oversight

American Mortgage Express Corporation d.b.a. American Residential Mortgage Corporation, Mt. Laurel, NJ

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-11-18.

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

                                                           Issue Date
                                                              November 18, 2004
                                                           Audit Case Number
                                                               2005-AT-1003




TO:        John C. Weicher, Assistant Secretary for Housing-Federal Housing
            Commissioner, H

FROM:

           James D. McKay
           Regional Inspector General for Audit, 4AGA

SUBJECT:   American Mortgage Express Corporation
           d.b.a. American Residential Mortgage Corporation
           Mt. Laurel, New Jersey


                                 HIGHLIGHTS

 What We Audited and Why

           We audited American Mortgage Express Corporation’s, d.b.a. American
           Residential Mortgage Corporation (American Mortgage Express) underwriting of
           seven Federal Housing Administration (FHA) loans. The loans were originated
           by its loan correspondent, Cotton State Mortgage, Inc. (Cotton State), Atlanta,
           GA. We conducted the audit based on the results of a prior Office of Inspector
           General audit that identified FHA loan origination deficiencies at Cotton State.

           Our objective was to determine if the underwriting of these loans complied with
           FHA requirements.


 What We Found

           We found significant underwriting deficiencies in four of seven loans. American
           Mortgage Express underwriters did not properly evaluate the borrower liabilities,
           income, and credit worthiness. The underwriting deficiencies occurred because
           American Mortgage Express’s prior management did not provide adequate
           control and supervision over the staff, nor did they have adequate internal
           procedures in place to prevent the deficient underwriting from occurring. As a
           result, American Mortgage Express approved loans for borrowers who were not
           qualified for FHA insured mortgages. By approving these loans, American
           Mortgage Express increased HUD’s insurance risk, as three loans with a total
           unpaid balance of $307,544 defaulted and the fourth loan foreclosed with a
           $103,794 insurance claim.

What We Recommend


           We recommend that the Assistant Secretary for Housing-Federal Housing
           Commissioner require American Mortgage Express to indemnify three loans
           totaling $307,544 and reimburse HUD $103,794 in claims paid for another loan.

           We further recommend HUD require American Mortgage Express to monitor all
           loan underwriting functions for compliance with HUD/FHA requirements.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06 REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We discussed our review results with American Mortgage Express and HUD
           officials during the audit. We provided a copy of the draft report to American
           Mortgage Express officials on October 5, 2004 for their comments and discussed
           the report with the officials at the exit conference on October 19, 2004. American
           Mortgage Express provided written comments on November 3, 2004.

           The complete text of the auditee’s response along with our evaluation of that
           response can be found in Appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                                    4

Results of Audit
      Finding 1: American Mortgage Express Did Not Follow HUD Requirements   5
      When Underwriting Loans

Scope and Methodology                                                        8

Internal Controls                                                            9

Appendix
      A.   Schedule of Questioned Costs and Funds To Be Put To Better Use    10
      B.   Auditee Comments and OIG’s Evaluation                             11
      C.   Criteria                                                          15
      D.   Narrative Case Presentations                                      17




                                           3
                    BACKGROUND AND OBJECTIVES

American Mortgage Express was incorporated in the Commonwealth of Pennsylvania on
March 2, 1994. HUD approved American Mortgage Express as a Title II non-supervised
mortgagee on November 29, 1994. American Mortgage Express originates FHA, Department of
Veteran Affairs (VA), and conventional loans. The company also purchases and sells residential
mortgage loans. American Mortgage Express is licensed to operate in a number of states, with a
concentration of business in the East Coast region. The company headquarters is located in
Mt. Laurel, New Jersey. Cotton State is a loan correspondent for American Mortgage Express.

On September 18, 2002, HUD notified American Mortgage Express of its intent to terminate the
HUD-FHA approval agreement of its Cherry Hill, New Jersey, office to originate HUD-FHA
insured single-family mortgage in HUD’s Camden, New Jersey jurisdiction. HUD cited
American Mortgage’s high default and claim rate as the basis for the proposed termination.
HUD withdrew the proposed termination on January 7, 2003, based on responses received from
American Mortgage Express. American Mortgage Express made major changes in its senior
management, underwriting and loan origination staff, and internal procedures. Other changes
made by American Mortgage Express included terminating its branch offices in
Dunedin, Florida, and Atlanta, Georgia, in 2002.

Our audit objective was to determine if the underwriting of the seven loans complied with FHA
requirements for the underwriting of FHA insured single-family mortgages originated between
April 1, 2001 and April 30, 2003.




                                              4
                                 RESULTS OF AUDIT

Finding 1: American Mortgage Express Did Not Follow HUD
           Requirements When Underwriting Loans
American Mortgage Express did not adhere to HUD requirements and prudent lending practices
when underwriting seven FHA-insured loans we reviewed for compliance. Four of the seven
loans had significant underwriting deficiencies that included inadequate credit analyses and
inadequate qualifying ratios. The conditions existed because of lack of control and supervision by
prior management over the staff and inadequate internal procedures. As a result of the
deficiencies, American Mortgage Express needs to indemnify HUD for three FHA-insured loans
with a total unpaid balance of $307,544 and reimburse HUD $103,794 in claims paid for another
loan.



 American Mortgage Express
 Did Not Comply with HUD
 Requirements


               American Mortgage Express did not comply with HUD requirements when
               underwriting seven loans we reviewed. Four of seven loans had significant
               underwriting deficiencies, as shown below.


                                      INADEQUATE
                                      ANALYSIS OF            INADEQUATE           INADEQUATE
                   FHA CASE         LIABILITIES AND          ANALYSIS OF           QUALIFYING
                   NUMBER                CREDIT                INCOME                RATIOS
                  101-9934811              X                      X                    X
                  101-9824807              X                                           X
                  105-0011109              X                                           X
                  101-9742188              X                                           X

               An individual description of the underwriting deficiencies for each of the seven
               loans is shown in Appendix D. American Mortgage Express prior management’s
               lack of control and supervision over the staff and inadequate internal procedures
               contributed to the underwriting deficiencies.




                                                5
Inadequate Analysis of
Liabilities and Credit

            American Mortgage Express did not adequately analyze the borrowers’ liabilities
            and credit. The loan files documented a history of borrower credit problems and
            excessive obligations. We found four loans with underwriting deficiencies. We
            cite two examples.

            For FHA Case Number 101-9824807, American Mortgage Express did not
            properly evaluate the borrower’s credit worthiness and ensure that the borrower
            demonstrated financial responsibility. The borrower’s credit history included
            multiple delinquent credit and collection accounts. Six of the derogatory accounts
            had been delinquent 90 days or more 12 times. The borrower’s history of poor
            credit should have resulted in the rejection of the loan. American Mortgage
            Express did not adequately consider the borrower’s disregard for meeting credit
            obligations. According to HUD Neighborhood Watch, the borrower defaulted on
            the loan due to excessive obligations.

            For FHA Case Number 105-0011109, American Mortgage Express did not
            properly analyze the borrower’s credit performance. The borrower’s credit
            history revealed several derogatory accounts that included charge offs, collection
            accounts, and a civil judgment. American Mortgage Express approved the loan
            even though the borrower had not demonstrated the ability to meet her financial
            obligations and there were no compensating factors to support the loan approval.


Inadequate Analysis of Income

            American Mortgage Express did not adequately analyze the co-borrowers’
            income for one loan. The loan involved a co-borrower whose income had been
            unstable.

            For FHA Case Number 101-9934811, American Mortgage Express approved the
            loan using the co-borrower’s income. The co-borrower’s job history showed she
            had worked for several different employers from 1 to 9 months. The
            co-borrower’s employment history showed gaps in her employment and an
            involuntary job termination after 1 month’s employment. Also, the application
            did not show that the co-borrower’s numerous job changes resulted in an increase
            in income and benefits. American Mortgage Express should not have included
            the co-borrower’s income in calculating the borrower’s income ratios because of
            the co-borrower’s unstable employment income.




                                             6
Inadequate Qualifying Ratios

             Our review of the loan files identified loans with housing and debt qualifying
             ratios that exceeded HUD’s limits without adequate compensating factors. Thus,
             American Mortgage Express had no justification for accepting the loans at the
             higher ratios. For example:

             For FHA Case Number 101-9934811, American Mortgage Express did not
             properly calculate the borrower’s housing ratio and debt ratio. American
             Mortgage Express included the co-borrower’s unstable income and excluded the
             borrower’s debt and VA benefits income. Therefore, the mortgage payment to
             effective income ratio should have been 47 percent and the total fixed payment to
             effective income was 72 percent. There were no compensating factors for
             allowing the borrower to exceed HUD’s limits.

             For FHA Case Number 101-9824807, American Mortgage Express approved the
             loan even though the borrower’s housing ratio of 31 percent and debt ratio of 43
             percent were over HUD’s limits. American Mortgage Express did not document the
             basis for its approval of the loan at the higher ratios.

Conclusion

             Because of prior management’s inadequate oversight and internal procedures,
             American Mortgage Express was ineffective in preventing significant
             underwriting deficiencies. As a result, American Mortgage Express approved
             mortgage loans for FHA insurance that did not meet HUD requirements and
             represented high risks of default and foreclosure. American Mortgage Express
             has started taking steps to improve their loan underwriting processes. They have
             made major changes in the senior management, underwriting and loan origination
             staff, and internal procedures.

Recommendations

             We recommend that the Assistant Secretary for Housing-Federal Housing
             Commissioner:

             1A.    Require American Mortgage Express to indemnify four loans totaling
                    $307,544 and reimburse HUD $103,794 for the loss on another loan.

             1B.    Require American Mortgage Express to monitor all loan underwriting
                    functions for compliance with HUD/FHA requirements.




                                             7
                        SCOPE AND METHODOLOGY

To achieve our audit objectives we reviewed:

   •   Applicable laws, regulations, and other HUD Program requirements;

   •   Procedures established by American Mortgage Express in underwriting FHA-insured
       loans; and

   •   Files and documents from HUD, American Mortgage Express, Cotton State, and closing
       attorneys.

We also reviewed 7 FHA-insured loans that: (1) had defaulted after 12 or fewer payments made,
or (2) were originated by a loan officer and approved by an underwriter/sponsor who had high
occurrences of defaults.

In addition, we interviewed appropriate officials and staff from American Mortgage Express and
HUD’s Atlanta Single Family Homeownership Center. We also interviewed the closing
attorneys to verify the information in the files.

We performed our review between April and July 2004. The audit covered the period
April 1, 2001, through April 30, 2003, but we extended the period as necessary to achieve the
audit objective.

We performed our review in accordance with generally accepted government auditing standards.




                                               8
                             INTERNAL CONTROLS

Internal Control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations;
   •   Reliability of financial reporting; and
   •   Compliance with applicable laws and regulations

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
              We determined the following internal controls were relevant to our audit objectives:

              •       Underwriting process.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.

 Significant Weaknesses


              Based on our review, we believe the following item is a significant weakness:

              •       American Mortgage Express prior management did not have adequate
                      oversight and controls to ensure that loans were underwritten in
                      accordance with HUD’s requirements (see finding 1).




                                                9
                                       APPENDIX

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

                 Recommendation                             Funds To Be Put
                     Number               Ineligible 1/     to Better Use 2/
                         1A                $103,794             $307,544



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
     polices or regulations.

2/   Funds to be put to better use are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     de-obligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              10
Appendix B

       AUDITEE COMMENTS AND OIG'S EVALUATION


                       Auditee Comments




Comment 1




Comment 2

Comment 3



Comment 4




                        11
Comment 5




Comment 6
Comment 7




            12
                      OIG Evaluation of Auditee Comments




Comment 1   FHA Case Number 101-9934811

            The underwriter did not properly calculate the borrower’s ratios on the
            Mortgage Credit Analysis Worksheet, which resulted in the loan having
            underreported liabilities, unstable income, and inadequate qualifying ratios.
            American Mortgage Express should have included a $267 payment in the
            evaluation of the borrower’s liabilities. Although there were less than 10
            months remaining on the debt, the debt was significant and should have been
            included. The borrower defaulted on the loan after five payments and had no
            cash reserves after loan closing. If American Mortgage Express had
            included the borrower’s debt of $267 and VA benefits income of $282 and
            excluded the co-borrower’s unstable income, then the borrower’s debt to
            income ratios would have been 47/72. There were no compensating factors
            for accepting the excessive ratios.

Comment 2   FHA Case Number 101-9934811

            We agree with American Mortgage Express officials that the co-borrower did
            have multiple jobs in the same two-year period. We also noted the co-
            borrower’s employment records showed gaps in her employment. The co-
            borrower changed jobs frequently within the same line of work with no
            advancement in her income. Thus, the co-borrower did not demonstrate
            income stability and job stability. The co-borrower’s broken employment
            history is not acceptable and her income should not be included in the debt to
            income calculation.

Comment 3   FHA Case Number 101-9934811

            The borrower’s excessive debt to income ratio, underreported liabilities and
            the co-borrower’s lack of income stability were contributing factors to the
            defaulted loan. The borrower defaulted on the loan after five payments and
            had no cash reserves after loan closing. American Mortgage Express
            approved the loan even though the borrower’s debt to income ratios was
            excessive and there were no compensating factors to justify the loan
            approval.




                                          13
Comment 4   FHA Case Number 101-9742188

            We agree with American Mortgage Express officials that the front ratio is
            over the "guidelines”. American Mortgage Express did not adhere to HUD's
            requirements in documenting the basis for accepting the higher ratios. The
            borrower’s attendance at a Homebuyer’s Education Class is not a valid
            compensating factor. There were no compensating factors provided for the
            higher front ratio.


Comment 5   FHA Case Number 101-9824807

            We agree with American Mortgage Express officials that the ratios are over
            the "guidelines” and that the underwriter did not properly document the
            compensating factors for exceeding the ratios. Thus, American Mortgage
            Express did not adhere to HUD’s requirements in documenting the basis for
            approving the loan at the higher ratios. According to HUD Neighborhood
            Watch, the borrower defaulted on the loan due to excessive obligations. The
            higher ratios were contributing factors to the loan default.

Comment 6   FHA Case Number 101-9824807

            We agree with American Mortgage Express officials comments.

Comment 7   FHA Case Number 105-0011109

            We agree with American Mortgage Express officials comments.




                                        14
Appendix C

                                         CRITERIA


HUD Handbook 4000.4, REV-1, Single Family Direct Endorsement Program, Paragraph 2-1,
requires mortgagees to develop HUD/FHA-insured loans in accordance with accepted sound
lending practices, ethics, and standards.

Paragraph 2-4 C, states that HUD looks to the underwriter as the focal point of the Direct
Endorsement Program. The underwriter must assume the following responsibilities:

   •       Compliance with HUD instructions, the coordination of all phases of underwriting,
           and the quality of decisions made under the program;

   •       The review of appraisal reports, compliance inspections and credit analyses
           performed by fee and staff personnel to ensure reasonable conclusions, sound reports
           and compliance with HUD requirements, and

   •       The decisions relating to the acceptability of the appraisal, the inspections, the buyers
           capacity to repay the mortgage and the overall acceptability of the mortgage loan for
           HUD insurance.

HUD Handbook 4155.1, REV-4, CHG 1, Mortgage Credit Analysis for Mortgage Insurance on
One-to-Four Family Properties, Paragraph 2-1, 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:

   •       Stability and adequacy of income;
   •       Funds to close;
   •       Credit history; and
   •       Qualifying ratios and compensating factors.

Paragraph 2-3, states that past credit performance serves as the most useful guide in determining
the attitude toward credit obligations that will govern the borrower’s future actions. A borrower
who has made payments on previous or current obligations in a timely manner represents
reduced risk. Conversely, if the credit history, despite adequate income to support obligations,
reflects continuous slow payments, judgments, and delinquent accounts, strong offsetting factors
will be necessary to approve the loan. The basic hierarchy of credit evaluation is the manner of
payments made on previous housing expenses, including utilities, followed by the payment
history of installment debts then revolving accounts.




                                                15
Paragraph 2-3A states that the payment history of the borrower’s housing obligations is of
significant importance in evaluating credit.

Section 2 defines effective income as the anticipated amount of income, and likelihood of its
continuance, must be established to determine the borrower’s capacity to repay the mortgage
debt. Income from any source that cannot be verified, is not stable, or will not continue may not
be used in calculating the borrower’s ratios.

Paragraph 2-6 provides that to analyze the probability of continued employment, lenders must
examine the borrower’s past employment record, qualifications for the position, previous
training and education, and the employer’s confirmation of continued employment. A borrower
who changes jobs frequently within the same line of work, but continues to advance in income
and benefits should be considered favorably.

Paragraph 2-12 states that debt to income ratios are used to determine whether the borrower can
reasonably be expected to meet the expenses involved in homeownership, and otherwise provide
for the family. The lender must compute two ratios: (1) mortgage payment expense to effective
income which is considered acceptable if it does not exceed 29 percent of gross effective income,
and (2) total fixed payment to effective income which is considered acceptable if it does not
exceed 41 percent of gross effective income. However, these ratios may be exceeded if
significant compensating factors are presented.

Paragraph 2-13 states compensating factors may be used in just approval of mortgage loans with
ratios exceeding HUD's benchmark guidelines. The underwriters must state in the "remarks"
section of the HUD 92900-WS the compensating factors used to support loan approval.




                                               16
Appendix D

                     NARRATIVE CASE PRESENTATIONS


FHA Case Number:              101-9934811
Settlement Date:              07/16/01
Status as of 7/30/04:         Default
Payments Before First
Default Reported:             5

Summary:

American Mortgage Express improperly included the co-borrower’s unstable income.
American Mortgage Express did not properly analyze the borrower’s liabilities. American
Mortgage Express also did not have compensating factors for accepting the loan at the higher
debt to income ratios. As a result, we are requesting indemnification of the $88,756 unpaid loan
balance.

Pertinent Details:

Unstable Income

American Mortgage Express did not properly analyze whether the co-borrower’s income was
stable and effective. The employment records for the co-borrower showed that she held five
different jobs from 1 to 9 months. The co-borrower held two of the five jobs from 1 to 3 months,
and was fired after 1 month from another job. The employment records also showed gaps in the
co-borrower’s employment. The co-borrower had only worked for her employer 3 months at the
time of the loan application. Since the co-borrower’s income had not been stable, it should not
be included in determining the monthly effective income. American Mortgage Express also did
not establish whether the co-borrower’s numerous job changes had advanced in income and
benefits. The application only contained the period of the jobs, not the prior salary or benefits.

Underreported Liabilities

American Mortgage Express did not include a $267 payment in the evaluation of the borrower’s
liabilities. The debt was significant and should have been included although there were less than 10
months remaining on the debt. The borrower defaulted on the loan after five payments and had no
cash reserves after loan closing. American Mortgage Express officials stated the underwriter should
have definitely considered the impact that this additional debt added to the borrower’s other
recurring debts for the first several months of the mortgage would have had on the borrower’s
ability to pay but disagreed that the amount should have been included in the debt to income
calculation.


                                                17
Inadequate Qualifying Ratios

American Mortgage Express exceeded HUD’s allowable limits without compensating factors.
American Mortgage Express’ Mortgage Credit Analysis Worksheet (MCAW) showed the
borrower’s mortgage payment to effective income ratio as 31 percent and total fixed payment to
effective income as 36 percent. American Mortgage Express excluded the borrower’s debt of
$267 and VA benefits income of $282 and included the co-borrower’s unstable income.
Therefore, the mortgage payment to effective income ratio should have been 47 percent and the
total fixed payment to effective income was 72 percent. There were no compensating factors for
approving the loan at the higher ratios.




                                              18
FHA Case Number:                101-9824807
Settlement Date:                05/17/01
Status as of 7/30/04:           Default
Payments Before First
Default Reported:               7

Summary:

American Mortgage Express did not properly analyze the borrower’s credit. American Mortgage
Express also approved the loan with no compensating factors to justify accepting the higher
ratios. As a result, we are requesting indemnification of the $125,112 unpaid loan balance.

Pertinent Details:

Inadequate Analysis of Borrower’s Credit

American Mortgage Express did not properly analyze the borrower’s credit and ensure that the
borrower demonstrated financial responsibility. The borrower’s credit history included
delinquent credit and collections. The credit report showed the borrower had 10 derogatory
accounts with balances totaling $3,114. Six of the derogatory accounts had been delinquent 90
days or more 12 times. Thus, the borrower had a history of poor credit that was not fully
considered in the analysis to support the approval of the loan. According to HUD Neighborhood
Watch, the borrower defaulted on the loan due to excessive obligations. American Mortgage
Express officials stated the borrower’s credit history definitely showed a disregard for timely
payments. American Mortgage Express officials also stated there are no reasons evident from
evaluation of the file for approving the loan over ratios.

Inadequate Qualifying Ratios

American Mortgage Express did not adhere to HUD’s requirements in documenting the basis for
approving the loan at the higher ratios. The mortgage payment to effective income ratio was 31
percent and the total fixed payment to effective income was 43 percent with no compensating
factors shown on the MCAW for accepting the higher ratios. American Mortgage Express did not
document the file to justify approving the loan at the higher ratios. American Mortgage Express
officials agreed the ratios are over the guidelines and the fact that the underwriter did not properly
document the compensating factors for exceeding the ratios is a valid point.




                                                  19
FHA Case Number:              105-0011109
Settlement Date:              06/22/01
Status as of 7/30/04:         Property conveyed to HUD
Payments Before First
Default Reported:             1

Summary:

American Mortgage Express did not properly analyze the borrower’s credit. American Mortgage
Express also did not document the basis for accepting the higher ratio. As a result, we are
requesting reimbursement of the claim amount of $103,794.

Pertinent Details:

Inadequate Analysis of Borrower’s Credit

American Mortgage Express did not properly analyze the borrower’s credit performance to
ensure that the borrower had demonstrated financial responsibility. The borrower’s credit report
showed seven derogatory accounts that included charge offs and collection accounts. There was
also a civil judgment totaling $11,373 filed against the borrower for an automobile. The borrower
had $113 a month garnished from her wages to pay on the judgment. Thus, American Mortgage
Express approved the loan even though the borrower had not demonstrated the ability to meet her
financial obligations. American Mortgage Express officials stated the borrower's overall disregard
for timely payment was evident upon review of the credit, and approval of this loan was not
warranted in the absence of compensating factors.

Inadequate Qualifying Ratio

American Mortgage Express did not document the basis for accepting the higher ratio. The MCAW
showed the mortgage payment to income ratio as 32.84 without compensating factors. American
Mortgage Express officials stated the approval of the loan was not warranted in the absence of
compensating factors.




                                                20
FHA Case Number:              101-9742188
Settlement Date:              04/04/01
Status as of 7/30/04:         Foreclosure Completed
Payments Before First
Default Reported:              0

Summary:

American Mortgage Express approved the loan for the borrower who had poor credit
performance. American Mortgage Express accepted the higher loan ratio without compensating
factors to justify accepting the higher ratio. As a result, we are requesting indemnification of the
$93,676 unpaid loan balance.

Pertinent Details:

Inadequate Analysis of Borrower's Credit

American Mortgage Express did not properly analyze the borrower’s past credit performance to
ensure that the borrower had demonstrated financial responsibility. The loan file showed the
borrower had a history of credit problems including nonpayment of rent. The borrower’s credit
report showed judgments totaling $6,188 for six eviction cases. This is significant because a
proper analysis of the borrower’s past rental history is necessary in the decision to approve the
loan. However, American Mortgage Express approved the loan even though the borrower had
not demonstrated the ability to meet his financial obligations. According to HUD Neighborhood
Watch, the borrower defaulted on the loan due to excessive obligations.

Inadequate Qualifying Ratio

American Mortgage Express did not adhere to HUD's requirements in documenting the basis for
accepting the ratio in excess of HUD limits. The borrower’s mortgage payment to effective
income ratio was 31.4 percent with no compensating factors shown on the MCAW for accepting
the higher ratio. American Mortgage Express officials agreed the front ratio was in excess of
HUD standards.




                                                 21
FHA Case Number:              101-9691425
Settlement Date:              03/09/01
Status as of 7/30/04:         Delinquent
Payments Before First
Default Reported:             12

Summary:

American Mortgage Express did not adhere to HUD's requirements in providing significant
compensating factors for accepting the higher qualifying ratio. American Mortgage Express also
did not properly calculate the borrower’s net rental income amount.

Pertinent Details:

Inadequate Qualifying Ratio

American Mortgage Express’ loan file showed the borrower’s qualifying ratio exceeded HUD’s
allowable limit. The borrower’s mortgage payment to effective income ratio was 40 percent and
the compensating factors shown on the MCAW were inadequate for accepting the higher ratio.
The underwriter used job stability and income from rental property as compensating factors for
exceeding the ratio; however, job stability and rental income cannot be used as compensating
factors because they are included in the borrower’s effective income. The borrower stated she
was behind on her mortgage payments because her rental property was vacant and she had to pay
the maintenance and repair costs on her rental property, as well as her permanent residence.
American Mortgage Express should have provided adequate compensating factors for allowing
the loan to exceed HUD’s ratio limits. However, HUD’s Atlanta Quality Assurance Division
officials position was the back ratio (i.e., fixed payment to income) did not exceed HUD’s
allowable limit; therefore, they would not take exception to the ratio.

Overstated Effective Income

American Mortgage Express did not properly calculate the borrower’s net rental income amount.
The MCAW shows the net rental income as $191 but it should have been $145. Therefore, the
effective income amount was overstated. American Mortgage Express officials agreed the
underwriter did not properly calculate the net rental income amount.




                                             22
FHA Case Number:              105-0035213
Settlement Date:              08/03/01
Status as of 7/30/04:         Property Conveyed to HUD
Payments Before First
Default Reported:             17

Summary:

American Mortgage Express did not properly analyze the borrower’s credit.

Pertinent Details:

Inadequate Analysis of Borrower’s Credit

American Mortgage Express did not properly analyze the borrower’s credit to ensure that the
borrower had demonstrated financial responsibility. The borrower's credit was very poor. The
borrower's credit report showed 20 derogatory accounts totaling $16,784. The derogatory
accounts included charge-offs and collection accounts. According to Neighborhood Watch, the
borrower defaulted on the loan due to excessive obligations. American Mortgage officials stated
the borrower had 20 derogatory accounts that included charge-offs and collection accounts and
no proof of circumstances beyond the borrower's control as well as an ability to re-establish good
credit. They agreed the loan should not have been approved. However, HUD’s Atlanta Quality
Assurance Division officials did not recommend indemnification of the loan.




                                               23
FHA Case Number:             101-9777838
Settlement Date:             04/10/01
Status as of 7/30/04:        Property Conveyed to HUD
Payments Before First
Default Reported:            4

Summary:

American Mortgage Express approved the loan for a borrower who had poor credit worthiness.

Pertinent Details:

Inadequate Analysis of Borrower’s Credit

American Mortgage Express did not properly analyze the borrower’s credit to ensure that the
borrower had demonstrated financial responsibility. The borrower’s current and prior credit
history included delinquent credit, collections, and judgments. The credit report showed the
borrower had 10 derogatory accounts of which 2 accounts had balances totaling $19,628. These
accounts were shown as 30 to 120 days past due on several occasions. The borrower’s other
derogatory accounts included a $20,324 charge-off for an automobile. Thus, the borrower had a
history of poor credit that was not fully considered by American Mortgage Express in its analysis
of the borrower’s liabilities. According to HUD Neighborhood Watch, the borrower defaulted
on the loan due to excessive obligations. American Mortgage Express officials stated the
borrower had a history of poor credit and the loan did not warrant approval. However, HUD’s
Atlanta Quality Assurance Division officials did not recommend indemnification of the loan.




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