oversight

MortgageIT Incorporated, New York, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-15.

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

                                                        Issue Date
                                                                 September 15, 2005
                                                        Audit Report Number
                                                                     2005-FW-1015




TO:        Brian D. Montgomery
           Assistant Secretary for Housing – Federal Housing Commissioner, H


FROM:      Frank E. Baca
           Regional Inspector General for Audit, 6AGA

SUBJECT: MortgageIT Incorporated Did Not Follow HUD Requirements When Processing
         Two Loans


                                  HIGHLIGHTS

 What We Audited and Why

            We reviewed Federal Housing Administration loans sponsored by MortgageIT
            Incorporated (MortgageIT) of New York, New York. During an audit of a
            Federal Housing Administration-approved loan correspondent, we identified three
            loans sponsored by MortgageIT that did not appear to be properly originated
            according to U. S. Department of Housing and Urban Development (HUD)
            regulations. Because the sponsor of the loans is ultimately responsible for loan
            processing deficiencies, we addressed these deficiencies to MortgageIT to
            determine whether it complied with HUD requirements.

 What We Found


            MortgageIT did not comply with HUD regulations, procedures, and instructions
            in the processing of two of the three Federal Housing Administration-insured
            single-family mortgages we reviewed. For one loan, the lender charged the
            borrower $1,407 in loan discount points without reducing the borrower’s interest
            rate. For another loan, the lender did not ensure the appraisal met HUD
           standards. As a result, the risk to HUD’s insurance fund was increased, and a
           borrower incurred excessive costs for a loan.

What We Recommend


           We recommend that the Assistant Secretary for Housing – Federal Housing
           Commissioner and Chairman, Mortgage Review Board, require MortgageIT to
           reimburse the appropriate parties for $1,407 in unearned fees and ensure
           MortgageIT’s controls over appraisals are adequate.

Auditee’s Response


           On September 2, 2005, MortgageIT provided a written response to our report.
           MortgageIT generally agreed with our report findings. It provided evidence of a
           principal reduction for the $1,407 in unearned fees and agreed to take steps to
           remind its underwriters that appraisers must consider the sales contract in
           determining the appraised value. The complete text of MortgageIT’s response
           can be found in Appendix B. We omitted the attachments due to Privacy Act
           concerns.




                                           2
                           TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
Finding: MortgageIT Did Not Follow HUD Requirements When Processing Two Federal   5
         Housing Administration Loans

Scope and Methodology                                                             7

Appendixes
   A. Schedule of Questioned Costs                                                 8
   B. Auditee Comments and OIG’s Evaluation                                        9
   C. Case Studies of Improperly Originated Loans                                 11




                                           3
                       BACKGROUND AND OBJECTIVES

MortgageIT Incorporated (MortgageIT) is a nonsupervised lender that began originating Federal
Housing Administration loans in 1999.

During the audit of a loan correspondent, 1 we identified three Federal Housing Administration
loans sponsored by MortgageIT that did not appear to be originated according to U. S.
Department of Housing and Urban Development (HUD) regulations. To resolve these
deficiencies, we performed a review of MortgageIT’s underwriting of these loans.

Our objective was to determine whether MortgageIT complied with HUD regulations,
procedures, and instructions when processing these Federal Housing Administration mortgages
that it sponsored for a loan correspondent.




1
    Report Number 2005-FW-1009, Allied Home Mortgage Capital Corporation, Nonsupervised Loan
    Correspondent, Houston, TX, issued May 24, 2005.



                                                   4
                                RESULTS OF AUDIT

Finding: MortgageIT Did Not Follow HUD Requirements When
Processing Two Federal Housing Administration Loans
MortgageIT did not comply with HUD regulations, procedures, and instructions in the
processing of two Federal Housing Administration-insured single-family mortgages. For one
loan, the lender charged the borrower loan discount points without reducing the borrower’s
interest rate. For another loan, the lender did not ensure the appraisal met HUD standards. As a
result, the risk to HUD’s insurance fund was increased, and a borrower incurred excessive costs
for a loan.




 MortgageIT Did Not Follow
 HUD Requirements


              MortgageIT did not follow HUD requirements for two of the three loans we
              reviewed. The following paragraphs summarize the deficiencies with the loans.
              For more detailed information, see appendix C.

              Case number 492-6908815

              MortgageIT allowed the loan correspondent to charge the borrower $1,407 in loan
              discount points without reducing the borrower’s interest rate. Instead, the loan
              correspondent charged the borrower an above-market interest rate. MortgageIT
              compensated the loan correspondent for the higher interest rate through the
              payment of a yield spread premium of $2,373. HUD believes yield spread
              premiums can be a legitimate tool to reduce the borrower’s closing costs through
              a higher interest rate. However, the loan correspondent could not provide
              documentation to show that the borrower received anything of value for the
              discount points charged. The Real Estate Procedures Act prohibits giving or
              accepting any part of a charge for services not performed. MortgageIT concurred
              and agreed to repay the $1,407.

              Case number 491-8097408

              MortgageIT did not ensure the appraisal met HUD standards. In determining the
              appraised value, the appraiser did not analyze the subject sales contract. The sales
              contract showed the seller agreed to pay the borrower’s closing costs up to
              $8,500. The appraiser indicates that the sales contract was not available but does
              not provide further explanation. Since the appraiser did not consider the terms of



                                               5
              the contract, MortgageIT cannot be certain of the accuracy of the appraised value.
              MortgageIT concurred that the appraiser should have provided an explanation for
              not reviewing the contract.

 Conclusion



              The underwriting deficiencies on these two loans unnecessarily increase the risk
              to the insurance fund. Further, the unearned fees unfairly imposed costs on the
              borrower without providing a benefit in return. MortgageIT should repay the
              appropriate parties for the $1,407 in unearned discount points.


Recommendations


              We recommend the Assistant Secretary for Housing – Federal Housing
              Commissioner and Chairman, Mortgage Review Board:

              1A. Require MortgageIT to reimburse the appropriate parties for $1,407 in
                  unearned fees.

              1B. Ensure MortgageIT’s controls over appraisals are adequate to provide
                  reasonable assurance that its appraisals include an analysis of the subject
                  sales contract.

              MortgageIT provided evidence of a principal reduction for the $1,407 in unearned
              fees. It also agreed to take steps to remind its underwriters that appraisers must
              consider the sales contract in determining the appraised value. The
              recommendations are therefore closed. No further action is required.




                                                6
                        SCOPE AND METHODOLOGY

We reviewed MortgageIT’s processing of three Federal Housing Administration loans that it
sponsored for a Federal Housing Administration-approved loan correspondent. During our audit
of that loan correspondent, we reviewed loans closed from July 1, 2002, through June 30, 2004,
that defaulted within the first three years of closing. We identified three loans sponsored by
MortgageIT that appeared to be improperly underwritten. Because the sponsor of the loan is
ultimately responsible for loan processing deficiencies, we addressed the deficiencies to
MortgageIT.

To accomplish our objective, we prepared case narratives of loan processing deficiencies
identified and provided the information to MortgageIT. We allowed MortgageIT an opportunity
to provide additional information that could resolve the deficiencies identified. MortgageIT
provided a written response, which we evaluated in reaching our conclusions.

In conducting our audit, we used computer-processed data contained in HUD’s Neighborhood
Watch system. However, we did not rely on the data to accomplish our audit objective.
Accordingly, we did not assess the reliability of the data in the system.

We did not assess MortgageIT’s underwriting controls because they were not significant to our
objective of reviewing these three loans.

We performed the work from May through July 2005. The audit was conducted in accordance
with generally accepted government auditing standards.




                                               7
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS




                            Recommendation
                                number     Ineligible 1/

                                    1A                 $1,407




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.




                                             8
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1

Comment 2




                          9
                         OIG Evaluation of Auditee Comments


Comment 1   We concur with MortgageIT's response to our report findings. The
            recommendations are therefore closed. No further action is required.

Comment 2   We omitted the attachments due to Privacy Act concerns.




                                           10
Appendix C

    CASE STUDIES OF IMPROPERLY ORIGINATED LOANS

Case number: 492-6908815

Mortgage amount: $70,339

Gift amount: $0

Date of loan closing: September 23, 2003

Status as of March 31, 2005: Modification

Payments before first default reported: 0

Summary:

Ineligible Closing Cost Charged to Borrower

MortgageIT allowed the loan correspondent to charge $1,407 in loan discount points without
reducing the borrower’s interest rate. Rather than reducing the interest rate, the loan
correspondent charged the borrower an above-market interest rate, resulting in a yield spread
premium of $2,373. The loan correspondent did not provide documentation to show the
borrower received anything of value for the discount points charged. HUD allows lenders who
originate Federal Housing Administration-insured loans to charge borrowers a 1 percent loan
origination fee and eligible closing and prepaid costs; however, additional fees should be for
specific services performed beyond the normal loan processing and underwriting. Section 8 of
the Real Estate Settlement Procedures Act prohibits giving or accepting any part of a charge for
services not performed. Since the loan correspondent charged loan discount points without
reducing the interest rate, the discount points were unearned fees in violation of the Real Estate
Settlement Procedures Act.




                                                11
Case number: 491-8097408

Mortgage amount: $143,744

Gift amount: $2,290

Date of loan closing: August 29, 2003

Status as of March 31, 2005: Foreclosure started

Payments before first default reported: 1

Summary:

Appraisal Did Not Include an Analysis of the Subject Sales Contract or List Price

The appraiser did not analyze the subject sales contract. The sales contract, dated before the date
of the appraisal, showed the seller agreed to pay the borrower’s closing costs up to $8,500. The
appraiser noted that the contract was not available for review but did not provide further
explanation. HUD Handbook 4150.2, paragraph 4.0, requires strict compliance with Uniform
Standards of Professional Appraisal Practice. Uniform Standards of Professional Appraisal
Practice rule 1-5(a) requires the appraiser to analyze all agreements of sale, options, or listings of
the subject property in determining a property’s appraised value. Rule 2-2(a)(ix) states that if the
information is unobtainable, the appraiser must provide a statement on efforts made to obtain the
information.




                                                 12