oversight

First United Mortgage Company, Inc., Non-Supervised Mortgagee, Cranford, New Jersey

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-12-28.

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                 AUDIT REPORT




     FIRST UNITED MORTGAGE COMPANY, INC.
          NON-SUPERVISED MORTGAGEE
             CRANFORD, NEW JERSEY


                        2005-NY-1002


                    DECEMBER 28, 2004

                      OFFICE OF AUDIT
                NEW YORK/NEW JERSEY REGION




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                                                                  Issue Date
                                                                          December 28, 2004
                                                                  Audit Case Number
                                                                          2005-NY-1002




TO: John C. Weicher, Assistant Secretary for Housing, Federal Housing Commissioner and
                       Chairman Mortgagee Review Board, H


FROM: Alexander C. Malloy, Regional Inspector General for Audit, 2AGA

SUBJECT:       First United Mortgage Company, Inc.
               Non-supervised Mortgagee
               Cranford, NJ


We audited First United Mortgage Company, Inc. (First United), a non-supervised mortgagee
located in Cranford, NJ, because of its high default rate. First United had a default rate (90 days
delinquent within the first two years of origination as reported in the U.S. Department of Housing
and Urban Development (HUD) Neighborhood Watch Early Warning System) of 8.43 percent as
of January 31, 2004, while the statewide rate was 3.49 percent for the same period. The
objectives of the audit were to determine whether First United (1) originated and underwrote loans
insured by the HUD/Federal Housing Administration in accordance with HUD requirements, which
specify following prudent lending practices, and (2) designed and implemented a quality control
plan in compliance with HUD requirements.

Our report contains two findings with recommendations requiring action by your office. In
accordance with HUD Handbook 2000.06, REV-3, within 60 days, please provide us for each
recommendation without a management decision, 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 the report is issued
for any recommendations 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 or John Harrison, Assistant
Regional Inspector General for Audit, at (212) 264-4174.




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Executive Summary
We audited First United Mortgage Co, Inc. (First United), a non-supervised mortgagee located in
Cranford, NJ. The objectives of the audit were to determine whether First United (1) originated
and underwrote loans insured by the U.S. Department of Housing and Urban Development
(HUD)/Federal Housing Administration in accordance with HUD requirements, which specify
following prudent lending practices, and (2) designed and implemented a quality control plan in
compliance with HUD requirements. The review generally covered the period between February
1, 2002, and January 31, 2004, and involved a review of 25 HUD/Federal Housing
Administration-insured loans with mortgage amounts totaling $3,073,370. A summary of the
results of our review is provided below.




Noncompliance with HUD              Our review of 25 HUD/Federal Housing Administration-
Requirements                        insured loans disclosed that First United did not follow
                                    prudent lending practices as prescribed by HUD
                                    regulations. We found at least one underwriting deficiency
                                    in 23 of the 25 loans. In addition, we found that First
                                    United charged fees that were unsupported and/or
                                    prohibited by HUD regulations in 24 of the 25 cases.

Origination and                     HUD regulations prescribe the types of income and
Underwriting Deficiencies           liabilities to include in determining a potential borrower’s
                                    creditworthiness, as well as debt to income ratios and
                                    compensating factors to consider in qualifying a borrower
                                    during the underwriting process. We found noncompliance
                                    with these regulations in 23 cases. As a result, unnecessary
                                    risk was incurred by the HUD/Federal Housing
                                    Administration Insurance Fund. Some of the underwriting
                                    deficiencies we identified were as follows:
                                          • Debt to income ratios that exceeded guidelines
                                              without compensating factors.
                                          • Inadequate verification of deposits, debt payments,
                                              and/or gifts.
                                          • Inadequate credit analysis.
                                          • Inadequate support for income calculations and/or
                                              employment.
                                          • Inadequate disclosure of liabilities.
                                          • Inadequate funds to close.
                                          • Closing not in compliance with loan approval.

 Ineligible and Unsupported         HUD regulations specify the fees and expenses that may be
 Fees                               charged to a borrower. We found that First United charged
                                    ineligible and/or unsupported fees in 24 cases. These fees
                                    included ineligible commitment fees, credit report fees, and
                                    shipping charges.      Consequently, borrowers incurred

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                        unnecessary costs.

                        We believe that these underwriting deficiencies occurred
                        because of inadequate quality control processes that did not
                        ensure that loans were approved in accordance with all HUD
                        requirements. As a result, HUD assumed an unnecessary
                        insurance risk because mortgages were approved for
                        questionable borrowers, and borrowers incurred unnecessary
                        cost burdens as a result of being charged ineligible fees.

Weaknesses in Quality   First United did not implement its quality control plan in
Control Plan            accordance with HUD and its own requirements. Indications
Implementation          of this noncompliance included the failure to (1) keep the
                        Quality Control Specialist independent of the loan originating
                        process, (2) select loans that defaulted within 6 months for
                        quality control review, (3) examine gift documentation for
                        loans selected for review, and (4) properly select appraisals
                        for review. In addition, quality control requirements were
                        not always completed in a timely manner, and quality control
                        files were not properly documented and retained.

                        These failures occurred because First United did not establish
                        procedures to ensure that its quality control plan was properly
                        designed and implemented. Consequently, First United was
                        not fully using its quality control plan, which is designed to
                        enhance and maintain the accuracy, validity, and
                        completeness of its loan origination process.

                        We recommend that First United indemnify HUD for
 Recommendations        $2,482,438 against future losses on 20 of the 25 loans
                        identified in appendix A of this report. We also recommend
                        that First United reimburse borrowers charged ineligible
                        ($3,773) and unsupported ($2,504) fees. We further
                        recommend that First United provide your office with a
                        corrective action plan containing assurances that all
                        guidelines pertaining to underwriting Federal Housing
                        Administration-insured loans will be followed by its
                        underwriting staff. We are also recommending specific
                        actions that First United should take to implement its quality
                        control plan in compliance with HUD requirements.

                        While our audit disclosed significant deficiencies relating
                        to loan underwriting and quality control, we noted that First
                        United has restructured its operations and begun to address
                        some of these deficiencies. For instance, First United has
                        closed two of its branch offices, which originated 11 of the
                        25 loans in which we found deficiencies. First United has
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                  also recently revised its quality control plan design.
                  Nevertheless, it must address the deficiencies noted in this
                  report to ensure that HUD does not continue to assume an
                  unnecessary insurance risk.

                  The results of our audit were discussed with First United
Exit Conference   officials throughout the course of the onsite audit work.
                  We forwarded a copy of the draft report for review and
                  comment to First United on November 1, 2004, and held an
                  exit conference on November 16, 2004, at First United’s
                  offices. First United provided written comments to our
                  draft report on November 30, 2004. We included excerpts
                  of the comments with the findings and provided the
                  complete text in appendix D of this report.

                  First United disagrees that it failed to adhere to prudent
                  lending practices or that it did not process loans in
                  accordance with applicable HUD requirements for the
                  majority of the loans reviewed. As explained in our
                  evaluation of First United’s comments contained in
                  appendix B, we believe that First United did not always
                  adhere to applicable HUD/FHA underwriting requirements,
                  thus causing HUD/FHA to assume an unnecessary risk.
                  First United did not specifically address the finding on
                  quality control, but did indicate that it will continue to work
                  to improve its quality control practices, reporting, and
                  managerial responses. We agree that First United needs to
                  take the actions we recommended to ensure that its quality
                  control plan implementation is effective.




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Table of Contents

Management Memorandum                                                             i



Executive Summary                                                             iii



Introduction                                                                   1



Findings

1.       Loan Underwriting Practices Resulted in Unnecessary Risk to
         the Federal Housing Administration Insurance Fund                    5

2.       Lack of Quality Control Procedures Resulted in
         Weaknesses in Plan Implementation                                    11



Management Controls                                                          15



Follow-up on Prior Audits                                                    17



Appendixes

     A    Schedule of Loan Underwriting Deficiencies                        19

     B Narrative Case Presentations                                          23

     C Schedule of Questioned Costs and Funds To Be Put to Better Use        95

     D    First United’s Comments                                           96



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Introduction
Section 203(b)(1) of the National Housing Act, as amended, authorizes the U.S. Department of
Housing and Urban Development (HUD) to provide Federal Housing Administration mortgage
insurance for single-family homes. HUD must formally approve a mortgagee that originates,
purchases, holds, or sells Federal Housing Administration-insured loans. Mortgagees must follow
the statutory and regulatory requirements of the National Housing Act and HUD instructions,
guidelines, and regulations when originating insured loans. Mortgagees that do not follow these
requirements are subject to administrative sanctions.

First United Mortgage Company, Inc. (First United), located in Cranford, NJ, is a non-
supervised, direct endorsement lender that is approved to originate and underwrite loans. First
United currently underwrites both Federal Housing Administration and conventional loans. The
loan origination process includes taking an initial loan application, initiating the appraisal
assignment, obtaining the credit report, and processing verifications of deposit and employment.
Based on the information gathered by its loan processors, First United underwrites loans and
decides whether borrowers represent an acceptable credit risk for HUD.

First United originated a total of 610 insured loans with beginning amortization dates during our
audit period of February 1, 2002, through January 31, 2004, at its home office in Cranford and at
two branch offices in Morrestown and Manasqaun, NJ. The total mortgage amount of the 610
loans was $94,860,372. As of March 8, 2004, 55 of the 610 loans had a default status.


                                     The objectives of the audit were to determine whether First
  Audit Objectives                   United (1) followed prudent lending practices and approved
                                     insured loans in accordance with HUD rules and
                                     regulations and (2) designed and implemented a quality
                                     control plan in compliance with HUD requirements. We
                                     selected First United for audit because of its 8.43 percent
                                     default rate (90 days delinquent within the first two years of
                                     origination as reported in the HUD Neighborhood Watch
                                     Early Warning System) as of January 31, 2004, while the
                                     statewide rate was 3.49 percent for the same period.

                                     The purpose of our review was to confirm the accuracy of the
  Audit Scope and                    material information used as a basis for underwriting and
  Methodology                        closing loans. We obtained background information by

                                     •   Reviewing relevant HUD regulations, requirements,
                                         and mortgagee letters.

                                     •   Examining reports and information maintained on
                                         Neighborhood Watch and Lexis-Nexis, a third-party
                                         research tool.



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                                                                 Introduction


               •   Interviewing officials of First United and obtaining
                   information from members of HUD’s Philadelphia
                   Homeownership Center.

               To accomplish our audit objectives, we selected a sample
               of 25 insured loans from Neighborhood Watch with
               beginning amortization dates between February 1, 2002 and
               January 31, 2004. In selecting our sample we focused on
               loans that went into default within the first 12 months. The
               25 loans in our sample totaled $3,073,370. The results of
               our detailed testing only apply to the 25 loans selected and
               cannot be projected to the universe of 610 Federal Housing
               Administration loans underwritten by First United.

               Our analysis of the cases was based upon a review of loan
               origination/underwriting files maintained by both HUD and
               First United. HUD Handbook 4155.1, REV-4, CHG-1,
               chapter 3, stipulates that all information required to process
               and underwrite Federal Housing Administration-insured
               mortgages must be verified and documented. However,
               First United was unable to locate files for two of its cases.
               Alternatively, First United obtained files from the
               purchaser of the mortgages for these two cases, which,
               while not containing all lender-required documents, we
               used to supplement our review of the applicable HUD files.

               Our file review and audit procedures included (a) analysis
               of borrowers’ income, assets, and liabilities; (b) verification
               of selected data on the settlement statements; (c)
               confirmation of employment and gifts; (d) interviews with
               selected closing attorneys; and (e) discussions with
               members of HUD and First United staffs.

               As part of our assessment of First United’s quality control
               plan, we obtained and reviewed its plan and recent HUD
               reviews of the plan. In addition, we reviewed the nine
               quarterly quality control reports for the period January 1,
               2002, through March 31, 2004, and the specific quality
               control files for 11 of the loans examined during this
               period.

               We performed the audit fieldwork between April and July
Audit Period
               2004. Our audit pertained to loans originated between
               February 1, 2002, and January 31, 2004. Our audit work
               was performed at First United’s office in Cranford, NJ.

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The audit was conducted in accordance with generally
accepted governmental auditing standards.




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                                                                                      Finding 1


       Loan Underwriting Practices Resulted in
       Unnecessary Risk to the Federal Housing
           Administration Insurance Fund
Our review disclosed that First United did not follow prudent lending practices and regulations
prescribed by HUD in its loan origination and underwriting in 23 of 25 cases we reviewed. Also,
borrowers were charged ineligible and/or unsupported fees in 24 of the 25 loans reviewed.
These deficiencies occurred because First United personnel did not assure that the loans were
processed in accordance with all applicable HUD requirements. As a result, mortgages were
approved for questionably qualified borrowers, causing HUD to assume an unnecessary
insurance risk.



                                    Section 2-1 of HUD Handbook 4000.4, REV-1, Single
HUD Origination and                 Family Direct Endorsement Program, requires mortgagees
Underwriting Criteria               to conduct business operations in accordance with accepted
                                    sound mortgage lending practices. Section 2-5 requires the
                                    mortgagee to obtain and verify information with at least the
                                    same care that would be exercised in originating the loan if
                                    the mortgagee were entirely dependent on the property as
                                    security to protect its investment.

                                    HUD Handbook 4155.1, REV-4, Mortgage Credit Analysis
                                    for Mortgage Insurance, prescribes basic underwriting
                                    requirements for single-family mortgage loans. For each
                                    HUD-insured loan, the lender must ensure that the
                                    borrower has the ability and willingness to repay the
                                    mortgage debt.       Four major elements are typically
                                    evaluated in assessing a borrower’s ability to repay
                                    mortgage debt: qualifying ratios and compensating factors,
                                    stability and adequacy of income, funds to close, and credit
                                    history.    This assessment must be based on sound
                                    underwriting principles in accordance with the guidelines,
                                    rules, and regulations described in Handbook 4155.1 and be
                                    supported by sufficient documentation.

                                    Section 3-1 of the same handbook advises that the
                                    application package must contain sufficient documentation
                                    to support a lender’s decision to approve a mortgage.
                                    While this decision will involve some subjectivity, as
                                    discussed below, First United did not always follow the
                                    above requirements in its loan origination and underwriting
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                                    in 23 of the 25 loans we reviewed.

                                    Our examination of 25 loans with beginning amortization
Origination and                     dates between February 1, 2002, and January 31, 2004,
Underwriting Deficiencies           disclosed origination and underwriting deficiencies in 23 of
                                    the 25 loans. First United did not (1) exercise due diligence
                                    in the verification of borrowers’ income, employment,
                                    and/or source of funds for down payment and closing costs
                                    and the analysis of borrower’s liabilities, credit history,
                                    and/or ability to pay or (2) fully comply with HUD
                                    underwriting regulations. Consequently, as shown below
                                    and in appendix A, we found a variety of underwriting
                                    deficiencies in the 23 loans. The deficiencies noted below
                                    are not independent of one another, as many of the loan
                                    files contained more than one deficiency.


                                        Areas of Deficiency                  Number of Loans
                            Qualifying ratios and compensating factors        17 of 25 loans
                            Inadequate verification of income/employment      12 of 25 loans
                            Inadequate verification of funds to close         18 of 25 loans
                            Inadequate verification of credit history          8 of 25 loans

                            Other processing procedures                         6 of 25 loans

                                    Specific examples of inadequate underwriting are as
                                    follows:

                                    •   Case number 351-4271956 was approved with a total
                                        fixed payment to effective income ratio of 47.955
                                        percent, without documented compensating factors to
                                        justify the high ratios. Further, (1) income and
                                        liabilities weren’t properly evaluated, (2) sufficient
                                        verification of borrowers’ employment was not
                                        obtained, (3) the gift fund needed for closing was not
                                        adequately verified, and (4) the loan was not closed in
                                        compliance with loan approval requirements. The loan
                                        defaulted after seven payments, and the reason reported
                                        was curtailment of income.

                                    •   Case number 352-4446481 was approved without
                                        proper evaluation of the borrowers’ ability to repay the
                                        mortgage. There was inadequate support for the
                                        borrowers’ employment. For instance, each of the two
                                        borrowers provided paychecks that were not cashed,
                                        and the pay stubs contained mathematical errors. In
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                                                   Finding 1


    one case, the pay stub did not reconcile with the
    corresponding check. Additionally, (1) no underwriting
    analysis of a cosigner was performed, (2) explanations
    and analysis of derogatory credit were not obtained, (3)
    support for a $3,200 gift was inadequate, and (4) the
    loan did not close in compliance with loan approval
    requirements. The loan defaulted after three payments.

•   Case number 351-4737106 was approved with a
    mortgage payment expense to effective income ratio of
    34.526 percent and a total fixed payment to effective
    income ratio of 45.191 percent, without documented
    compensating factors to justify the high ratios. Further,
    (1) support for gift funds, which were the only funds
    the borrower had for closing, was inadequate; (2) no
    explanation was obtained for inconsistent employment
    information; (3) while one underwriter rejected the
    loan, which had been previously approved by another
    underwriter, the loan was processed based upon the first
    underwriter’s decision without explanation; and (4) the
    loan did not close in accordance with loan approval
    requirements. The loan defaulted after six payments, and
    the reason reported was a curtailment of income. In
    addition, the closing attorney retained $920 of trust
    account funds and was reimbursed $1,013 in excess of
    documented expenses.

•   Case number 352-5002658 was approved with both a
    mortgage payment expense to effective income and a
    total fixed payment to effective income ratio of 42.72
    percent.     Compensating factors were listed as
    “conservative use of credit” and “excellent savings
    pattern.” These compensating factors were not justified
    because an alternative credit history was not obtained
    for the co-borrower. In addition, verification of third-
    party payment of borrower’s debt was not explained,
    and a mortgage cosigner’s income and creditworthiness
    were not determined. The loan defaulted after one
    payment, and the reason reported was excessive
    obligations.

Appendix A to this report provides a summary of the loan
underwriting deficiencies noted during our review, while
appendix B provides a description of the origination and
underwriting deficiencies for each of the loans. The
deficiencies occurred because First United representatives
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                                                                                      Finding 1


                                    did not follow HUD requirements or comply with prudent
                                    lending practices. The deficiencies resulted in the approval
                                    of mortgages for questionably qualified borrowers, which
                                    has caused HUD to assume an unnecessary insurance risk.

                                    As of August 31, 2004, 18 of the 25 loans were in default,
                                    and 7 of the loans were current. We are requesting
                                    indemnification for the 20 loans with significant
                                    underwriting deficiencies. These loans are insured for
                                    $2,482,438 (see appendix C). Indemnification of these
                                    loans would preclude a potential future claim against the
                                    Federal Housing Administration Insurance Fund, resulting
                                    in funds to be put to better use. The remaining 3 of the 23
                                    loans involved a failure to itemize lender credits, which,
                                    while violating HUD regulations, would not affect a
                                    borrower’s ability to pay; thus, we are not requesting
                                    indemnification from any future losses on those loans.

                                    First United charged ineligible fees and/or unsupported fees
Borrowers Charged                   in 24 of the 25 cases. Mortgage Letter 94-7, section IV,
Ineligible/Unsupported              provides that a commitment or lock-in fee must be in
Fee Origination and                 writing and guarantee the mortgage interest rate and/or
Underwriting                        discount points for a period of not less than 15 days before
                                    the anticipated closing date. Handbook 4000.2, REV-2,
                                    Section 5-3, identifies the types of costs that a lender is
                                    allowed to charge a borrower and provides that it should be
                                    the actual cost. We found that borrowers were charged the
                                    following ineligible and unsupported fees:


                   Type of Ineligible/Unsupported            Number of         Amount of Fee
                                 Fee                          Loans
               Ineligible commitment fee                    17 of 25 loans         $4,765
               Ineligible shipping fee                       2 of 25 loans          $ 108
                 Total ineligible fees A                                           $ 4,873
               Unsupported credit report fee                19 of 25 loans         $ 571

                                    A prior HUD review of First United also identified and
                                    requested reimbursement for $1,100 of ineligible
                                    commitment fees in four of the cases we reviewed. Since
                                    First United has already reimbursed the borrowers for these
                                    costs, we deleted the $1,100 from our determination,
                                    leaving $3,773 in ineligible fees to be reimbursed to
                                    borrowers (see appendix C).



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                                                                      Finding 1




Auditee Comments   First United’s comments are presented in their entirety in
                   appendix D. Specific case comments and our evaluation of
                   those comments are included with the individual narrative
                   case presentations in appendix B. Appendix A, Summary of
                   Underwriting Deficiencies, has been adjusted to reflect First
                   United’s comments.

Recommendations    We recommend that the Assistant Secretary for Housing-
                   Federal Housing Commissioner, Chairman, Mortgagee
                   Review Board, require First United to

                   1A.    Reimburse the borrowers $3,773 of ineligible fees
                          and $571 of unsupported credit report fees that they
                          were charged.

                   1B.    Reimburse the borrower for the $1,933 of
                          unsupported closing attorney costs and funds
                          remaining in trust.

                   1C.    Indemnify HUD against potential future losses on
                          20 loans totaling $2,482,438, which are considered
                          as funds to be put to better use since
                          indemnification prevents future claims against the
                          Federal Housing Administration insurance fund.

                   1D.    Provide your office with a corrective action plan to
                          assure compliance with all HUD guidelines
                          regarding the origination and underwriting of
                          Federal Housing Administration-insured loans.




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  Lack of Quality Control Procedures Resulted in
       Weaknesses in Plan Implementation
 Our review disclosed weaknesses in the implementation of First United’s quality control plan.
 First United did not ensure that the Quality Control Specialist was independent of the loan
 origination process and that quality control reviews complied with HUD requirements to analyze
 loans that default within the first 6 months, verify gifts, and sample desk review appraisals. In
 addition, First United did not complete all quality control requirements in a timely manner or
 properly document and retain quality control files. These weaknesses occurred because First
 United did not establish procedures to ensure that its quality control plan was properly designed
 and implemented. Consequently, the effectiveness of its quality control plan was lessened, and
 First United was not assured of the accuracy, validity, and completeness of its loan origination
 process.



Plan Implementation                   Our review of First United’s implementation of its quality
Weaknesses                            control plan found noncompliance with both HUD and its
                                      own requirements. Paragraph 6-1 of HUD Handbook
                                      4060.1, REV-1, requires that a quality control plan be
                                      sufficient in scope to enable the mortgagee to evaluate the
                                      accuracy, validity, and completeness of its loan origination
                                      and servicing operations. The plan design must provide for
                                      independent evaluation of the significant information
                                      gathered for use in the loan origination and underwriting
                                      decision-making. Specific implementation weaknesses we
                                      found were as follows:

                                      •   The Quality Control Specialist was not independent of
                                          the loan origination process as required by HUD
                                          Handbook 4060.1, REV-1, section 6-1A. Our review of
                                          quarterly quality control review reports for the period
                                          January 2002 through December 2003 disclosed that
                                          the Quality Control Specialist was also involved in the
                                          loan origination process during the period July 2002
                                          through June 2003. Loan origination activity conducted
                                          by the Specialist included ordering credit reports on
                                          borrowers, verifying borrowers’ employment, and
                                          conducting limited denial participation checks.




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                                                                         Finding 2


                            •   Loans defaulting within 6 months had not been
                                adequately reviewed as required by HUD Handbook
                                4060.1, REV-1, section 6-1D. We found that First
                                United had selected for quality control review 3 of the
                                17 loans in our sample of 25 that had defaulted within 6
                                months. Further, these three were apparently randomly
                                selected, as opposed to being selected because they
                                defaulted within 6 months. Quality control reviews of
                                these early defaulted loans can provide valuable
                                information about the causes of default that may
                                indicate inadequate underwriting.

                            •   Quarterly quality control reports lacked adequate
                                documentation that gifts were reviewed. None of the
                                quarterly quality control reports we reviewed indicated
                                that gifts were reviewed in accordance with HUD
                                Handbook 4060.1, REV-1, paragraph 6-4J.

                            •   Desk review appraisals were being completed on 15
                                percent of the selected quality control sample, rather
                                than on all sampled loans as required by HUD
                                Handbook 4060.1, REV-1, section 6-1C.

                            First United acknowledged that the Quality Control
                            Specialist had performed loan origination activities but
                            noted that it was for only a short time. It further
                            acknowledged that it lacked a system to properly identify
                            loans defaulting within 6 months and that it relied upon the
                            direct endorsement underwriter to examine proper gift
                            documentation.

Untimely Review and         As of August 19, 2004, we found that First United had not
Follow-up                   reported on its quarterly quality control review for the
                            period ending March 31, 2004. Additionally, our review of
                            quality control documents disclosed that follow-up was not
                            always adequate. For instance, there was no response from
                            First United management regarding quality control findings
                            in the quarterly reports for the periods ending June 2002
                            and September 2003. Further, there was no response to the
                            finding in the quarterly report for the periods ending March
                            and September 2002 that follow-up on delinquent loans
                            needed more emphasis.

Inadequate File Retention   First United did not comply with its own requirement that
and Documentation           quality control files be maintained for the current and 2
                            prior years. We requested 11 quality control files to assess
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Finding 2


                     whether applicable quality control reports were adequately
                     supported; however, First United was unable to provide us
                     with any of the requested files. As a result, we could not
                     determine whether quality control reviews were conducted
                     in accordance with HUD Handbook 4060.1.

                     We also found that First United could not provide reports
                     produced by the outside investors upon whom it relied to
                     perform quality control services. First United also did not
                     have written reports that specified the investors’
                     responsibilities for the period that it relied upon outside
                     investors for quality control functions, October 2002
                     through December 2003. Examples of various quality
                     control functions conducted by outside investors were the
                     re-verification of a borrower’s credit, income/assets, and
                     the review of appraisals. HUD Regulation 4060.1, section
                     6-1E, holds the mortgagee responsible for ensuring that
                     HUD requirements are met regarding quality control. In
                     addition, section 6-1E requires that the mortgagee obtain
                     written reports from investors regarding the results of
                     quality control testing.




 Auditee Comments    First United did not address the specific findings relating to
                     implementation of its Quality Control Plan, but did note
                     that it will continue to work to improve its quality control
                     practices, reporting and documented managerial responses.


 OIG Evaluation of   Our review disclosed specific weaknesses in First United’s
                     implementation of its quality control plan as a result of a
 Auditee Comments    failure to establish procedures to ensure that its quality
                     control plan was properly designed and implemented.
                     While not addressing each deficiency, First United noted
                     that it will continue to improve quality control practices.
                     We agree that First United needs to take the actions we
                     recommended to ensure that its quality control plan
                     implementation is effective.




                             Page 13                              2005-NY-1002

                                                                    TOC
Finding 2

Recommendations   We recommend that the Assistant Secretary for Housing-
                  Federal Housing Commissioner, Chairman, Mortgagee
                  Review Board, require First United to

                  2A.   Implement quality control procedures to ensure that:

                        •   The Quality Control Specialist is independent of
                            the loan originating process.
                        •   All loans that default within the first six
                            payments are properly reviewed.
                        •   Proper gift verification is performed for loans
                            selected for quality control review.
                        •   Appraisal desk reviews are sampled in
                            accordance with HUD requirements.
                        •   Quality control reviews and appropriate
                            management responses are completed in a
                            timely manner.
                        •   Quality control files are properly documented
                            and retained, including assurance of compliance
                            with HUD requirements by outside investors
                            relied upon to conduct quality control.




                         Page 14                           2005-NY-1002


                                                              TOC
Management Controls
In planning and performing our audit, we considered the management controls of First United to
determine our auditing procedures, not to provide assurance on the 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. Management controls include the
systems for measuring, reporting, and monitoring program performance.


                                    We determined the following management controls were
 Relevant Management                relevant to our audit objectives:
 Controls
                                    •   Program Operations – Policies and procedures that
                                        management has implemented to reasonably ensure that a
                                        program meets its objectives.

                                    •   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.

                                    •   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.

                                    We assessed all the relevant controls identified above.

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

                                    Significant weaknesses exist in the following management
   Significant Weaknesses           controls: Program Operations and Compliance with Laws
                                    and Regulations. These weaknesses are described in the
                                    two findings of this report and summarized below.

                                •   First United did not assure that certain loans were
                                    processed in accordance with all applicable HUD
                                    requirements (see finding 1).
                                        Page 15                                     2005-NY-1002


                                                                                       TOC
                                       Management Control



•   First United did not design and implement its quality
    control plan to ensure compliance with HUD requirements
    (see finding 2).




           Page 16                         2005-NY-1002


                                              TOC
Follow-up on Prior Audits
This is the initial Office of Inspector General (OIG) audit report on First United.




                                            Page 17                                   2005-NY-1002


                                                                                        TOC
Follow-up on Prior Audits




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                             Page 18         2005-NY-1002

                                               TOC
                                                                                                                                                               Appendix A

                                          Summary of Underwriting Deficiencies (1)                                         (page 1 of 4)
                                                     1         2       3       4       5       6       7       8       9       10      11      12      13
                                                     351-      351-    352-    352-    351-    352-    352-    351-    352-    351-    351-    352-    352-
Case #                                               4271956   4245405 4737106 4446481 4166768 4624970 4713314 4258438 4705394 4248193 4271037 4639998 4592520
Mortgage amount ($)                                  $152,605 $105,154 $234,000 $104,139 $71,050 $157,700 $167,779 $118,044 $104,250 $102,159 $134,893 $147,530 $109,112
Payments before first default reported               7        9        6        3        3       11       3        8        9        7        5        11       4

Areas of Deficiencies:                                                                                                        1/       2/
Qualifying Ratios and Compensating Factors
Excessive debt to income ratios without
compensating factors                                    X                 X                  X       X                                           X        X
Inaccurate debt to income ratios                        X                                    X       X        X        X                                  X         X
Inadequate compensating factors                                                                               X                    X
Inadequate disclosure of liabilities                    X         X                          X                                              X                       X
Inadequate underwriting requirements for
temporary interest rate buydown                                                                                                                                     X
                                      Subtotal:         3         1        1        0        3       2        2        1           1        1    1         2        3

Inadequate Verification of Funds To Close
Verification of cash gift not obtained                  X                 X         X                X                                                    X
Verification of debt payments not obtained
Verification of deposit not obtained                                                X        X       X                 X                    X    X        X         X
Verification of paid outside closing cost not
obtained                                                X                           X        X                                                            X         X
Inadequate bank account documentation                                                                X                                           X                  X
Inadequate earnest money deposit
documentation                                                             X                                   X        X
Inadequate funds to close on HUD-1 Settlement
Statement                                                                           X        X                                                   X                  X
Inadequate funds to close on Mortgage Credit
Analysis Worksheet                                      X                 X         X                X                 X
Closing not in compliance with loan approval
requirements                                            X                 X         X                                  X
                                         Subtotal:      4         0        4        6        3       4        1        4           0        1    3         3        4

Inadequate Verification of
Income/Employment
Inadequate support for income calculation               X         X                                  X        X        X                                  X
Inadequate support for employment                       X                 X         X                X        X
                                      Subtotal:         2         1        1        1        0       2        2        1           0        0    0         1        0

                                                                                   Page 19                                      2005-NY-1002
                                                                                                                                                              Appendix A


                                         Summary of Underwriting Deficiencies (1)                                         (page 2 of 4)
                                                    1         2       3       4       5       6       7       8       9       10      11      12      13
                                                    351-      351-    352-    352-    351-    352-    352-    351-    352-    351-    351-    352-    352-
Case #                                              4271956   4245405 4737106 4446481 4166768 4624970 4713314 4258438 4705394 4248193 4271037 4639998 4592520
Mortgage amount ($)                                 $152,605 $105,154 $234,000 $104,139 $71,050 $157,700 $167,779 $118,044 $104,250 $102,159 $134,893 $147,530 $109,112
Payments before first default reported              7        9        6        3        3       11       3        8        9        7        5        11       4

Inadequate Documentation of Credit History
Inadequate credit analysis                                       X                 X        X                         X                   X
                                  Subtotal:            0         1        0        1        1       0        0        1         0         1     0         0        0

Other Processing Procedures
Inadequate origination analysis of non-
processed borrower                                                                 X
Unsigned sales contract                                                  X
Subsequently rejected Mortgage Credit Analysis
Worksheet disregarded without justification                              X
Non-itemized lender credit
                                        Subtotal:      0         0        2        1        0       0        0        0         0         0     0         0        0

Ineligible/Unsupported Fees
Unsupported credit report fee                          X         X       X         X        X       X        X                  X         X     X        X         X
Ineligible commitment fee                                                X         X        X                X        X                   X     X        X         X
Ineligible shipping fee                                                  X
                                       Subtotal:       1         1        3        1        2       1        2        1         1         2     2         2        2

Deficiency count for each case                         10        4       11       11        9       9        7        8         2         5     6        8         9
Indemnification recommended                            X         X       X        X         X       X        X        X         X         X     X        X         X


         Note: 1/ First United could not locate its case file.
              2/ While Neighborhood Watch reported this loan paid in full as of September 30, 2004, Federal Housing Administration Insurance was reported
                as still in effect.




                                                                                       Page 20                             2005-NY-1002
                                                                                                                                                 Appendix A


                                    Summary of Underwriting Deficiencies (2)                                  (page 3 of 4)
                                                   14      15       16      17      18      19       20       21       22       23       24      25
                                                   351-    352-     351-    352-    352-    352-     352-     352-     352-     352-     351-    352-
Case #                                             4268219 5002658 4255346 4821402 4187932 4840266 4567838 4903996 4787988 4635690 4317276 4660882 Total
Mortgage Amount ($)                                $95,207 $123,373 $88,152 $73,841 $74,600 $156,300 $162,550 $132,762 $137,583 $133,168 $47,958 $139,461 $3,073,370
Payments Before First Default                         3        1       6        0         4      3        1        5          3     3        8         3


Areas of Deficiencies:                                                                    1/
Qualifying Ratios and Compensating Factors
Excessive debt to income ratios without
compensating factors                                                   X                                                                                            7
Inaccurate debt to income ratios                               X                                 X       X                                                         10
Inadequate compensating factors                                X                                                                                                    3
Inadequate disclosure of liabilities                  X                                                                                                                6
Inadequate Underwriting Requirements for
Temporary Interest Rate Buydown                                                                                                                                        1
                                      Subtotal:       1        2       1        0         0      1        1        0          0     0        0         0           27


Inadequate Verification of Funds To Close
Verification of cash gift not obtained                X                                                                                                                6
Verification of debt payments not obtained            X        X                                                                                                       2
Verification of deposit not obtained                  X                                          X                                                                 10
Verification of paid outside closing cost not
obtained                                              X                         X         X                                                                            8
Inadequate bank account documentation                          X                          X                                                                            5
Inadequate earnest money deposit
documentation                                         X                                                                                                                4
Inadequate funds to close on HUD-1 Settlement
Statement                                             X                         X                                                                                      6
Inadequate funds to close on Mortgage Credit
Analysis Worksheet                                                                                                                                                     5
Closing not in compliance with loan approval                                                                                                                           4
                                      Subtotal:       6        2       0        2         2      1        0        0          0     0        0         0           50

Inadequate Verification of
Income/Employment
Inadequate support for income calculation                      X                                 X       X                                                          9
Inadequate support for employment                     X                                                                                                             6
                                       Subtotal:      1        1       0        0         0      1        1        0          0     0        0         0           15



                                                                                Page 21                                    2005-NY-1002
                                                                                                                                                  Appendix A


                                     Summary of Underwriting Deficiencies (2)                                  (page 4 of 4)
                                                    14      15       16      17      18      19       20       21       22       23       24      25
                                                    351-    352-     351-    352-    352-    352-     352-     352-     352-     352-     351-    352-
Case #                                              4268219 5002658 4255346 4821402 4187932 4840266 4567838 4903996 4787988 4635690 4317276 4660882 Total
Mortgage Amount ($)                                 $95,207 $123,373 $88,152 $73,841 $74,600 $156,300 $162,550 $132,762 $137,583 $133,168 $47,958 $139,461 $3,073,370
Payments Before First Default                          3        1       6        0       4        3        1        5          3       3      8         3

Inadequate Documentation of Credit History
Inadequate credit analysis                             X        X                X                                                                                      8
                                       Subtotal:       1        1       0        1       0        0        0        0          0       0      0         0               8

Other Processing Procedures
Inadequate origination analysis of non-
processed borrower                                              X                                                                                                       2
Unsigned sales contract                                                                                                                                                 1
Subsequently Rejected Mortgage Credit Analysis
Worksheet disregarded without justification                                                                                                                             1
Non-itemized lender credit                             X                                                                       X       X                                3
                                        Subtotal:      1        1       0        0       0        0        0        0          1       1      0         0               7

Ineligible/Unsupported Fees
Unsupported credit report fee                          X                X        X       X        X       X                                   X                       19
Ineligible commitment fee                                               X        X       X        X                 X          X       X      X                       17
Ineligible shipping fee                                                                                                                                 X              2
                                       Subtotal:       1        0       2        2       2        2        1        1          1       1      2         1             38


Deficiency count for each case                        11        7       3        5       4        5       3         1          2       2      2         1             145
Indemnification recommended                           X         X       X        X       X        X       X                                                    $2,482,438


             Note: 1/ First United could not locate its case file.
                   2/ As of September 30, 2004, Neighborhood Watch reports that this loan was paid in full, yet Federal Housing Administration
                    insurance was reported as in effect.




                                                                                     Page 22                            2005-NY-1002
Narrative Case Presentation                                                 Appendix B



Case Number:           351-4271956
Loan Amount:           $152,605
Settlement Date:       September 27, 2002
Status:                Currently in Default

Pertinent Details

A.     Excessive Debt to Income Ratios Without Compensating Factors

HUD Handbook 4155.1, REV-4, CHG 1, section 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio
should not exceed 29 and 41 percent, respectively, unless the mortgagee identifies
compensating factors to justify exceeding these ratios. First United computed debt to
income ratios of 20.7 and 47.955 percent, respectively, without listing any compensating
factors.

B.     Inaccurate Debt to Income Ratios
C.     Inadequate Support for Income Calculation
D.     Inadequate Disclosure of Liabilities

The ratios calculated by First United are incorrect due to an overstatement of income by
$991 and a $545 understatement of liabilities. After considering these deficiencies, we
calculated the debt to income ratios to be 24.45 and 66.6 percent, respectively.

First, from the documents in the file we could not determine how First United calculated the
borrower’s estimated monthly income of $2,315. We calculated a monthly income of
$1,973, based on the hourly rate indicated on the verification of employment provided by
the borrower’s employer. Second, overtime should not have been considered for the co-
borrower because the verification of employment for both borrowers stated that the
continuance of the overtime was not guaranteed. HUD Handbook 4155.1, REV-4, CHG 1,
section 2-7A, states that overtime may be used as qualifying income if the borrower has
received such income for approximately the past 2 years and there are reasonable prospects
of its continuance. The lender must develop an average of overtime income for the past 2
years, and the employment verification must not state categorically that such income is not
likely to continue. Periods of less than 2 years may be acceptable provided that the
underwriter adequately justifies and documents his or her reason for using the income for
qualifying purposes. Third, no justification was given by the underwriter to conclude that
the overtime should be included as qualified income if earned less than 2 years. The
Mortgage Credit Analysis Worksheet included the co-borrower’s monthly overtime income
of $649.

Further, there was inadequate disclosure of liabilities. First, a $545 monthly payment for
consolidated debts was not considered. HUD Handbook 4155.1, REV-4, CHG-1, section
2-11A, states that the mortgagee must include monthly housing expense and all other
additional recurring charges, including child support, installment accounts, and revolving
accounts, when computing debt to income ratios. Second, the borrower’s credit report
disclosed an outstanding state tax lien of $2,940, which was neither listed on the loan

                                                                                               TOC
                                          Page 23                              2005-NY-1002
Narrative Case Presentation                                                Appendix B



application nor considered when computing debt to income ratios. No explanation for
the omission was documented. First United did not comply with HUD Handbook
4155.1, REV-4, CHG 1, section 2-3B, which states that a satisfactory explanation must
be provided by the borrower for the omission of any significant debt shown on the credit
report but not listed on the loan application

E.     Inadequate Funds To Close on Mortgage Credit Analysis Worksheet

The Mortgage Credit Analysis Worksheet reported a $4,047 negative balance.           This
negative balance should have prevented First United from approving the loan.

F.     Closing Not in Compliance with Loan Approval

HUD Handbook 4155.1 REV-4, CHG 1, section 3-12B, requires that the loan close in the
same manner in which it was underwritten and approved. The HUD-1 Settlement
Statement in the file listed a seller concession of $7,000, which was $1,602 higher than
the $5,398 amount listed on the Mortgage Credit Analysis Worksheet.

G.     Verification of Cash Gift Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10C, requires that the lender obtain a
copy of the gift donor’s bank withdrawal slip or canceled check from the gift donor’s
bank, along with the borrower’s deposit slip or bank statement showing the deposit into
the borrower’s bank account. Paragraph 2-10C further provides that if the funds are not
deposited to the borrower’s account before closing, the lender must obtain verification
from the closing agent that funds were received from the donor for the amount of the gift.
The file contained a gift letter for $5,000. The donor provided a cancelled check for
$1,000, made payable to the borrower’s realtor, along with evidence of deposit by the
realtor. However, the donor also made a $4,000 cashier’s check, payable to the borrower
on closing day, but there was no documentation to verify that the closing agent received
these funds.

H.     Inadequate Support for Employment

HUD Handbook 4155.1, REV-4, CHG 1, section 2-6, requires the lender to verify
employment for the most recent 2 full years. The file contained verification of
employment from the borrowers’ current employer; however, the borrowers had worked
for that employer less than 2 years. Additional employment verification should have
been obtained.

I.     Verification of Paid Outside Closing Cost Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, requires that all funds for the
borrower’s investment in the property be verified and documented. The HUD-1
Settlement Statement in the file reported that the borrower paid $50 for a credit report
and a $375 appraisal fee outside closing. The file contained a check deposit sheet made
by First United and a copy of a non-canceled check for $425 made to First United by the
                                                                                             TOC
                                         Page 24                             2005-NY-1002
Narrative Case Presentation                                                 Appendix B



gift donor. As a result, the documentation was insufficient to prove that the paid outside
closing items had been paid before closing, without reducing the funds available to close.

J.      Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the actual costs
of credit reports. The file reported credit report costs of $40. However, the borrowers
were charged $50 for credit reports on the HUD-1 Settlement Statement. Consequently,
the $10 is an unsupported fee.

First United’s Comments

A. First United did not comment on the issue of excessive debt to income ratios without
   compensating factors.

B. First United agreed that the reasoning for the use of overtime and the basis for the
C. income calculation should have been documented in the file. However, First United
   disagreed that the borrowers’ income was overstated by $991 based upon use of
   overtime income, because the verifications of employment for both borrowers only
   indicated that the overtime was “not guarantee” instead of categorically stating that
   the overtime income was “not likely to continue.”

D. First United agreed that debt was incorrectly excluded by the underwriter and that the
   existence of the state tax lien and its prior disposition were not properly documented.

E. First United agreed that the MACAW reported inadequate funds to close.

F. First United did not comment about the issue that the loan did not close in
   compliance with loan approval.

G. First United did not comment about the issue of inadequate gift verification.

H. First United agreed that the file lacked complete documentation of employment.

I.   First United did not comment about the issue of inadequate verification of costs paid
     outside closing.

J. First United agreed that credit report fees were not supported.

OIG’s Evaluation of First United’s Comments

A. First United did not comment.

B. First United concurred with the finding that underwriter did not provide adequate
C. justification of the borrowers’ income calculation.

D. First United concurred.
                                                                                   TOC
                                          Page 25                             2005-NY-1002
Narrative Case Presentation                    Appendix B




E. First United concurred.

F. First United did not comment.

G. First United did not comment.

H. First United concurred.

I.   First United did not comment.

J. First United concurred.




                                                  TOC
                                     Page 26    2005-NY-1002
Narrative Case Presentation                                                   Appendix B



Case Number:          351-4245405
Loan Amount:           $105,154
Settlement Date:       August 29, 2002
Status:                Currently in Default

Pertinent Details

A.     Inadequate Support for Income Calculation

Handbook 4155.1, REV-4, CHG-1, section 2-7, provides that overtime and bonus income
may be used to qualify if the borrower has received such income for approximately 2 years
and there are reasonable prospects for continuance. If bonus income varies significantly
from year to year, a period of more than 2 years must be used to calculate average income.
First United appeared to include bonus income in the borrower’s base income. However,
since there was a significant variance in bonus income over the 3-year period provided, the
bonus income should have been averaged over 3 years. This would have caused total
monthly wage income to decrease from $4,231 to $4,123.

B.     Inadequate Credit Analysis

Handbook 4155.1, REV-4, CHG-1, section 2-3, provides that major indications of
derogatory credit problems require a sufficient written explanation from the borrower. First
United did not obtain a satisfactory explanation for a $284 balance that was in collections.
The conditional commitment in the file indicated that evidence had to be provided before
closing that this amount had been paid in full, but there was no documentation that the $284
balance had been paid.

C.     Closing Not in Compliance with Loan Approval

Handbook 4155.1, REV-4, CHG 1, section 3-12B, states that the loan must close in the
same manner in which it was underwritten and approved. The Mortgage Credit Analysis
Worksheet had total seller’s contribution as $166, while the actual seller’s contribution at
closing on the HUD-1 Settlement Statement was $2,000.

D.     Inadequate Underwriting Documentation

Documents in the file contain discrepancies for the borrower’s residence. The borrower’s
loan application, bank statements, payroll tax form, and driver’s license indicate a residence
at 1657 N. Robinson Street. The July 18, 2002, credit report indicates an address of 1957 N.
Robinson Street but also indicated association with 1657 N. Robinson Street. In the July 26,
2002, explanation for credit report delinquencies, the borrower stated an address of 1957 N.
Robinson Street. An August 27, 2002, lease, effective September 1, 2002, was used to
support future monthly rental income of $500 per month at 1297 N. Robinson Street.
Lastly, on the deed for the purchase of the Federal Housing Administration-insured property
that occurred on August 29, 2002, the borrower listed 1457 N. Robinson Street as his post
office address. These discrepancies for the addresses of both the borrower and the rental


                                                                                  TOC
                                           Page 27                              2005-NY-1002
Narrative Case Presentation                                                    Appendix B



property raise questions as to whether the rental income and potential debt with the prior
residence were properly verified.

E.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of credit reports. The file contained two credit reports at a cost of $5 for each
report. However, the borrower was charged $50 for credit reports on the HUD-1 Settlement
Statement, as opposed to the actual cost of $10. Consequently, the $40 is an unsupported
fee.

First United’s Comments

A. First United disagrees that the income calculation was incorrect, noting that the figure
   used for bonus income was the average for the two previous years.

B. First United states that the credit supplement to document payment of a debt in
   collection was not copied into the loan file. First United will pursue obtaining this
   supplement to provide HUD.

C. First United agrees that the MCAW in its file incorrectly reported the seller
   contribution, but that the final 1003 reflected the correct amount as reported on the
   HUD-1 Settlement Statement.

D. First United agreed variant house numbers should have been corrected or explained in
   the file.

E. First United stated that actual invoicing for credit reports will occur in future files.

OIG’s Evaluation of First United’s Comments

A. Support for the income calculation was inadequate. First United indicates that it
   averaged bonus income for the previous two years. The borrower’s bonus income
   increased more than $8,000 from calendar year 2001 to 2002. Handbook 4155.1
   REV-4, CHG 1 requires the use of a period of more than two years to calculate
   average income if bonus income varies significantly from year to year.

B. The loan file lacks documentation that the debt was paid.

C. As noted by First United, the loan file MCAW was not updated to reflect what was
   on the HUD-1 Settlement Statement. Nevertheless, OIG has determined that the
   HUD-1 Settlement Statement per the HUD file did reflect the correct seller
   contribution amount as reported on the HUD-1 Settlement Statement. Consequently,
   we eliminated the deficiency that closing was not in compliance with loan approval
   requirements.

D. First United concurred.
                                                                                  TOC
                                            Page 28                              2005-NY-1002
Narrative Case Presentation             Appendix B




E. First United concurred.




                                           TOC
                              Page 29    2005-NY-1002
Narrative Case Presentation                                                Appendix B



Case Number:          352-4737106
Loan Amount:          $234,000
Settlement Date:      October 2, 2002
Status:               Currently in Default

Pertinent Details

A.     Excessive Debt to Income Ratios Without Compensating Factors

HUD Handbook 4155.1, REV-4, CHG 1, section 2-12 and 2-13 state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio
should not exceed 29 and 41 percent, respectively, unless the mortgagee identifies
compensating factors to justify exceeding these ratios. First United computed debt to
income ratios of 34.526 and 45.191 percent, respectively, without listing compensating
factors.

B.     Subsequently Rejected Mortgage Credit Analysis Worksheet Disregarded
       Without Justification

The loan was underwritten based upon the Mortgage Credit Analysis Worksheet, dated
September 12, 2002, with debt to income ratios of 34.526 and 45.191. However, the file
contained a second worksheet, dated September 27, 2002, prepared by a different
underwriter with debt to income ratios of 33 and 42.9 percent. Although these ratios
were lower than those on the previous worksheet, this underwriter rejected the loan.
However, the loan was approved, based upon the previous worksheet, with no
explanation for disposition of the most recent and rejected worksheet.

C.     Verification of Cash Gift Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10C, requires that the lender obtain a
copy of the gift donor’s bank withdrawal slip or canceled check from the gift donor’s
bank, along with the borrower’s deposit slip or bank statement showing the deposit into
the borrower’s bank account. Also, if the funds are not deposited to the borrower’s
account before closing, the lender must obtain verification that the closing agent received
the funds from the donor for the amount of the gift. The gift letter in the file reported a
gift of $26,900. We found supporting documents for $18,000 of the $26,900 gift amount.
The remaining $8,900 was supported by a check made by the donor to an unrecognized
third party on April 16, 2002 (more than 5 months earlier than the closing date). No
documentation was obtained showing the fund transfer from the donor’s account to the
borrower’s account. We also noted that the gift fund was required for the borrower to
close.

D.     Inadequate Earnest Money Deposit Documentation

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10A, provides that if the amount of
any earnest money deposit exceeds 2 percent of the sales price or appears excessive
based on the borrower’s savings history, the lender must verify the deposit amount and


                                          Page 30                             2005-NY-1002    TOC
Narrative Case Presentation                                                Appendix B



the source of funds. The Mortgage Credit Analysis Worksheet in the file showed that the
earnest money deposit was $29,400, which was greater than 2 percent of the sales price.
The application reported that these funds were held in escrow by the seller’s attorney
($8,900) and borrower’s attorney ($20,500). However, the letters from the attorneys
indicated that they held escrows of $9,900 (seller’s attorney) and $18,000 (borrower’s
attorney). Therefore, the remaining $1,500 earnest money was not documented as
deposited. Further, we noted that the borrower had no assets other than the gift funds of
$26,900, as indicated on the gift letter (of which $8,900 was inadequately supported as
noted in section C). We also noted that assets available were reported as $26,900 on the
rejected Mortgage Credit Analysis Worksheet, dated September 27, 2002. Moreover, the
HUD-1 Settlement Statement indicated that the earnest money was $9,900. Therefore,
First United did not obtain sufficient verification for the earnest money deposit, which
was required to close.

E.     Inadequate Funds To Close on Mortgage Credit Analysis Worksheet

The Mortgage Credit Analysis Worksheet, dated September 12, 2002, reported that the
borrower needed cash in the amount of $29,053 to close. The borrower had no assets
other than the $26,900 gift, as indicated on the gift letter (which included an unsupported
amount of $8,900 as noted in section C). Since the borrower evidently did not have
enough funds to close, First United did not comply with HUD Handbook 4155.1, REV-4,
CHG 1, section 2-10A, which requires that the lender estimate the settlement
requirements to determine the cash required to close.

F.     Closing Not in Compliance with Loan Approval

HUD Handbook 4155.1, REV-4, CHG 1, section 3-12B, requires that the loan close in the
same manner in which it was underwritten and approved. We found that the closing
attorney’s records did not reconcile with the HUD-1 Settlement Statement, which reported
more costs than documentation disclosed was actually paid. Further, there were surplus
funds in the attorney’s trust fund, which were not returned to the borrower.

G.     Inadequate Support for Employment

Handbook 4155.1, REV-4, CHG 1, paragraph 3-5, requires the lender to ask sufficient
questions to obtain a complete picture of the borrower’s financial situation, the source of
funds for the transaction, and the intended use of the property. The borrower’s credit
report in the file indicated that the borrower had been employed with five different firms,
none of which reconciled to the firm name provided on the loan application, at which the
borrower reported he had been self-employed for 5 years. No explanation was obtained
for the inconsistent employment information. HUD Handbook 4155.1, REV-4, CHG 1,
section 2-9B, provides that a year-to-date profit-and-loss statement and balance sheet are
required for self-employed borrowers. While a profit-and-loss statement was obtained, a
balance sheet was not.




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H.     Ineligible Commitment Fee

Mortgage Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and must guarantee the interest rate and/or discount points for a period of not less
than 15 days before the anticipated closing date. A commitment fee of $275 was
included on the HUD-1 Settlement Statement, which was paid by the borrower on
October 2, 2002 (closing date). However, the lock-in confirmation document, dated
August 2, 2002, indicated that the borrower did not choose a lock-in. Therefore, the
$275 is an ineligible fee.

I.     Ineligible Shipping Fee

The borrower was charged $58 for a UPS Express fee, which is not listed on the
approved listing of closing costs and other fees in HUD Handbook 4000.2, REV-2,
section 5-3.

J.     Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the borrower
actual costs of credit reports. The file contained a credit report at a cost of $33.
However, the borrower was charged $43 for the credit report on the HUD-1 Settlement
Statement. Thus, the $10 is an unsupported fee.

K.     Inadequate Underwriting Documentation

HUD Handbook 4155.1, REV-4, CHG 1, section 3-1H, states that the sales contract and
any amendments or other agreements and certifications should be included in the case
binder. The file contained an incomplete and non-executable sales contract that was not
signed by either the borrower or seller.

First United’s Comments

A. First United agreed that compensating factors to justify ratios in excess of HUD
   guidelines should have been documented, and that this will be implemented as a
   standard procedure. However, First United believed that a 93 percent loan to value
   ratio would give strength to justifying the loan.

B. First United agreed that the previous MCAW by another underwriter should not have
   remained in the loan file.

C. OIG stated that the file contained documentation for $18,000 of the $26,900 gift, but
   that documentation for the remaining $8,900 was a donor check made payable to an
   unrecognized third party. First United asserts that the unrecognized third party was
   the attorney for the transaction, and that the $8,900 was reflected on the HUD-1
   Settlement Statement as a downpayment.



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D. First United disagrees that earnest money was not properly documented. First United
   states that the initial $8,900 portion of the gift, plus a $1,000 deposit made at contract
   signing, was held by the seller’s attorney. Further, First United states that the
   $18,000 balance of the gift was also properly documented.

E. First United disagreed that the borrower did not have sufficient funds to close. First
   United noted that the loan file documented an additional $2,500 gift, but
   acknowledged that a copy of the additional gift letter was not in the file. First United
   stated that it would attempt to obtain the gift letter.

F. Concerning the OIG conclusion that the closing attorney’s record did not reconcile
   with the HUD-1 Settlement Statement, and that there were surplus funds in the
   attorney’s trust fund which were not returned to the borrower, First United stated that
   it is not privy to the closing agent’s records and therefore cannot respond to the
   statements without first contacting with the attorney. First United will be pursuing
   this avenue of action.

G. First United disagreed that there was inadequate support for the borrower’s
   employment. First United stated that the credit report can not be used as
   confirmation of employment. Further, First United stated that the borrower’s self-
   employed status was clearly documented because the absence of a balance sheet
   would not affect the calculation of income and or alter the underwriting decision.

H. First United agreed that the file did not contain documentation to support the
   commitment fee.

I. First United stated that the shipping fee was charged by the closing agent despite
   written instruction that it was not an allowable fee.

J. First United agreed that the supplemental credit report fees were not properly
   supported in the file.

K. First United agreed that the sales contract within the loan file was incomplete due to
   copying error, and would attempt to secure a complete copy.

OIG’s Evaluation of First United’s Comments

A. First United concurred that justification for excessive ratios was lacking. In addition,
   HUD Handbook 4155.1, REV-4, CHG 1 does not list the loan to value ratio as a
   compensating factor.

B. First United concurred.

C. We do not believe that First United adequately verified the cash gift as required by
   HUD Handbook 4155.1, REV-4 CHG 1, section 2-10C. Documentation in the loan
   file does not support First United’s contention that the third party who received the
   $8,900 check was either the seller’s or buyer’s attorney. Further, we cannot conclude


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Narrative Case Presentation                                                 Appendix B



   from documentation in the loan file that the $8,900 down payment on the HUD-1
   Settlement Statement was disbursed from a source other than the $18,000 held by the
   buyer’s attorney.

D. First United disagreed that earnest money was inadequately documented. As
   explained in item C, there is no evidence that the $8,900 held in escrow by the
   seller’s attorney was not part of the $18,000 verified gift fund. Since the gift amount
   provided funds required to close, we do not believe that the earnest money was
   adequately documented.

E. First United concurred that the file did not document the $2,500 gift, but stated that
   the transfer of the funds was documented in the loan file. OIG review did not find
   documentation for the transfer.

F. First United stated the need to contact the closing attorney to validate the facts in the
   report. We agree.

G. While the credit report should not be used for confirmation of employment, we
   believe that apparent discrepancies should be questioned. Further, Section 2-9B
   provides that balance sheet is required for self-employed borrowers.

I. First United concurred.

J. First United concurred.

K. First United concurred.

L. First United concurred.




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Narrative Case Presentation                                                     Appendix B



Case Number:            352-4446481
Loan Amount:            $104,139
Settlement Date:        March 03, 2002
Status:                 Reinstated by Mortgagor Who Retains Ownership

Pertinent Details

A.      Inadequate Support for Employment

HUD Handbook 4155.1, REV–4, CHG 1, section 3-1E, provides that pay stubs must
show the borrower’s name, Social Security number, and year-to-date earnings. In
addition, section 3-1 states that when standard documentation does not provide enough
information to support a decision, the lender must provide additional explanatory
statements, consistent with other information in the application, to clarify or supplement
the documentation submitted by the borrower. We found the support for employment to
be inadequate. The file contained pay stub summaries for both borrowers that were
generated by the same employer. The pay stub summaries, which covered an identical 4
weeks of employment for each borrower, contained mathematical mistakes and were not
in sequence by check number. In addition, each sequential week of employment listed on
each of the pay stub summaries contained four corresponding un-cashed paychecks, and
net pay and deduction amounts on one paycheck did not reconcile to the related pay stub.
With these discrepancies, additional explanatory statements should have been obtained
from the borrowers to support their employment.

B.      Verification of Cash Gift Not Obtained

Mortgagee Letter 00-28 provides that the donor must furnish conclusive evidence that the
funds given to the borrower came from the donor’s own funds and were not provided
directly or indirectly by the seller, real estate agent, builder, or any entity with an interest
in the sales transaction. In addition, the mortgagee remains responsible for obtaining
verification that the closing agent received the funds from the donor for the amount of the
purported gift and that the deposit was properly documented in the borrower’s account.

The file contained a gift letter for $3,200, dated February 20, 2002, and a $3,200 gift
check, written to the co-borrower dated December 21, 2001 (6 weeks before the gift
letter). Further, the file did not contain documentation to substantiate the deposit of the
gift. Lastly, the file provided a bank statement from the gift donor that listed a $3,200
deposit on December 20, 2001 (1 day before the $3,200 gift withdrawal on December 21,
2001). Consequently, the documentation that the gift funds came from the donor’s own
funds and that the borrower received the funds was inadequate.

C.      Verification of Deposit Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large
increase in a bank account or the bank account was opened recently, the mortgagee must
obtain an explanation and evidence of the source of funds from the borrower. The co-
borrower’s bank statements contained unexplained deposits of $900 on March 14, 2002,

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and $3,200 on December 5, 2001. It should also be noted that these unexplained deposits
represented funds needed to close.

D.      Inadequate Credit Analysis

HUD Handbook 4155.1, REV-4, CHG 1, section 2-3, provides that indications of
derogatory credit problems require a sufficient written explanation from the borrower.
The file contained copies of bank statements of the co-borrower that listed many “non
sufficient funds” charges for the co-borrower’s automobile loan payments. Further, these
payments amounted to $623 per month, which was more than the required monthly $310
payment as listed on the co-borrower’s credit report. As a result, the increased liability
due to the nonpayment for the car could significantly increase the debt to income ratios
of the borrower and co-borrower. We also could not locate any evidence in the file to
document that the co-borrower made an actual car payment, which raises the question as
to whether the co-borrower was in default for car payments at the closing. Further, we
could not locate any explanation in the file regarding adverse ratings for four other
accounts of the co-borrower. Consequently, analysis of credit was inadequate.

E.     Closing Not in Compliance with Loan Approval

HUD Handbook 4155.1, REV-4, CHG 1, section 3-12B, states that the loan must close in
the same manner as it was underwritten and approved. The file contained a HUD-1
Settlement Statement, which included an origination fee of $1,026 and a non-realty item
of $275 that were not included on the Mortgage Credit Analysis Worksheet during the
underwriting process. The omission of these two items could have a significant impact
on the borrower’s ability to have enough assets to close. In addition, an Initial Escrow
Account Disclosure Statement, contained in the file, requested an escrow cushion of $586
representing 2 months of real estate taxes and hazard payments. The HUD-1 Settlement
Statement, however, listed $293 collected, which represents only 1 month real estate tax
and hazard premium.

F.     Inadequate Funds To Close on Mortgage Credit Analysis Worksheet

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that the cash investment
in the property equal the difference between the amount of the insured mortgage,
excluding any up-front Mortgage Insurance Premium, and the total cost to acquire the
property, including prepaid expenses. In addition, Handbook 4155.1, REV-4, CHG 1,
section 1-9, provides that the lender must estimate the settlement requirements to
determine the cash required to close. The file contained a Mortgage Credit Analysis
Worksheet that did not include closing costs of $1,456 and a non-realty item amounting
to $275, as stated on the good faith estimate.       The HUD-1 Settlement Statement
indicates that the $1,026 origination fee and the $275 non-realty item were charged on
the HUD-1 Settlement Statement at closing. With the additional closing costs charged on
the HUD-1 Settlement Statement, the borrower would have a negative cash reserve of
$677, instead of $624 as reported.



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G.     Inadequate Funds To Close on HUD-1 Settlement Statement
H.     Verification of Paid Outside Closing Costs Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, states that all of the funds for the
borrower’s investment in the property must be verified and documented. The borrower
did not appear to have sufficient funds to close. There was no documentation to show
that paid outside closing items totaling $520 had been paid before closing without
reducing the funds available to close. Cash due from the borrower on the HUD-1
Settlement Statement was $4,100. If the total $520 paid outside closing amount is added
to the $4,100 owed by the borrower and then offset against the remaining $3,941 in
assets, the borrower has a $679 deficit at closing.

I.     Inadequate Origination Analysis of Non-processed Borrower

HUD Handbook 4155, section 2-2A, refers to “cosigners,” who don't take ownership
interest but must execute the loan application and mortgage note, and noted that they
become liable for the repayment of the obligation. The Handbook also states that the
cosigner’s income, assets, liabilities, and credit history are included in the determination
of creditworthiness. The file contained a HUD-1 Settlement Statement and Mortgage
that listed a borrower who was not included in the underwriting process. The loan should
have been underwritten with this non-processed borrower.

J.     Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the borrower
the actual costs of credit. The file contained two credit reports at costs of $20 and $35.
However, the borrower was charged $86 for credit reports on the HUD-1 Settlement
Statement, as opposed to the actual cost of $55. Accordingly, the $31 is an unsupported
fee.

K.     Ineligible Commitment Fee

Mortgage Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and must guarantee the interest rate and/or discount points for a period of not less
than 15 days before the anticipated closing date. A commitment fee of $275 was
included on the HUD-1 Settlement Statement, which was paid by the borrower on March
22, 2002 (closing date). However, the lock-in confirmation document, dated January 16,
2002, indicated that the borrower did not choose a lock-in. Therefore, the $275 is an
ineligible fee.

First United’s Comments

A. First United agrees that the underwriter should have questioned the mathematical
   errors on both borrowers’ paystubs, and that the paystub and paycheck for one
   borrower did not reconcile, but disagrees that there was inadequate support for the
   borrowers’ employment. Specifically, First United does not see the relevance of the


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Narrative Case Presentation                                                Appendix B



   sequential order of checks issued the borrowers, nor believe that it should have
   inquired about when the borrowers cashed their paychecks.

B. First United disagrees that verification of a cash gift was not obtained. First United
   states that it is required to see donor ability and the transfer of gift funds, both of
   which are contained in the loan file. Additionally, First United believes that it is
   impractical and an undue burden to request that the donor source the funds.

C. First United disagrees that deposits were not verified. First United states that the
   $900 deposit is not excessive and does not need to be sourced, and that the $3,200
   deposit represents a gift.

D. First United disagrees that there was inadequate credit analysis. First United
   maintains that the borrower’s credit report confirms that the borrower’s payments
   were current, and that the borrower remitted two payments during the time frame
   covered by the bank statements.

E. First United disagrees that the loan was not closed properly. First United stated that
   the first tax payment would be in May, with both June and July payments being made
   prior to the third quarter due date in August. First United did not comment on the
   $1,026 origination fee and $275 non-realty item that were not listed on the Mortgage
   Credit Analysis Worksheet, but were listed on the HUD-1 Settlement Statement.

F. First United states that a thorough review of actual and estimated costs needs to be
   completed in order to properly address this item.

G. First United states that a thorough review of actual and estimated costs needs to be
   completed in order to properly address this item.

H. First United states that a thorough review of actual and estimated costs needs to be
   completed in order to properly address this item.

I. First United disagrees that an unprocessed borrower should have been underwritten.
   Auditee states that the non-processed borrower is required by law to sign the
   Mortgage and TIL, but not the Note, and is not obligated on the loan.

J. First United concurs with this issue.

K. First United concurs with this issue.

OIG’s Evaluation of First United’s Comments

A. Given the discrepancies documented in our review of the loan file, we believe that
   First United should have questioned the borrowers’ employment, and obtained
   additional explanatory statements to reconcile the discrepancies in accordance with
   HUD Handbook 4155.1, REV-4, CHG 1, section 3-1.

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Narrative Case Presentation                                                Appendix B



B. Documentation that the gift came from the donor’s own funds, and that the borrower
   received the funds was inadequate per Mortgagee Letter 00-28. The loan file
   identifies a $3,200 deposit on December 5, 2001 into the borrower’s checking
   account as a “gift”. Documentation also shows that the borrower’s savings account
   contained a deposit of $3,200 on December 21, 2001, which was a transfer of funds
   from the borrower’s checking account. However, documentation for the donor bank
   statements disclosed a $3,200 deposit on December 20, 2001, which was one day
   prior to a $3,200 withdrawal and date of a $3,200 bank check, which was identified
   as the gift check. Consequently, the documentation that the gift funds came from the
   donor’s own funds was inadequate.

C. We believe that HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B requires that
   the deposits be verified. The $900.00 deposit on March 14, 2002 is not explained,
   and, as explained in B above, it is unclear whether the $3,200 deposit is a gift.

D. HUD Handbook 4155.1, REV-4, CHG 1, section 2-3, provides that indications of
   derogatory credit problems require a sufficient written explanation from the
   borrower. The file contained copies of co-borrower’s bank statements listing many
   “non sufficient funds” charges for the co-borrower’s automobile loan payments.
   Furthermore, these car payments amounted to $623 per month, which was more than
   the required monthly $310 payment as listed on the co-borrower’s credit report. This
   indicates that the co-borrower may have been having difficulty meeting car payments,
   which should have been questioned. Further, we could not locate any explanation in
   the file regarding adverse ratings for three other accounts of the co-borrower.
   Consequently, the analysis of the borrower’s credit was inadequate.

E. The loan file contained a HUD-1 Settlement Statement listing an origination fee of
   $1,026 and a non-realty item of $275 that were not disclosed on the Mortgage Credit
   Analysis Worksheet during the underwriting process as required by HUD Handbook
   4155.1, REV-4, CHG 1, section 3-12B. The omission of these two items could have
   a significant impact on the borrower’s ability to have enough assets to close.

F. First United states that a thorough review of actual and estimated costs needs to be
   completed in order to properly address this item.

G. First United states that a thorough review of actual and estimated costs needs to be
   completed in order to properly address this item.

H. First United states that a thorough review of actual and estimated costs needs to be
   completed in order to properly address this item.

I. HUD Handbook 4155, section 2-2A requires that the loan should have been
   underwritten with the non-processed borrower.

J. First United concurred.

K. First United concurred.
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Narrative Case Presentation                                                   Appendix B



Case Number:           351-4166768
Loan Amount:           $71,050
Settlement Date:       March 26, 2002
Status:                Currently in Default

Pertinent Details

A.         Excessive Debt to Income Ratios Without Compensating Factors

HUD Handbook 4155.1, REV-4, CHG 1, section 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio should
not exceed 29 and 41 percent, respectively, unless the mortgagee identifies compensating
factors to justify exceeding these ratios. First United computed front and back ratios of
33.074 percent, without noting any compensating factors.

B.     Inaccurate Debt to Income Ratios
C.     Inadequate Disclosure of Liabilities
D.     Inadequate Credit Analysis

HUD Handbook 4155.1, REV-4, CHG 1, paragraph 2-11A, states that the mortgagee must
include the monthly housing expense and all other additional recurring charges, including
child support, installment accounts, and revolving accounts, when computing debt to
income ratios. The ratios calculated by First United are incorrect because a $209 monthly
installment debt payment, reported in the credit report, was not considered in calculating the
ratios. Further, while the handwritten loan application disclosed this debt, the final typed
loan application did not. Additionally, the borrower had provided an explanation of why
this account had two 30-day late payments. Inclusion of this debt raises the fixed payment
to income ratio to 42.449 percent.

E.     Verification of Deposits Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, paragraph 2-10B, provides that if there is a large
increase in a bank account amount or the bank account was opened recently, the mortgagee
must obtain an explanation and evidence of the source of funds from the borrower. The file
contained a recently opened bank account and bank statements that indicated non-payroll
deposits, without an adequate written explanation from the borrower as to the source of the
funds. The checking account was opened on February 8, 2002, with a deposit of $1,797.
The borrower explained that these funds came from paychecks. A $700 deposit was made
on February 22, 2002, without any explanation. On February 26, 2002, the borrower
deposited $2,200, derived from 401K loan proceeds, to the checking account. Additionally,
a $250 commitment fee was paid outside closing by a money order on February 5, 2002,
before the establishment of the checking account. There was no explanation as to the source
of these funds.

F.     Inadequate Funds To Close on HUD-1 Settlement Statement
G.     Verification of Paid Outside Closing Cost Not Obtained

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The HUD-1 Settlement Statement listed $1,462 due at closing from the borrower and $399
paid outside closing on March 23, 2003, for hazard insurance. Therefore, the borrower
needed $1,861 to close. The borrower’s final checking account balance before closing was
$1,639. Therefore, all the unexplained deposits were required for closing, and there was no
indication that additional funds would be borrowed.

H.      Closing Not in Compliance with Loan Approval

HUD Handbook 4155.1, REV-4, CHG 1, section 3-12B, requires that the loan close in the
same manner in which it was underwritten and approved. The Mortgage Credit Analysis
Worksheet listed a total seller’s contribution of $1,654, while the actual seller’s contribution
at closing on the HUD-1 Settlement Statement was $2,300.

I.      Ineligible Commitment Fee

Mortgagee Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and must guarantee the interest rate and/or discount points for a period of not less
than 15 days before the anticipated closing date. A commitment fee of $275 was paid. The
mortgagor declined an interest rate lock-in in the lock-in confirmation document on
February 5, 2002. Accordingly, the $275 commitment fee is ineligible because there was no
documentation to show the mortgagor agreed to a lock-in agreement.

J.      Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the borrower
actual costs of credit reports. While the file contained one credit report at no recorded cost
to the borrower, the borrower was charged $50 for credit reports on the HUD-1 Settlement
Statement. Accordingly, the $50 is an unsupported fee.

First United’s Comments

A. First United agrees that compensating factors should have been listed for the excessive
    mortgage payment to effective income ratio.

B. Without a copy of the credit report, First United could not determine whether the
C. unreported debt should have been included in the ratio calculation. First United is
D. attempting to obtain a copy of the credit report.

E. First United disagrees that there were large deposits that needed to be verified.

F. First United states that it is logical and conceivable that an additional paycheck would
G. have covered the funds needed to close. First United stated that it is not reasonable or
   possible to verify funds to close in an account up to the day prior to closing.

H. First United agrees that the MCAW in its file incorrectly reported the seller
   contribution, but that the final 1003 reflected the correct amount as reported on the
   HUD-1 Settlement Statement.
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Narrative Case Presentation                                               Appendix B




I. First United agrees that documentation to support a commitment fee was lacking.

J. First United agrees that documentation to support credit report fees was lacking.

OIG’s Evaluation of First United’s Comments

A. First United concurred.

B. First United should have included in its ratio calculation the debt listed on the
C. borrower’s credit report, and obtained an explanation for two 30-day late payments on
D. this debt.

E. HUD Handbook 4155.1 REV-4 CHG 1, paragraph 2-10B, provides that if there is a
   large increase in a bank account amount or the bank account was opened recently, the
   mortgagee must obtain an explanation and evidence of the source of funds from the
   borrower. Since, the borrower opened the bank account less than two months before
   the closing, evidence should have been obtained regarding the source all the funds
   and the $250 commitment fee that was paid before the bank account was established.

F. HUD Handbook 4155.1, REV-4, CHG 1, section 2-10 requires that all of the funds
G. for the borrower’s investment in the property must be verified and documented.

H. As noted by First United, the loan file MCAW was not updated to reflect what was
   on the HUD-1 Settlement Statement. OIG has determined that the HUD-1 Settlement
   Statement per the HUD file did reflect the correct seller contribution amount as
   reported on the HUD-1 Settlement Statement. Consequently, we eliminated the
   deficiency that closing was not in compliance with loan approval requirements.

I. First United concurred.

J. First United concurred.




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Narrative Case Presentation                                                  Appendix B



Case Number:           352-4624970
Loan Amount:           $157,700
Settlement Date:       April 24, 2002
Status:                Reinstated by Mortgagor Who Retains Ownership

Pertinent Details

A.     Excessive Debt to Income Ratios Without Compensating Factors

HUD Handbook 4155.1, REV-4, CHG 1, section 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio
should not exceed 29 and 41 percent, respectively, unless the mortgagee identifies
compensating factors to justify exceeding these ratios. First United computed debt to
income ratios of 29.69 and 47.52 percent, respectively, without listing any compensating
factors.

B.     Inaccurate Debt to Income Ratios
C.     Inadequate Support for Income Calculation

The ratios calculated by First United are incorrect because the borrower’s income was
overstated as discussed in the following paragraph. First United calculated the
borrower’s estimated monthly income as $2,782, which included base income, overtime
income, and bonus income of $2,583, $136, and $63, respectively. Handbook 4155.1,
REV-4, CHG 1, section 2-7A, states that overtime and bonus income may be used as
qualifying income if the borrower has received such income for approximately the past 2
years and there are reasonable prospects of its continuance. The lender must develop an
average of overtime or bonus income for the past 2 years, and the employment
verification must not state categorically that such income is not likely to continue.
Periods of less than 2 years may be acceptable, provided that the underwriter adequately
justifies and documents his or her reason for using the income for qualifying purposes.
There was no verification that the borrower received the overtime and bonus incomes for
the past 2 years or whether there were reasonable prospects of its continuance.
Therefore, overtime and bonus income should not be included as qualifying income for
the borrower. As a result, we calculated the debt to income ratios to be 30.82 and 49.32
percent, respectively.

D.     Verification of Cash Gift Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10C, requires that the lender obtain a
copy of the gift donor’s bank withdrawal slip or canceled check from the gift donor’s
bank, along with the borrower’s deposit slip or bank statement showing the deposit in the
borrower’s bank account. Further, if the funds are not deposited to the borrower’s
account before closing, the lender must obtain verification that the closing agent received
funds from the donor for the amount of the gift. The gift letter in the file stated a gift of
$2,500. The gift donor’s bank withdrawal statement indicated that the donor deposited
$3,000 the day before closing and withdrew $2,500 on the same day. In addition, the file


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did not contain evidence indicating the borrower received the funds. Consequently, the
source and receipt of the gift were not adequately documented.

E.     Inadequate Funds To Close on Mortgage Credit Analysis Worksheet

HUD Handbook 4155.1, REV-4, CHG 1, section 1-9, states that the lender must estimate
the settlement requirements to determine the cash required to close. The Mortgage Credit
Analysis Worksheet reported a gift of $6,100, which was $3,600 more than the
documented gift letter amount of $2,500. In addition, the worksheet did not include a
$1,000 cash deposit held by the realtor. Adding the $1,000 deposit to the reported
borrower’s assets of $6,383 and deducting the $3,600 overstated gift reduces the cash
reserve from $1,581 to a deficit of $1,019.

F.     Inadequate Bank Account Documentation
G.     Verification of Deposit Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, states that if there is a large
increase in a bank account amount, the mortgagee must obtain an explanation and
evidence of the source of funds from the borrower. Paragraph 3-1F indicates that as an
alternative to obtaining a verification of deposit, the mortgagee may choose to obtain the
borrower’s original bank statements for the most recent 3-month period. The file
contained two incomplete bank statements, disclosing deposits of $2,200 on February 4,
2002, and $1,159 on March 22, 2002, which were not explained. Also, the bank
statement listed a deposit of $6,500 on March 18, 2002, for which the borrower’s
explanation letter stated that $6,000 of the $6,500 deposit was a redeposit of a previous
$6,000 withdrawal from the same account. The borrower’s explanation was inadequate
due to the incompleteness of the bank statements during the timeframe of the withdrawal.

Lastly, First United explained that the residual $500 of the $6,500 deposit was cash on
hand of the borrower. Handbook 4155.1, REV-4, CHG 1, section 2-10M, states that
borrowers who have saved cash at home and are able to demonstrate adequately the
ability to do so are permitted to have this money included as an acceptable source of
funds to close the mortgage. To include such funds in assessing the homebuyer’s cash
assets for closing, the money must be verified, and the asset verification process requires
the borrower to explain in writing how such funds were accumulated and the amount of
time taken to do so. The lender must determine the reasonableness of the accumulation
of the funds based on the borrower’s income stream, the period during which the funds
were saved, the borrower’s spending habits, documented expenses, and the borrower’s
history of using financial institutions. Adequate verification of the $500 cash on hand
was not obtained.

H.     Inadequate Support for Employment

HUD Handbook 4155.1, REV-4, CHG 1, section 2-6, requires that the lender verify the
borrower’s employment for the most recent 2 full years. Handbook 4155.1, REV-4, CHG 1,
paragraph 3-1E, provides that as an alternative to obtaining verification of employment, the
lender may obtain the borrower’s original pay stub(s) covering the most recent 30-day


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period, along with original payroll tax forms from the previous 2 years. Also, Mortgage
Letter 97-26 states that the lender may perform telephone verification of current
employment when the alternate income documentation procedure is used. The only
verification of employment for the borrower was two biweekly pay stubs, covering a recent
30-day payment history, and no telephone verification of the borrower’s current
employment was conducted. First United obtained only one verification of employment
from the co-borrower’s current employer, for which employment was only 1 month. Both
borrowers provided payroll tax forms for 2001 and tax returns for 2000. The mortgagee did
not comply with the regulations.

I.      Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the borrower
actual costs of the credit reports. The file contained three credit reports at a cost of $12.50,
$20 and $5 respectively. However, the borrowers were charged $50 for credit reports on the
HUD-1 Settlement Statement, as opposed to the actual cost of $37.50. Accordingly, the
$12.50 is an unsupported fee.

First United’s Comments

A. First United agreed that compensating factors should have been listed.

B. First United disagreed that overtime and bonus income were inadequately
C. supported. First United justified including overtime in income because the borrower
   was in a skilled trade with both the opportunity and likelihood of advancement.

D. First United agreed that documentation of the gift was incomplete.

E. First United agreed that documentation that the borrower had sufficient funds to close
   was incomplete.

F. First United did not comment on inadequate bank account documentation.

G. First United did not comment about inadequate deposit verification.

H. First United disagreed that the borrower’s employment was not adequately supported.
   First United stated that, although there was no verbal verification of employment, the
   file contained a letter from the employer confirming a raise, two consecutive paystubs
   documenting the raise, and an updated paystub within 30 days of closing date. First
   United agreed that the file did not contain verification for the prior employment due
   to inadequate copying.

I. First United agreed that the file lacked the supporting documentation for itemized
   credit report billings.




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OIG’s Evaluation of First United’s Comments

A. First United concurred.

B. We disagree with First United because the file did not contain verification that the
C. borrower received the overtime and bonus incomes for the past two years as required
   by HUD Handbook 4155.1 REV-4, CHG 1, section 2-7A.

D. First United concurred.

E. First United concurred.

F. First United did not comment.

G. First United did not comment.

H. We disagree that the borrower’s employment was adequately verified. First United
   did not provide two-year W-2 form and verbal verification as required by HUD
   Handbook 4155.1 Rev-4, CHG 1, section 3-1E, and Mortgage letter 97-26
   respectively. A tax return is not an acceptable substitute for a W-2 because it does
   not provide required information, such as the employer’s name and the period
   working with the employer.

I. First United concurred.




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Case Number:           352-4713314
Loan Amount:           $167,779
Settlement Date:       August 28, 2002
Status:                Currently in Default

Pertinent Details

A.     Inadequate Compensating Factors

HUD Handbook 4155.1, REV-4, CHG 1, section 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio should
not exceed 29 and 41 percent, respectively, unless the mortgagee identifies compensating
factors that could justify exceeding these ratios. First United computed ratios of 36.677 and
48.484. The spouse’s income is listed as a compensating factor on the Mortgage Credit
Analysis Worksheet; however, since the spouse is not a co-borrower, this is not an
allowable compensating factor as defined in paragraph 2-13.

B.     Inaccurate Debt to Income Ratios
C.     Inadequate Support for Income Calculation

HUD Handbook 4155.1, REV-4, CHG-1, section 2-7, provides that unemployment income
is acceptable if it is expected to continue for 3 years and requires a 2-year documentation of
its receipt and reasonable assurance of its continuance. This may be appropriate for
individuals employed on a seasonal basis. The ratios calculated by First United are
incorrect because the borrower’s income was overstated as discussed. The income on the
Mortgage Credit Analysis Worksheet included $420 in unemployment per month, based on
a 2-year average. However, the file indicates the borrower’s explanation attributed the
unemployment to illness, which may not have been seasonal and, thus, is unallowable as
income. Disallowing this income, we computed ratios of 35.8007 and 47.3253, which
would require justification with compensating factors.

D.     Inadequate Support for Employment

The borrower claimed self-employment, and employment confirmation appears to have
been done as if the borrower were self-employed. However, income for several years was
associated with two employers, for which the borrower provided payroll tax forms.
Nevertheless, the verification of employment was sent to the borrower’s home address
without any phone confirmation with the employer. Additionally, the verification of
employment confirmed income from only the primary employer. The income with both
employers should have been confirmed directly and not via the borrower.

HUD Handbook 4155.1, REV-4, CHG 1, paragraph 3-1, requires that the application
package contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to
support this decision, the lender must provide additional explanatory statements. Lenders
are required to obtain verification of employment and a most recent pay stub. As an
alternative to obtaining a verification of employment, the lender may choose to obtain from

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the borrower original pay stub(s) covering the most recent 30-day period, along with
original copies of the previous 2 years’ payroll tax forms. The file contained copies of
payroll tax forms from both employers for the previous 2 years but did not have original pay
stubs for the most recent 30-day period.

E.      Inadequate Earnest Money Documentation

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large
increase in a bank account or the bank account was opened recently, the mortgagee must
obtain an explanation and evidence of the source of funds from the borrower. The
borrower’s spouse, who was not a co-borrower, borrowed $2,700 on June 3, 2002, from her
401-K account and deposited these funds into her account on June 7, 2002. Then a $2,435
earnest money deposit was made on June 14, 2002. The explanation in the file from the
borrower stated that he had borrowed the $2,700 from his 401-K account and had deposited
the funds into his bank account. However, the documents in the file do not support the
explanation provided by the borrower. A proper explanation for this deposit and
determination as to whether it was a gift by the spouse should have been made.

F.      Ineligible Commitment Fee

Mortgagee Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and must guarantee the interest rate and/or discount points for a period of not less
than 15 days before the anticipated closing date. A commitment fee of $275, listed on the
HUD-1 Settlement Statement, was paid by the borrower on August 28, 2002, the closing
date. However, the mortgagor declined an interest rate lock in the lock-in confirmation
document on July 2, 2002. The $275 represents an ineligible fee.

G.      Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the borrower
actual costs of the credit reports. While the file contained one credit report at a cost of $33,
the borrower was charged $43. Consequently, the $10 is an unsupported fee.

First United’s Comments

A. First United agrees that spousal earnings are not listed as a compensating factor in the
   handbook, but states that contributing income of a spouse, even though not obligated
   on the loan, is a practical and logical compensating factor.

B. First United stated that a history of receipt of unemployment income is documented
C. with no reason to think it will not continue.

D. First United disagrees that there was inadequate support for employment. First
   United states that the borrower was treated as a self-employed, and thus the loan was
   conservatively underwritten with the use of net rather than gross income.

E. First United states that the earnest money came from an account of the borrower’s
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   spouse, to which the borrower had full access.

F. First United agrees that documentation to support a commitment fee was lacking.

G. First United agrees that documentation to support credit report fees was lacking.

OIG’s Evaluation of First United’s Comments

A. HUD Handbook 4155.1, REV-4, CHG 1 does not allow the income of a spouse who
   is not a co-borrower as a compensating factor.

B. The borrower’s explanation indicated that he missed a lot of work due to illness in the
C. two years that he collected unemployment. However, there was no evidence in the file
   that the borrower received disability or that unemployment income was seasonal and
   could reasonably be expected to continue. Without this expectation, we do not
   believe that this income should have been expected to continue.

D. Employment verification was inadequate whether the borrower was treated as self-
   employed or as an employee. A verification of employment was sent to the
   borrower’s home, and requested verification from only one of the two sources of
   income. While the previous two years’ pay stubs were obtained, pay stubs for the
   most recent 30-day period were not.

E. HUD Handbook 4155.1 REV-4, CHG 1, Paragraph 2-10B, provides that if there is a
   large increase in a bank account, or the bank account was opened recently, the
   mortgagee must obtain an explanation and evidence of the source of funds from the
   borrower. The borrower explained that the earnest money came from his 401-K
   account, while documentation in the file indicates it came from the spouse's account.
   Since the explanation provided by the borrower as to the source of the funds was
   inconsistent with that in the file, the lender should have obtained clarification as to
   the source of the funds.

F. First United concurred.

G. First United concurred.




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Case Number:          351-4258438
Loan Amount:          $118,044
Settlement Date:      October 24, 2002
Status:               Currently in Default

Pertinent Details

A.     Inaccurate Debt to Income Ratios
B.     Inadequate Support for Income Calculation

Handbook 4155.1, REV 4, CHG 1, chapter 2, section 5, states that the lender is
responsible for adequately analyzing the probability that the borrower will be able to
repay the mortgage obligation in accordance with the terms of the loan. First United
computed debt to income ratios of 24.671 and 39.076 percent, respectively. The ratios
calculated by First United are incorrect as discussed in the following paragraph.

First United estimated monthly income of $4,526, composed of a base income of $2,796
and other earnings of $1,730. Based upon our review of the file, we calculated other
earnings of $1,638, based on the hourly rate and weekly work hours provided by the
employer. This reduces the estimated monthly income to $4,434.

C.     Inadequate Funds To Close on Mortgage Credit Analysis Worksheet

Handbook 4155.1, REV-4, CHG 1, section 1-9, states that for each transaction, the lender
must estimate the settlement requirements to determine the cash required to close. The
Mortgage Credit Analysis Worksheet erroneously counted a $2,500 gift twice and
omitted discount points of $2,361 and residual prepaid expenses of $640 shown on the
good faith estimate. As a result, we calculated total cash reserves on the Mortgage Credit
Analysis Worksheet to be a negative $669.

D.     Verification of Deposits Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10B, states that if there is a large increase in
a bank account amount or the account was opened recently, an explanation and evidence
of source of funds must be obtained by the lender. The file contained bank statements
from two financial institutions. One bank account was opened on September 15, 2002
(closing date October 24, 2002), with unexplained deposits of $200 on September 16,
2002, and $1,000 on September 23, 2002. The other bank statement listed three
unexplained deposits of $1,000 on July 19, 2002, $1,000 on August 2, 2002, and $1,049
on August 23, 2002. It is important to note that these deposits were needed for closing.

E.     Inadequate Earnest Money Deposit Documentation

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10A, provides that if the amount of
the earnest money deposit appears excessive based on the borrower’s history of
accumulating savings, the lender must verify with documentation the deposit amount and
the source of funds. The HUD-1 Settlement Statement in the file indicated that the

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borrower made a $1,000 earnest money deposit, which was supported by a copy of a
$1,000 money order dated July 12, 2002. However, the borrower’s bank statement
reported a balance of $9 until July 19, 2002. In addition, the bank account indicated a
balance of $5,069 as of October 16, 2002 (composed of a $5,000 gift and three
unexplained deposits as stated in section E). The borrower’s savings history, as indicated
by a $9 balance, raises a question about an ability to accumulate savings. Therefore, the
earnest money deposit should have been verified because there may not have been
enough funds to purchase the money order on July 12, 2002, without other sources.

F.     Closing Not in Compliance with Loan Approval

Handbook 4155.1 REV-4, CHG 1, section 3-12B, states that the loan must close in the
same manner in which it was underwritten and approved. The HUD-1 Settlement
Statement in the file listed a seller concession of $3,000, which was $639 higher than the
amount of $2,361 indicated on the Mortgage Credit Analysis Worksheet.

G.     Inadequate Credit Analysis

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, provides that major indications of
derogatory credit problems require a sufficient written explanation from the borrower.
The borrower’s derogatory credit records were not fully explained because the
borrower’s explanation letter did not address delinquencies with Providian Financial and
Universal Citi. In addition, the borrower’s credit report showed many other late
payments and collections, which the borrower explained were the unpaid bills of his girl
friend. The borrower’s explanation of the derogatory credit was insufficient.

H.     Ineligible Commitment Fee

Mortgage Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and must guarantee the interest rate and/or discount points for a period of not less
than 15 days before the anticipated closing date. The borrower paid a $275 commitment
fee on October 24, 2002 (closing date); however, in the lock-in confirmation document
on September 5, 2002, the borrower chose not to lock in. Therefore, the fee is ineligible.

First United’s Comments

A. First United agreed that the file contained a mathematical error, but stated that it
B. would not have affected the quality of the underwriting decision because the ratios
   were still within HUD guidelines.

C. Concerning inadequate funds to close, First United agreed that the $2,500 gift was
   erroneously counted twice, however, First United disagreed that funds to close should
   include $2,361 in discount points because the discount points were paid by the seller.

D. First United disagreed that verification of deposits was not obtained. First United
   maintains that the borrower’s deposits appear to establish a pattern of
   consistent saving of earnings without any excessive amounts.

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E. First United disagrees with the issue that earnest money deposit was not adequately
   documented. First United states that the borrower obviously had funds for the earnest
   money from earnings that had not been consistently deposited, but cashed.

F. First United agreed that the loan was not closed in compliance with the loan approval
   due to a typographical error on the MCAW that reflected a seller concession of
   $2,361. First United stated that the actual concession on the HUD-1 Settlement
   Statement was $3,000, and that the final 1003 reflected the correct concession.

G. First United agreed that the credit analysis was inadequate because two accounts were
   not addressed in the borrower’s explanation, but stated that this oversight in the
   explanation would not have effected the credit decision.

H. First United agreed that the loan file did not contain documentation to support the
   lock-in fee.

OIG’s Evaluation of First United’s Comments

A. First United concurred.

B. First United concurred.

C. We disagree with First United that adequate funds to close were documented. OIG’s
   calculation already included the $2,361 seller concession with the borrower’s funds to
   close, which resulted in a negative cash reserve of $669.

D. We disagree with First United regarding verification of deposits. HUD Handbook
   4155.1 REV-4 CHG1, Section 2-10B requires verification of the source of the
   deposits in new accounts and large deposits in established accounts. The file did not
   contain evidence that the deposits were from the borrower’s earnings. In addition, we
   believe that a $1,000 deposit is excessive compared to the borrower’s account
   balance and saving history.

E. We disagree with First United regarding the issue of earnest money deposit. The file
   did not contain adequate documentation to support that the borrower had adequate
   funds from earnings for the deposit.

F. The loan file documents that the final MACAW listed a seller concession of $2,361.
   We are not sure of the relevance of the “final 1003” noted by First United.

G. First United agreed that the borrower’s credit history explanation was incomplete.
   We do not know what affect this omission may have had on the underwriter decision.

H. First United concurred.




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Narrative Case Presentation                                                    Appendix B



Case Number:           352-4705394
Loan Amount:           $104,250
Settlement Date:       September 6, 2002
Status:                Reinstated

Pertinent Details

A.     Case File Not Provided

Handbook 4155.1, REV-4, CHG-1, chapter 3, states that all information required in
processing and underwriting Federal Housing Administration-insured mortgages must be
verified and documented. First United was not able to locate a copy of the file for this case.
Consequently, we had to use the Homeownership Center file as the only resource for our
review.

B.     Inadequate Compensating Factors

Handbook 4155.1, REV-4, CHG 1, section 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio should
not exceed 29 and 41 percent, respectively, unless the mortgagee identifies compensating
factors to justify exceeding these ratio. First United computed ratios of 31.309 percent and
49.879 percent, respectively. A good loan to value ratio was noted on the Mortgage Credit
Analysis Worksheet as a compensating factor. However, a good loan to value ratio is not
listed as a valid compensating factor in Handbook 4155.1, REV-4, CHG 1, section 2-13.
Further, this was a section 203-k loan, so the good loan to value ratio was not solely due to a
large investment by the borrower but is also a factor of a formula that is used to increase the
value by 10 percent.

C.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. The Homeownership Center file contained
one credit report at a cost of $33. However, the borrower was charged $43 for credit
reports, as opposed to the actual cost of $33. Consequently, the $10 is an unsupported fee.

First United’s Comments

A. First United stated that a case file did not exist due to circumstances beyond its
   control.

B. First United disagrees that sound equity is not a valid compensating factor, and
   maintains that the cited 85 percent loan to value ratio is a valid compensating factor.

C. First United agreed that the file lacked an itemized charge for credit fees.

OIG’s Evaluation of First United’s Comments


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A. This was not counted as an underwriting deficiency.

B. Handbook 4155.1 REV-4, CHG 1 does not list a good loan to value ratio as a
   compensating factor to justify approval of mortgage loans with ratios that exceed the
   29 and 41 percent guidelines.

C. First United concurred.




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Narrative Case Presentation                                                   Appendix B



Case Number:           351-4248193
Loan Amount:           $102,159
Settlement Date:       February 4, 2003
Status:                Paid in Full

Pertinent Details

A.     Inadequate Credit Analysis
B.     Inadequate Disclosure of Liability

Handbook 4155.1, REV-4, CHG-1, section 2-3, states that major indications of derogatory
credit problems require a sufficient written explanation from the borrower. The borrowers’
credit reports in the file indicated many delinquencies. The borrowers explained that the
debts were due to their unsuccessful business several years ago and that they, therefore, had
difficulty paying them on time. The borrowers also stated they were currently paying all of
their credit card bills on time. However, the credit report indicated that these payments were
also untimely. These consistently delayed payments were also significant in amount and
occurred within 2 months of closing. The borrowers’ explanation of the current derogatory
credit was inadequate.

HUD Handbook 4155.1, REV-4, CHG 1, section 2-11A, provides that in computing the
debt to income ratios, the lender must include the monthly housing expense and all
additional recurring charges. The co-borrower’s bank statements listed significant
monthly withdrawals before closing, and the account balance dropped from $50,940 as of
June 17, 2002, to $12,405 as of December 15, 2002 (ending balance included the residual
amount of a $15,000 gift). This could indicate continuing borrower obligations (possibly
from the failed business noted above) and that the cause of this drop in the bank balance
should have been further reviewed.

C.     Verification of Deposits Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, states that if there is a large
increase in a bank account amount, the mortgagee must obtain an explanation and
evidence of the source of funds from the borrower. The bank statements in the file
showed many significant deposits without a written explanation from the borrowers as to
the source of the funds. It is important to note that these deposits were needed for
closing.

D.     Ineligible Commitment Fee

A commitment fee of $395 was included on the HUD-1 Settlement Statement and paid
by the borrower on February 04, 2003 (closing date). In the lock-in confirmation
document on January 24, 2003, the borrower chose not to lock in. Mortgage Letter 94-7,
section IV, provides that commitment or lock-in fees must be in writing and must
guarantee the interest rate and/or discount points for a period of not less than 15 days
before the anticipated closing date.

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E.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. The file contained one merged credit
report and two supplemental credit reports. Each credit report was charged $24. However,
the borrowers were charged $200, as opposed to the actual cost of $72. Consequently, the
$128 is an unsupported fee.

First United’s Comments

A. First United disagreed that credit analysis and disclosure of liability were
B. inadequate. First United stated that the borrowers explained that past derogatory
   credit was the result of a failed business, an event that was unlikely to recur, and that
   the borrowers were currently paying off their credit cards. First United stated that
   there was only one recent derogatory issue, which was minimal. First United further
   stated that since the borrowers were working to reduce their credit card balances, and
   there were sufficient funds to close, the decrease in borrowers’ assets did not need to
   be questioned.

C. First United stated that it would need to know the specific deposits that were the
   subject of inadequate verification in order to address it.

D. First United agreed that the file did not contain documentation for a lock-in fee.

E. First United agreed that the file did not contain documentation for credit report fees.

OIG’s Evaluation of First United’s Comments

A. While the borrowers’ credit explanation letter stated their credit card debt was being
B. paid on time, the credit report disclosed recent delayed payments. We believe that
   this, at a minimum, should have been questioned. Similarly, we believe that the
   significant reduction in bank balances should have been questioned, as stated in HUD
   Handbook 4155.1 REV-4 CHG 1, section 2-11A. First United stated that since the
   borrowers were working to reduce their credit card balances, and there were
   sufficient funds to close, the decrease in borrowers’ assets did not need to be
   questioned. We conclude that if the borrowers were paying off additional credit card
   balances, then these liabilities should have been documented and included in the
   borrower’s debt to income ratios as required by HUD Handbook 4155.1 REV-4 CHG
   1, section 2-11A.

C. HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B requires that an explanation
   and source of funds be obtained for any large increase in a bank account. We noted
   the following deposits in the co-borrower’s bank account: $2,010.88 on 12/05/02,
   $1,996.78 on 10/16/02, $1,846.23 on 9/18/02, $1,970.89 on 9/30/02, $1,846.23 on
   9/6/02, $1,846.23 on 8/17/02, $2,046.23 on 8/3/02, $1,500 on 7/15/02, and $1,916.53
   on 7/1/02. We believe that the inconsistent amount and timing of these deposits
   required further questioning.
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D. First Untied concurred.

E. First Untied concurred.




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Case Number:          351-4271037
Loan Amount:          $134,893
Settlement Date:      September 20, 2002
Status:               Currently in Default

Pertinent Details

A.     Excessive Debt to Income Ratios Without Compensating Factors

Handbook 4155.1, REV-4, CHG 1, paragraphs 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio
should not exceed 29 and 41 percent, respectively, unless the mortgagee identifies
compensating factors to justify exceeding these ratios. First United computed debt to
income ratios of 26.363 and 41.255 percent, respectively, without listing any
compensating factors.

B.     Inadequate Bank Account Documentation

HUD Handbook 4155.1, REV-4, CHG 1, section 3-1F, provides that as an alternative to
obtaining a verification of deposit, the mortgagee may choose to obtain the borrower’s
original bank statements for the most recent 3-month period. The borrower’s bank
statements obtained covered 1 month. In addition, the top of the statement indicated that
it was for the period June 30 to July 31, 2002; however, the transactions listed on the
statement were for the period July 29 to August 19, 2002. No explanation was
documented for these discrepancies.

C.     Verification of Deposits Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large
increase in a bank account or the bank account was opened recently, the mortgagee must
obtain an explanation and evidence of the source of funds from the borrower. The file
contained a bank statement from a credit union indicating a $1,800 deposit on September
6, 2002, a $1,480 deposit on August, 23, 2002, a $1,220 deposit on August 9, 2002, and a
$960 deposit on July 26, 2002. No explanation was documented from the borrower for
the source of these funds. In addition, these deposits were needed for closing.

D.     Inadequate Funds To Close on HUD-1 Settlement Statement

Handbook 4155.1, REV-4, CHG-1, section 2-10K, provides that for assets such as
individual retirement accounts and Keogh accounts, only the net amount, after
subtracting Federal income tax and withdrawal penalties, may be considered as assets to
close, and evidence of redemption is required. The file contained a letter from the
borrower’s pension service division indicating that the borrower could borrower half of
the contributions in the pension plan. However, First United included 100 percent of the
borrower’s pension account balance as a liquid asset, without considering an already
existing outstanding loan and the 50-percent borrowing cap. Moreover, there was no
evidence of actual redemption from the pension plan. The mortgagee did not comply

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with the regulation. It is also important to note that funds from the pension plan were
needed to close.

E.     Ineligible Commitment Fee

Mortgage Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and guarantee the interest rate and/or discount points for a period of not less than
15 days before the anticipated closing date. The borrower paid a commitment fee of
$275 on September 02, 2002 (closing date). In the lock-in confirmation document, dated
September 9, 2002, the borrower chose not to lock in. Therefore, the $275 represents an
ineligible fee.

F.     Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, paragraph 5-3, permits the lender to charge borrowers the
actual costs of credit reports. The file contained a credit report at a cost of $40; however,
the borrower was charged $50. Consequently, the $10 is an unsupported fee.

First United’s Comments

A. First United disagreed that 41.255 percent ratios were excessive and needed
   compensating factors.

B. First United agreed that there was inadequate bank account documentation because
   the loan lacked complete copies of bank statements.

C. First United did not comment on the issue of inadequate verification of deposits.

D. First United agreed that there was inadequate bank account documentation because
   the loan lacked complete copies of bank statements.

E. First United agreed that the file lacked documentation to support the commitment fee.

F. First United agreed that the file lacked documentation to support credit report fees.

OIG’s Evaluation of First United’s Comments

A. HUD Handbook 4155.1, REV-4 CHG1, section 2-12 and 2-13 requires compensating
   factors for ratios that exceed HUD guidelines.

B. First United concurred, and will need to obtain the documentation to respond to the
   issue.

C. First United did not comment.

D. First United concurred, and will need to obtain the documentation to respond to the
   issue.
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E. First Untied concurred.

F. First United concurred.




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Case Number:          352-4639998
Loan Amount:          $147,530
Settlement Date:      July 19, 2002
Status:               Currently in Default

Pertinent Details

A.     Excessive Debt to Income Ratios Without Compensating Factors

HUD Handbook 4155.1, REV-4, CHG-4, section 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio should
not exceed 29 and 41 percent, respectively, unless the mortgagee identifies compensating
factors to justify exceeding these ratios. First United computed debt to income ratios of
38.36 percent and 44.04 percent, respectively, with no compensating factors.

B.         Inaccurate Debt to Income Ratios
C.         Inadequate Support for Income Calculation

The ratios completed by First United are incorrect. We could not determine how First
United calculated the borrower’s estimated base income of $3,207 as required by
Handbook 4155.1, REV-4, CHG-4, section 2-7, which provides that the income of each
borrower must be analyzed to determine whether it can be reasonably expected to
continue through at least the first 3 years of the mortgage loan. Based upon the
borrower’s pay stubs and employment verification letter, we calculated the borrower’s
monthly base income as $2,948. After considering the above deficiency, we calculated
the borrower’s mortgage payment to effective income ratio and total fixed payment to
income ratio debt to income ratios to be 41.11 and 47.20 percent, respectively.




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D.     Verification of Cash Gift Not Obtained

Mortgagee Letter 00-28 provides that the donor must furnish conclusive evidence that the
funds given to the borrower came from the donor’s own funds. The mortgagee did not
obtain conclusive evidence that the funds for two separate gifts given to the borrower
came from the donor’s own funds. The borrower received a $12,500 gift on November 2,
2000, and a $13,000 gift on June 18, 2002. To support the $12,500 gift, the donor
provided evidence of withdrawal from a bankbook and a corresponding bank check
payable to a closing agent in connection with a prior non-executed purchase. However, 3
months before the gift withdrawal, this bank account had a balance of $12,644 after a
deposit of $12,263. Accordingly, the source of the donor’s funds for this gift is not clear.
The $13,000 gift was supported by a bank check from another financial institution and
corresponding bank account activity up to June 17, 2002, 1 day before the gift
withdrawal date. However, there was an unexplained $3,200 deposit on June 7, 2002, 11
days before the gift. Accordingly, the source of the donor’s funds for this gift is not
clear.

E.     Verification of Deposits Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large
increase in a bank account or the bank account was opened recently, the mortgagee must
obtain an explanation and evidence of the source of funds from the borrower. Our review
of the file disclosed inadequate evidence for the source of funds. The borrower’s bank
statements contained a $2,300 deposit on June 3, 2002, and a $1,200 deposit on June 19,
2002. A borrower’s explanation letter stated that $2,000 of the $2,300 deposit came from
a closing attorney pertaining to a previous non-purchased residence. The source of the
$2,000 deposit provided by the borrower’s attorney should have been obtained.
However, the only documentation was a non-canceled $2,000 check from a closing
attorney, with no explanation from the attorney as to the source of the funds. The
explanation letter also stated that the remaining $300 was cash in possession of the
borrower and that the $1,200 was received from his mother and brother to ensure that
there were enough funds for closing. Neither of these two amounts was adequately
verified. First, verification for the $300 should have been obtained in accordance with
Handbook 4155.1 REV-4, CHG 1, section 2-10M, which states that borrowers who have
saved cash at home and are able to demonstrate adequately the ability to do so are
permitted to have this money included as an acceptable source of funds to close the
mortgage. To include such funds in assessing the homebuyer’s cash assets for closing,
the money must be verified, and the asset verification process requires the borrower to
explain in writing how such funds were accumulated and the amount of time taken to do
so. Second, the $1,200 given by relatives should have been verified as a gift.

F.     Verification of Paid Outside Closing Costs Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10, states that all of the funds for the
borrower’s investment in the property must be verified and documented. The HUD-1
Settlement Statement in the file showed that the borrower paid a $43 credit report cost


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and a $425 appraisal fee outside closing. The file had no evidence to support the
payment of these paid outside closing costs.

G.     Ineligible Commitment Fee

Mortgagee Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and must guarantee the interest rate and/or discount fees for a period of not less
than 15 days before the anticipated closing date. The borrower paid a commitment fee of
$275, included on the HUD-1 Settlement Statement, on July 19, 2002 (closing date). The
borrower elected not to have an interest rate lock in the interest rate lock-in agreement,
dated March 29, 2002. Because the borrower elected not to lock in the interest rate, the
$275 is an ineligible commitment fee.

H.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. The file contained two credit reports at
a cost of $20 for one and an unknown amount charged for another. The borrower was
charged $43 for credit reports on the HUD-1 Settlement Statement. Therefore, the $23 is
an unsupported fee.

First United’s Comments

A. First United disagrees that the loan was approved with excessive ratios and without
   compensating factors. First United states that 15 percent equity in a property is a
   sound compensating factor.

B. First United disagrees that the ratios and the borrower’s income were incorrectly
C. calculated. First United states that the borrower’s income was derived by averaging
   actual earnings for the full year 2001 with year to date earnings of 2002.

D. First United disagrees that the underwriter did not obtain conclusive evidence that
   funds for two separate gifts came from the donor’s own funds. First United states
   that one of the two donor accounts in question was a business account, into which
   large deposits would be likely. First United also states that it is not reasonable to
   expect, nor is it required, that the source of deposits into a donor account three
   months prior to the giving of a gift to the borrower, nor 2 weeks prior to giving the
   second gift, be questioned.

E. First United disagrees that adequate verification of deposits was not obtained
   regarding $300 cash provided by the borrower, noting that $300 is not a large sum of
   money and it is more than reasonable that any borrower may have acquired this
   amount of cash. First United did agree that additional documentation should have
   been obtained for the $2,000 provided by a prior attorney, as well as for $1,200 by
   the borrower’s relatives.



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F. First United states that they can pursue obtaining copies of cancelled checks for paid
   outside closing costs, however, they do not see that the total amount would have
   affected the borrower’s ability to close.

G. First United concurs with this issue.

H. First United concurs with this issue.

OIG’s Evaluation of First United’s Comments

A. HUD Handbook 4155.1, REV-4, CHG-4, section 2-12 and 2-13 requires that
   excessive ratios be justified with compensating factors. First United did not provide
   any compensating factors for ratios of 38.36 and 44.01 percent. In its response, First
   United cites a high property loan to value ratio as a compensating factor. However,
   this is not a compensating factor listed in HUD Handbook 4155.1, REV-4, CHG-4,
   section 2-13.

B. We could not determine from the file how First United calculated the
C. borrower’s estimated base income of $3,207 as required by Handbook 4155.1, REV-
   4, CHG-4, section 2-7. Based upon the borrower’s pay stubs and employment
   verification letter, we calculated monthly base income of $2,948. Based upon
   employment documentation in the file, overtime for this borrower would not be
   allowable per Handbook 4155.1, REV-4, CHG-4, section 2-7A. Moreover, we
   calculated borrower’s monthly income of $3,116.22 including overtime, as opposed
   to the $3,207 calculated by First United.

D. Mortgagee Letter 00-28 requires conclusive evidence that gift funds come from the
   donor’s own funds. The loan file documented a gift donor withdrawal/deposit history
   statement that contained activity through June 17, 2002 (one day prior to the gift
   withdrawal). Therefore, although a $13,000 check disbursement from the donor’s
   account is documented on June 18, 2002, conclusive evidence that the gift amount
   came from the donor’s funds is lacking.

E. HUD Handbook 4155.1 REV-4, CHG 1, section 2-10As requires that large increases
   in a bank account should be explained and evidence of the source of funds obtained.

F. Handbook 4155.1, REV-4, CHG 1, section 2-10 requires that paid outside closing
   costs be supported.

G. First United concurred.

H. First United concurred.




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Case Number:           352-4592520
Loan Amount:           $109,112
Settlement Date:       May 3, 2002
Status:                Currently in Default

Pertinent Details

A.     Inaccurate Debt to Income Ratios
B.     Inadequate Disclosure of Liabilities
C.     Inadequate Compensating Factors

The total fixed payment to income ratio computed by First United is incorrect, and the
compensating factors used to justify the ratio are inadequate. Handbook 4155.1, REV-4,
CHG-4, section 2-11A, provides that the mortgagee must include the monthly housing
expense and all other additional recurring charges, including child support, installment
accounts, and revolving accounts, when computing debt to income ratios. A monthly
liability of $38 was not factored into the calculation of the ratio. Including this liability
in the ratio would result in a total fixed payment to income ratio of 41.24 percent.

In addition, the compensating factor used to justify the ratio was inadequate. HUD
Handbook 4155.1, REV-4, CHG-4, section 2-13, states that compensating factors may be
used to justify approval of mortgage loans with ratios exceeding benchmark guidelines.
The Mortgage Credit Analysis Worksheet listed “Existing lease on property supports
$1,275 per month ratios with rent roll supports 33%” and “borrower was qualified with
gross market rents supported by appraisal” as compensating factors. However, the file
disclosed that the lease, with a termination date of May 31, 2002 (one month after the
closing date of May 3, 2002), provided for an annual amount of $10,200, with monthly
payments of $850. This is $425 lower than the $1,275 security deposit amount applied
by First United as a compensating factor. In addition, the continuance of a pending
renewal lease with the same monthly rent is questionable because the appraisal report
listed $600 per month as the market rent.

D.      Inadequate Underwriting Requirements for Temporary Interest Rate Buydown

First United qualified the borrower for a temporary interest rate buydown without
providing an explanation that the eventual increase in mortgage payments will not
adversely affect the borrower and likely lead to default as stated in Handbook 4155.1,
REV-4, CHG-4, section 2-14A, part 4. As a result, the borrower should have been
underwritten without the temporary interest buydown, which would raise the debt to
income ratios significantly.

E.     Inadequate Bank Account Documentation
F.     Verification of Deposits Not Obtained

HUD Handbook 4155.1, REV-4, CHG-4, section 3-1F, provides that as an alternative to
obtaining a verification of deposit, the mortgagee may choose to obtain the borrower’s
original bank statements for the most recent 3-month period. Our review of the file

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disclosed incomplete bank statements for three borrower bank accounts and many
unexplained deposits in two of these accounts. HUD Handbook 4155.1, REV-4, CHG 1,
section 2-10B, provides that if there is a large increase in a bank account or the bank
account was opened recently, the mortgagee must obtain an explanation and evidence of
the source of funds from the borrower. The file contained incomplete bank statements
for two accounts that showed deposits of $2,100, composed of four $500 deposits in one
account and a $100 deposit in the other account. No explanation from the borrower as to
the source of funds was provided. In addition, one bank account included an ending
balance of $984, with no indication of the account’s beginning balance. It is important to
note that these deposits were needed for closing.

G.     Inadequate Funds To Close on HUD-1 Settlement Statement
H.     Verification of Paid Outside Closing Costs Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10, states that all of the funds for the
borrower’s investment in the property must be verified and documented. The borrower
did not appear to have sufficient funds to close. There was no documentation to show
that paid outside closing items totaling $400 had been paid before closing without
reducing the funds available to close. Cash due from the borrower on the HUD-1
Settlement Statement was $2,532. If the $400 paid outside closing amount is added to
the $2,532 owed by the borrower and offset against the remaining $2,757 assets, the
borrower would have a $175 deficit at closing.

I.     Ineligible Commitment Fee

Mortgagee Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and must guarantee the interest rate and/or discount fees for a period of not less
than 15 days before the anticipated closing date. A commitment fee of $275 was
included on the HUD-1 Settlement Statement and paid by the borrower on May 5, 2002
(closing date). The borrower elected not to have an interest rate lock-in in the agreement,
dated January 28, 2002. Because the borrower elected not to lock in the interest rate on
the loan, the $275 represents an ineligible fee.

J.     Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the borrower
the actual costs of credit reports. The file contained one credit report at a cost of $16.50.
However, the borrower was charged $43 for credit reports, as opposed to the actual cost
of $16.50. Consequently, $26.50 represents unsupported fees.

First United’s Comments

A. First United agrees that the total fixed payment to income ratio is inaccurate due to
B. the failure to include a debt, but states that the corrected ratio would not be excessive.
C. Further, First United believes that the compensating factor of proposed market rents
   from the appraisal qualified the borrower, and therefore consideration of the
   remaining lease term has no value.

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D. First United agrees that the underwriter should have justified the basis for approval of
   a loan with a temporary interest buydown, but disagrees that the ratio would have
   increased significantly because it is likely that the borrower’s income would have
   increased in the future to offset the rise in the monthly mortgage payment.

E. First United agrees that bank statements in the loan file were incomplete due to poor
F. copying and will attempt to pursue to secure complete statements. First United
   disagrees that deposits of $500 and $100 are large and need to be specifically sourced.

G. First United agrees that paid outside closing costs were not verified as paid, but
H. maintains that the borrower would have had the funds to close because the amount
   ($400) is nominal.

I. First United agrees that documentation was lacking for a commitment fee.

J. First United agrees that documentation was lacking for credit report fees.

OIG’s Evaluation of First United’s Comments

A. First United concurs that the borrower’s total fixed payment to income ratio was
B. incorrect as per Handbook 4155.1, REV-4, CHG-4, section 2-11A due to omission of
C. a debt. We concur with First United’s response that rental income based upon an
   appraisal is an acceptable compensating factor as per HUD Handbook 4155.1, REV-4,
   CHG-4, section 2-12 and 2-13. We have eliminated this deficiency.

D. First United qualified the borrower for a temporary interest rate buy down without
   justifying that a future increase in mortgage payments would not adversely affect the
   borrower and likely lead to default as directed in Handbook 4155.1, REV-4, CHG-4,
   section 2-14A, part 4. The borrower should have been underwritten without the
   temporary interest buydown, which we believe would have raised the debt to income
   ratios significantly.

E. The file contained incomplete bank statements for two accounts that showed deposits
F. of $2,100, composed of four $500 deposits in one account and a $100 deposit in the
   other account. No explanation from the borrower as to the source of funds was
   provided as required by HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B. In
   addition, one bank account included an ending balance of $984, with no indication of
   the account’s beginning balance. It is important to note that these deposits were
   needed for closing.

G. Handbook 4155.1, REV-4, CHG 1, section 2-10 requires that paid outside closing
H. costs should be verified. Without verification, we calculated that the borrower would
   have a $175 deficit at closing.

I. First United concurred.


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J. First United concurred.




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Case Number:          351-4268219
Loan Amount:          $95,207
Settlement Date:      August 27, 2002
Status:               Currently in Default

Pertinent Details

A.     Verification of Cash Gift Not Obtained

Mortgagee Letter 00-28 provides that the donor must be able to furnish conclusive
evidence that the funds given to the borrower came from the donor’s own funds and were
not provided directly or indirectly by the seller, real estate agent, builder, or any other
entity with an interest in the sales transaction. The borrower received a $4,000 gift from
the donor on August 24, 2002. The donor provided a $3,000 canceled check but
provided no disbursement support for the remaining $1,000 gift.

B.     Inadequate Support for Employment

HUD Handbook 4155.1, REV–4, CHG 1, section 3-1, states that when standard
documentation does not provide enough information, the lender must provide additional
explanatory statements, consistent with other information in the application, to clarify or
supplement the documentation submitted by the borrower. The file contained a verification
of employment, dated July 17,2002, and bank statements for the period May 20, 2002, to
August 14, 2002, which listed five biweekly payroll direct deposits through July 17, 2002.
However, there were no biweekly payroll direct deposits recorded for the periods ending
July 31 and August 14, 2002 (the closing was on August 27, 2002). No explanation was
obtained from the borrower as to why biweekly payroll direct deposits ceased on the
borrower’s bank statements.

C.     Inadequate Earnest Money Deposit Documentation

HUD Handbook 4155.1, REV-4, CHG-4, section 2-10A, provides that if the amount of
the earnest money deposit exceeds 2 percent of the sales price or appears excessive,
based on the borrower’s history of accumulating savings, the mortgagee must verify the
amount of deposit and the source of funds. The Mortgage Credit Analysis Worksheet
contained an earnest money deposit of $1,400, composed of an unsupported $1,000 down
payment and a $400 non-canceled check representing fees for a credit report and
appraisal report. The borrower’s savings history, as disclosed in the bank statements,
included a negative beginning balance of $139 as of May 21, 2002, and an ending
balance of $3,358 as of August 14, 2002 (the ending balance included a residual amount
of a $4,000 gift). Therefore, the lender should have verified the earnest money deposit
based on the borrower’s inability to accumulate savings.

D.     Non-itemized Lender Credit

The HUD-1 Settlement Statement and Mortgage Credit Analysis Worksheet reported that
the borrower received a non-itemized $2,000 lender credit toward settlement costs. HUD

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Handbook 4155.1, Rev-4, section 1-9A, part 1, states that closing costs and prepaid
expenses paid on behalf of the borrower by the lender must be disclosed on the good faith
estimate and the HUD-1 Settlement Statement. The good faith estimate and HUD-1
Settlement Statement must include an itemized statement indicating which items are
being paid on the borrower’s behalf; disclosing a lump sum is unacceptable.

E.     Verification of Debt Payments Not Obtained.

The file contained evidence that the borrower paid debts of $919, $113, and $328.
However, these payments, which included a Western Union payment and two checks by
phone, contained no support that the funds used to pay the debts originated from the
borrower’s bank account. According to HUD Handbook 4155.1, Rev-4, section 2-10C,
when someone other than a family member has paid off debts, the funds used to pay off
the debt must be treated as an inducement to purchase, and the sales price must be
reduced by a dollar-for-dollar amount in calculating the maximum insurable mortgage.

F.     Verification of Deposits Not Obtained.

Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large
increase in a bank account or the bank account was opened recently, the mortgagee must
obtain an explanation and evidence of the source of funds from the borrower. The file
contained a bank statement indicating two $1,000 deposits, one $855 deposit, and one
$457 deposit without explanation from the borrower as to the source of funds. It is also
important to note that these unexplained deposits were needed at the closing.

G.     Inadequate Credit Analysis

The file contained copies of bank statements indicating that the borrower was charged
many “non-sufficient fund” and overdraft fees. Handbook 4155.1, REV-4, CHG-1,
section 2-3, provides that major indications of derogatory credit require a sufficient
written explanation from the borrower. First United did not obtain the required
explanation from the borrower.

H.     Inadequate Disclosure of Liabilities

Handbook 4155.1, REV-4, CHG 1, section 2-11A, provides that borrower’s liabilities
include all installment loans, revolving charge accounts, real estate loans, alimony, child
support, and all other continuing obligations. Documents containing partial copies of
borrower bank checks in the file included many checks written to the same individual.
These checks, which were written in individual amounts of $75, $100, $125, and $150,
amounted to $1,875 over a 5-month period. There was no explanation in the file of the
purpose of these payments, which if deemed a liability, could increase the debt to income
ratios significantly.




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I.     Inadequate Funds To Close on HUD-1 Settlement Statement
J.     Verification of Paid Outside Closing Costs Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10, states that all of the funds for the
borrower’s investment in the property must be verified and documented. The borrower
did not appear to have sufficient funds to close. There was no documentation to show
that paid outside closing items totaling $1,392 had been paid before closing without
reducing the funds available to close. Cash due from the borrower on the HUD-1
Settlement Statement was $2,458. If the total $1,392 paid outside closing amount is
added to the $2458 owed by the borrower and then offset against the residual gift of
$3,357 with no remaining assets, the borrower would have had a $494 deficit at closing.

K.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. Charges for backup credit reports,
ordered to monitor the performance of credit reporting agencies, may not be charged to
the borrower. The file contained one credit report at no cost to the borrower. However,
the borrower was charged $50 for credit reports on the HUD-1 Settlement Statement.
Consequently, the $50 is an unsupported cost.

First United’s Comments

A First United disagrees that $1,000 of the $4,000 gift was not documented. First
  United states that the $1,000 earnest money deposit was the balance of the $1,000
  gift.

B. First United disagrees that there was inadequate support for the borrower’s
   employment. First United states that an underwriter determines the adequacy of
   employment and income documentation via copies of paystubs, verification of
   employment forms, W-2 forms, and tax returns, if necessary, and verifies that there
   are sufficient assets to close from bank statements and/or verifications of deposit.
   First United states that it is not likely that an underwriter would compare each of
   these documents to the other. In addition, First United stated that if the borrower
   chose to cease direct deposit to a certain bank account, it would not have affected the
   quality of the loan or the underwriting decision.

C. First United disagrees that there was inadequate documentation for earnest money.
   First United states that $1,000 earnest money was part of the $4,000 gift.

D. First United disagrees that the application of lender credit funds is not provided since
   the lender fees are broken out on the Good Faith Estimate and the HUD-1 Settlement
   Statement.

E. First United agreed that additional documentation was needed to show that payment
   for one debt came from borrower’s funds, but disagreed that documentation did not


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   exist for two other cited debt payments. For these two, First United states that the file
   documented two checks that utilized payment by phone.

F. First United agreed that verification of large deposits was not obtained.

G. First United agreed that an explanation was not obtained for derogatory credit.

H. First United disagreed that there was inadequate disclosure of liabilities. First United
   states that a valid credit report was obtained, and that the various payments made to
   an individual over a period of time are likely for childcare, which are not required to
   be included in the monthly debt. First United did acknowledge, however, that the file
   may have been documented with an explanation for these payments.

I. First United disagreed that the borrower did not have sufficient funds to close
J. because it is not unreasonable that the borrower would have been able to accumulate
   the remaining $400 earnest money deposit from regular earnings to the time of
   closing.

K. First United agrees that documentation was lacking for credit report fees.

OIG’s Evaluation of First United’s Comments

A. Neither the loan file nor First United’s response provided adequate support for the
   $1000 portion of a gift as required by Mortgagee Letter 00-28. In addition, the lender
   should have verified the earnest money deposit based on the borrower’s inability to
   accumulate savings as required by HUD Handbook 4155.1, REV-4, CHG-4, section
   2-10A.

B. The verification of employment was dated July 17, 2002, which was also the last
   evidence of a biweekly direct pay deposit. There was no explanation obtained from the
   borrower as to why biweekly payroll direct deposits ceased on the borrower’s bank
   statements as required by HUD Handbook 4155.1, REV–4, CHG 1, section 3-1.

C. Because the $1,000 gift was not adequately sourced as explained in part A, we were
   unable to determine that either of the two $1,000 deposits listed in the bank statement
   on July 30, 2002 was a deposit of a gift by the donor. Therefore, as stated, the lender
   should have verified the earnest money deposit should have been verified based on
   the borrower’s inability to accumulate savings as per HUD Handbook 4155.1, REV-
   4, CHG-4, section 2-10A.

D. The loan file documented a lump sum lender credit on both the Good Faith Estimate
   and HUD-1 Settlement Statement in violation of HUD Handbook 4155.1, Rev-4,
   section 1-9A, part 1.

E. First United concurred that the file did not contain payment evidence for a $328 debt.
   First United, however, stated that borrower debts payments of $113 and $919.38 were
   adequately supported. Our review of these two payments revealed that they were

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   supported with two non-cashed checks, which is contrary to HUD Handbook 4155.1,
   Rev-4, section 2-10C.


F. First United agrees with this issue.

G. First United agrees with this issue.

H. We concur with First United’s statement that explanation for these payments should
   have been documented, and in fact, believe that Handbook 4155.1, REV-4, CHG 1,
   section 2-11A requires it.

I. Handbook 4155.1, REV-4, CHG 1 requires that costs paid outside closing be verified
J. prior to closing.

K. First United concurred.




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Case Number:           352-5002658
Loan Amount:           $123,373
Settlement Date:       June 20, 2003
Status:                Currently in Default

Pertinent Details

A.     Inadequate Credit Analysis
B.     Inadequate Bank Account Documentation
C.     Inadequate Compensating Factors

Handbook 4155.1, REV-4, CHG-4, section 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio should
not exceed 29 and 41 percent, respectively, unless the mortgagee identifies compensating
factors that could justify exceeding these ratios. First United computed debt to income
ratios of 42.72 percent and 42.72 percent, respectively. The Mortgage Credit Analysis
Worksheet noted compensating factors as “conservative use of credit” and “excellent
savings pattern.”

Handbook 4155.1, REV-4, CHG-4, section 2-3, provides that for those borrowers who do
not use traditional credit, the lender must develop a credit history from utility payment
records, rental payments, automobile insurance payments, or other means of direct access
from the credit provider or may elect to use a nontraditional agency. The file contained a
credit report for the co-borrower that listed no credit scores due to a lack of credit history.
First United did not obtain an alternate credit history through a nontraditional agency.

Handbook 4155.1, REV-4, CHG-4, section 3-1F, provides that the file must include
verification of deposit and most recent bank statements. The file included verification of
deposit but no bank statements. It is also important to note that the verification of deposit
was dated May 9, 2003, while the borrower’s handwritten application was dated May 20,
2003 (11 days after the verification of deposit).

Handbook 4155.1, REV-4 CHG-4, section 2-13, states that compensating factors may be
used in just approval of mortgage loans with ratios exceeding benchmark guidelines. As
previously stated in sections B and C, the files included insufficient banking data and an
inadequate credit history of the co-borrower. As a result, the compensating factors
(“conservative use of credit” and “excellent savings pattern”) applied by First United to
provide justification for excessive debt to income ratios are inadequate.

D.     Inaccurate Debt to Income Ratios
E.     Inadequate Support for Income Calculation

The ratios completed by First United were incorrect by overstating the borrower’s income as
discussed in the following section.

Handbook 4155.1, REV-4, CHG-4, section 2-7, provides that the income of each
borrower must be analyzed to determine whether it can be reasonably expected to


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continue through at least the first 3 years of the mortgage loan. From the documents in
the file, we could not determine how First United estimated the co-borrower’s base pay
of $1,255 as stated on the Mortgage Credit Analysis Worksheet. Our estimation of the
co-borrower’s base income was $1,225, a $30 difference.

After considering the above deficiency, we calculated the borrower’s mortgage payment
to effective income ratio and total fixed payment to income ratio debt to income ratios to
be 43.18 percent, which would require justification by compensating factors.

F.     Inadequate Disclosure of Liabilities

Handbook 4155.1, REV-4, CHG-4, section 2-3B, states that a satisfactory explanation
must be provided by the borrower to account for the omission of any significant debt
shown on the credit report but not listed on the loan application. The credit report in the
file listed a debt with a balance of $1,551 that was not listed on the borrower’s
application and not considered in the debt to income ratios.

G.     Verification of Debt Payments Not Obtained

The file contained a payment by a realty company of the borrower’s homeowners’
insurance amounting to $598. According to HUD Handbook 4155.1, Rev-4, section 2-
10C, when someone other than a family member has paid off debts, the funds used to pay
off the debt must be treated as an inducement to purchase, and the sales price must be
reduced by a dollar-for-dollar amount in calculating the maximum insurable mortgage.
We could not locate an explanation in the file by the lender for the payment of the
borrower’s homeowner’s insurance by a real estate agency.

H.     Inadequate Origination Analysis of Non-processed Borrower

The file included a mortgage that contained an additional borrower who was not included
in the underwriting process. Handbook 4155, section 2-2A, refers to “cosigners” who do
not take ownership interest, but they must execute the loan application and mortgage note
(they become liable for the repayment of the obligation). The cosigner’s income, assets,
liabilities, and credit history are included in the determination of creditworthiness. First
United should not have underwritten the loan with the non-processed borrower.

First United’s Comments

A. First United disagrees that the credit analysis of the co-borrower was inadequate.
   First United states that the file contains three trade lines for the borrower and co-
   borrower jointly.

B. First United disagrees that the file included inadequate bank documentation, stating
   that the file included a Verification of Deposit form that documented average
   balances consistent with current balances.



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C. First United disagrees that compensating factors were inadequate. First United states
   that the compensating factors were adequate, and additionally, an 82 percent loan to
   value ratio, which is a compensating factor, was not listed on the Mortgage Credit
   Analysis Worksheet

D. First United agrees that the debt to income ratio was inadequate, but states that the
E. error would not have a significant impact on the resulting ratios or the underwriting
   decision.

F. First United disagrees that there was inadequate disclosure of liabilities. First United
   states that the $1,551 debt listed on the borrower’s credit report was not listed on the
   borrower’s application because the debt is a non-traditional credit item that was
   added to the credit report to establish credit history, and need not be considered.

G. First United agrees that the file should have contained an explanation for payment of
   the homeowner’s premium by a real estate agent. However, First United stated that
   the payment would not have affected the quality of the loan or the underwriting
   decision since the borrower demonstrated sufficient funds to close.

H. First United disagrees that an unprocessed borrower should have been underwritten
   because the non-processed borrower is required by state law to sign the Mortgage but
   not the Note and is not obligated on the debt.

OIG’s Evaluation of First United’s Comments

A. As stated in the finding, the file contained a co-borrower credit report ordered for the
   co-borrower only that listed no credit scores due to a lack of credit history. First
   United did not obtain an alternate credit history through a nontraditional agency as
   per handbook 4155.1, REV-4, CHG-4, section 2-3.

B. Handbook 4155.1, REV-4, CHG 4 requires verification of deposit and obtaining bank
   statements.

C. We believe that First United did not adequately justify the two compensating factors
   (“conservative use of credit” and “excellent savings pattern”). As previously stated
   in sections B and C, the file included insufficient banking data and an inadequate
   credit history of the co-borrower. In addition, HUD Handbook 4155.1, REV-4,
   CHG-4, section 2-13 does not list a property’s loan to value ratio as an acceptable
   compensating factor.

D. The ratios were incorrect by overstating the borrower’s income. We estimated
E. co-borrower’s base income of $1,225, a $30 difference. After considering the above
   deficiency, we calculated the borrower’s mortgage payment to effective income ratio
   and total fixed payment to income ratio debt to income ratios to be 43.18 percent,
   which would require justification by compensating factors.

F. We concur with First United’s response and have eliminated this deficiency.

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G. The file did not document an explanation by the lender for the payment of the
   borrower’s homeowner’s insurance by a real estate agency as required by HUD
   Handbook 4155.1, Rev-4, section 2-10C.

H. HUD Handbook 4155, REV-4, CHG-4, section 2-2A requires that loan be
   underwritten with the non-processed borrower as per HUD Handbook 4155, section
   2-2A.




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Case Number:           351-4255346
Loan Amount:           $88,152
Settlement Date:       August 29, 2002
Status:                Currently in Default

Pertinent Details

A.     Excessive Debt to Income Ratios Without Compensating Factors

mortgage payment to effective income ratio and total fixed payment to income ratio should
Handbook 4155.1, REV-4, CHG 1, section 2-12 and 2-13, state that the borrower’s not
exceed 29 and 41 percent, respectively, unless the mortgagee identifies compensating
factors that could justify exceeding these ratios. First United computed ratios of 33.562
percent and 45.982 percent, and it did not identify any compensating factors.

B.     Closing Not in Compliance with Loan Approval

The MCAW listed a total seller contribution of $1,853, while the actual seller’s contribution
at closing on the HUD-1 Settlement Statement was $3,000. Handbook 4155.1, REV-4,
CHG 1, section 3-12, B, states that the loan must close in the same manner in which it was
underwritten and approved.

C.     Ineligible Commitment Fee

A commitment fee of $275, included on the HUD-1 Settlement Statement, was paid by the
borrower on August 29, 2002 (closing date). The mortgagor declined an interest rate lock-
in in the lock-in confirmation document on July 15, 2002. Mortgagee Letter 94-7, section
IV, provides that commitment or lock-in fees must be in writing and must guarantee the
interest rate and/or discount points for a period of not less than 15 days before the
anticipated closing date. The $275 commitment fee is ineligible because there was no
documentation showing that the mortgagor agreed to a lock-in agreement.

D.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. Charges for backup credit reports ordered
to monitor the performance of credit reporting agencies may not be charged to the borrower.
The file contained one credit report at no cost to the borrower. However, the borrower was
charged $50 for a credit report on the HUD-1 Settlement Statement. Consequently, the $50
is an unsupported fee.

First United’s Comments

A. First United agrees that there were no compensating factors given for excessive debt
   to income ratios.



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B. First United agreed that the MCAW in its file incorrectly reported the seller
   contribution, but that the final 1003 reflected the correct amount as reported on the
   HUD-1 Settlement Statement.

C. First United agrees that there was no documentation to support a lock-in fee.

D. First United did not comment about the issue of an unsupported credit report fee.

OIG’s Evaluation of First United’s Comments

A. First United concurred.

B. As noted by First United, the loan file MCAW was not updated to reflect what was
   on the HUD-1 Settlement Statement. OIG has determined that the HUD-1 Settlement
   Statement per the HUD file did reflect the correct seller contribution amount as
   reported on the HUD-1 Settlement Statement. Consequently, we eliminated the
   deficiency that closing was not in compliance with loan approval requirements.

C. First United concurred.

D. First United did not provide a comment.




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Case Number:           352-4821402
Loan Amount:           $73,841
Settlement Date:       August 10, 2003
Status:                Currently in Default

Pertinent Details

A.     Inadequate Funds To Close on HUD-1 Settlement Statement
B.     Verification of Paid Outside Closing Cost Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10, states that all of the funds for the
borrower’s investment in the property must be verified and documented. The borrower did
not appear to have sufficient funds to close. There was no documentation to show that paid
outside closing items totaling $865 had been paid before closing. Adding these funds to the
$626 listed on the HUD-1 Settlement Statement as cash due from the borrower results in a
total of $1,491. The file disclosed that the borrower had total cash available of $871,
resulting in inadequate funds to close.

C.     Ineligible Commitment Fee

A commitment fee of $395, included on the HUD-1 Settlement Statement, was paid by the
borrower on August 19, 2003 (closing date). The mortgagor declined an interest rate lock-
in in the lock-in confirmation document on May 29, 2003. Mortgagee Letter 94-7, section
IV, provides that commitment or lock-in fees must be in writing and must guarantee the
interest rate and/or discount points for a period of not less than 15 days before the
anticipated closing date. The borrower signed a June 6, 2002, Federal Housing
Administration conditional commitment, which locked in an interest rate of 6.5 percent until
August 27, 2003. The commitment did not list a commitment fee and stated that the current
fees due were a 1-percent or $727.50 origination fee. The commitment provided that if the
loan was locked at zero points, the origination fee should be refunded to the borrower at
closing upon receipt of the closing paper and funds from the borrower’s attorney. The $395
commitment fee is ineligible because there was no documentation showing that the
mortgagor agreed to this fee. The $727.50 origination fee should also be repaid to the
borrower because the loan was locked at zero points and the file contained no
documentation that this amount had been paid.

D.     Inadequate Verification of Previous Rental or Mortgage Payment History

Handbook 4155.1, REV-4, CHG-1, section 2-3, states that the payment history of the
borrower’s housing obligations is of significant importance in evaluating credit. The lender
must determine the borrower’s payment history of housing obligations through either the
credit report, directly from the landlord or mortgage servicer, or through canceled checks
covering the most recent 12-month period. The credit report verified the rental payment
history for a Newark, NJ, residence while the applicant had resided in East Orange for the
most recent 12 months. Therefore, there was no verification of the rental payment history
for the most recent 12-month period.


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E.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. Charges for backup credit reports ordered
to monitor the performance of credit reporting agencies may not be charged to the borrower.
The file contained one credit report at a cost of $13.50. However, the borrower was charged
$75 for the credit report on the HUD-1 Settlement Statement, as opposed to the actual cost
of $13.50. Consequently, the $61.50 is unsupported.

First United’s Comments

A. First United agrees that items paid outside closing were not verified, but asserts that
B the borrower had adequate funds to close.

C. First United stated that the loan file contains documentation that the loan was locked
   more than 15 days prior to closing. First United stated that additional research is
   necessary regarding the origination fee and the points associated with the loan.

D. First United agrees that an updated rental verification should have been obtained.

E. First United agrees that invoices for credit report fees were lacking, and that itemized
   bills will be maintained in the future.

OIG’s Evaluation of First United’s Comments

A. Handbook 4155.1, REV-4, CHG 1, section 2-10, requires that all of the funds for the
B. borrower’s investment must be verified and documented. First United did not do
   this, and consequently, after adding the paid outside closing amounts to the funds
   listed on the HUD-1 Settlement Statement as cash due from borrower, the borrower
   has insufficient funds to close. The mortgagor did not accept an interest rate lock-in,
   per the lock-in confirmation document on May 29, 2003 and should not have been
   charged the lock-in commitment fee. The $727.50 origination fee should be repaid.

C. First United concurred.

D. First United concurred.

E. First United concurred.




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Case Number:          352-4187932
Loan Amount:          $74,600
Settlement Date:      April 16, 2002
Status:               Foreclosure Completed

Pertinent Details

A.     Inadequate Bank Account Documentation

Handbook 4155.1, REV-4, CHG 1, section 3-1F, states that as an alternative to obtaining
a verification of deposit, the mortgagee may choose to obtain the borrower’s original
bank statements for the most recent 3-month period. The file contained two statements
from borrower’s bank for the period February 8 to March 2, 2002, and an illegible date in
March to March 26, 2002, respectively. Because the beginning balance of the second
statement did not match with the ending balance of the first one, we concluded that these
two bank statements were not consecutive. In addition, the account number on the first
bank statement was covered up with dark ink. As a result, we cannot determine that the
two bank statements came from the same bank account. The file also contained a co-
borrower’s bank statement covering the timeframe from January 11 to February 7, 2002
(less than 1 month). Therefore, the documentation for the borrowers’ bank accounts was
inadequate. It is important to note that the bank assets were needed for closing.

B.     Verification of Paid Outside Closing Cost Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10, states that all of the funds for the
borrower’s investment in the property must be verified and documented. There was no
documentation to show that a paid outside closing item of $594 as a 1-year flood
insurance premium had been paid before closing, without reducing the funds available to
close.

C.     Case File Not Provided

Handbook 4155.1, REV-4, CHG-1, chapter 3, requires that all information required in
processing and underwriting Federal Housing Administration-insured mortgages be
verified and documented. First United was not able to locate a copy of the file for this
case. Consequently, we had to use the Homeownership Center file as the resource for
our review.

D.     Ineligible Commitment Fee

A commitment fee of $275, included on the HUD-1 Settlement Statement, was paid by
the borrower on April 16, 2002 (closing date). In the lock-in confirmation document on
January 20, 2002, the borrower chose not to lock in. Mortgage Letter 94-7, section IV,
provides that commitment or lock-in fees must be in writing and must guarantee the
interest rate and/or discount points for a period of not less than 15 days before the
anticipated closing date. Consequently, the $275 commitment fee is ineligible.

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E.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. Charges for backup credit reports
ordered to monitor the performance of credit reporting agencies may not be charged to
the borrower. The file contained two credit reports at a cost of $25. However, the
borrower was charged $50 for credit reports on the HUD-1 Settlement Statement, as
opposed to the actual cost of $25. Consequently, the $25 is an unsupported cost.

First United’s Comments

A. First United agreed that the file contained inadequate bank account documentation
   due to poor copying.

B. First United disagreed that verification of costs paid outside closing was not obtained.
   First United stated that the borrower would have had enough funds to close, and
   could have earned the nominal $594 from the time of the last verification of the
   account (March 26, 2002) to the date of closing, April 16, 2002.

C. First United was unable to produce the loan file due to circumstances beyond its
   control, and noted that these circumstances will not recur.

D. First United agreed that the loan file lacked documentation for the commitment fee.

E. First United agreed that the loan file lacked documentation for the credit report fee.

OIG’s Evaluation of First United’s Comments

A. First United concurred.

B. HUD Handbook 4155.1, REV-1 CHG 1, section 2-10 requires that all funds for the
   borrower’s investment in the property must be verified and documented.

C. This issue was not counted as a deficiency.

D. First Untied concurred.

E. First Untied concurred.




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Case Number:          352-4840266
Loan Amount:          $156,300
Settlement Date:      January 29, 2003
Status:               Currently in Default

Pertinent Details

A.     Excessive Debt to Income Ratios Without Compensating Factors

Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, state that the borrower’s
mortgage payment to effective income ratio and total fixed payment to income ratio
should not exceed 29 and 41 percent, respectively, unless the mortgagee identifies
compensating factors that could justify exceeding these ratios. First United computed
debt to income ratios of 24.657 and 41.169 percent, respectively, without listing the
required compensating factors. In addition, the ratios calculated by First United were
incorrect, as discussed in the following sections.

B.     Inaccurate Debt to Income Ratios
C.     Inadequate Support for Income Calculation

The ratios calculated by First United were incorrect. We could not determine from the
file how First United calculated the co-borrower’s seasonal income of $674, which was
part of the estimated monthly income of $1,506. Our calculation showed the average
monthly seasonal income was $602 for the past 3 years. As a result, we calculated debt
to income ratios of 24.96 and 41.67 percent, respectively.

D.     Verification of Deposits Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large
increase in a bank account amount, the mortgagee must obtain an explanation and
evidence of the source of funds from the borrower. We found three deposits that were
not satisfactorily explained. The borrower’s Astoria Federal Savings bank statement
indicated a deposit of $1,699 on September 23, 2002. A borrower’s explanation letter
stated that the deposit was 2 months’ child support. We were not be able to reconcile that
amount to the child support payment as indicated in the file, which was $699 biweekly.
The borrower’s First Union bank statement also contained a $1,284 deposit and a $1,515
deposit on December 6 and 17, 2002, respectively, that were not explained in the
borrower’s letter. It is important to note that these deposits were needed for closing.

E.     Ineligible Commitment Fee

A commitment fee of $275, included on the HUD-1 Settlement Statement, was paid by
the borrower on January 29, 2003 (closing date). In the lock-in confirmation document
on November 8, 2002, the borrower chose not to lock in. Mortgage Letter 94-7, section
IV, provides that commitment or lock-in fees must be in writing and must guarantee the
interest rate and/or discount points for a period of not less than 15 days before the

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anticipated closing date. First United charged a commitment fee ineligibly when the
borrower did not select to lock in. Consequently, the $275 commitment fee is ineligible,

F.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. Charges for backup credit reports
ordered to monitor the performance of credit reporting agencies may not be charged to
the borrower. The file contained two credit reports at a cost of $33 each. However, the
borrowers were charged $86 for credit reports on the HUD-1 Settlement Statement, as
opposed to the actual cost of $66. Consequently, the $20 is an unsupported cost.


First United’s Comments

A. First United disagreed that compensating factors were required because a 41.169
   percent ratio is a fraction above the 41 percent guideline. In addition, First United
   states that income was conservatively calculated because social security income was
   not grossed up. This allowable action would have brought the ratio to below the 41%
   guideline.

B. First United disagreed that there was inadequate support for the calculation of
C. income. First United stated that it used a two-year average of seasonal income
   instead of the three-year average used by OIG.

D. First United disagreed that the source of deposits were not verified. First United
   stated that the three deposits ($1,699 on 9/23/02, $1,284 on 12/6/02, and $1,515 on
   12/17/02) represented child support payments.

E. First United agreed that the file lacks documentation to for the commitment fee.

F. First Untied agreed that the file lacks documentation for credit report fees.

OIG’s Evaluation of First United’s Comments

A. HUD Handbook 4155.1, REV-4 CHG1, section 2-12 and 2-13 requires compensating
   factors for ratios that exceed HUD guidelines. However, OIG recognizes that the
   income was conservatively calculated because social security income was not grossed
   up. Consequently, OIG eliminated the excessive ratio deficiency.

B. We believe that First United’s calculation is incorrect. Based upon a two-year
C. average, we calculated monthly income of $582.22, which is $91.91 less than that
   calculated by First United. Further, use of the two-year average results in monthly
   income that is $19.20 lower than our computation of a three-year average.

D. We disagree that the three deposits were adequately sourced as child support
   payments. The file contained a borrower’s explanation letter that the $1,699 deposit


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   on 9/23/02 represented a two-month child support payment. However, this
   explanation does not reconcile with other supporting documents in the file that report
   child support as $698.75 biweekly, which would be approximately $1,400 per month.
   We believe that this discrepancy should have been questioned. Further, no
   explanation was documented in the file for the remaining two deposits as required by
   HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B.

E. First United concurred.

F. First United concurred.




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Case Number:           352-4567838
Loan Amount:           $162,550
Settlement Date:       April 30, 2002
Status:                Currently in Default

Pertinent Details

A.      Inaccurate Debt to Income Ratios
B.     Inadequate Support for Income Calculation

Handbook 4155.1, REV 4, CHG 1, chapter 2, section 5, states that the lender is
responsible for adequately analyzing the probability that the borrower will be able to
repay the mortgage obligation in accordance with the terms of the loan. First Union
computed front and back ratios of 37.108 percent. However, the ratio was computed
incorrectly because income was overstated. Handbook 4155.1, REV-4, CHG-1, section 2-7,
provides that overtime and bonus income may be used to qualify if the borrower has
received such income for approximately 2 years and there are reasonable prospects for
continuance. If bonus income varies significantly from year to year, a period of more than 2
years must be used to calculate average income. The borrower received overtime for over 3
years, and there were significant variations in the amount earned over the 3 years. We could
not determine from the file how the borrower’s employment income was calculated. We
calculated monthly income of $369 less, which increases the ratios to 39.974.

C.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge the
actual costs of the credit reports to the borrower. Charges for backup credit reports ordered
to monitor the performance of credit reporting agencies may not be charged to the borrower.
The file contained one credit report at a cost of $36.50. However, the borrower was charged
$50 for credit reports on the HUD-1 Settlement Statement, as opposed to the actual cost of
$36.50. Consequently, $13.50 is unsupported.

First United’s Comments

A. First United disagrees that the income calculation was incorrect, noting that the
B. income calculation included an average of bonus income for 2001 and year-to-date
   2002. First United further states that, even if OIG’s income calculation were used,
   the front and back ratios would be 39.974, which are within prescribed guidelines.

C. First United stated that actual invoicing for credit reports will occur in future files.

OIG’s Evaluation of First United’s Comments

A. The calculation of bonus income was incorrect. Handbook 4155.1 REV-4 CHG-1,
B. Paragraph 2-7 provides that overtime and bonus income may be used to qualify if the
    borrower has received such income for approximately two years and there are
   reasonable prospects for continuance. If bonus income varies significantly from year

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   to year a period of more than two years must be used to calculate average income.
   Since overtime income varied significantly over three years ($8,000 in 1999, $1,000
   in 2000, and $13,500 in 2001), we believe that it should have been averaged over the
   three years. Additionally, Handbook 4155.1, REV-4, CHG 1 states that the
   borrower’s mortgage payment to effective income ratio and total fixed payment to
   income ratio should not exceed 29 and 41 percent, respectively, unless compensating
   factors are identified.

C. First United concurred.




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Case Number:          352-4903996
Loan Amount:          $132,762
Settlement Date:      February 2, 2003
Status:               Paid in Full

Pertinent Details

A.     Ineligible Commitment Fee

A commitment fee of $225, included on the HUD-1 Settlement Statement, was paid by
the borrower on February 21,2003 (closing date). The borrower elected not to have an
interest rate lock in the interest rate lock-in agreement, dated February 4, 2003.
Mortgagee Letter 94-7, section IV, provides that commitment or lock-in fees must be in
writing and must guarantee the interest rate and/or discount fees for a period of not less
than 15 days before the anticipated closing date. Because the borrower elected not to
lock in the interest rate on the loan, the $225 commitment fee is ineligible.

First United’s Comments

A. First United agrees that support was lacking for the commitment fee.

OIG Evaluation of First United’s Comments

A. First United concurred.




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Case Number:            352-4787988
Loan Amount:            $137,583
Settlement Date:        November 7, 2002
Status:                 Currently in Default

Pertinent Details

A.      Non-itemized Lender Credit

HUD Handbook 4155.1, REV-4, CHG-1, section 1-9A, provides that “lenders may pay the
borrower’s closing costs and/or prepaid items by ‘premium pricing.’ The funds derived
from a premium priced mortgage may never be used to pay any portion of the borrower’s
down payment and must be disclosed on the good faith estimate and the HUD-1 Setlement
Statement. The good faith estimate and HUD-1 Settlement Statement must provide an
itemized statement indicating which items are being paid on the borrower’s behalf;
disclosing only a lump sum is not acceptable. Also, the amount paid on the borrower’s
behalf for each item may not exceed the allowable fees recognized by the Federal Housing
Administration office having jurisdiction where the property is located. If the premium
pricing agreement establishes a specific dollar amount for closing costs and prepaid
expenses with any remaining funds reverting to the borrower, the excess funds must be used
to reduce the principal balance. Closing costs paid in this manner may not be included in
the acquisition cost of the property and, thus, the mortgage amount. If the lender through
the premium rate pays all closing costs and prepaid expenses, the mortgage amount will
typically be based on the loan-to-value limit applied solely to the lesser of the sales price or
appraised value.”

The HUD-1 Settlement Statement indicated that a lender assist of $1,434 was paid on
November 7, 2002 (date of closing). The lender assist was not itemized on the good faith
estimate or the HUD-1 Settlement Statement.

B.      Ineligible Commitment Fee

A commitment fee of $225, included on the HUD-1 Settlement Statement, was paid by the
borrowers on November 7, 2002 (closing date). Mortgagee Letter 94-7, section IV,
provides that commitment or lock-in fees must be in writing and must guarantee the interest
rate and/or discount points for a period of not less than 15 days before the anticipated
closing date. The $225 commitment fee is ineligible because there was no documentation to
show the mortgagor agreed to a lock-in agreement.

First United’s Comments

A. First United disagrees, and states that in the event the HUD instructs that specific
   application of funds breakout is required, it will appear in future files.

B. First United agreed that the loan file lacked documentation to support a commitment
   fee.


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OIG’s Evaluation of First United’s Comments

A. The HUD-1 indicated that a lender assist of $1,433.57 was paid on November 7,
   2002, the date of closing. Neither the GFE nor the HUD-1 itemized the lender assist.

B. First United concurred.




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Case Number:           352-4635690
Loan Amount:           $133,168
Settlement Date:       July 26, 2002
Status:                Currently in Default

Pertinent Details

A.     Non-itemized Lender Credit

The HUD-1 Settlement Statement and Mortgage Credit Analysis Worksheet listed a
lump-sum, non-itemized lender credit of $591, received by the borrower. HUD
Handbook 4155.1, Rev-4, section 1-9A, part 1, states that closing costs and prepaid
expenses paid on behalf of the borrower by the lender must be disclosed and itemized on
the good faith estimate and the HUD-1 Settlement Statement.

B.     Ineligible Commitment Fee

A commitment fee of $225, included on the HUD-1 Settlement Statement, was paid by
the borrower on July 02, 2002 (closing date). The borrower elected not to have an
interest rate lock in the interest rate lock-in agreement, dated July 26, 2002. Mortgagee
Letter 94-7, section IV, provides that commitment or lock-in fees must be in writing and
must guarantee the interest rate and/or discount fees for a period of not less than 15 days
before the anticipated closing date. Because the borrower elected not to lock in the
interest rate, the $225 represents an ineligible fee.

First United’s Comments

A. First United disagreed that the lender credit was not itemized, and noted that if HUD
   instructs that breakout of specific application of funds is required, it will be done in
   the future.

B. First United agreed that the loan file lacked documentation for a commitment fee.

OIG’s Evaluation of First United’s Comments

A. Handbook 4155.1, REV-4 CHG 1, section 1-9A requires that a lender credit be
   itemized on the HUD-1 Settlement Statement. The HUD-1 in the file lacked any
   itemization.

B. First United concurred.




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Case Number:           351-4317276
Loan Amount:           $47,958
Settlement Date:       November 22, 2002
Status:                Currently in Default

Pertinent Details

A.     Ineligible Commitment Fee

The borrower paid a $275 commitment fee, listed on the HUD-1, Settlement Statement,
on November 22, 2002, the closing date. The borrower elected not to have an interest
rate lock-in in the agreement, dated November 13, 2002. Mortgagee Letter 94-7, section
IV, provides that commitment or lock-in fees must be in writing and must guarantee the
interest rate and/or discount fees for a period of not less than 15 days before the
anticipated closing date. Because the borrower elected not to lock in the interest rate, the
$275 commitment fee is an ineligible fee.

B.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, section 5-3, states that the lender is permitted to charge a
borrower the actual costs of credit reports. The borrower was charged $10 for credit
reports on the HUD-1 Settlement Statement; however, we could not locate a credit report
in the file. Consequently, the $10 is an unsupported cost.

First United’s Comments

A. First United agreed that the loan file lacked support for a commitment fee.

B. First United agreed that the loan file lacked documentation for credit report fees.

OIG’s Evaluation of First United’s Comments

A. First United concurred.

B. First United concurred.




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Case Number:          352-4660882
Loan Amount:          $139,461
Settlement Date:      May 24, 2002
Status:               Paid in Full

Pertinent Details

A.     Ineligible Shipping Fee

The borrower was charged an overnight fee of $50. Such a fee is not listed on the
approved listing of closing costs and other fees as stated in HUD Handbook 4000.2,
REV-2, section 5-3. Consequently, the $50 is an ineligible cost.

First United’s Comments

A. First United disagrees that it charged the shipping fee, and stated that the closing
   attorney charged the fee despite written instruction that such fee was unallowable.
   First United advised that it will request that the fee be refunded.

OIG’s Evaluation of First United’s Comments

A. The $50 shipping fee is an ineligible fee that should be refunded to the borrower.




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                                                               Appendix C


Schedule of Questioned Costs and Funds To Be Put to Better Use
                            Type of Questioned Costs
     Finding           Ineligible      Unsupported                 Funds To Be Put
     Number            Costs 1/        Costs 2/                  to Better Use 3/

      1A                 3,773                $     571

      1B                                          1,933

      1C                                                           $2,482,438

                                                                          ______
               Total    $3,773                    $2,504           $2,482,438


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 whose eligibility cannot be clearly determined during
      the audit since such costs were not supported by adequate documentation. A legal
      opinion or administrative determination may be needed on these costs.

3/    “Funds to be put to better use” are costs that will not be expended in the future if
      our recommendations are implemented; for example, 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.




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