the $9,214 gift. Decatur and the underwriter improperly grossed up monthly child support payments and thereby overstated the borrowers’ income. To support the child support income, Decatur obtained a copy of a court order and a child support payment history, but these documents were faxed to Decatur from one of the seller’s development sales offices, instead of from the borrower and/or court. The underwriter did not show how the borrowers would not be adversely affected as the buy- down period expired. 2004-CH-1009 Page 44 Exit Table of Contents Appendix C Decatur and the underwriter used an unreasonably low estimate of property taxes in the mortgage credit analysis. The underwriter used an estimate of $25 per month for property taxes based on undeveloped land. Marion County actually assessed $1,878 in taxes on the subject property, or about $156 per month. The Appraisal (by JWM17R) used one comparable property that was over a mile from the subject property, and two of the comparable properties were over six months before the appraisal. In addition, Decatur’s loan file contained two appraisal reports. The first—dated January 7, 2002—showed a sales price of $152,349 and an appraised value of $153,000. The second appraisal report was amended January 8, 2002 to show a revised sale price of $157,141. The revised appraisal report used the same comparable properties but the comparables were adjusted upwards to a new appraised value of $157,500. Decatur did not document any investigation of credit inquiries that were reported on the credit reports. Page 45 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6485246 Mortgage Amount: $ 150,727 Section of Housing Act: 203(b) Date of Loan Closing: 11/19/01 Current Status: Foreclosure completed 6/1/04 (as of 7/30/04). Payments Before First Default Reported: 7 Unpaid Principal Balance: $149,055 Summary: Decatur Mortgage’s loan file contained a worksheet showing how the builder/seller added the anticipated gift from the non-profit donor [$6,393] and the seller fee [$950] (the seller pays the total amount to the non-profit donor as a contribution) into the computation of the sales price of the house. The seller modified the sales agreement with the buyer from a price of $151,091 to $153,116, to cover an increase of costs relating to switching from one non-profit donor to another. On the date of closing, Decatur requested the Appraiser to change the appraisal due to the increased sales price. The Appraiser (JWM17R) revised the reports estimated value from $152,000 up to $153,500, which covered the revised sales price. Decatur did not document the timing of the wire transfers of the gift from the Housing Action Resource Trust ($6,393) and the seller contribution ($7,343) back to the Trust. The gift was actually wire transferred first. Decatur did not adequately verify the source of the borrower’s earnest money deposit. The seller provided receipts showing three money orders of $500 each, and a check for $1,000 for earnest money. The bank statements showed the check for $1,000 being cashed but did not show withdrawals corresponding to the money order purchases. Decatur did not document how the money orders were obtained. The borrower’s bank statements showed very little cash and low average balances. Decatur did not investigate the large deposit to the account just prior to the $1,000 check being issued. A sneak preview loan application in Decatur’s file indicated that source of funds for the earnest money would be a “loan from Manager.” According to the HUD-1 Settlement Statement, the borrowers provided earnest money of $1,500 but received $195 back at closing—for a net investment of $1,305. The underwriter (V175) had cited as a condition of approval that there be no cash out by the borrowers. The settlement agent paid $2,378 at closing to pay off four of the borrower’s delinquent accounts. This negative investment of the borrower of $1,073 to pay off the borrower’s delinquent accounts was paid from the $6,393 gift from the non-profit donor. 2004-CH-1009 Page 46 Exit Table of Contents Appendix C Decatur did not show how the borrower’s attitude towards credit made them an acceptable risk. The credit reports showed a history of bad debts, but these were only addressed by paying them off at closing. The underwriter (V175) improperly grossed up Supplemental Social Security income and overstated this income by $119 per month. Decatur did not establish that this income would continue for at least three years as conditioned by the underwriter. Decatur obtained the verification documents for the Social Security benefits from the seller. Decatur also allowed the seller to provide a letter from the servicer of four student loans confirming that the loans were in forbearance. Decatur did not obtain evidence that the borrowers were actually receiving rent payments from their prior residence (a mobile home) as indicated by a lease in HUD’s loan file. The underwriter did not include the mobile home mortgage payment of $349 per month as a liability in the mortgage credit analysis. The person who signed the lease told us that she never moved into the mobile home owned by the borrowers, and never made any lease payments to the borrowers. Decatur and the underwriter used an unreasonably low estimate of property taxes in the mortgage credit analysis. The underwriter used $25 per month for taxes. Marion County actually assessed taxes on the property as a completed home that amounted to approximately $167 per month. The underwriter computed a Total Fixed Payment to Income Ratio of 45.7 percent, which exceeded HUD’s guideline. The underwriter did not provide compensating factors. The underwriter did not show how the borrower would not adversely be affected as the buy- down period expired. Page 47 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6510827 Mortgage Amount: $ 158,796 Section of Housing Act: 203(b) Date of Loan Closing: 10/16/01 Current Status: In Default – Foreclosure started 7/1/04 (as of 7/30/04). Payments Before First Default Reported: 16 Unpaid Principal Balance: $154,467 Summary: Decatur Mortgage’s loan file showed a receipt from the seller that the borrower provided a $10,000 check as earnest money deposit, but the HUD-1 does not give the borrower credit for this deposit and reduce the mortgage. Receipts and check copies show that the borrowers gave $500 on September 15, 2001, and another $10,000 on September 20, 2001. On September 19, 2001, the borrower’s Mother-in-Law provided a $20,000 gift in the form of a Cashier’s Check. A bank verification showed that after the gift was deposited, the borrowers had a cash balance of about $21,541 after the gift was deposited. Bank statements in Decatur’s file did not show a pattern of savings or show the earnest money deposits being withdrawn. The HUD-1 showed the borrowers bringing $15,260 to closing. The borrower told us that he provided the $10,000 to the seller but never received credit for the deposit. Decatur did not establish that the borrowers improved their attitude towards credit and were acceptable credit risks. The credit report identified 19 delinquent loans and accounts in collection. At closing, the settlement agent paid $5,074 to pay off borrower bad debts. Decatur and the underwriter (H527) used an unreasonably low estimate of property taxes in the mortgage credit analysis. The underwriter used $25 per month for taxes as provided by Decatur but was based on the taxes for undeveloped land. The actual taxes assessed on the property as a completed home were $2,307, or approximately $192 per month. The credit reports reported an additional Social Security number for the borrower and two additional numbers for the co-borrower. Decatur did not document any investigation into these additional Social Security numbers. The borrower said that Decatur never asked him about the Social Security numbers. The Appraiser (JWM17R) did not adequately justify using three of four comparable properties that were over a mile from the subject property. One comparable was over three miles away and two were over five miles away. Two of the comparable properties were sold over six months prior to the subject, including the one comparable that was within a mile, without adequate explanation. 2004-CH-1009 Page 48 Exit Table of Contents Appendix C This loan was given a quality control review by Decatur’s managing owner. The review did not disclose any deficiencies, and the documentation did not indicate what was done to review the loan. Page 49 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6531249 Mortgage Amount: $ 126,672 Section of Housing Act: 203(b) Date of Loan Closing: 11/30/01 Current Status: Terminated – Conveyed to HUD 12/01/03; Claim of $133,003 Paid on 4/4/04; Additional claim of $3,280 paid on 5/9/04. Payments Before First Default Reported: 6 Unpaid Principal Balance: $125,715 Loss on property resale: $60,944 Summary: Decatur Mortgage did not document the source of funds for the $1,275 earnest money deposit from the borrower. Bank statements did not demonstrate an ability to save or the payment of the earnest money deposit. According to the HUD-1 Settlement Statement, the only funds provided by the borrower was the $1,275 earnest money deposit. At closing, the settlement agent paid a total of $6,950 to pay off delinquent accounts of the borrower. The negative investment by the borrower of $5,675 was paid out of the $9,860 gift provided by the Housing Action Resource Trust, a non-profit donor. Decatur did not show how the borrower was an acceptable credit risk or had improved her attitude towards debt. Decatur did not document any investigation of two credit inquiries that were reported on the credit report. The underwriter (V175) did not document how the borrower would not be adversely affected as the buy down period expired. The underwriter used about a $500 per month higher income figure for the borrower than the amount supported by the employment verification. Decatur did not document the timing of the $9,860 gift wire transferred by the non-profit donor, or the $10,810 seller contribution back to the donor. The gift was actually transferred first. Decatur and the underwriter used an unrealistically low estimate of property taxes for mortgage credit analysis. The underwriter used $40 per month as an estimate for property taxes but the County actually assessed approximately $108 per month as a newly completed home. 2004-CH-1009 Page 50 Exit Table of Contents Appendix C According to a home cost itemized worksheet in Decatur’s loan file, the seller added the contribution that it would have to make to the non-profit donor into the sales price of the subject property. Although this mortgage defaulted after only six payments were made, Decatur’s managing owner did not perform a quality control review of this loan. Page 51 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6537560 Mortgage Amount: $ 141,288 Section of Housing Act: 203(b) Date of Loan Closing: 10/30/01 Current Status: In Default but active. Foreclosure legal action started 3/1/03. (As of 7/30/04). Payments Before First Default Reported: 9 Unpaid Principal Balance: $138,530 Summary: The Appraiser (JWM17R) used four comparable properties that were all located within 4 blocks of the subject property in the same subdivision. The seller of the subject is the builder, so the comparables were likely built and sold by the same seller. Two comparables were sold over a year before the subject. The Appraiser stated that supply and demand were in balance but lacked current sales data for the area. Decatur did not document the source of funds for the borrower’s $2,000 earnest money deposit shown on the HUD-1 Settlement Statement. From Decatur’s file, the seller gave a letter stating that $1,000 was provided as earnest money provided as two personal checks of $500 each. The bank statements did not cover the period the checks were provided and did not show the balances and checks being cashed. The HUD-1 showed a $2,000 deposit. The borrower told us that she only provided $1,000. The HUD-1 Settlement Statement showed a $2,000 earnest money deposit and the borrower received $313 back at closing, leaving a net investment of $1,687 (not considering the overstated deposit). At closing the settlement agent paid a total of $6,209 to pay off the borrower’s delinquent debts. This negative investment of $4,522 was paid from the $10,306 gift from the Housing Action Resource Trust, a non-profit donor. Decatur and the underwriter did not show why the borrower was an acceptable credit risk. The credit report showed six delinquent accounts and three civil judgments. These items show a lack of money management and willingness to pay debts. The paying off of the $6,209 in delinquent accounts by the settlement agent did not show an improvement in the borrower’s attitude toward debt. Decatur did not document the timing of the $10,306 gift transfer from the Housing Action Resource Trust, or the $11,256 seller contribution back to the Trust. The gift was actually transferred first. 2004-CH-1009 Page 52 Exit Table of Contents Appendix C The underwriter (Y471) did not show how the increased payments as the buy-down period expired would not adversely affect the borrower. Decatur and the underwriter used an unrealistically low estimate for property taxes in the mortgage credit analysis. The underwriter used $40 per month for taxes (unimproved land). The County actually assessed $2,116 on the completed property, or about $176 per month. Decatur did not verify that the borrower’s mother was actually paying car payments of $151 per month for the borrower to justify omitting the car payments from the mortgage credit analysis. Page 53 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6550730 Mortgage Amount: $ 133,980 Section of Housing Act: 203(b) Date of Loan Closing: 11/15/01 Current Status: Foreclosed and conveyed to HUD on 1/1/04 – Claim paid $142,6001 on 1/19/04; Additional claim of $5,853 paid on 3/18/04 (as reported 7/30/04). Payments Before First Default Reported: 7 Unpaid Principal Balance: $132,998 Loss on resale of property: $67,282 Summary: Decatur Mortgage did not document the timing of the gift wire transfer of $4,083 from the non- profit donor (Nehemiah) and the seller contribution of $4,883 back to the donor. The gift was actually transferred first. Decatur did not adequately document the source of the earnest money deposit. The deposit was provided by a $500 check and an $860 check. The bank statement shows the $500 check cashed but not the second check. The bank statements don’t show if there was adequate cash to make the second payment. No savings pattern was established. The bank statements showed a balance in July 2001 of $57. In July the borrower had an unexplained deposit of $6,000 and an unexplained withdrawal of $4,831. Bank statements were not provided for the period where the earnest money was provided. Decatur and the underwriter (AF58) did not show why the borrower was an acceptable risk. The credit reports show the borrower had past judgments and a Chapter 7 Bankruptcy in 1994. In 1995 the borrower had a judgment of $25,200 on a mortgage. The credit report showed another judgment in 1998. The underwriter included unconfirmed bonuses and overtime in the income for mortgage credit analysis. Decatur and the underwriter used an unrealistically low estimate of property taxes in the mortgage credit analysis. The underwriter used $25 per month for taxes, which approximated the taxes on the undeveloped land. The County actually assessed taxes of $1,925 on the completed subject property, or about $160 per month. 2004-CH-1009 Page 54 Exit Table of Contents Appendix C Decatur did not document any investigation of an additional Social Security number identified on the credit report. Decatur also did not investigate all credit inquiries reported on the credit report. The Appraiser (JWM17R) used four comparables. All four comparables were FHA Insured sales. Three of the four comparables were within 3 blocks of the subject property and were in the same subdivision and likely built and sold by the same builder/seller as the subject. Two of the four comparables were sold over 6 months prior to the subject appraisal. The Appraiser said that supply and demand were in balance. Page 55 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6574687 Mortgage Amount: $ 160,014 Section of Housing Act: 203(b) Date of Loan Closing: 03/11/02 Current Status: Delinquent but reinstated by mortgagor 4/1/04 (as of 7/30/04) Indemnification agreement with Sponsor, August 12, 2004 through August 12, 2009. Partial claim of $12,233 paid by HUD on 3/20/2004. Prior Status: In Pre-foreclosure and under repayment. Payments Before First Default Reported: 7 Unpaid Principal Balance: $156,800 Summary: Decatur Mortgage did not document the timing of the $10,877 gift wire transferred from the Housing Action Resource Trust and the $11,827 seller contribution sent back to the Trust. The gift was actually wire transferred first. According to the HUD-1 Settlement Statement the borrower gave an earnest money deposit of $1,557 and another $259 at closing for an investment of $1,816. At closing the settlement agent paid a total of $6,736 to pay off nine of the borrower’s delinquent debts. This negative investment of $4,920 was paid from the $10,877 gift from the non-profit donor. Decatur did not document the actual provision of the $1,557 earnest money deposit and source of the funds. Bank account documentation did not show a pattern of savings or the actual deposit. The borrower told us that Decatur never required him to document the source of the funds for the money orders he used to pay his earnest money deposit. The borrower said the deposit cash was from part of his wife’s student loan. The underwriter (AF58) did not establish how the borrower would not be adversely affected as the buy-down period expired. Decatur and the underwriter used an unrealistically low estimate of property taxes for the mortgage credit analysis. The underwriter used $25 per month for taxes, which approximated taxes on the undeveloped land. The County assessed taxes of $1,323 on the completed subject property, which is about $110 per month. Decatur did not document investigation of credit inquiries that were reported on the credit reports. 2004-CH-1009 Page 56 Exit Table of Contents Appendix C The appraisal (by VIDEWC) used three comparable properties. Two of the comparable properties were sold more that six months before the appraisal and one of them was over a mile away from the subject property. The Appraiser said that current supply and demand were in balance but did not adequately justify the comparables used. The borrower told us that the seller’s staff told him not to apply for a mortgage with his wife due to her bad credit history, lack of a job and the impending foreclosure of their prior residence that the wife owned. The borrower said that a March 11, 2002 letter in Decatur’s file about past due accounts was false and typed by Decatur’s Loan Officer. The borrower said that the information was incorrect. The borrower said that he also hand carried a letter from his school to Decatur. Page 57 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6611721 Mortgage Amount: $ 136,720 Section of Housing Act: 203(b) Date of Loan Closing: 12/27/01 Current Status: In Default. Foreclosure started 4/1/04. (As of 7/30/04). Prior Status: Reinstated by mortgagor on 2/1/03. Payments Before First Default Reported: 7 Unpaid Principal Balance: $133,698 Summary: Decatur Mortgage’s file contained two different sales agreements dated the same day. The sales price was dropped from $144,861 to $138,877 to reflect a lower gift fund requirement and less cash due from the borrower. Decatur did not adequately document the source of funds for the $1,000 earnest money deposit. The borrower’s account history did not show that two $500 checks were cashed, and there were no copies of cancelled checks. At the time the borrower signed the sales agreement showing a $500 deposit, the borrower’s account balance was only $4. The bank statements did not show an ability to save. Decatur did not show that the borrower was an acceptable credit risk. The credit reports showed nine delinquent accounts and past collections some of which ran up to the credit report date. The settlement agent paid off two delinquent accounts totaling $356 at closing. The borrower told us that not all of her delinquent accounts were paid off at closing. Decatur did not document the timing of the $4,166 gift wire transfer from the non-profit donor (Nehemiah) and the seller contribution of $4,666 sent back to the donor. The gift was actually wire transferred first. The underwriter (V175) omitted a $24 per month delinquent account from the mortgage credit analysis. The debt was reported as an overdue debt of $1,922 on one credit report but as a collection account with $0 due on another credit report. Decatur and the underwriter used an unreasonably low estimate of property taxes in the mortgage credit analysis. The underwriter used an estimate of $25 per month for taxes, which approximated taxes for unimproved land. The County assessed $2,090 against the completed subject property, which was about $175 per month. 2004-CH-1009 Page 58 Exit Table of Contents Appendix C The underwriter did not show how the borrower would not be adversely affected as the buy down period expired. The appraisal (by JWM17R) used four comparable properties that were FHA insured loans and all were within 3 blocks of the subject property in the same subdivision. Being in the same subdivision means that the comparables were likely built by the same builder/seller as the subject property. Decatur did not investigate two credit inquiries shown on the credit report. One of the inquiries was a company named Direct Rental. We found a judgment listed in the Lexis-Nexis system for $5,093 by Auto Sales and Service filed on March 19, 2002. This debt was not listed as a debt on the applications or the credit report but likely existed at the time of the application and closing. Page 59 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6471089 Mortgage Amount: $ 148,291 Section of Housing Act: 203(b) Date of Loan Closing: 08/01/02 Current Status: Delinquent but reinstated by mortgagor 4/1/04. – (As of 7/30/04). HUD paid a $650 Loan Modification fee on 5/13/2004. Unpaid Principal Balance: $147,648 Summary: According to the HUD-1 Settlement Statement, the borrower provided an earnest money deposit of $1,439 as a total investment. The settlement agent paid a total of $6,464 at closing to pay off the borrowers delinquent debts. This negative investment of $5,025 was paid from the $10,520 gift from the Housing Action Resource Trust gift. Decatur Mortgage did not document the timing of the Housing Action Resource Trust gift wire transfer of $10,520 and the seller’s contribution of $11,020 sent back to the Trust. The gift was actually wire transferred first. Decatur did not adequately document that the borrower provided the $1,439 earnest money deposit. The seller’s letter to Decatur indicated that the borrower provided a check for $500 and a check for $939. The bank statements Decatur obtained did not cover the period of the checks to show they were ever cashed and no cancelled check was obtained. The bank statements did not show a pattern of savings. Decatur did not show how the borrower was an acceptable credit risk. The credit reports showed two large collection accounts. The borrower’s explanation was his foolishness at a young age. These debts were paid off at closing using gift funds. The underwriter (Y471) used a higher income figure in the mortgage credit analysis than what was supported by employment documentation. The underwriter did not show how the borrower would not be adversely affected as the buy down period expired. The underwriter stated that a second job was not used to qualify but the income was already overstated. Decatur did not document any investigation of credit inquiries that appeared on the credit reports. The Appraisal (by PWE2TC) used four comparable properties. Three of the comparables were over a mile away in a neighboring city. One of these three was sold over six months before the appraisal. 2004-CH-1009 Page 60 Exit Table of Contents Appendix C The Appraiser’s comment was that the close comparable was the only one available from the subject’s subdivision. The Appraiser estimated $135 per month for taxes, which the underwriter used. Page 61 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6443404 Mortgage Amount: $ 142,607 Section of Housing Act: 203(b) Date of Loan Closing: 10/15/01 Current Status: In Default (as of 7/30/04) – HUD paid a Special Forbearance fee to the servicer of $100 on 10/02/03. Unpaid Principal Balance: $140,652 Summary: Decatur Mortgage did not document any investigation of two additional Social Security numbers identified for the co-borrower on the credit report. The borrower had sufficient funds in the bank but Decatur did not document that the borrowers actually provided the $1,439 earnest money deposit from the borrower’s account and not from some other source. Decatur did not document that the $4,346 gift from a non-profit donor (Nehemiah) was wire transferred prior to the seller’s contribution of $5,146 being sent back to the donor. The gift was actually sent first. The underwriter (3248) overstated the borrower’s income by $174 per month from what was confirmed. The borrower would likely still have qualified. Decatur and the underwriter used an unreasonably low estimate of property taxes in the mortgage credit analysis. The underwriter used $40 per month as taxes that approximated the taxes on unimproved land. The County actually assessed taxes on the completed subject property of approximately $165 per month. Decatur did not document any investigation of nine credit inquiries that were reported on the credit report. 2004-CH-1009 Page 62 Exit Table of Contents Appendix C FHA Case Number: 151-6838872 Mortgage Amount: $ 167,728 Section of Housing Act: 203(B) Date of Loan Closing: 08/30/02 Current Status: Foreclosure completed 7/1/04 – (as of 7/30/04). Unpaid Principal Balance: $166,549. Summary: Decatur Mortgage did not document the timing of the $5,112 gift transfer from a non-profit donor (Nehemiah) and the seller contribution of $5,612 back to the donor. The gift was actually transferred first. Decatur did not adequately document the source of the $1,000 earnest money deposit or the $3,157 provided at closing. The seller provided a letter showing a $1,000 check payment but the bank statements Decatur obtained do not show the check being cashed, and there is no copy of a cancelled check. The bank account showed no pattern of savings and would have barely had enough funds to pay the earnest money check. Decatur did not show why the borrower was an acceptable credit risk. The credit report showed 18 accounts in collection. The credit report showed six debts that were not considered in the mortgage credit analysis or paid off at closing. The borrower’s explanations of bad debts did not reflect a good attitude towards credit. According to the HUD-1 Settlement Statement the borrower gave a $1,000 earnest money deposit and brought another $3,157 to closing for a total investment of $4,157. The settlement agent paid a total of $3,682 to pay off various delinquent accounts of the borrower. This shows that the borrower actually only gave $475 towards the transaction and the balance was provided by the non-profit donor. The underwriter (Y471) overstated income by $301 per month in the mortgage credit analysis by using borrower overtime and gain sharing earnings that were not confirmed by the employer. Decatur and the underwriter used an unreasonably low estimate of property taxes in the mortgage credit analysis. The underwriter used $40 per month for taxes, which approximated taxes on unimproved land. The County assessor told us that so far the land had only been assessed at the developer’s special rate for undeveloped land. The Assessor gave us an approximation of about $110 per month as an estimate for the subject property based on local tax rates. Page 63 2004-CH-1009 Exit Table of Contents Appendix C The appraisal report (by JWM17R) did not show the distance from the subject property for three of the four properties. Decatur did not document any investigation into a second Social Security Number shown for the borrower on a credit report. The Lexis-Nexis system also showed the second number shown for the borrower. Decatur did not document any investigation of two credit inquiries shown on the credit report. The seller raised the sales price on a second sales agreement from $165,300 to $170,412. The second sales agreement showed a gift from a non-profit sponsor where the first did not. 2004-CH-1009 Page 64 Exit Table of Contents Appendix C FHA Case Number: 151-6688221 Mortgage Amount: $ 139,156 Section of Housing Act: 203(b) Date of Loan Closing: 05/15/02 Current Status: Delinquent. Partial reinstatement by mortgagor 7/1/04. (As of 7/30/04). Prior Status: Not applicable Payments Before First Default Reported: 9 Unpaid Paid Balance: $136,446 Summary: Decatur Mortgage did not document the timing of the $4,240 gift wire transfer from a non-profit donor (Nehemiah) and the $4,740 seller’s contribution sent back to the donor. The gift was actually sent first. Decatur did not adequately support the source of the earnest money deposit of $1,413. Decatur did not have copies of cancelled checks, money orders and receipts to show that the earnest money was provided. Decatur and the underwriter (Y471) used an unreasonably low estimate of property taxes for the mortgage credit analysis. The underwriter used $40 per month for taxes, which approximated taxes on undeveloped land. Hendricks County had not yet assessed the subject property as a completed property. The County provided us with taxes assessed on other properties sold for more and less than the subject property so we were able to estimate a tax figure of approximately $250 per month. The Appraiser (JWM17R) used three of the five comparable properties were over two miles from the subject property. The other two comparable properties were within a block of the subject and were sold over six months before the appraisal. These two comparables were from information in the builder and appraiser files—were in the same subdivision as the subject—and likely were built and sold by the same builder/seller. Page 65 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6415426 Mortgage Amount: $ 119,922 Section of Housing Act: 203(b) Date of Loan Closing: 09/14/01 Current Status: Claim – Conveyed To HUD 8/1/03 (as of 7/30/04) Indemnification agreement with sponsor 8/12/2004 through 8/12/2009. Prior Status: Property Conveyed to Insurer Claims Paid: $129,433 8/31/03 2,875 1/16/04 Total $132,308 Payments Before First Default Reported: 4 Unpaid Paid Balance: $119,542 Loss on Property Sale: $59,696 Summary: The appraisal (by JWM17R) cited three comparable properties that were 1.5 miles from the subject property and one was 2 blocks away in the subject’s subdivision that was likely built by the same builder/seller as the subject. Decatur did not document the source of funds for the earnest money deposit totaling $1,218. The borrower provided two Travelers Express money orders totaling $718 and three personal money orders totaling $500. Decatur provided no support for the source of cash used to buy the money orders. Decatur did not document the timing of the wire transfers of the gift funds of $3,654 from a non- profit donor (Nehemiah) and the seller’s contribution of $4,454 back to the donor. The gift actually was transferred first. Decatur did not establish that the borrower’s income was stable. The borrower worked for three different employers in three different industries over a two-year period before the loan application. The underwriter (Y471) approved this loan even though the Mortgage Payment to Income ratio exceeded HUD’s guideline. The underwriter’s comments related to holding two jobs since the end of January, the two for one buy-down, and a minimal increase in housing expense. The borrower intended on changing jobs and the underwriter qualified the borrower at the lower first 2004-CH-1009 Page 66 Exit Table of Contents Appendix C year buy-down rate. The underwriter did not adequately show how the borrower would not be adversely affected as the buy-down period expired. The former housing expense was materially more than the full mortgage payment. The underwriter omitted auto loan debts totaling $262 per month from the mortgage credit analysis. Decatur and the underwriter used an unrealistically low estimate of property taxes, which approximated what would be paid on unimproved land. The underwriter used $40 per month but the County actually assessed approximately $128 per month on the completed property. Decatur did not show that the borrower’s credit worthiness improved since his Chapter 7 Bankruptcy in 1996. The borrower’s credit report still showed eight delinquent accounts. A bankruptcy discharge notice and a customer ledger from a creditor were faxed to Decatur from the seller’s development sales office, demonstrating that an interested third party provided them. Decatur’s Management did not perform a Quality Control Review of this loan even though it defaulted after only 4 payments. Page 67 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6649076 Mortgage Amount: $ 164,886 Section of Housing Act: 203(b) Date of Loan Closing: 04/24/02 Current Status: Foreclosure started 4/1/04 (as of 7/30/04) Prior Status: Default $100 Special Forbearance claim paid by HUD 5/22/03 750 Loan Modification claim paid by HUD 11/9.03 $850 Total partial claims paid Payments Before First Default Reported: 17 Unpaid Paid Balance: $171,147 Summary: Decatur Mortgage did not document the timing of the wire transfers of the gift funds of $11,025 from the Housing Action Resource Trust and the seller’s contribution of $11,525 back to the Trust. The gift actually was transferred first. According to the HUD-1 Settlement Statement the borrower provided $4,400 as earnest money as the only investment. At closing the settlement agent paid a total of $9,403 to pay off the borrower’s delinquent accounts. This negative investment of $5,003 was provided by the $11,025 gift from the donor. Decatur did not establish how the borrower was an acceptable credit risk just by paying off delinquent accounts as part of the home financing transaction. Decatur did not adequately support the source of the earnest money deposit. Receipts from the seller indicated that the borrower provided two money orders and a bank check totaling $4,400 for the earnest money deposit. Decatur did not establish where the money came from to buy the money orders and bank check. The bank statements in the file did not show sufficient funds for these payments. The underwriter (Y471) omitted a $48 per month liability that was included on the credit report but was not paid off at closing. Decatur and the underwriter used an unrealistically low estimate of property taxes, which approximated what would be expected for unimproved land. The underwriter used $25 per month. Hendricks County had not yet assessed the subject property as a completed home with a house on the lot, but as an unimproved lot the assessed taxes were $445, or about $37 per month. The taxes likely increased when the county reassessed the property as a finished home. 2004-CH-1009 Page 68 Exit Table of Contents Appendix C Decatur did not document any investigation of the credit inquiries identified on the credit reports. The sales price was increased in this case from $164,267 to $167,509 to cover the increase in the gift from the non-profit donor that the seller would have to contribute back to the donor. The appraisal (by JWM17R) cited three comparable properties. One comparable was 2 miles from the subject property and the other two were within one block that were in the same subdivision, and likely built and sold by the same builder/seller as the subject property. Page 69 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6642980 Mortgage Amount: $ 149,306 Section of Housing Act: 203(b) Date of Loan Closing: 02/18/02 Current Status: In Default (as of 7/30/04)- Prior Status: Delinquent Payments Before First Default Reported: 14 Unpaid Paid Balance: $147,418 Summary: Decatur Mortgage did not document any investigation of a second Social Security Number reported for the co-borrower on the credit reports. The borrower’s monthly rent payment shown on the credit report differed from that confirmed verbally by Decatur staff. The loan officer who took the application verbally verified the borrower’s prior rent payments. Decatur did not document the timing of the wire transfers of the gift funds of $10,551 from Housing Action Resource Trust and the seller’s contribution of $11,501 back to the Trust. The gift actually was transferred first. According to the HUD-1 Settlement Statement the borrower provided a $1,517 earnest money deposit as the only investment. At closing, the settlement agent paid a total of $6,596 to pay off delinquent accounts of the borrower. This negative investment of $5,079 was actually paid from the $10,551 gift from the non-profit donor. Decatur did not establish how the borrower was an acceptable risk just by paying off delinquent accounts from the property financing transaction and gift funds. The credit report identified 10 delinquencies and defaults. Decatur did not adequately show how the borrower’s attitude towards debt had changed. The seller raised the sales price of the subject property from $149,271 to $151,701 when the anticipated gift requirements went up. Decatur did not adequately establish the source of funds for the $1,517 earnest money deposit. The earnest money was provided by three money orders and Decatur did not document where the cash came from to buy the money orders. 2004-CH-1009 Page 70 Exit Table of Contents Appendix C The underwriter (AF58) omitted a $414 per month liability from the mortgage credit analysis. Decatur had the debt paid down at closing to less than 10 months remaining payments. This monthly payment was still material enough to affect the ability to meet borrower payment obligations. Decatur and the underwriter used an unrealistically low estimate of property taxes, which approximated that of unimproved land. The underwriter used $25 per month for taxes. The County actually assessed taxes of about $160 per month on the subject property as a completed home. The underwriter did not provide adequate compensating factors to show how the borrower would not be adversely affected as the buy-down period expired. The credit analysis was done using the initial buy down payment rate. The appraisal (by JWM17R) cited three comparable properties. All three comparable properties were located in the subject’s subdivision. One comparable was a cash sale and the other two were FHA insured. Since the comparables were all in the subject’s subdivision it was likely that they were all built and sold by the same builder/seller as the subject property. Page 71 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6589970 Mortgage Amount: $ 167,576 Section of Housing Act: 203(b) Date of Loan Closing: 02/22/02 Current Status: Default (as of 7/30/04) – First legal action to start foreclosure 6/1/03 Payments Before First Default Reported: 8 Unpaid Paid Balance: $166,091 Summary: Decatur Mortgage did not document the timing of the wire transfers of the gift funds of $5,108 from a non-profit donor (Nehemiah) and the seller’s contribution of $5,608 back to the donor. The gift actually was transferred first. Decatur did not adequately support the source of $3,750 of the $4,250 earnest money deposit. An initial deposit of $500 was made by check and bank statements in Decatur’s file showed it being cashed with just enough cash to cover the check. Decatur did not document where the remaining $3,750 deposit came from. The bank statements did not show a pattern of savings. The borrower told us that he sold his boat to come up with the earnest money deposit but he ended up getting $3,447 of the cash back at the closing. Decatur did not establish that the borrowers were acceptable credit risks. The credit report showed delinquent accounts for the borrowers. According to the HUD-1 Settlement Statement, the borrower gave earnest money of $4,250 but received $3,447 back at closing—leaving a net investment of $803. At closing the settlement agent paid a total of $3,169 to pay off the borrower’s delinquent accounts. This means that the negative investment of $2,366 was paid from the $5,108 provided by the non-profit donor’s gift. Decatur’s file contained three letters explaining account delinquencies and why the borrower’s pay stub showed less than 40 hours worked. The file also had a letter from a tire company explaining the borrower’s good payment history. All four of the letters were faxed to Decatur’s office from the seller’s subdivision sales office. The borrower told us that the letter dated February 21, 2002 explaining his short pay period was incorrect information and he was unaware of the letter. The letter said that the borrower’s girlfriend’s father had died so he missed some work. The borrower said that his girlfriend’s father did not pass away until June of 2003. The borrower did not know who prepared the letter. Decatur and the underwriter (AF58) used an unrealistically low estimate of property taxes for the mortgage credit analysis. The underwriter used $40 per month, which approximated the taxes on 2004-CH-1009 Page 72 Exit Table of Contents Appendix C undeveloped land. Johnson County actually assessed $2,445 in taxes against the completed property, or about $204 per month. Decatur did not investigate credit inquiries reported on the credit reports. The underwriter did not show how the borrower would not be adversely affected as the buy- down period expired since the borrower was qualified at the reduced rate. The appraisal (by JWM17R) cited four comparable properties that were all in the subject property’s subdivision and likely built and sold by the same builder/seller as the subject property. Two of the comparables were over six months old at the time of the appraisal, and the other two were taken from the builders and appraiser’s files. The Appraiser initially issued her report on January 30, 2002 showing a subject sales price of $165,849 and a value of $167,000. The Appraiser amended her report on February 20, 2002 to show a sales price of $170,462 and a value of $170,500. The Appraiser did not adjust any of her comparables and did not justify the amendment. Page 73 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6463779 Mortgage Amount: $ 138,852 Section of Housing Act: 203(b) Date of Loan Closing: 09/14/01 Current Status: Claim – Conveyed to HUD on 2/01/04 (as of 7/30/04). Prior Status: Default Payments Before First Default Reported: 9 Unpaid Paid Balance: $135,456 Total Claim Amount Paid: $166,284 Loss on Property Sale: $67,530 Summary: Decatur Mortgage did not verify the source of funds for the $1,411 earnest money deposit. According to a letter from the seller, the borrower provided a check for $500 and two money orders totaling $911. Decatur did not get bank statements or other documentation to show that the check came out of the borrower’s account and where the cash for the money orders came from. Decatur did not document the timing of the $8,231 wire transferred gift from the non-profit donor Housing Action Resource Trust and the seller’s contribution of $9,181 sent back to Trust. According to records we got from the settlement agent’s bank, the settlement agent wire transferred the seller’s contribution to the donor on September 14, 2001 (day of closing) but did not receive the wire transfer from the donor until September 17, 2001 (three days later). In this case, the Seller provided the gift because it paid the donor the cash prior to the gift being made. According to the HUD-1 Settlement Statement, the borrower gave earnest money of $1,411 but received $351 back at closing—for a net investment of $1,060. At closing the settlement agent paid $4,418 to pay off the borrower’s delinquent accounts. This negative investment of $3,358 was paid from the gift funds from the non-profit donor, which were provided by the seller. The underwriter (V175) approved this loan with a Mortgage Payment to Effective Income ratio over HUD guidelines without compensating factors. The underwriter did not show how the borrower would not be adversely affected as the buy- down period expired. 2004-CH-1009 Page 74 Exit Table of Contents Appendix C Decatur and the underwriter used an unrealistically low estimate of property taxes for the mortgage credit analysis. The underwriter used $40 per month, which approximated the taxes on undeveloped land. Hamilton County actually assessed taxes against the completed property of about $86 per month. Decatur did not show how the borrower was an acceptable credit risk. The credit reports showed that the borrower had $4,418 in delinquent debt and had a $1,460 judgment. Decatur did not show improved credit worthiness just by paying off delinquent accounts from closing proceeds. Decatur did not show that the borrower had stable income. In a 2 & ½ year period, the borrower worked at five different companies in two different positions. The borrower had only worked at her current employer for 10 months prior to closing. Decatur’s processor was unable to verify the income but used pay statements to calculate the income. Decatur did not document their investigation of eight credit inquiries that were reported on the credit report. HUD’s Neighborhood Watch system showed this loan was in default after 9 payments were received. The first payment was due 11/1/01. The Sponsor did not submit this loan to HUD for endorsement until October 9, 2002. The payment history sent by the Sponsor did not show that this loan was current when it was submitted for endorsement. The appraisal (by JWM17R) used four comparable properties. Two comparables were from the subjects’ subdivision and were likely built and sold by the same builder/seller as the subject. One of these two comparables was over six months prior to the appraisal. The other two comparable properties were one mile away and 1 & ½ miles away respectively. The Appraiser stated that supply and demand were in balance but cited a lack of recent comparable sales. Page 75 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6476419 Mortgage Amount: $ 167,779 Section of Housing Act: 203(b) Date of Loan Closing: 11/19/01 Current Status: In Default. Foreclosure started 6/1/04 (as of 7/30/04) – Partial claims paid by HUD totaling $4,034. Indemnification agreement with sponsor for period 8/12/2004 through 8/12/2009. Prior Status: Reinstated but delinquent Payments Before First Default Reported: 3 Unpaid Paid Balance: $163,630 Claims Paid: Partial Claim $3,934 paid 11/16/02 Special Forbearance 100 paid 6/23/03 Total: $4,034 Summary: Decatur Mortgage did not document the timing of the $5,179 wire transferred gift from a non- profit donor (Nehemiah) and the seller’s contribution of $5,979 sent back to the donor. The gift was actually sent first. Decatur did not document the source and provision of $1,500 of the $1,726 earnest money deposit. Decatur and the underwriter (V175) omitted a $10 per month debt on the credit report from the mortgage credit analysis without justification. Another $43 per month debt was deleted from a revised credit report and Decatur did not explain why this debt was omitted. Decatur did not show how the borrower improved his attitude towards credit after a Chapter 7 Bankruptcy discharged in 1999. The credit reports reported nine small accounts with delinquencies. The settlement agent paid off $372 of the borrower’s delinquent accounts at closing. Decatur did not document adequate investigation of eight credit inquiries reported on the credit report. The one credit inquiry that the borrower did explain was an auto inquiry. The borrower’s explanation was that the auto dealer was looking for the best interest rate for a new 2004-CH-1009 Page 76 Exit Table of Contents Appendix C Chevy Lumina. This explanation indicated that the borrowers were in the process of buying a new car at the time of the loan application. No further research was indicated. Decatur and the underwriter used an unrealistically low estimate of property taxes for the mortgage credit analysis. The underwriter used $40 per month, which approximated the taxes on undeveloped land. The County actually assessed taxes against the completed property of about $253 per month. This loan went into default after only three payments were made. The loan servicer reported that the cause of the default was excessive obligations. Decatur’s management did not perform a Quality Control Review of this loan. Page 77 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6476579 Mortgage Amount: $ 130,935 Section of Housing Act: 203(b) Date of Loan Closing: 11/19/01 Current Status: Claim Paid. Property conveyed to insurer 2/1/04, claim payment of $136,315 on 2/5/04, and payment of $5,898 on 5/9/04 (as of 7/30/04). Indemnification agreement with sponsor 8/12/2004 through 8/12/2009. Prior Status: Per Neighborhood Watch dated 4/29/04, Foreclosure Completed Payments Before First Default Reported: 2 Unpaid Principal Balance: $127,563 Appraiser: Appraiser’s Staff ID # JWM17R Loss on Resale: $64,912 Summary: Decatur Mortgage did not document any investigation into an additional Social Security Number for the borrower shown on the Mortgage Credit Services, Incorporated credit report dated 10/17/01. Decatur did not investigate to determine whether the borrower used the number or may have co-signed loans. The sales price increased by $2,500 on the second purchase agreement based on the Nehemiah Gift being replaced by a Housing Action Resource Trust (Hart) Gift for $1,795 more money. Decatur did not adequately show that the borrower was an acceptable credit risk. The credit reports identified 14 delinquent accounts and accounts in collection, and the borrower’s explanations did not adequately explain how the delinquencies were outside of his control. Decatur had the settlement agent pay off nine delinquent accounts at closing. This did not make the borrower an acceptable credit risk. Decatur did not document the timing of the $5,695 wire transfer gift from the Housing Action Resource Trust, and the seller contribution of $6,645 wire transferred back to the Trust. The gift actually was sent first, but it was Decatur’s responsibility to document the source of the gift funds, and they did not do this. Decatur did not adequately document the source of funds of $1,100 for the earnest money deposit. The bank statements did not cover the period of the indicated checks, and the source of funds for the unusual deposits was not established. The HUD-1 settlement statement only gave 2004-CH-1009 Page 78 Exit Table of Contents Appendix C the borrower credit for a $500 earnest money deposit, and the borrower may have been overcharged by an additional $600 in earnest money deposit. Decatur did not document a Quality Control Review for this mortgage loan that defaulted after two payments. HUD requires a 100 percent full review of any mortgage loan that defaults in the first six months after closing. Decatur did not properly verify the borrower’s employment and pay statements, and the underwriter (AF58) overstated the borrower’s monthly income by $69 per month. Decatur incorrectly omitted a monthly rental/purchase liability of $115, and the underwriter understated the borrower’s liabilities by $115 per month by not including the 24-month rental agreement as a debt. Decatur did not document an investigation on whether a $356 per month family auto loan on the Quick Questionnaire was the same debt as the $312 Tranex auto loan, or new debt not reported on the credit report. The underwriter may have understated the borrower’s debts and mortgage credit ratios by not including the $356 as debt. The underwriter used an unreasonably low estimate of property taxes in the mortgage credit analysis to qualify the borrower. The underwriter estimated $40 per month. The Marion County Treasurer actually accessed $1,844 against the property, or approximately $154 per month. The appraiser (JWM17R) used two comparables in the subject property’s subdivision, and two comparables over two miles from the subject property, that were over six months before the subject appraisal. Decatur accepted a faxed rental letter, written explanation of bad debts, borrower pay statements and a W-2 form, from the seller’s Sales Office at River’s Edge Townhouses—an interested third- party. Page 79 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6477778 Mortgage Amount: $ 128,651 Section of Housing Act: 203(b) Date of Loan Closing: 11/07/01 Current Status: Default (as of 7/30/04). Prior Status: Repayment Payments Before First Default Reported: 14 Unpaid Principal Balance: $127,080 Appraiser: Appraiser’s Staff ID #JWM17R Summary: The Appraiser (JWM17R) used two comparables in the subject property’s subdivision. The underwriter (H527) used an unreasonably low estimate of property taxes in the mortgage credit analysis to qualify the borrower. The underwriter estimated $25 per month. The Marion County Treasurer actually assessed $1,383 against the property, or approximately $115 per month. The underwriter used an unreasonably low estimate of property taxes to reduce the mortgage credit analysis ratios and qualify the borrower. The underwriter did not provide compensating factors to justify underwriting this mortgage loan. The underwriter did not adequately show that the borrower was an acceptable credit risk. The credit reports identified four Civil Judgments and bad debts totaling $8,084 that were paid off at closing from Housing Action Resource Trust Gift Funds. The use of gift Funds to pay off the borrower’s debts is an inducement, and reduces the selling price of the property. Decatur did not document the timing of the $9,922 wire transfer gift from a non-profit donor to the settlement agent, and the seller payment wire transferred back to the donor. The gift actually was sent first. The underwriter did not document how the borrower would not be adversely affected as the buy- down period expired. Decatur did not document the source of funds for the earnest money deposit. The bank statements do not show the funds being withdrawn from the borrower’s account. 2004-CH-1009 Page 80 Exit Table of Contents Appendix C FHA Case Number: 151-6482988 Mortgage Amount: $ 120,785 Section of Housing Act: 203(b) Date of Loan Closing: 11/08/01 Current Status: Claim of $125,615 paid 12/11/03. Additional claim of $2,588 paid 4/23/04. Property conveyed to insurer (on 12/01/03). Indemnification agreement with sponsor for 8/14/2004 through 8/14/2009. Prior Status: Foreclosure Completed 10/01/03 Payments Before First Default Reported: 4 Unpaid Principal Balance: $119,742 Appraiser: Appraiser’s Staff ID #JWM17R Loss on Resale: $51,981 Summary: Decatur Mortgage did not document the source of funds of $1,250 for the earnest money deposits that was paid for with money orders. The bank statements did not cover the period when the earnest money payments were made to the seller, and no ability to save was established. No evidence was provided to show the actual source of the cash used to buy the money orders, and the previous months bank balance was $11 as of July 31, 2001. Decatur did not document the timing of the Housing Action Resource Trust (Hart) Gift wire- transferred from the non-profit donor to the settlement agent, or the seller contribution wire- transferred back to the donor. Decatur did not document that the gift funds came from the donor’s funds and not the sellers. The gift was actually wire transferred first. The underwriter (AF58) used an unreasonably low $25 per month estimate of property taxes in the mortgage credit analysis to qualify the borrower. The County Treasurer actually assessed $1,215 against the property, or approximately $101 per month. Decatur did not document any investigation of a credit inquiry shown on the credit report to ensure that the borrower did not obtain any additional credit. The underwriter did not show how the borrower would not be adversely affected as the two year buy-down period expired. Page 81 2004-CH-1009 Exit Table of Contents Appendix C The underwriter did not use an estimate for homeownership association dues in the mortgage credit analysis. This understated housing expenses by $20.33 per month. The underwriter would have exceeded HUD’s mortgage credit ratios, and this would have required compensating factors for loan approval, if the underwriter considered the full principal and interest amount of the note, the association dues, and property taxes assessed. The underwriter overestimated the borrower’s monthly income by $425 per month on the mortgage credit analysis. Decatur accepted faxed pay statements from the seller’s sales office. The employment documentation cannot be handled by an interested third party (Arlington Meadows). The Appraiser (JWM17R) used all three comparable properties from the subject property’s subdivision, which may have been built and sold by the same builder/seller. HUD’s file contained two sales agreements with different dates. The higher sales amount was used and included a higher gift figure from the non-profit donor. The higher price covered the extra contribution to the non-profit donor that the seller would have to make. Housing Action Resource Trust Gift Funds were used to pay off the borrower’s debts. According to the HUD-1 Settlement Statement, the borrower provided $1,250 in earnest money, and another $43 at closing, for a total investment of $1,293. At closing the settlement agent paid $2,079 to pay off the borrower’s delinquent accounts. The negative investment of $786 was paid out of the gift from the non-profit donor. Decatur did not document a Quality Control Review of this mortgage loan. The mortgage loan defaulted after four payments, and HUD requires all mortgage loans that default within the first six months after closing to undergo a 100 percent review. 2004-CH-1009 Page 82 Exit Table of Contents Appendix C FHA Case Number: 151-6483461 Mortgage Amount: $ 165,800 Section of Housing Act: 203(b) Date of Loan Closing: 12/03/01 Current Status: Foreclosed and conveyed to HUD on 6/1/04. HUD paid claim of $174,454 on 6/24/04. (As of 7/30/04) Prior Status: Foreclosure Started on 6/01/03 Payments Before First Default Reported: 13 Unpaid Paid Balance: $161,419 Loss on Property Sale: N/A Appraiser: Appraiser’s Staff ID #JWM17R Summary: Decatur Mortgage did not document an investigation of an additional social security number for the borrower on the credit report. Decatur did not document the timing of the wire transfers of $10,552 from the non-profit donor (Housing Action Resource Trust) to the settlement agent, and the wire transfer of the seller’s contribution of the Gift, plus a fee from the seller's proceeds back to the donor. The Gift was actually transferred first. Decatur did not show how the borrowers were acceptable credit risks. The credit report showed 20 delinquencies in excess of $5,000, and one Municipal Court Judgment that was not satisfied. Decatur did not demonstrate how the borrowers improved their attitude toward debt by paying off the borrower’s delinquent accounts at closing by proceeds from the non-profit donor and the borrower. The underwriter (AF58) used an unreasonably low estimate of property taxes to qualify the borrower for the mortgage credit analysis. The underwriter estimated $25 per month for taxes. The actual taxes assessed by the County Treasurer were $2,436, or approximately $203 per month. The underwriter did not document how the borrower would be able to afford the increase in property taxes as of the first escrow analysis. Page 83 2004-CH-1009 Exit Table of Contents Appendix C Decatur did not document the Omission of Liabilities in excess of $5,000 obtained from the credit report, and excluded from the initial and final Uniform Residential Loan Application. The underwriter did not provide compensating factors to justify approving this loan, which exceeded HUD’s approved maximum ratios. Two of the four comparable properties are over one mile from the subject property, and the Appraiser (JWM17R) did not adequately justify using these properties. According to the HUD-1 Settlement Statement, the borrower gave a $1,701 earnest money deposit and $49 at closing—for a total investment of $1,750. At closing, the settlement agent paid a total of $5,814 to pay off the borrower’s delinquent accounts. The Housing Action Resource Trust (a non-profit donor) provided the negative investment of $4,064. 2004-CH-1009 Page 84 Exit Table of Contents Appendix C FHA Case Number: 151-6486054 Mortgage Amount: $ 143,115 Section of Housing Act: 203(b) Date of Loan Closing: 11/21/01 Current Status: In Default. (as of 7/30/04) HUD Paid $750 loan modification fee on 9/14/2003. Indemnification agreement with sponsor for 8/12/2004 through 8/12/2009. Prior Status: Forbearance (on 3/01/04). Payments Before First Default Reported: 2 Unpaid Principal Balance: $160,622 Appraiser: Appraiser’s Staff ID #JWM17R . Summary: Decatur Mortgage did not document the timing of the $6,562 Housing Action Resource Trust Gift wire-transfer, and the seller contribution of $7,512 wire transfer back to the Trust. The gift actually was sent first. According to the HUD-1 Settlement Statement, the borrower provided $1,443 in earnest money, plus $23 at closing, for a total investment of $1,466. The settlement agent paid $3,094 at closing to pay off the borrower’s delinquent accounts. This negative investment of $1,628 was paid from the $6,562 gift from the non-profit donor, Housing Action Resource Trust. Decatur did not provide documentation to show the borrowers provided the source of funds for the earnest money deposit. Bank account information did not show the payment and did not show a history of savings. The underwriter (AF58) did not adequately consider the borrowers credit worthiness after their Chapter 7 Bankruptcy. The closing agent paid off 11 collection and delinquency accounts, and the underwriter did not establish how the borrowers attitude and use of credit had improved. The underwriter did not establish how the borrower would not adversely be financially affected as the buy-down period expired. Decatur and the underwriter used an unrealistically low estimate of property taxes for the mortgage credit analysis. The underwriter used $40 per month for taxes, which approximated taxes on unimproved land. The County actually assessed $1,426 on the property as a completed residence that approximated $119 per month. Page 85 2004-CH-1009 Exit Table of Contents Appendix C Decatur did not investigate and resolve a second Social Security Number for the co-borrower that was reported in the credit report. Decatur did not establish that the borrower had stable income. The borrower held more than 4 unrelated jobs in the last two years, for brief periods Decatur did not document a quality control review of this case file. This mortgage loan defaulted after two payments, and HUD requires a 100 percent review of early payment loan defaults. The seller raised the sales price of the house on a second sales agreement from $143,459 to $145,392 when the non-profit donor was changed from Nehemiah to the Housing Action Resource Trust program. The Appraiser (JWM17R) issued the appraisal report on October 25, 2001 with an estimated value of $144,000. The Appraiser modified the appraisal on November 26, 2001 (after closing) giving a new estimate of $145,500. The Appraiser adjusted each comparable property up by $1,000 each and the revised value covered the revised sales price of the property. 2004-CH-1009 Page 86 Exit Table of Contents Appendix C FHA Case Number: 151-6486185 Mortgage Amount: $ 110,229 Section of Housing Act: 203(b) Date of Loan Closing: 09/19/01 Current Status: Property conveyed to insurer (on 9/01/03) Indemnification agreement with sponsor for 8/12/2004 through 8/12/2009. Claim: $116,976 claim paid on 9/08/03 and $2,079 claim paid 12/27/03. Prior Status: Foreclosure completed on 4/1/03 per Neighborhood Watch 5/06/04. Payments Before First Default Reported: 5 Unpaid Principal Balance: $109,702 Appraiser: Appraiser’s Staff ID #JWM17R. Loss on Resale: $56,963 Summary: The underwriter (3248) used an unreasonably low property tax figure of $40 per month to analyze the borrowers ability to pay the mortgage. The actual taxes assessed amounted to $77 per month. The underwriter computed a Mortgage Payment to Income Ratio of 32 percent on the Mortgage Credit Analysis Worksheet. This exceeded HUD’s ceiling of 29 percent, and required compensating factors. The underwriter did not provide adequate compensating factors to justify approving this loan The borrower defaulted after five payments, and HUD requires a 100 percent Quality Control Review. Decatur Mortgage did not document a review was performed on this early payment defaulted mortgage loan. The underwriter did not show how the borrower would not adversely be financially affected as the buy-down period expired. Decatur did not establish that the borrower had stable employment. The borrower was showing 10 months full time employment, and the borrower continually changed part time jobs. Page 87 2004-CH-1009 Exit Table of Contents Appendix C Decatur did not document the timing of the $3,360 Nehemiah Gift wire-transfer to the settlement agent, and the seller contribution of $4,160 back to the non-profit donor. The gift funds were actually sent first. 2004-CH-1009 Page 88 Exit Table of Contents Appendix C FHA Case Number: 151-6490797 Mortgage Amount: $ 111,954 Section of Housing Act: 203(b) Date of Loan Closing: 09/21/01 Current Status: In Default (as of 7/30/04). Foreclosure Started (on 2/01/04) Prior Status: Delinquent as of 8/01/03. Payments Before First Default Reported: 19 Unpaid Principal Balance: $109,934 Appraiser: Appraiser’s Staff ID #JWM17R Summary: The underwriter (ZLPR Loan Prospector) did not document how the borrower would not adversely be financially affected as the buy-down period expired. The underwriter used an unreasonably low property tax figure of $40 per month to analyze the borrowers ability to pay the mortgage. The actual taxes assessed amounted to $72.68 per month. The underwriter computed a Total Fixed Payment to Income Ratio of 55 percent on the Mortgage Credit Analysis Worksheet. This exceeded HUD’s ceiling of 41 percent, and required compensating factors. The underwriter did not provide adequate compensating factors to justify approving this loan. Decatur Mortgage did not document the timing of the $3,413 Nehemiah Gift wire-transfer to the settlement agent, and the seller contribution of $4,213 (included the fee), wire-transfer back to the donor. The gift funds were sent first. All three of the comparable properties were within two blocks of the subject property, and possibly in the same subdivision. Comparables 2 & 3 were sold more than six months before the subject appraisal. The Appraiser (JWM17R) did not adequately justify using these properties. Page 89 2004-CH-1009 Exit Table of Contents Appendix C FHA Case Number: 151-6494487 Mortgage Amount: $ 105,864 Section of Housing Act: 203(b) Date of Loan Closing: 11/28/01 Current Status: Default (as of 7/30/04). First legal action to commence foreclosure on 3/01/04. Prior Status: Foreclosure Started on 3/01/03. Payments Before First Default Reported: 10 Unpaid Principal Balance: $104,680 Appraiser: Appraiser’s Staff ID #JWM17R Summary: The underwriter (Y471) used an unreasonably low property tax figure of $25 per month to analyze the borrowers ability to pay the mortgage. The actual taxes assessed on the completed residence amounted to $141 per month. Decatur Mortgage did not document and verify the $334 car payment listed on the pre-loan application. The exclusion on the Uniform Residential Loan Application is an Omission of Liabilities, and the exclusion of the car debt on the Mortgage Credit Analysis Worksheet reduced the borrowers recurring expenses and ratios. Comparables 3 & 4 were within two blocks of the subject property, possibly in the same subdivision, and their sales dates were over six months from the appraisal date. Comparables 1 & 2 were located more than two miles from the subject property, and the appraiser (JWM17R) did not adequately justify using these properties. 2004-CH-1009 Page 90 Exit Table of Contents Appendix C FHA Case Number: 151-6507102 Mortgage Amount: $ 132,660 Section of Housing Act: 203(b) Date of Loan Closing: 10/31/01 Current Status: Property Conveyed to HUD on 4/01/04. Prior Status: Foreclosure Completed on 2/01/04. Claim: $138,025 Date Paid: 4/09/04 Payments Before First Default Reported: 15 Unpaid Principal Balance: $129,391 Appraiser: Appraiser’s Staff ID #VIDEWC Loss on Resale: $58,437 Summary: The underwriter (AF58) did not document how the borrower would not adversely be financially affected as the buy-down period expired. The underwriter used an unreasonably low property tax figure of $40 per month to analyze the borrowers ability to pay the mortgage. The actual taxes assessed amounted to $228 per month. Decatur Mortgage did not document and verify, per the credit report, the two names using the borrower’s social security number, and two different social security numbers for the co- borrower, and how these problems were resolved. Decatur did not document the timing of the $10,042 Housing Action Resource Trust Gift wire- transfer to the settlement agent, and the seller contribution of $10,992 (includes the fee) wire- transfer back to the Trust. The gift funds were actually sent first. All three of the comparable properties were within five blocks of the subject property, and were in the same subdivision and likely built and sold by the same builder/seller as the subject property. Comparable 1 was sold more than six months before the subject property appraisal on 10/26/01, and the Appraiser (VIDEWC) did not adequately justify using this property. Page 91 2004-CH-1009 Exit Table of Contents Appendix C Decatur allowed an interested third party to provide some of the documentation for loan processing. Earnings statements, social security benefits, various debt, and deposit explanation letters were faxed from a project named Rivers Edge. Rivers Edge is one of the Builder/Seller’s developments. The Housing Action Resource Trust Gift Funds were used to pay off $6,087 of the borrower’s debts at closing, per the debts listed on the credit report. The HUD-1 Settlement Statement shows the borrower giving a $1,300 earnest money deposit but getting back $505 at closing for a net investment of $795. At closing, the settlement agent paid $6,087 to pay off the borrower’s delinquent accounts. This negative investment of $5,292 was paid from the $10,042 gift from the Housing Action Resource Trust (non-profit donor). 2004-CH-1009 Page 92 Exit Table of Contents Appendix C FHA Case Number: 151-6527323 Mortgage Amount: $ 134,842 Section of Housing Act: 203(b) Date of Loan Closing: 11/05/01 Current Status: Property Conveyed to HUD on 9/01/03. Prior Status: Foreclosure Completed on 2/01/03. Claim: $144,970 Date Paid: 9/25/03 Payments Before First Default Reported: N/A Unpaid Principal Balance: $132,490 Appraiser: Appraiser’s Staff ID #JWM17R . Loss on Resale: $70,131 Summary: The underwriter (Y471) did not document how the borrowers would not adversely be financially affected as the buy-down period expired. The underwriter used an unreasonably low property tax figure of $40 per month to analyze the borrowers ability to pay the mortgage. The actual taxes assessed amounted to $118 per month. Decatur Mortgage did not document and verify, per the credit report, the five inquiries within 90 days (one was a collection inquiry). There was no information in the file to determine if the loan processor followed up or investigated the credit inquiries. Decatur did not document the timing of the $10,110 Housing Action Resource Trust Gift wire- transfer to the settlement agent, and the seller contribution of $11,069 (includes the fee) wire- transfer back to the donor. The gift funds were sent first—in the proper order. Decatur did not establish that the borrowers had stable employment. The borrowers worked for two different employers in two different industries over a one-year period leading up to the mortgage application. Decatur did not verify the source of funds for the earnest money deposit, which totaled $1,377 over four payments, according to a letter in the file from Dura Builders to Decatur Mortgage. Bank statements were not verified during this time period, and there was little evidence in the files to verify that the borrower made the earnest money deposit. Page 93 2004-CH-1009 Exit Table of Contents Appendix C Comparables 1 & 4 were within one block of the subject property, and possibly in the same subdivision. Comparables 2 & 3 were more than one mile from the subject property, and the Appraiser (JWM17R) did not adequately justify using these two comparables when comparables are located more than one mile from the subject property. All four comparable properties were FHA insured and three were from the builder and appraiser’s files. The underwriter did not establish that the borrowers had established good credit. The credit report showed three Civil Judgments, a tax lien, and over $3,000 in past due debts. According to the HUD-1 Settlement Statement, the borrower provided $1,377 in earnest money, plus $202 at closing, for a total investment of $1,579. At closing, the settlement agent paid a total of $7,265 to pay off the borrower’s delinquent accounts. Housing Action Resource Trust Gift Funds of $10,110 provided this negative investment of $5,686. The borrowers went into default after only making three payments, and Decatur’s managing owner provided insufficient documentation to determine what work was done in the Quality Control Review they completed. The managing owner found no deficiencies in their review. 2004-CH-1009 Page 94 Exit Table of Contents Appendix C FHA Case Number: 151-6542156 Mortgage Amount: $ 153,924 Section of Housing Act: 203(b) Date of Loan Closing: 11/05/01 Current Status: In Default as of 7/30/04. Foreclosure Started on 11/01/02. Prior Status: Delinquent on 10/01/02. Payments Before First Default Reported: 4 Unpaid Principal Balance: $148,346 Appraiser: Appraiser’s Staff ID #VIDEWC Summary: The underwriter (3248) did not document how the borrowers would not adversely be financially affected as the buy-down period expired. The underwriter used an unreasonably low property tax figure of $40 per month to analyze the borrowers ability to pay the mortgage. The actual taxes assessed amounted to $124 per month. Decatur Mortgage did not document the timing of the $10,691 Housing Action Resource Trust Gift wire-transfer to the settlement agent, and the seller contribution of $11,641 (includes the fee) wire-transfer back to the Trust. The gift funds were actually sent first, but Decatur did not document the source of the gift as required by HUD. The underwriter overstated the borrowers other income. The borrowers’ two children were entitled to receive social security benefits until they reach age 18. The underwriter overstated the benefit (income) by 25%, and should not have used this benefit in the analysis. To count the benefit it must be scheduled to last for at least three years, and the children were to receive the benefit for less than two years. HUD does not consider it a reliable source of income unless it lasts for at least three years. The underwriter did not verify the source of funds for the earnest money deposit totaling $1,564 over four payments according to a letter in the file from Dura Companies to Decatur. The borrower did not have a checking or savings account, and no documentation was provided to support the source of funds for the money orders. Page 95 2004-CH-1009 Exit Table of Contents Appendix C Comparables 1 & 3 were within five blocks of the subject property, and were in the same subdivision. They were sold more than six months before the subject property appraisal on 10/26/01. Comparable 1 is 1-1/2 miles from the subject property, and the Appraiser (VIDEWC) did not adequately justify using this one comparable. The underwriter did not document that the borrowers had established good credit. The credit report showed three Civil Judgments, a Repossession, and nine past due debts. According to the HUD-1 Settlement statement, the borrower provided $1,505 in earnest money as the total investment. At closing the settlement agent paid $4,604 to pay off the borrower’s delinquent accounts. The Housing Action Resource Trust Gift Funds of $10,691 provided this negative investment of $3,099. Decatur did not document and verify, per the credit report, two names using the same social security number. Decatur did not document an investigation into the second social security number. The underwriter did not provide compensating factors to justify calculating the borrower’s total mortgage payment using the first year buy-down amount for principal and interest. 2004-CH-1009 Page 96 Exit Table of Contents Appendix C FHA Case Number: 151-6567251 Mortgage Amount: $ 151,539 Section of Housing Act: 203(b) Date of Loan Closing: 12/31/01 Current Status: Foreclosure Completed on 5/01/03. Conveyed to HUD 7/1/04. Claim of $162,252 paid on 7/24/04. Prior Status: Foreclosure completed 5/1/03. Payments Before First Default Reported: 5 Unpaid Principal Balance: $150,940 Appraiser: Appraiser’s Staff ID #VIDEWC Summary: Decatur Mortgage did not document the timing of the $10,619 Housing Action Resource Trust Gift wire-transfer to the settlement agent, and the seller contribution of $11,569 (includes the fee) wire-transfer back to the Trust. The gift funds were actually sent first, but Decatur did not document the source of the gift as required by HUD. The underwriter (AF58) used an unreasonably low property tax figure of $40 per month (which approximated taxes on undeveloped land) to analyze the borrowers ability to pay the mortgage. The actual taxes assessed amounted to $180.53 per month. The underwriter did not document how the borrowers would not adversely be financially affected as the buy-down period expired. Decatur did not document the reasoning for the three different appraisal amounts in the mortgagee case file, and each time the appraisal amount increased. The appraisal estimated value increased when the subject’s sales price increased. This showed that the Appraiser (VIDEWC) raised the property’s value when the sales price increased. Decatur did not identify this mortgage loan as an early payment default and perform a Quality Control Review as required by HUD. The underwriter did not document whether the borrower had established good credit after a Chapter 7 Bankruptcy. The credit report showed 16 delinquent accounts subsequent to bankruptcy. Page 97 2004-CH-1009 Exit Table of Contents Appendix C Decatur did not investigate and document possible day care expenses for the co-borrower. This recurring expense would have been included in the Mortgage Credit Analysis Worksheet, and would have affected the fixed payment-to-income ratio, and required a compensating factor. According to the HUD-1 Settlement Statement, the borrower provided an earnest money deposit of $1,000 and another $156 at closing, for an investment of $1,156. At closing, the settlement agent paid $6,733 to pay off the borrower’s delinquent accounts. This negative investment of $5,577 was paid out of the $10,619 gift from the non-profit donor. 2004-CH-1009 Page 98 Exit Table of Contents Appendix C FHA Case Number: 151-6584264 Mortgage Amount: $ 156,259 Section of Housing Act: 203(b) Date of Loan Closing: 01/08/02 Current Status: Claim of $166,098 paid on 4/12/04 (as of 7/30/04) – Conveyed to HUD for Insurance Benefits on 4/1/04. Prior Status: Foreclosure completed 2/01/04 Payments Before First Default Reported: 8 Unpaid Paid Balance: $152,674 Total Claim Amount Paid: $166,098 Loss on Property Sale: $55,089 Summary: Decatur Mortgage did not verify the source of the $1,587 earnest money deposit. According to receipts from the builder/seller, the borrowers paid their earnest money deposit in two personal checks. There were copies of the uncancelled checks. The bank statements in the loan files did not show these two checks being cashed and the bank statements did not show a history of savings. Decatur did not document the timing of the wire transfers of the $4,763 gift from the non-profit donor (Nehemiah) and the $5,263 seller’s contribution back to the donor. The gift transfer actually occurred first. The underwriter (V175) approved this mortgage after computing ratios that exceeded HUD guidelines. The underwriter did not provide compensating factors to justify the approval. The underwriter omitted two liabilities as shown on the credit report from the mortgage credit analysis. The two debts were $258 per month to Bank One, and $152 per month owed to Wells Fargo. No debts were paid off at closing and the files did not show these debts being paid off. These two debts totaled $410 per month. Decatur and the underwriter used an unrealistically low estimate of property taxes in the mortgage credit analysis. The underwriter used $40 per month, which approximated taxes on the unimproved land. Marion County actually assessed property taxes of $1,939, or about $161 per month as a completed residential property. Page 99 2004-CH-1009 Exit Table of Contents Appendix C The loan officer who took the application also performed a verbal verification of rent. The Appraiser (JWM17R) used three comparable properties. The Appraiser stated that supply and demand were in balance. Two of the comparables were 5 blocks away but both were conventional loans and the sales were over six months prior to the subject appraisal. The third comparable was an FHA insured loan that was 1.6 miles away from the subject and was derived from the builder’s and Appraisers files. In Decatur’s file we noted that all of the pay statements and a bank statement were faxed to Decatur from a place named Lloyd Meadows. This may have been a subdivision owned by the seller. We also noted that Decatur’s file contained two typewritten unsigned letters. One letter explained a gap in the borrower’s employment, and the other discussed delinquent accounts. Both of these letters had notes attached that said, “sign at closing.” These letters appeared to have been prepared by someone other than the borrower, and Decatur was to have the letters signed by the borrower at closing. 2004-CH-1009 Page 100 Exit Table of Contents Appendix C FHA Case Number: 151-6584501 Mortgage Amount: $ 134,893 Section of Housing Act: 203(b) Date of Loan Closing: 02/21/02 Current Status: Claim paid. - Conveyance to HUD 10/1/03. Indemnification agreement with sponsor for 8/12/2004 through 8/12/2009. Prior Status: Conveyed to HUD 10/01/03 Payments Before First Default Reported: 2 Unpaid Paid Balance: $134,583 Total Claim Amount Paid: $143,236 paid 10/25/03 2,662 paid 2/21/04 Total $145,898 Loss on Property Sale: $62,098 Summary: Decatur Mortgage did not verify the source of funds for the $1,370 earnest money deposit. Decatur did not obtain bank statements showing checks provided as earnest money were cashed. The bank statements provided showed little cash and no ability to save. Decatur did not document the timing of the wire transfer of $6,211 from a non-profit donor Housing Action Resource Trust and the seller’s contribution of $7,161 back to the Trust. The transfers actually took place in the proper order. According to the HUD-1 Settlement Statement, the borrower gave earnest money of $1,370, plus $170 at closing, for a total investment of $1,540. At closing, the settlement agent paid $2,976 to pay off the borrower’s delinquent accounts. This negative investment of $1,436 was paid from the $6,211 gift from the non-profit donor. Decatur did not show how the borrower was an adequate credit risk. The credit report indicated eight delinquent accounts that Decatur paid off at closing out of closing proceeds. This payoff did not change the borrower’s attitude towards credit. Decatur did not investigate a credit inquiry reported on the credit report. Page 101 2004-CH-1009 Exit Table of Contents Appendix C The underwriter (V175) approved this loan although the mortgage credit ratios exceeded HUD guidelines. The only compensating factors provided were: job stability, ratios within guidelines and a 2-for-1 buy-down. The ratios as computed were over HUD’s guidelines as shown on the Mortgage Credit Analysis Worksheet using the lowest payment level under the buy-down. The underwriter’s justification was inadequate. The underwriter did not show how the borrower’s ability to pay would not adversely be affected as the buy-down period expired. The borrower’s ratios were already over HUD guidelines at the lowest buy-down amount. Decatur and the underwriter used an unrealistically low estimate of property taxes for the mortgage credit analysis. The underwriter used $25 per month for property taxes, which approximated the taxes on unimproved land. Marion County actually assessed $1,595 against the completed home, which was about $133 per month. The Appraisal report (by JWM17R) used three comparable properties one mile from the subject property and one that was one block away in the same subdivision—and likely built by the same builder/seller as the subject property. All four comparable properties were FHA insured properties from the builder’s and Appraiser’s files. This loan went into default after only two payments had been received. Decatur’s management did not identify this loan as an early default loan, and did not perform a Quality Control Review of the loan. 2004-CH-1009 Page 102 Exit Table of Contents Appendix C FHA Case Number: 151-6588010 Mortgage Amount: $ 116,623 Section of Housing Act: 203(b) Date of Loan Closing: 03/11/02 Current Status: Default. First legal action to commence foreclosure on 3/1/04 (as of 7/30/04) – Prior Status: In Default Payments Before First Default Reported: 9 Unpaid Paid Balance: $114,995 Summary: Decatur Mortgage did not verify the source of funds for the $1,113 earnest money deposit. The bank statements in the loan file did not support the provision of the deposits, and the statements did not show a pattern of savings. Decatur did not document the timing of the wire transfers of $4,675 from the non-profit donor Housing Action Resource Trust and a $5,625 seller contribution back to the Trust. The gift was actually wire transferred first. According to the HUD-1 Settlement Statement, The borrower provided a $1,113 earnest money deposit, and gave another $236 at closing, for a total investment of $1,349. At closing the settlement agent paid a total of $1,455 to pay off a judgment against the borrower. This negative investment of $106 was paid from the $4,675 gift from the non-profit donor. Decatur did not adequately show that the borrower was an acceptable credit risk. The credit report showed that the borrower had debts over $4,300 and a civil judgment of $1,455 that was paid off at closing. The credit report showed a history of poor money management and unwillingness to pay debts. The credit report showed a liability of $2,359 that was in collection. Decatur did not pay this off at closing, and it was not considered in the mortgage credit analysis. The borrower told us that the loan originator knew about this debt but said that they didn’t have to show it or pay it off. The borrower said that she still owed this debt. HUD’s file contained an unsigned letter dated October 31, 2001 from the borrower stating that a charged off Universal account was due to her letting someone else get the card in the borrower’s name, and that the judgment on a prior residence was due to damages caused by someone else. The borrower told us that she never provided the letter or the information in the letter. The borrower said that the information was not true and that the debts were hers. Page 103 2004-CH-1009 Exit Table of Contents Appendix C The seller raised the sales price from $109,041 to $118,491 four months after the initial sales agreement. The second sales agreement showed a higher estimate of gift from a different non- profit donor. The borrower told us that she only knew that the increased sales price had something to do with her needing the gift since she didn’t have enough money. The underwriter (ZLPR Loan Prospector) did not adequately show how the borrower would not be adversely affected as the buy-down expired. Decatur and the underwriter used an unrealistically low estimate of property taxes in the mortgage credit analysis. The underwriter used $40 per month, which approximated the taxes on the undeveloped land. Marion County actually assessed $990 on the property as a developed property, which was about $82 per month. The appraisal (by JWM17R) used four comparable properties that were all within the same subdivision as the subject property, and were likely built and sold by the same builder/seller as the subject property. Two comparables were over six months prior to the appraisal. Three of the comparables were shown as being from the builder and Appraiser files. The Appraiser stated that supply and demand were in balance but cited a lack of similar reported sales to justify using old comparables. 2004-CH-1009 Page 104 Exit Table of Contents Appendix D Status of Claims Paid HUD's FHA Loan Mortgage Claim Paid Computed Number Status Amount By HUD Sale Loss 151-6605466 Default $152,605 $0 $0 151-6647913 Delinquent $167,779 $0 $0 151-6387115 Default $164,328 $0 $0 151-6396198 Delinquent $132,559 $0 $0 151-6907158 Delinquent $117,080 $750 $0 151-6957663 Default $127,585 $0 $0 151-6610262 Default $153,772 $0 $0 151-6442972 Default $144,637 $0 $0 151-6561313 Delinquent $154,686 $650 $0 151-6485246 Foreclosed $150,727 $0 $0 151-6510827 Default $158,796 $0 $0 151-6531249 Claim Paid $126,672 $136,282 $60,944 151-6537560 Default $141,288 $0 $0 151-6550730 Claim Paid $133,980 $148,454 $67,282 151-6574687 Delinquent $160,014 $12,233 $0 151-6611721 Default $136,720 $0 $0 151-6471089 Delinquent $148,291 $650 $0 151-6443404 Default $142,607 $100 $0 151-6838872 Foreclosed $167,728 $0 $0 151-6688221 Delinquent $139,156 $0 $0 151-6415426 Claim Paid $119,922 $132,307 $59,696 151-6649076 Default $164,886 $850 $0 151-6642980 Default $149,306 $0 $0 151-6589970 Default $167,576 $0 $0 151-6463779 Claim Paid $138,852 $166,284 $67,530 151-6476419 Default $167,779 $4,034 $0 151-6476579 Claim Paid $130,935 $142,213 $64,912 151-6477778 Default $128,651 $0 $0 151-6482988 Claim Paid $120,785 $128,203 $51,981 151-6483461 Claim Paid $165,800 $174,454 $0 151-6486054 Default $143,115 $750 $0 151-6486185 Claim Paid $110,229 $119,055 $56,963 151-6490797 Default $111,954 $0 $0 151-6494487 Default $105,864 $0 $0 151-6507102 Claim Paid $132,660 $138,025 $58,437 151-6527323 Claim Paid $134,842 $144,970 $70,131 151-6542156 Default $153,924 $0 $0 151-6567251 Claim Paid $151,539 $162,252 $0 151-6584264 Claim Paid $156,259 $166,098 $55,089 151-6584501 Claim Paid $134,893 $145,898 $62,098 151-6588010 Default $116,623 $0 $0 Totals $5,827,404 $1,924,512 $675,063 2004-CH-1009 Page 105 Exit Table of Contents Appendix D THIS PAGE LEFT BLANK INTENTIONALLY 2004-CH-1009 Page 106 Exit Table of Contents Appendix E Auditee Comments and OIG’s Evaluation Page 107 2004CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 108 Exit Table of Contents Appendix E Page 109 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 110 Exit Table of Contents Appendix E Page 111 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 112 Exit Table of Contents Appendix E Page 113 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 114 Exit Table of Contents Appendix E Page 115 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 116 Exit Table of Contents Appendix E Page 117 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 118 Exit Table of Contents Appendix E Page 119 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 120 Exit Table of Contents Appendix E Page 121 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 122 Exit Table of Contents Appendix E Page 123 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 124 Exit Table of Contents Appendix E Page 125 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 126 Exit Table of Contents Appendix E Page 127 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 128 Exit Table of Contents Appendix E Page 129 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 130 Exit Table of Contents Appendix E Page 131 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 132 Exit Table of Contents Appendix E Page 133 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 134 Exit Table of Contents Appendix E Page 135 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 136 Exit Table of Contents Appendix E Page 137 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 138 Exit Table of Contents Appendix E Page 139 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 140 Exit Table of Contents Appendix E Page 141 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 142 Exit Table of Contents Appendix E Page 143 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 144 Exit Table of Contents Appendix E Page 145 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 146 Exit Table of Contents Appendix E Page 147 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 148 Exit Table of Contents Appendix E Page 149 2004-CH-1009 Exit Table of Contents Appendix E 2004-CH-1009 Page 150 Exit Table of Contents Appendix E Page 151 2004-CH-1009 Exit Table of Contents Appendix E OIG Evaluation of Auditee Comments Decatur's overall response was that it followed HUD’s requirements in effect at the time in gathering information. Additionally, that it was the responsibility of the sponsor and its underwriters in how they analyzed the information provided and for the decision to approve the loans we cited in this report. Decatur's owners asserted that they provided adequate oversight of Decatur, took corrective actions, and voluntarily closed its operations. Therefore, the owners should not be held responsible for any technical origination deficiencies along with the sponsor's analysis and loan approval decisions. Decatur's owners also maintained that they performed adequate Quality Control Reviews over Decatur's loans and although they did not document what was done during each review—they were not specifically required to do so. Decatur's owners also stated that corrective actions they and their sponsor took served to lower Decatur's default rate. We agree that the sponsors are primarily responsible to HUD for the actions of loan correspondents; however, the correspondents are still responsible for the origination and processing that they perform on behalf of the sponsors and HUD/FHA. We cited HUD’s regulations and requirements in the findings of the report as necessary. In addition to specific HUD/FHA requirements, loan correspondents and sponsors are required to follow prudent lending practices. The corrective actions that Decatur's owners indicated were required by the sponsor were basically already prudent lending practices that Decatur and its sponsor should have followed. Despite discontinuing the use of the Homeownership Action Resource Trust for homebuyer assistance, Decatur continued using the Nehemiah program for homebuyer assistance. At the time we selected the 41 defaulted loans for review, Decatur's default rate for the period September 1, 2001 through August 31, 2003 was 8.1 percent, while the National average was only 2.16 percent and for the State of Indiana State it was 3.09 percent. For the period July 1, 2002 through June 30, 2004, Decatur managed to lower its default rate to 6.27 percent while the National rate was 1.84 percent and the State rate was 2.84 percent. These rates demonstrate that while Decatur improved its performance, it still experienced a much higher than average default rate. Decatur's owners asserted that HUD's Quality Assurance Division already addressed the issues we cited with Decatur's sponsor for eight of the loans cited in this report. We included those eight loans in our review because at the time of our audit, HUD was entering into an indemnification agreement with the sponsor. HUD and the main sponsor did not enter into an indemnification agreement for the eight loans until August 12, 2004. We modified the wording in our findings as needed to clarify who was responsible for what actions and modified our recommendations as necessary. HUD’s management needs to address the loans we cited with the sponsors, but we also believe that HUD needs to consider the issues we identified with Decatur's owners in any possible future applications to originate FHA-insured loans. Finding 1 2004-CH-1009 Page 152 Exit Table of Contents Appendix E Decatur’s owners disagreed with this finding. The owners asserted that they provided adequate management oversight and never submitted documentation that they knew to be deficient. The owners stated that as a loan correspondent, Decatur did loan processing by obtaining information and the sponsor’s underwriters were responsible for the analysis of the documentation provided. The owners maintain the issues we cited were underwriting issues that should be addressed with its sponsors. We disagree that Decatur’s owners adequately oversaw operations as we discussed in the second finding of this report. We agree that the sponsors are primarily responsible to HUD/FHA for the actions of its loan correspondents and for the underwriting approval decisions. As a loan correspondent, Decatur Mortgage Company was responsible to HUD/FHA and the sponsors for the application process and, the obtaining and processing of documentation in accordance with FHA’s requirements and prudent lending practices. To a large degree, sponsors rely on information provided by loan correspondents in performing the underwriting analysis. As we cited in the first finding, Decatur processed loan applications that overstated or provided unverified income, and understated expenses. Decatur failed to adequately document the actual source of borrower funds and allowed gift funds provided by non-profit donors to pay-off delinquent debts of the borrowers. Decatur allowed interested third parties to provide documentation and tended to use the same appraiser for its loans. Although the sponsor is primarily responsible to HUD, our analysis of Decatur’s delinquent loans as a whole did not show that Decatur’s staff was using prudent loan origination practices to gather information for the sponsor’s underwriters. We modified our finding to clarify lender responsibilities and modified our recommendations as needed. Verifying / Supporting Income and source of Funds Decatur's owners asserted that FHA does not require loan correspondents to analyze employment or financial documentation to determine the effective income or assets for closing. This analysis is done by the underwriter and not the loan correspondent. The owners assert that the income issue is related strictly to underwriting the loan—not to origination or processing. Decatur's owners stated that in FHA Case number 151-6605466, Decatur properly obtained a rental agreement and a copy of a rent check from the borrower and had no reason to question the borrower's veracity. The homebuilder's sales agent confirmed that the borrower herself furnished the rental information and the sales staff had no knowledge of misinformation. Decatur's owners stated that for FHA Case number 151-6542156, Decatur properly obtained copies of the Social Security benefits letters and the loan application disclosed the ages of the borrower's children. The underwriter decided how to treat the income. The underwriter grossed up the income in accordance with HUD's rules on nontaxable income. We do not agree with Decatur's assertions. In FHA Case number 151-6605466, Decatur obtained a rental agreement dated the day of the subject property sales agreement and a copy of an uncashed check. The bank statements did not show any such rental payments received by the Page 153 2004-CH-1009 Exit Table of Contents Appendix E borrower and no explanation was obtained. We agree that the sponsor's underwriter is responsible for rejecting this loan if there is evidence that the rental income was not being received, but Decatur did not meet its obligations to the sponsor and HUD to properly verify income. In this Case, the only documentation Decatur provided was a lease and a copy of the front of a personal check. The bank statements did not show such a check deposited so the evidence provided was inadequate. The fact that Decatur's owners had to verify the provision of the check and lease with the seller's agent demonstrates that Decatur may have obtained this documentation from the seller's agent and not from the borrower. In FHA Case number 151-6542156, the Social Security income was for two children that were approaching the age of 18. According to documents in Decatur's loan file, this income was due to their deceased father and not due to a disability. Social Security income was nontaxable so the amount verified by the Social Security Administration was a gross amount and not net. As such, grossing up an additional 25 percent was improper. The grossed up amount was provided to the sponsor on the loan application prepared by Decatur. It was Decatur's error to report the grossed up income on the application and the underwriter’s error in not reducing the income or eliminating it from the mortgage credit ratio analysis due to its short-term duration. Appraisals Decatur's owners asserted that a loan correspondent initiates/orders the appraisals, but does not evaluate the appraisals. They also stated appraisal evaluation is an underwriting function and not that of a loan correspondent. Decatur's owners asserted that lenders and correspondents are only responsible for identifying appraisals they knew or should have known were defective. Decatur did not know nor should have known of any deficiencies with comparable sales for any of the cited appraisals. Decatur's owners asserted that there is no prohibition against using two comparable properties in the subject' subdivision and the use of comparables over a mile away or over six months old was explained by the appraiser. In the five cases cited in our first finding where appraisals were adjusted upwards, Decatur did not condone an increased value without support for the higher valuation. It was the underwriter's responsibility to ensure that the appraiser's conclusions were acceptable. We agree that the primary responsibility for reviewing the appraisals rested with the sponsor. We modified the wording as appropriate in the report. Although Decatur maintains that it did not condone unsupported increases in appraisal valuation, we noted that for FHA Case 151- 6485246, a Decatur employee faxed a request to the appraiser that stated "new sales price $153,116 please adjust appraisal closing at 2:00 today". The appraiser subsequently increased the appraised value. This indicates that Decatur's staff was able to request and obtain changes in appraisals based on changes in the sales price. We modified our recommendations to include HUD reviewing the appraisals on the cases we mentioned in this report to determine if the appraisals were defective, and to take any actions deemed necessary against the appraiser and sponsor. Borrower Credit 2004-CH-1009 Page 154 Exit Table of Contents Appendix E Decatur's owners responded that in the cases we cited in our report, Decatur obtained and provided adequate documentation to the sponsor, and the sponsor's underwriter made the determination whether the borrower's credit was worthy of loan approval. Decatur also stated the credit report inquiries were not credit inquiries, and did not require investigation. We agree that the sponsor's underwriter was primarily responsible for the underwriting approval of these loans. Decatur, as a loan correspondent, was responsible for fully processing loan applications and submitting loans to the sponsor that met HUD’s requirements. For FHA Case number 151-6387115 cited by Decatur’s owners, the credit inquiries were by Wireless Finance and Ameritech Small Business. Even though these inquiries may not have been from a lending institution, they could still represent possible delinquent accounts or other debt. At closing for this loan, Decatur had more of the borrower's delinquent accounts paid-off than was actually provided by the borrower. Although the decision to approve this loan was ultimately the sponsor's underwriter, Decatur had a responsibility to submit only loans to the sponsor that showed acceptable credit histories. For FHA Case number 151-6396198 cited by the owners, the credit report inquiries were from a credit bureau and a mortgage inquiry. These inquiries all represent possible credit that should have been researched. A recurring problem we cited in our first finding was delinquent accounts being paid-off at closing from closing proceeds. Paying off delinquent accounts at closing does not reflect well on the credit worthiness of a borrower. It is true the sponsor's underwriter was ultimately responsible for the decision to approve the loans cited, but Decatur's agreement with its sponsor required loans to comply with FHA’s requirements before submission. Decatur was responsible for the processing of these loans and the decision that it was acceptable to be approvable by the sponsor. Source of Funds Decatur's owners responded that in the cases we cited in our first finding, the earnest money deposits were less that two percent of the sales price and did not require verification. They said if the deposits appeared excessive based on the borrower's savings history, the sponsor's underwriter should have requested additional documentation of the earnest money deposits. Regarding nonprofit gift funds, Decatur's owners asserted that HUD Handbook 4155.1 REV-4, CHG-1, nor any other FHA provision required evidence of a wire transfer from nonprofits to the closing agents. They asserted that HUD's Single Family Reference Guide states the transfer of down payment assistance funds could be reflected as a transaction on the HUD-1 Settlement Statement. We disagree with Decatur's response. For the loans we cited in this report, the borrowers did not demonstrate any history of savings—thus Decatur should have documented the earnest money deposits during the loan processing. HUD Handbook 4155.1 REV-4, Section 2-10, requires lenders to document fund transfers from the donor to the borrower. Lenders must obtain verification the closing agent received the gift funds from the donor. We agree the underwriter Page 155 2004-CH-1009 Exit Table of Contents Appendix E should have required Decatur to obtain such documentation, but it was still Decatur’s responsibility to the loan processor to gather the documentation. The closing agent lacked documentation of the wire transfers to and from the nonprofit donors. We obtained the documentation directly from the closing agent's bank. In only one case—FHA Case number 151-6463779—the nonprofit donor provided the gift funds after the seller's contribution was sent to the nonprofit. In this Case, the seller provided the gift funds in violation of HUD’s requirements. Such verification was a loan processing requirement and the sponsor should have required verification by Decatur. The Single Family Reference Guide referred to by Decatur's owners was dated November 27, 2001. The Guide refers to Mortgagee Letter 2000-28. The Letter required donors to show that gifts to homebuyers did not come from interested parties, and made lenders responsible to obtain verification the closing agent received funds from the donor. Mortgagee Letter 2002-2 dated January 16, 2002 states when a seller or a nonprofit pays a homebuyers consumer debt to meet debt to income ratios, this is an inducement to purchase and is not acceptable underwriting. The underwriter is ultimately responsible for the mortgage credit analysis. However, Decatur processed the loans that allowed nonprofit donors to pay-off borrower debts and sellers to provide gift funds without documenting if this occurred after the receipt of funds from the donor. Payment of Delinquent Debts Decatur's owners asserted they complied with FHA’s guidelines in place at the time for using nonprofit gift funds to pay borrower delinquent accounts. The owners claimed HUD did not prohibit gift funds to be used to pay-off borrower’s delinquent debts at closing until after February 16, 2002—after the FHA Case numbers were ordered. The owners cited FHA Case number 151-6838872 as a Case where the gift funds were not used to pay-off borrower debts. Decatur's owners are correct about the date of HUD's prohibition on the practice of using gift funds to pay-off borrower’s delinquent debts; however, the funds had to be used to pay-off delinquent debts reflects on the borrower's credit worthiness. For FHA Case number 151- 6838872, the borrower only provided $475 toward the transaction after paying off bad debts. This amounted to only .03 percent of the $170,412 sales price. This Case was not one of the 23 Cases we cited where gift funds were used to pay-off bad debts. Borrower Expenses and Property Taxes We do not agree that Decatur was not responsible for the issues cited in this audit report. As a loan correspondent, Decatur was responsible for processing the loan application for submission to the sponsor. Since Decatur prepared the application form, it made the decision on the estimate of taxes and expenses to provide to the sponsor. The purpose of the mortgage credit analysis is to determine whether the loan applicant will be able to afford the anticipated mortgage payments and other expenses. To estimate taxes at a level paid by the developer on undeveloped land rather than what the borrower would be expected to pay is not a reasonable estimate—regardless of what is specifically prohibited by 2004-CH-1009 Page 156 Exit Table of Contents Appendix E HUD’s regulation. Any monthly expenses omitted from the loan application were improper. The sponsor was responsible for the underwriting of the loans but must—to a large extent—rely on information provided by the loan correspondent. In these cases, Decatur failed the sponsor and HUD by providing low tax estimates, and failed the loan applicants in cases where the ability to pay their mortgage and living expenses was borderline. Documentation Provided by Interested Third Parties Decatur's owners asserted that credit reports and verification forms may not pass through the hands of interested third parties, but they were not aware of any prohibition against borrowers furnishing bank statements, pay statements, W-2 forms, letters of explanation, and other items by using a third parties fax machine. Handbook 4000.2 REV-2 only cited credit reports and verification forms as examples of what interested third parties were not allowed to handle. Decatur's practice was to accept faxed documentation prior to formal loan application, but require original documents at the time of the loan application when Decatur met with the borrowers. Decatur's owners stated HUD did not prohibit the use of a third party's equipment to transmit loan documentation until January 2004. Decatur's owners stated that in the three cases where our report cited incorrect letters of explanation created by the seller, Decatur had no reason to suspect the information was inaccurate. The owners asserted the borrowers furnished the documentation and represented that the information was correct. The owners stated it is ultimately an underwriter's responsibility to ensure that a file does not contain documentation improperly handled by third parties. We agree the sponsor's underwriters were responsible for approving the loans when file documents showed that they were faxed from the seller's office. If the loan correspondent obtained original documentation from the borrowers after receiving a faxed copy, we would not have cited the issue. If Decatur's loan officer received the documentation from the borrower during a face-to-face interview, there would not have been a reason to fax it from the seller's office. W-2 statements and letters of explanation are key documents supporting the amount of earnings and why past delinquencies arose. Even if HUD had not specifically cited the documentation type in past mortgagee letters or handbooks, prudent lending practices would require the loan officer to be absolutely sure that the documentation was provided by the borrower and not fabricated by the seller or someone else with an interest in the transaction. A document faxed in from a seller or real estate agent does not show that the borrower provided the documentation or knew about the documentation. For FHA Case number 151-6589970, Decatur asserted that the borrower provided the letter of explanation about a short pay period. However, the borrower said the letter was wrong and he had never seen it before. The sponsors are ultimately responsible to HUD for the actions of their loan correspondents, but Decatur did not properly follow prudent lending practices in obtaining all documentation for submission to the sponsor. Finding 2 Decatur's owners disagreed with the second finding of this audit report. Page 157 2004-CH-1009 Exit Table of Contents Appendix E Decatur's owners asserted that Decatur's Branch Manager oversaw the operations of Decatur's staff, and the managing owner—Homebuilders Financial Network—provided management support. The owners indicated Homebuilders Financial Network performed Quality Control Reviews over at least 10 percent of Decatur's loan originations each quarter in accordance with its approved Quality Control Plan. Decatur's owners stated they followed the requirements of the Quality Control Plan in all Cases reviewed, but were not required by HUD to repeat the lists of items reviewed or show the analysis done and documents verified in each Case reviewed. HUD only requires quality control reports to identify deficiencies identified and cited. The owners asserted the deficiencies identified in this report were underwriting issues that Decatur was not responsible for. Furthermore, they said the Quality Control Reviews were not deficient because they did not identify the same issues. Decatur's owners also asserted they were not given access to early default information in HUD's Neighborhood Watch System until mid 2002. Although Decatur's owners said they followed their approved Quality Control Plan, they had no documentation to show what they did for the Cases they reviewed. HUD's Mortgagee Approval Handbook 4060.1 REV-1, dated September 1993, paragraph 6-3(D), requires the quality control reviewers to obtain new credit reports. Paragraph 6-3(E) of the Handbook requires the quality control plan to provide for the written reverification of the mortgagor's employment, deposits, gift letter, or other sources of funds. These requirements indicate the quality control reviewer will be obtaining documentation needed to perform the reviews. The sole documentation that Decatur's owners were able to provide for each loan reviewed was a one-page summary report showing that Decatur did a good job, or showing what minor problems were identified and corrected. Decatur's owners said they did everything required by the Quality Control Plan for all loans reviewed, but had no support for what was specifically reviewed for each loan. If a lender does not document what they did to verify whether the loan origination and processing was done correctly, HUD and the lender lack assurance that the lender was prudent in conducting its reviews and it becomes difficult to follow-up on corrective actions taken. 2004-CH-1009 Page 158 Exit Table of Contents
Decatur Mortgage Company, L.L.C., Non-Supervised Loan Correspondent, Indianapolis, IN
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)