oversight

Security Atlantic Mortgage Company, Inc., Nonsupervised Mortgagee, Edison, New Jersey

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-16.

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

          AUDIT REPORT




SECURITY ATLANTIC MORTGAGE COMPANY, INC.
       NONSUPERVISED MORTGAGEE
           EDISON, NEW JERSEY

               2005-NY-1007

             September 16, 2005



            OFFICE OF AUDIT
         New York/New Jersey Region
                                                                 Issue Date
                                                                   September 16, 2005
                                                                 Audit Report Number
                                                                     2005-NY-1007




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


FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: Security Atlantic Mortgage Company, Inc., Did Not Always Comply with
         HUD/Federal Housing Administration Loan Origination Requirements


                                   HIGHLIGHTS

 What We Audited and Why

             We audited Security Atlantic Mortgage Company, Inc. (Security Atlantic), a
             nonsupervised direct endorsement lender located in Edison, New Jersey, because
             its 7.02 percent default rate for loans with a beginning amortization date between
             October 1, 2002, and September 30, 2004, was more than twice the average
             default rate for the State of New Jersey, which was 3.34 percent.

             Our audit objectives were to determine whether Security Atlantic (1) approved
             insured loans in accordance with the requirements of the U.S. Department of
             Housing and Urban Development (HUD)/Federal Housing Administration, which
             include following prudent lending practices, and (2) developed and implemented
             a quality control plan that complied with HUD requirements.

 What We Found
             HUD assumed an unnecessary insurance risk for 16 loans valued at $3,208,308 that
             Security Atlantic approved with material underwriting deficiencies. In addition,
             borrowers were charged $11,249 for ineligible and/or unsupported fees. Further,
             Security Atlantic could not document that it complied with HUD regulations that
           prohibit charging a commitment fee unless borrowers agree to lock in a mortgage
           rate.

           Security Atlantic did not comply with HUD tier pricing regulations in the origination
           of 38 loans, resulting in $60,546 in inappropriate charges. These loans, which had
           the same interest rate and lock-in date and were within the same metropolitan
           statistical area, had a variation of more than two discount points.

           Security Atlantic did not ensure that its quality control plan was implemented in
           accordance with both HUD’s and its own requirements. Security Atlantic did not
           ensure that (1) loans that defaulted within six months were analyzed, (2)
           management responses to quality control findings were timely, and (3) compliance
           with the HUD tier-pricing rule was monitored.


What We Recommend


           We recommend that the assistant secretary for housing - federal housing
           commissioner require Security Atlantic to: (1) indemnify HUD for potential losses
           on 15 loans with significant underwriting deficiencies valued at $3,048,552, (2)
           reimburse HUD $171,053 for the amount paid in claims and fees on one loan with
           significant underwriting deficiencies, and (3) reimburse borrowers for $11,249 in
           ineligible and/or unsupported fees found in 26 loans. In addition, we recommend
           that the assistant secretary for housing - federal housing commissioner determine the
           extent to which Security Atlantic violated HUD regulations regarding lock-in fees,
           take appropriate administrative action, and seek reimbursement to any borrowers
           erroneously charged fees. We further recommend that Security Atlantic reimburse
           borrowers for $60,546 in overcharges that were levied in violation of HUD’s tier
           pricing regulations and implement a quality control process in accordance with HUD
           requirements.

Auditee’s Response


           Officials of Security Atlantic disagreed with the tone of the report and the
           recommendations made. Specifically, Security Atlantic officials did not agree
           with our conclusion that it approved loans that increased risk to the Federal
           Housing Administration insurance fund. Overall, Security Atlantic officials
           agreed with many of the underwriting deficiencies we noted, but did not believe
           that these deficiencies were a contributing factor to the mortgagor’s default.
           Security Atlantic disagreed that it violated HUD’s tier pricing rule based on the
           belief that sponsors cannot be held accountable for monitoring tier-pricing rules
           for loan correspondents. Security Atlantic generally agreed that it had
           inadequately implemented its quality control plan during our audit period, but
           noted that it has made improvements.



                                             2
We discussed the contents of the report with Security Atlantic officials during the
audit and at an exit conference on July 28, 2005, and they provided their written
comments on August 15, 2005. Appendix B of this report contains the complete
text of Security Atlantic’s comments, along with our evaluation of the comments.




                                 3
                               TABLE OF CONTENTS

Background and Objectives                                                                5

Results of Audit
      Finding 1: Security Atlantic Approved Loans That Caused an Unnecessary             6
                 Risk to the HUD/Federal Housing Administration Insurance Fund

        Finding 2: Security Atlantic Violated the HUD Tier Pricing Rule                  11

        Finding 3: Security Atlantic Inadequately Implemented Its Quality Control Plan   13

Scope and Methodology                                                                    15

Internal Controls                                                                        16

Appendixes
   A.    Schedule of Questioned Costs and Funds to Be Put to Better Use                  18
   B.    Auditee Comments and OIG’s Evaluation                                           19
   C.    Summary of Loans with Significant Deficiencies                                  42
   D.    Narrative Case Presentations                                                    44
   E.    Schedule of Tier Pricing Violations                                             75
   F.    Schedule of Ineligible and Unsupported Fees                                     78




                                              4
                         BACKGROUND AND OBJECTIVES


Security Atlantic Mortgage Company, Inc. (Security Atlantic), became an approved U. S.
Department of Housing and Urban Development (HUD)/Federal Housing Administration lender
in 1993. The company originates loans, which it then sells to investors, banks, and other
mortgage bankers. The main office of Security Atlantic is located in Edison, New Jersey, and at
the beginning of our audit, there were separate branch offices located in Staten Island, New
York, Malvern, Pennsylvania, and Boca Raton, Florida. In addition to being an authorized agent
for three principals, Security Atlantic has 166 loan correspondents. Security Atlantic terminated
the contract with its quality control contractor in December 2004 and began conducting its own
quality control function.

Between October 1, 2002, and September 30, 2004, Security Atlantic originated 342 and 5,106
Federal Housing Administration-insured mortgages for its retail and wholesale division,
respectively. 1 We selected Security Atlantic for audit because its 7.02 percent default rate for
loans with a beginning amortization date between October 1, 2002, and September 30, 2004, was
more than twice the average default rate for the State of New Jersey, which was 3.34 percent.

The objectives of this audit were to determine whether Security Atlantic (1) approved insured
loans in accordance with HUD requirements, which include following prudent lending practices,
and (2) developed and implemented a quality control plan that complied with HUD
requirements.




1
 Retail loans are originated by Security Atlantic staff. Wholesale loans are originated by licensed mortgage
brokers, also referred to as third party originators.


                                                       5
                                RESULTS OF AUDIT

Finding 1: Security Atlantic Approved Loans That Caused An
           Unnecessary Risk to the HUD/Federal Housing
           Administration Insurance Fund

Security Atlantic did not follow prudent lending practices and regulations prescribed by HUD in
its loan origination and underwriting in 20 of 31 loans we reviewed As a result, loans were
approved for potentially ineligible borrowers. Fifteen of these loans valued at $3,048,552 are
currently insured, while $171,053 in claims and fees were paid on one remaining loan. The
remaining four loans were paid in full during the course of our audit, and thus no longer
represent a risk to the HUD/Federal Housing Administration insurance fund. In addition,
borrowers were charged $11,249 for ineligible and/or unsupported fees. These deficiencies
occurred because Security Atlantic did not have adequate controls to ensure that loans were
processed in accordance with HUD requirements.


 Origination and Underwriting
 Deficiencies


              We found material origination and underwriting deficiencies in 20 of 31 loans we
              reviewed with beginning amortization dates between October 1, 2002, and
              September 30, 2004. These deficiencies occurred because Security Atlantic did
              not adequately (1) verify of borrowers’ income, employment, and/or source of
              funds for down payment and closing costs, and (2) analyze borrowers’ liabilities,
              credit history, and/or ability to pay.

              HUD Handbook 4155.1, REV-4, entitled “Mortgage Credit Analysis for
              Mortgage Insurance,” prescribes basic underwriting requirements for HUD-
              insured single-family mortgage loans. Lenders must ensure that borrowers have
              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: (1)
              qualifying ratios and compensating factors, (2) stability and adequacy of income,
              (3) funds to close, and (4) credit history. This assessment must be based on sound
              underwriting principles in accordance with the guidelines described in Handbook
              4155.1 and be supported by sufficient documentation. In addition, section 3-1 of
              this handbook requires that the application package contain sufficient
              documentation to support a lender’s decision to approve a mortgage. While this
              decision will involve some subjectivity, Security Atlantic did not always follow
              the above requirements in its loan origination and underwriting.

              As shown in the chart below and in appendix C, we found a variety of significant
              underwriting deficiencies in 16 loans. The deficiencies noted are not independent
              of one another, as many of the loan files contained more than one deficiency.


                                               6
       Areas of deficiency                             Number of
                                                       loans
    Nonqualifying ratios and/or inadequate                13 of 16 loans
    compensating factors
    Inadequate verification of funds to close             14 of 16 loans
    Inadequate verification of income/employment           6 of 16 loans
    Inadequate credit analysis                             3 of 16 loans
    Other processing procedures                            4 of 16 loans

Specific examples of Security Atlantic’s inadequate underwriting are as follows:

•    Case 352-5094184 was approved with a mortgage payment expense to
     effective income ratio and a total fixed payment to effective income ratio of
     37.97 and 50.83 percent, respectively. HUD Handbook 4155.1, REV-4, CHG
     1, sections 2-12 and 2-13, provide 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 lender identifies compensating factors
     that could justify exceeding these ratios. “Excellent credit, very good job
     stability, 203k with repairs, and a reserved savings pattern” were listed as
     compensating factors. However, except for “a reserved savings pattern,” the
     factors cited are not allowable compensating factors as defined in section 2-
     13. Further, the reserved savings pattern was inadequate because the
     borrower had significant credit card debts and numerous deposits were
     unexplained. The loan defaulted after five payments, and the reported cause
     was excessive obligations.

•    In case number 352-5033337, Security Atlantic inadequately evaluated the
     borrowers’ ability to repay the mortgage. The verification of current
     employment lacked an address, telephone number, and the starting date of
     employment; and the verification of prior employment was provided by the
     current employer. In addition, (1) borrowers’ income was not accurately
     calculated, (2) the credit analysis was inadequate, (3) liabilities were not
     adequately disclosed, (4) one of the borrowers had discrepant birth date
     information, and (5) the closing did not comply with the loan approval. The
     loan defaulted after one payment with no specific reason cited.

•    Case number 352-4927551 lacked adequate verification of funds to close
     because the file did not contain adequate verification of deposits. There was
     no documentation for $6,100 in personal funds listed on the borrower’s
     application. Without these funds, the borrower would have had a negative
     $3,864 cash reserve at closing. Further, verification of $7,468 in non-payroll
     deposits, a debt payment of $2,010, and a $500 earnest money deposit was
     inadequate. The loan defaulted after six payments, and the reason reported
     was curtailment of income.




                                   7
          •   Case number 352-4957069 was approved with a mortgage payment expense
              to effective income ratio and a total fixed payment to effective income ratio of
              30.90 and 48.04 percent, respectively, without adequate compensating factors.
              After taking into consideration overstated overtime income, the ratios would
              be 32.24 and 50.11 percent. In addition, (1) the borrower did not have
              sufficient funds to close with a negative cash reserve of $1,830 at closing, and
              (2) the closing was not in compliance with loan approval because there were
              differences between the HUD-1 settlement statement and the mortgage credit
              analysis worksheet for a seller concession, gift, and earnest money deposit.
              The loan defaulted before any payments were made, and the reason reported
              was curtailment of income.

          As of June 1, 2005, eight of the 16 loans were in default, seven were current, and
          claims had been paid on one. We are requesting indemnification for 15 of the 16
          loans with significant underwriting deficiencies. These loans are insured for
          $3,048,552. Indemnification of these loans would preclude a potential future
          claim against the HUD/Federal Housing Administration insurance fund, resulting
          in funds to be put to better use. We are also requesting repayment of the claims
          and fees paid of $171,053 on one loan with significant underwriting deficiencies.
          Four additional loans with significant underwriting deficiencies were paid in full
          during the course of our audit; therefore, they no longer represent a risk to the
          HUD/ Federal Housing Administration insurance fund.

          Appendix C to this report provides a summary of the significant underwriting
          deficiencies noted in the 15 cases still actively insured, and in the one case for which a
          claim has been paid, while appendix D provides a more detailed description of the
          deficiencies. The deficiencies occurred because Security Atlantic did not have
          adequate controls to ensure that loans were processed in accordance with applicable
          HUD requirements. The deficiencies resulted in the approval of mortgages for
          potentially ineligible borrowers, which caused HUD to assume an unnecessary
          insurance risk.

Ineligible/Unsupported Fees
Charged Borrowers

          Security Atlantic charged ineligible and/or unsupported fees in 26 of the 31 loans
          reviewed. Mortgagee Letter 94-7, section IV, provides that a commitment or
          lock-in fee must be in writing and guarantee the mortgage interest rate and/or
          discount points for a period of not less than 15 days before the anticipated closing
          date. HUD Handbook 4000.2, REV-2, section 5-3, identifies the types of costs,
          such as obtaining credit report fees, that a lender is allowed to charge a borrower
          and limits the charge to actual cost. We found that borrowers were charged the
          following ineligible and unsupported fees:




                                            8
              Type of ineligible/unsupported Number of                      Amount of
              fee                                     loans                 fee
          Ineligible commitment fee                       9 loans                $4,255
          Ineligible shipping fee                         2 loans                $ 120
                                Total ineligible fees                            $4,375
          Unsupported commitment fee                     16 loans                $6,720
          Unsupported credit report fee                   5 loans                $ 154
                             Total unsupported fees                              $6,874
          Total ineligible/unsupported fees                                     $11,249

          HUD Handbook 4000.2, REV-3, section 1-9A, provides that lenders are permitted
          to charge a commitment fee to guarantee, in writing, the interest rate and discount
          points for a specific period or to limit the extent to which they may change. The
          minimum time for lock-ins is 15 days. The loan may close in less than 15 days at
          the convenience of the borrower, and the lock-in fees may still be earned.
          Lenders are expected to honor all such commitments.

          Of the 25 loans charged a commitment fee, 16 lacked documentation to
          substantiate that the borrowers agreed to lock in their loans, and the remaining
          nine loans contained lock-in agreements signed by the borrowers; however, the
          agreement stated that the borrower did not want an interest rate commitment.
          Monthly quality control reports provided by Security Atlantic also reported
          deficiencies regarding commitment fees. These reports noted that borrowers were
          charged commitment fees with written commitments that were incomplete or
          missing or when a lock-in was declined. Other ineligible and unsupported fees
          charged included shipping fees and credit report fees.

          During our audit period, October 1, 2002, through September 30, 2004, Security
          Atlantic underwrote 5,106 loans in its wholesale division. Given the incidence of
          ineligible or unsupported fees disclosed in our sample (25 of 31, or 80.6 percent),
          as well as by Security Atlantic’s quality control reviews, and the large number of
          loans underwritten, there is the potential that significant numbers of borrowers
          have been erroneously charged a commitment fee.

          Appendix F lists the ineligible and unsupported costs by loan.


Recommendations

          We recommend that the assistant secretary for housing - federal housing
          commissioner require Security Atlantic to:

          1A. Indemnify HUD against potential future losses on 15 loans totaling
              $3,048,552, which are considered as funds to be put to better use since




                                           9
     indemnification prevents future claims against the Federal Housing
     Administration insurance fund.

1B. Reimburse HUD the $171,053 on the one loan for which claims and fees
    have been paid that contained serious underwriting deficiencies.

1C. Reimburse borrowers for the $4,375 in ineligible fees.

1D. Work with the Homeownership Center to determine the eligibility of the
    $6,874 in unsupported fees charged borrowers. If the fees are determined to
    be ineligible, Security Atlantic should be required to reimburse the
    borrowers accordingly.

1E. 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.

1F. Work with the Home Ownership Center to review the 5,106 loans with
    beginning amortization dates between October 1, 2002, and September 30,
    2004, for ineligible commitment fees. If it is determined that borrowers
    were charged ineligible commitment fees, Security Atlantic should be
    required to reimburse borrowers or HUD, as applicable, for these fees.




                               10
 Finding 2: Security Atlantic Violated the HUD Tier Pricing Rule
 Our review found that Security Atlantic originated 38 loans that did not comply with HUD tier
 pricing regulations resulting in $60,546 in inappropriate charges. Security Atlantic charged
 certain borrowers discount points although other borrowers with the same mortgage interest rate
 and lock-in date and who were in the same metropolitan statistical area were not charged
 discount points. These deficiencies occurred because Security Atlantic did not have adequate
 controls to ensure that loans complied with tier pricing guidelines. Consequently, Security
 Atlantic’s lending practices may have unfairly imposed greater costs on some borrowers.


Violations of HUD Tier Pricing
Regulations

               HUD’s tier pricing rule (24 CFR [Code of Federal Regulations] 202.12) limits
               variation in mortgage charge rates to no more than two percentage points when
               borrowers lock in the interest rate on or around the same day, using the same
               mortgage type, and the properties financed are located in the same geographical
               area. Mortgagee Letter 94-43 provides that Federal Housing Administration-
               approved lenders should determine that any permitted overage does not violate
               the tiered pricing rule and include in their quality control program a system to
               monitor and supervise their overage activities to prevent violations of tiered
               pricing prohibitions.

               We obtained and analyzed a tier-pricing database from Security Atlantic that
               contained 5,106 wholesale loans closed between October 1, 2002, and September
               30, 2004, and we identified 38 loans that had a variation greater than two discount
               points with the same interest rate, lock-in date, and metropolitan statistical area.
               For instance, two loans with the same interest rate were locked in on May 12,
               2004, for properties within the same metropolitan statistical area. One loan was
               charged four discount points, while the other loan was not charged discount
               points, resulting in a $3,940 overcharge to the borrower who paid the points.
               Security Atlantic officials did not have an adequate system to monitor for
               violations of tier pricing regulations. As a result, we found that 38 borrowers
               were inappropriately charged $60,546 due to violations of HUD’s tier pricing
               regulations. See appendix E for a detailed list of the loans.


Recommendations

               We recommend that the assistant secretary for housing - federal housing
               commissioner require Security Atlantic to:

               2A.     Reimburse the borrower the $60,546 in overcharges that were levied in
                       violation of HUD’s tier pricing rule.



                                              11
2B.   Submit a corrective action plan for HUD’s review to ensure that Security
      Atlantic is adequately documenting its monitoring for compliance with
      HUD’s and its own tier pricing rules and regulations.




                               12
 Finding 3: Security Atlantic Inadequately Implemented Its Quality
             Control Plan
 Security Atlantic did not ensure that its quality control plan was implemented in accordance with
 both HUD’s and its own requirements. It did not ensure that (1) loans that defaulted within six
 months were analyzed and (2) management responded in a timely manner to quality control
 findings. Additionally, Security Atlantic did not monitor its loans to ensure compliance with the
 HUD tier-pricing rule as required by its quality control plan. These weaknesses occurred
 because Security Atlantic did not establish procedures to ensure that its quality control plan was
 properly implemented. Consequently, the effectiveness of Security Atlantic’s quality control
 plan was lessened, with the result that Security Atlantic is unable to ensure the accuracy, validity,
 and completeness of its loan origination process.


Loans Defaulting within Six
Months Not Selected for Review

                Loans defaulting within six months were not adequately reviewed as required by
                HUD Handbook 4060.1, REV-1, paragraph 6-6D, and as intended by Security
                Atlantic’s quality control plan, sections 7.19 and 7.23. While Security Atlantic
                selected 2 of the 17 loans in our sample of 31 that had defaulted within six months
                for quality control review, the remaining 15 were not reviewed. Further, the two
                loans reviewed were apparently randomly selected, as opposed to being selected
                because they defaulted within six months. This occurred because Security
                Atlantic did not have adequate controls over its quality control functions. Quality
                control reviews of these early defaulted loans can provide valuable information
                about the causes of default that may indicate inadequate underwriting. Security
                Atlantic officials acknowledged this weakness and advised that review of these
                defaulted loans will be routine.

Inadequate Management Response


                Management response to quality control reports was not always adequate. Of 24
                monthly quality control reports we reviewed, we found that Security Atlantic had
                not prepared management responses for 18 of the reports. HUD Handbook
                4060.1, REV-1, CHG-1, section 6-3I, requires that management take prompt
                action to deal appropriately with any material findings and that the final report or
                an addendum identify actions taken, the timetable for their completion, and any
                planned follow-up activities.

                In an effort to better use the results of monthly quality control reports, in October
                2003, Security Atlantic officials hired a liaison to work with them and their
                quality control contractor. In December 2004, Security Atlantic terminated its
                quality control contractor and hired the liaison to supervise a quality control
                department to improve the effectiveness of its quality control function.


                                                13
          Nevertheless, Security Atlantic must address the quality control deficiencies noted
          in this report to ensure that HUD does not continue to assume an unnecessary
          insurance risk.

          Our review also disclosed that Security Atlantic could not provide evidence to
          support management’s monitoring of its tier pricing practices. As stated in Security
          Atlantic’s quality control plan, section 3.3, Security Atlantic shall extend strong
          oversight to monitor overages and tier pricing by its loans officers. However,
          Security Atlantic lacks assurance that its lending practices do not impose greater
          costs on some borrowers.


Recommendations
       We recommend that the assistant secretary for housing - federal housing
       commissioner require Security Atlantic to:

          3A.    Develop procedures to implement an adequate quality control process to
                 ensure that (1) all loans that default within the first six payments are
                 properly reviewed, (2) quality control reviews and appropriate
                 management responses are completed in a timely manner, and (3) proper
                 review for compliance with tier pricing regulations is performed and
                 documented.




                                           14
                         SCOPE AND METHODOLOGY


We sampled 31 defaulted loans that were originated by Security Atlantic with a beginning
amortization date between October 1, 2002, and September 30, 2004. Thirty loans were selected
from Neighborhood Watch, and one was referred by the Philadelphia Homeownership Center.
Sample selections included loans underwritten for Security Atlantic’s wholesale and retail
divisions. Loan selection criteria included factors such as loans that 1) defaulted within 12
payments, 2) had a high-back ratio, 3) involved a gift of $25,000 or more, and 4) were not
reviewed or indemnified by HUD.

To achieve our audit objectives, we reviewed documentation from the Homeownership Center
loan endorsement files, as well as electronic case files provided by the auditee. We also
reviewed Security Atlantic’s quality control procedures to assess whether they were adequate
and properly implemented in accordance with HUD requirements. Lastly, we obtained pertinent
database files from the auditee to determine whether tier-pricing practices conducted by Security
Atlantic complied with HUD’s tier pricing rule.

We interviewed Security Atlantic’s management and quality control staff to obtain an
understanding of the policies and procedures related to the auditee’s management controls. We
also analyzed the auditee’s post-endorsement technical reviews, quality assurance reports, and
independent audit reports.

We performed audit fieldwork from December 2004 through June 2005. The audit was
conducted in accordance with generally accepted government auditing standards.




                                               15
                             INTERNAL CONTROLS

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

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

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


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

              •       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 the relevant controls identified above.

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

 Significant Weaknesses
              Based on our review, the following items are considered significant weaknesses:




                                               16
•   Security Atlantic did not ensure that certain loans were processed in
    accordance with all applicable HUD requirements (see Finding 1).

•   Security Atlantic did not ensure that it complied with HUD’s tier pricing rule
    (see Finding 2).

•   Security Atlantic did not ensure that it complied with HUD regulations
    regarding lock-in fees (see Finding 1).

•   Security Atlantic did not adequately implement its quality control plan to
    ensure compliance with HUD requirements (see Finding 3).




                                 17
                                     APPENDIXES

Appendix A

                           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/

           1                $ 175,428 2                  $ 6,874                $ 3,048,552

           2                $ 60,546

           3

                   Total $ 235,974                       $ 6,874                $ 3,048,552



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 those costs charged to a HUD-financed or HUD-insured program
           or activity whose eligibility could not be determined at the time of the audit.
           Unsupported costs require a decision by HUD program officials. This decision, in
           addition to obtaining supporting documentation, might involve a legal interpretation or
           clarification of departmental policies and procedures.

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




2
    Represents $4,375 of ineligible fees charged borrowers and $171,053 in claims paid by HUD.


                                                         18
Appendix B
                   Auditee Comments and OIG Evaluation

Ref to OIG Evaluation           Auditee Comments




     Comment 1




                                  19
Appendix B
                   Auditee Comments and OIG Evaluation

Ref to OIG Evaluation           Auditee Comments




                                  20
Appendix B
                   Auditee Comments and OIG Evaluation
Ref to OIG Evaluation           Auditee Comments




  Comment 2



  Comment 3



  Comment 4


  Comment 5




                                  21
 Appendix B
                    Auditee Comments and OIG Evaluation
 Ref to OIG Evaluation           Auditee Comments




Comment 5




Comment 6




                                   22
Appendix B
                   Auditee Comments and OIG Evaluation
Ref to OIG Evaluation           Auditee Comments




    Comment 7



    Comment 8




    Comment 9




    Comment 10




    Comment 4




                                  23
Appendix B
                   Auditee Comments and OIG Evaluation
Ref to OIG Evaluation           Auditee Comments




    Comment 3




                                  24
 Appendix B
                    Auditee Comments and OIG Evaluation
 Ref to OIG Evaluation           Auditee Comments




Comment 11




Comment 12




                                   25
 Appendix B
                    Auditee Comments and OIG Evaluation
 Ref to OIG Evaluation           Auditee Comments




Comment 13




                                   26
 Appendix B
              Auditee Comments and OIG Evaluation
                   Ref to OIG Evaluation       Auditee Comments




 Comment 14




Comment 15




                                27
Appendix B
              Auditee Comments and OIG Evaluation
                   Ref to OIG Evaluation       Auditee Comments




 Comment 16




                                28
 Appendix B
                    Auditee Comments and OIG Evaluation
 Ref to OIG Evaluation           Auditee Comments




Comment 17




Comment 18




                                   29
Appendix B
                   Auditee Comments and OIG Evaluation

Ref to OIG Evaluation           Auditee Comments




 Comment 19




 Comment 20




                                  30
Appendix B
                   Auditee Comments and OIG Evaluation

Ref to OIG Evaluation           Auditee Comments




 Comment 21




  Comment 22




                                  31
   Appendix B
                      Auditee Comments and OIG Evaluation
   Ref to OIG Evaluation           Auditee Comments




Comment 23




                                     32
Appendix B
                   Auditee Comments and OIG Evaluation

Ref to OIG Evaluation           Auditee Comments




 Comment 24




 Comment 25




 Comment 26




                                  33
Appendix B
                   Auditee Comments and OIG Evaluation
Ref to OIG Evaluation           Auditee Comments




 Comment 27




 Comment 28




                                  34
Appendix B
                   Auditee Comments and OIG Evaluation

Ref to OIG Evaluation           Auditee Comments




 Comment 29




 Comment 30




                                  35
 Appendix B
                    Auditee Comments and OIG Evaluation

 Ref to OIG Evaluation           Auditee Comments




Comment 31




Comment 32




                                   36
Appendix B
                   Auditee Comments and OIG Evaluation


Comment 1   Our report responds to the audit objectives to determine whether Security Atlantic
            approved insured loans and implemented a quality control plan in accordance
            with HUD requirements for the tested loans during the review period. As such,
            the conclusions address deficiencies and weaknesses in Security Atlantic’s
            underwriting and quality control processes as measured against HUD
            requirements. When appropriate, we have recognized improvements made by
            Security Atlantic, and recommended additional measures to ensure that Security
            Atlantic complies with these requirements. As such, our objective is not to drive
            a company out of business, but to help eliminate future underwriting deficiencies
            so that a business may continue to function efficiently as a Federal Housing
            Administration approved lender.

Comment 2   Our report cites the default rate for loans originated during our audit period,
            October 1, 2002 through September 30, 2004, in order to provide the reason that
            Security Atlantic was selected for audit. This rate will fluctuate over time in
            response to the both the number of loans originated and the default history.

Comment 3   During the review period, Security Atlantic did not implement its quality control
            plan in accordance with HUD regulations that require loans that default within six
            months to be reviewed, and management responses to quality control findings to
            be timely. However, our report points out the actions and improvements that
            Security Atlantic has taken to improve its quality control process. As such, our
            report is not inaccurate and unfair.

Comment 4   Security Atlantic maintains that it cannot be held responsible for
            monitoring/enforcing tiered pricing rules for its loan correspondents, and should
            not be responsible for the alleged $60,547 overcharges because it never received
            those funds. However, HUD Handbook 4060.1 REV-1, section 3-4A(1) holds the
            sponsor responsible for the actions of its loan correspondents in originating
            insured mortgages. A sponsor is required to supervise and perform quality
            control reviews of its loan correspondents to assure that they comply with the
            HUD loan origination requirements. Mortgagee Letter 94-43 states that lenders
            should determine that any permitted overage does not violate the tier-pricing rule,
            and include in their quality control program a system to monitor and supervise
            overage activities to prevent violations. Further, Security Atlantic’s quality
            control plan states that it will exercise strong oversight to monitor overages and
            tier pricing by its loan officers.

Comment 5   We recommended indemnification for cases in which we believe the significance
            of the underwriting deficiencies adversely affected the risk assumed by the
            Federal Housing Administration insurance fund. This decision was based upon
            criteria in HUD regulations and additional guidance promulgated by HUD. In its
            response to each case noted in Appendix D, Security Atlantic provided additional


                                            37
Appendix B
                     Auditee Comments and OIG Evaluation
              documents and information that was not previously available. As a result of this
              information, we deleted indemnification requests for three loans.

Comment 6     Security Atlantic provided a HUD-1 that evidences sale of the borrower’s
              previously owned property; consequently, we have deleted a request for payment
              of a claim on this case. Reimbursement to HUD for the other claim paid and any
              associated fees should be made as per HUD regulations.

Comment 7     The $4,375 represents commitment and shipping fees charged which are not
              allowable charges as per HUD regulations. These fees should be refunded to the
              borrowers regardless of whether Security Atlantic or its loan correspondents
              charged the borrowers.


Comment 8     The $6,874 represents commitment and credit report fees for which there was no
              support in the file. Security Atlantic believes that it should not be liable for
              commitment fees charged by its loan correspondents. However, three of the 16
              cases with unsupported commitment fees were originated by Security Atlantic, as
              were three of the five loans with unsupported credit report fees. Regardless of
              who originated the loans, if these are unsupported fees, the borrowers should be
              reimbursed.

Comment 9     While we recognize, and acknowledge in the report, that Security Atlantic has
              taken action to improve its quality control process, we believe that Security
              Atlantic needs to specifically detail how it has, or plans to, ensure that the
              underwriting deficiencies found in the cases reviewed will be addressed.

Comment 10 Given the high incidence (80.6 percent) of ineligible and/or unsupported
           commitment fees that we found in the 31 cases reviewed, we believe that Security
           Atlantic and the HOC need to further determine the extent to which borrowers
           may have been charged ineligible and unsupported fees.

Comment 11 Regarding issues A and B, Security Atlantic agreed that a $60 recurring debt was
           excluded, but did not believe the $388 debt should be included because there was
           evidence of satisfactory payment during the previous 12 months. However, the
           satisfactory payment refers to another loan on which the borrower was a co-
           signor, and was properly excluded. The $388 debt evidenced two delinquencies
           within the past 12 months, and therefore should have been included. We deleted
           reference to the verification of paid-outside closing costs in issue C.

Comment 12 The borrower had two bank accounts at Fleet Bank, for which there were two
           statements as noted by Security Atlantic, but only one statement for the other
           account, which was not addressed by Security Atlantic in issue C. Concerning
           issue E, the HUD-1 noted that the borrower paid a $379 appraisal fee outside
           closing that was not verified.



                                              38
Appendix B
                     Auditee Comments and OIG Evaluation

Comment 13 The $1,002 prepaid items noted in issue H were accounted for as a seller
           concession, after which we calculated that the borrower had inadequate funds to
           close.

Comment 14 Reference to inadequate origination of a nonprocessed borrower was deleted
           because of the New Jersey State law governing non-purchasing spouses.

Comment 15 HUD regulations do not specifically cite taking a homeownership course as a
           compensating factor as noted by Security Atlantic to issue A. Concerning the
           calculation of overtime in issues B and C, we computed an average ($1,227) for a
           two-year period, and can not determine how Security Atlantic computed $1,305.
           With regard to inadequate credit analysis in issue D, the late payments occurred
           after the separation agreement, and some even after the presumed divorce decree
           in early 2002. Concerning issue F, if the $11,500 were not a gift as Security
           Atlantic states, then the borrower would not have had sufficient funds to close.
           With the $7,633 bank asset that already included the fund from the borrower’s
           401k plan, the borrowers could not afford $13,137 cash due on HUD-1. In
           addition, there is no support for the check the co-borrower made to herself as
           mentioned in item F.

Comment 16 Regarding issue A, although Loan Prospector was used to process the loan, which
           would not require compensating factors, proper application of Loan Prospector
           requires data integrity. The file contained a Loan Prospector Feedback Certificate
           that listed a different property address and different mortgage amount from that
           for which the loan was processed. Further, the closing occurred more than six
           months after the processing through Loan Prospector in violation of HUD
           Handbook 4155.1, REV-4, CHG 1, section 3-1. Regarding issue C, if the $10,000
           was not a gift, but derived from the proceeds of stock sales, these proceeds were
           not properly sourced and verified.

Comment 17 Based upon additional information provided by Security Atlantic, we deleted the
           inadequate support for employment deficiency. Concerning inadequate credit
           analysis, we do not believe that an adequate explanation was obtained as to why
           the borrower, as co-mortgagor on another mortgage, had not made the payments.
           Nevertheless, we have deleted reference to this deficiency since the mortgage had
           been paid in full prior to the closing of the current loan.

Comment 18 Concerning issues A, B and C, Security Atlantic erroneously calculated
           overtime/bonus income based upon a year-to-date statement; HUD regulations
           require that a 2-year average be used. Based upon the information provided by
           Security Atlantic, we deleted the inadequate funds to close deficiency.

Comment 19 Auditee concurs.




                                             39
Appendix B
                      Auditee Comments and OIG Evaluation
Comment 20 There were inadequate compensating factors to justify a back ratio of 55.9
           percent.

Comment 21 HUD Handbook 4155.1, REV-4, CHG 1, section 2-7 requires that if income is
           used to qualify as other than a compensating factor, a determination must be made
           as to the likelihood that it will continue; as Security Atlantic agreed, this was not
           done.

Comment 22 Security Atlantic subsequently provided the borrower’s credit explanation letter;
           consequently, we deleted this deficiency.

Comment 23 Regarding compensating factors, the late credit card payments and unexplained
           deposits contradict the assertion that there was sufficient evidence of a determined
           saver to compensate for a back ratio of 50.83 percent. Since the borrower’s 401k
           plan would be allowable as reserves after closing, we have deleted the inadequate
           reserves after closing deficiency. While the late payments noted in the inadequate
           credit analysis deficiency were within two years of closing, we have eliminated
           this deficiency based upon the borrower’s explanation. We also eliminated the
           verification of paid outside closing deficiency after Security Atlantic provided a
           copy of the check used to pay the paid-outside-closing items.

Comment 24 Although Security Atlantic could not produce evidence that the paid-outside
           closing costs were paid or that the borrower had the $707 needed to close, we
           have deleted the case because of the minimal amounts involved.

Comment 25 Auditee unable to locate case file, therefore no comments were provided.

Comment 26 Auditee concurs.

Comment 27 Security Atlantic provided documentation to support most of the calculation of
           the borrowers’ income. The unexplained difference had a minimal impact upon
           the qualifying ratios. Although Security Atlantic admitted that the compensating
           factor was inadequate, we deleted this case because the back ratio would be 42
           percent, which although in excess of the HUD guidelines in effect at the time, is
           below the current threshold for which a compensating factor is required.

Comment 28 Security Atlantic advised that it has obtained a copy of the HUD-1 for the sale of
           the borrowers’ prior property; accordingly, we have deleted this case pending
           receipt of the HUD-1.

Comment 29 Auditee concurs.

Comment 30 We deleted this case because, although there was no gift letter, the contract of sale
           recorded the gift of equity.




                                              40
Appendix B
                   Auditee Comments and OIG Evaluation
Comment 31 Auditee concurs.

Comment 32 Auditee concurs




                                  41
Appendix C
                                                          Page 1 of 2

             SUMMARY OF LOANS WITH SIGNIFICANT DEFICIENCIES




                                   42
Appendix C
                                                              Page 2 of 2

             SUMMARY OF LOANS WITH SIGNIFICANT DEFICIENCIES




                                    43
                                                                                 Appendix D-1

                                                                                       page 1 of 1

Appendix D

                    NARRATIVE CASE PRESENTATIONS
Case number:          351-4404800
Loan amount:          $128,981
Settlement date:      April 23, 2003
Status:               Reinstated by borrower who retains ownership

Pertinent Details

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

The ratios calculated by Security Atlantic were incorrect because two debts were omitted, which
caused a $448 understatement of liabilities. After considering this deficiency, we calculated the
debt to income ratios to be 16.36 and 48.03 percent, respectively. The borrower cosigned for a
loan of $15,698, giving the borrower liability exposure of $388 per month. In addition, the
underwriter did not include a recurring liability of $60 per month on a balance of $2,463 owed
by the borrower. HUD Handbook 4155.1, REV-4, CHG-1, section 2-11A, provides that the
lender 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.

C.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. However, the case file did not contain a lock-in agreement for the $495
paid by the borrower on April 23, 2003 (closing date).




                                                44
                                                                                Appendix D-2

                                                                                      page 1 of 2
Case number:          352-4762508
Loan amount:          $141,175
Settlement date:      November 8, 2002
Status:               First legal action to commence foreclosure

Pertinent Details

A.     Excessive Debt to Income Ratios without Compensating Factors

HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide 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 lender identifies compensating factors to
justify exceeding these ratios. Security Atlantic computed debt to income ratios of 30.53 and
42.70 percent, respectively, without listing compensating factors.

B.     Inadequate Credit Analysis

HUD 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. Security Atlantic
did not obtain an explanation for three delayed payments in the borrower’s Nelnet account.

C.     Inadequate Bank Account Documentation

Handbook 4155.1, REV-4, CHG 1, section 3-1 F, provides that as an alternative to obtaining a
verification of deposit, the lender may choose to obtain original bank statements for the most
recent three-month period. Security Atlantic chose the alternative methodology, and while there
were bank statements for the borrower for a three-month period, there was one statement for the
coborrower covering the period July 17 to August 15, 2002.

D.     Inadequate Underwriting Documentation

HUD Handbook 4155.1, REV-4, CHG 1, section 3-1, provides that when standard
documentation does not provide enough information to support a decision, the lender must
provide additional explanatory statements, consistent with information in the application, to
clarify or supplement the documentation submitted by the borrower. Security Atlantic should
have clarified questions about the marital status of the borrower. While the file contained an
application indicating that the borrower was married, the mortgage note indicated that the
borrower was unmarried. In addition, the file contained a gift letter from the borrower’s
husband.




                                               45
                                                                                  Appendix D-2

                                                                                        page 2 of 2

E.     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 a $379 appraisal fee outside of closing. However, there was
no documentation to show that this had been paid before closing without reducing the funds
available to close.

F.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $395, included on the HUD-1 settlement
statement, was paid by the borrower to Sunset Mortgage on November 8, 2002 (closing date).
However, the lock-in agreement, dated July 25, 2002, disclosed that the borrower did not choose
to lock-in the interest rate or discount points. Consequently, the $395 is an ineligible fee.




                                                46
                                                                                  Appendix D-3

                                                                                        page 1 of 3
Case number:           352-4927551
Loan amount:           $100,424
Settlement date:       May 13, 2003
Status:                Reinstated by Borrower who retains ownership

Pertinent Details

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

HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide 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 lender identifies compensating factors that could
justify exceeding these ratios. Security Atlantic computed ratios of 25.14 and 46.13 percent,
respectively. “Job stability, low mortgage payment to income ratio, and saving ability” were listed
as compensating factors. However, job stability and low mortgage to income ratio are not allowable
compensating factors as defined in section 2-13. In addition, the file did not contain appropriate
documentation supporting the borrower’s saving ability or history. Further, the ratios calculated
by Security Atlantic were incorrect because a monthly liability of $14 was not factored into the
calculation of the ratios. Including this liability in the ratio calculation would increase the debt
to income ratios to 25.15 and 46.54 percent, respectively.

D.     Inadequate Support for Employment

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 the file
contained a profit-and-loss statement, a balance sheet was not included.

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

Handbook 4155.1, REV-4, CHG 1, section 3-1F, provides that the file must include verification
of deposit and most recent three-month bank statements. The file did not contain bank
statements to document the $6,100 personal funds listed on the borrower’s application form,
which were needed for closing. Section 2-10B provides that if there is a large increase in a bank
account or the bank account was opened recently, the lender must obtain an explanation and
evidence of the source of funds from the borrower. The file contained a bank statement from the
borrower’s business account, which was opened on March 19, 2003, two months before the
closing date. However, no verification was obtained for four large deposits ($1,508 on March
19, 2003, $1,880 on April 3, 2003, $1,300 on April 11, 2003, and $2,780 on April 23, 2003).
The available balance of $1,514 in this business account on April 28, 2003, was needed for
closing.




                                                47
                                                                                 Appendix D-3

                                                                                       page 2 of 3


G.     Inadequate Earnest Money Deposit

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 lender must verify the amount of deposit and the
source of funds. The mortgage credit analysis worksheet contained an earnest money deposit of
$500. Since the file did not contain adequate bank documentation as stated in section E, we
conclude that there was insufficient documentation to support the borrower’s history of
accumulating savings. As a result, the $500 earnest money needs to be explained.

H.     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 a
property equals 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, section 2-10 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 prepaid expenses of $1,002 as stated on the good faith estimate. After offsetting
against the seller concession, which was the only funds available to the borrower due to the
unverified personal bank assets (refer to section E), the borrower would have a negative cash
reserve of $2,012.

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

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides 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. The file did not contain documentation to show that a
paid-outside-closing appraisal fee of $450 had been paid without reducing the funds available to
close. Cash due from the borrower on the HUD-1 settlement statement was $2,913. If the total
$450 paid outside of closing and $500 unverified earnest deposit (see section G) are added to the
$2,913 owed by the borrower, the borrower has a $3,864 deficit at closing without appropriate
verification of the $6,100 personal funds in the bank (see section E).

K.     Verification of Debt Payments Not Obtained.

HUD Handbook 4155.1, REV-4, section 1-7B requires that certain other expenses paid on behalf
of the borrower and other inducements to purchase result in a dollar-for-dollar reduction to the
sales price before applying the appropriate LTV ratio. The HUD-1 settlement statement listed
that the borrower satisfied a $2,010 debt to New Jersey Family Support Center on the date of
closing. However, the file contained no support that the funds used to pay the debts originated
from the borrower’s bank account. The borrower did not have enough funds to close as
mentioned in section I.



                                                48
                                                                                  Appendix D-3

                                                                                        page 3 of 3


L.     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 that cost $39. However, the borrower
was charged $60 for the credit report on the HUD-1 settlement statement. Thus, the $21 is an
unsupported fee.

M.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $395, paid by the borrower on May 13, 2003
(closing date), was included on the HUD-1 settlement statement. However, the lock-in
document, dated February 26, 2003, indicated that the borrower did not choose a lock-in.
Therefore, the $395 is an ineligible fee.




                                                 49
                                                                               Appendix D-4

                                                                                    page 1 of 2
Case number:          351-4420218
Loan amount:          $214,801
Settlement date:      May 29, 2003
Status:               First legal action to commence foreclosure

Pertinent Details

A.     Inadequate Compensating Factors

HUD 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 lender identifies compensating factors that
could justify exceeding these ratios. Security Atlantic computed ratios of 13.8 and 42.52
percent. Compensating factors listed were a 5 percent increase on housing payment and 5
percent downpayment. HUD Handbook 4155.1, REV-5, section 2-13 F, provides that only a
minimal increase in the borrower’s housing expense is justified as a compensating factor. We do
not consider five percent a minimal increase. HUD Handbook 4155.1, REV-5, section 2-13 B,
provides that a large downpayment is a compensating factor, however, we do not regard a five
percent downpayment as large. In addition, we noted that the borrowers received a 4 percent
adjustable interest rate for the first year, and the rate may change on the first day of October
2004 and on that day of each succeeding year. Since the borrowers were highly leveraged, a
small interest rate increase may cause financial distress to the borrowers.

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

The ratios calculated by Security Atlantic were incorrect because income was overstated by
$148. HUD Handbook 4155.1, REV-4, CHG 1, section 2-7A, provides that overtime may be
used as qualifying income if the borrower has received such income for approximately the past
two years and there are reasonable prospects of its continuance. We calculated the two-year
monthly average overtime income and bonus as $1,227 based on the employment verification
information, which would increase the debt to income ratios to 14.01 and 43.16 percent,
respectively. We cannot determine the basis for Security Atlantic’s computation of bonus and
overtime income of $1,375.

D.     Inadequate Credit Analysis

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. The borrower noted that he
could not explain the reason for late credit card payments because his ex-wife incurred the
delinquencies. However, we noted that 29 of these late payments were for credit cards under the
borrower’s name only and occurred after the date of separation as stated in the divorce decree.




                                              50
                                                                              Appendix D-4

                                                                                    page 2 of 2


E.     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 lender must obtain an
explanation and evidence of the source of funds from the borrower. Security Atlantic did not
obtain explanation from the borrower regarding six deposits totaling $13,425. After deducting
$6,324 we identified as a withdrawal from the borrower’s 401k plan, total nonsourced deposits
would be $7,101.

F.     Verification of Gift Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10C, requires that the lender obtain a copy of
the 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 the lender must be able to determine that the gift funds ultimately
were not provided from an unacceptable source and were indeed the donor’s own funds.
Mortgagee Letter 00-28 also requires that the donor furnish conclusive evidence that the funds
given to the homebuyer came from the donor’s own funds. We noted that the donor deposited
$11,700 to her bank account the same day she withdrew $11,500 as a gift. The ending balance
after these transactions became $583. Therefore, we could not determine the source of the gift.
The file contained a gift letter for $11,500, and a noncanceled check of $11,500 made by the
donor “payable to cash.” Since there was no other supporting documentation for this gift
transaction, we cannot verify whether the borrower or the closing agent received the funds.




                                               51
                                                                                Appendix D-5

                                                                                      page 1 of 2
Case number:          351-4475365
Loan amount:          $120,531
Settlement date:      September 15, 2003
Status:               First legal action to commence foreclosure

Pertinent Details

A.     Excessive Debt to Income Ratios without Compensating Factors

HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide 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 lender identifies compensating factors to
justify exceeding these ratios. Security Atlantic computed debt to income ratios of 32.89 and
48.08 percent, respectively, without listing compensating factors. While LoanProspector was
used to underwrite this loan, there are questions about the integrity of the data used in the risk
assessment. The LoanProspector Feedback Certificate listed a different property address than the
property for which the loan was approved, and the LoanProspector evaluation was completed
over six months before the closing date, which exceeds the 120 day timeframe required by HUD
Handbook 4155.1, REV-4, CHG 1, section 3-1. Accordingly, compensating factors would be
required.

B.     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
estimate the settlement requirements to determine the cash required to close. The mortgage
credit analysis worksheet listed a $10,000 gift and $10,507 in available bank assets. However,
we noted that the borrower’s bank assets of $10,507 already included the $10,000 gift. Since the
gift was double counted, the borrower’s cash reserve would be negative $1,132.

C.     Verification of Gift Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10C, requires that the lender document the
gift funds by obtaining a gift letter, signed by the donor and borrower, that specifies the dollar
amount of the gift; provides that no repayment is required; shows the donor’s name, address, and
telephone number; and provides the nature of the donor’s relationship to the borrower. The file
contained a gift letter that lacked the donor’s address and was not signed and dated by the
borrower.




                                                52
                                                                                  Appendix D-5

                                                                                        page 2 of 2

D.     Closing Not in Compliance with Loan Approval

Handbook 4155.1 REV-4, CHG 1, section 3-12B, provides that the loan must close in the same
manner in which it was underwritten and approved. The mortgage credit analysis worksheet
listed discount points of $2,411, which was reduced to $1,205 on the HUD-1 settlement
statement. In addition, earnest money was $2,000 on the mortgage credit analysis worksheet but
$2,100 on the HUD-1 settlement statement.

E.     Verification of Paid-Outside-Closing Costs Not Obtained

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that all of the funds for the
borrower’s investment in the property must be verified. The file did not contain documentation
to show that a $375 paid-outside-closing appraisal fee had been paid before closing.

F.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $395 was included on the HUD-1 settlement
statement, which was paid by the borrower on September 15, 2003 (closing date). However, the
file did not contain the lock-in confirmation document. Therefore, the $395 is an unsupported
fee.




                                                53
                                                                                   Appendix D-6

                                                                                     page 1 of 1
Case number:           352-4877503
Loan amount:           $164,112
Settlement date:       February 14, 2003
Status:                Reinstated by borrower who retains ownership

Pertinent Details

A.     Inadequate Compensating Factors

HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide 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 lender identifies compensating factors that could
justify exceeding these ratios. Security Atlantic computed ratios of 27.5 and 45.88 percent,
respectively. The compensating factors were listed as (1) less than 10 percent increase in housing
payments, (2) ability to save, and (3) 5 percent down payment. HUD Handbook 4155.1, REV-5,
section 2-13 F, provides that only a minimal increase in the borrower’s housing expense is justified
as a compensating factor. We do not consider 10 percent a minimal increase. Prior rental expense
was $1,200 per month, while the projected housing expense was $1,500 per month, or more than a
25 percent increase. HUD Handbook 4155.1, REV-5, section 2-13 B, provides that large down
payment is a compensating factor. As a result, a five percent down payment was not an adequate
compensating factor.

B.     Inadequate Bank Account Documentation

Handbook 4155.1, REV-4, CHG 1, section 3-1F, provides that as an alternative to obtaining a
verification of deposit, the lender may choose to obtain the borrower’s original bank statements
for the most recent three-month period. The bank statements in the file for the period April 26 to
November 26, 2002, were missing pages. As a result, we could not document a full three-month
period. In addition, we noted that the ending balance of the bank statement was illegible.

C.     Nonitemized Lender Credit

The HUD-1 settlement statement reported a $700 nonitemized lender credit. HUD Handbook
4155.1, REV-4, section 1-9A, part 1, provides 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.




                                                 54
                                                                                  Appendix D-7

                                                                                        page 1 of 1
Case number:           352-5089740
Loan amount:           $159,756
Settlement date:       August 27, 2003
Status:                Property conveyed to insurer

Pertinent Details

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

Security Atlantic computed debt to income ratios of 31.20 and 42.99 percent, respectively.
However, this calculation omitted a debt and overstated bonus income. After considering these
deficiencies, we calculated debt to income ratios of 35.23 and 50.38 percent, respectively. HUD
Handbook 4155.1, REV-4, CHG-1, section 2-11A, provides that the lender 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. A debt balance of
$6,017 was omitted, causing a $76 understatement of monthly liabilities. HUD Handbook
4155.1, REV-4, CHG-1, section 2-7A, requires the lender to develop an average of bonus or
overtime income for the past two years and verify that such income is likely to continue. We
could not determine how the lender calculated the monthly bonus income amount of $756. We
calculated the amount at $225 (by dividing the total annual bonus amounts listed on the
verification of employment by the total number of months covered), resulting in an
overstatement of $531.

D.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. However, the case file did not contain a lock-in sheet or other
document explaining the $495 commitment fee charge, which was paid by the borrower on
August 27, 2003 (closing date). Therefore, the $495 is an unsupported fee.




                                                 55
                                                                                Appendix D-8

                                                                                      page 1 of 2
Case number           352-4894655
Loan amount:          $188,680
Settlement date:      April 15, 2003
Status:               Reinstated by borrower who retains ownership

Pertinent Details

A.     Excessive Debt to Income Ratio with Inadequate Compensating Factors

HUD 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 lender identifies compensating factors to
justify exceeding these ratios. Security Atlantic computed debt to income ratios of 42.90 and
55.58 percent, respectively. The compensating factors listed on the mortgage credit analysis
worksheet were credit explanation for derogatoriness, good credit scores, income stability,
savings pattern, and daughter lives with her (borrower) and helps with payments. However, the
compensating factors listed were either not valid or inadequate. The first and second factors
were inadequate because the borrower’s credit scores were marginal and explanations for credit
problems were inadequate. The third and fifth factors are not valid factors. The fourth factor
was inadequate because the bank statement did not demonstrate accumulative savings pattern.
Moreover, the borrower’s daughter had specified in writing that she was an unemployed mother,
and the extent of help with payments was undocumented.

B.     Verification of Gift Not Obtained

HUD Handbook 4155.1, REV 4, CHG 1, provides that a lender must document the transfer of
the funds from the donor to the borrower. While the file contained a gift check for $8,700, there
was inadequate documentation that the funds came from the donor because the donor’s bank
statement had pages missing. The donor’s bank statement disclosed an available balance of
$437.64; however, we could not determine whether the $8,700 was recently deposited or whether
the donor had the funds available prior to the gift.

C.     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
reported that the borrower paid $400 as an appraisal fee and a $58 credit report fee. Although,
the file contains an appraisal report, it does not contain documentation for the cost of the
appraisal or whether the fee was paid. Similarly, there was inadequate documentation to indicate
that the credit report fee was paid. 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.




                                               56
                                                                                  Appendix D-8

                                                                                        page 2 of 2



D.     Unsupported Credit Report Fee

Handbook 4000.2, REV-2, paragraph 5-3, provides that the lender is permitted to charge the
actual costs of credit reports. The file contained one credit report at a cost of $14. However, the
borrower was charged $58 for credit reports on the HUD-1 settlement statement as opposed to
the actual cost of $14. Consequently, the $44 is regarded as unsupported fees.

E.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $495 was included on the HUD-1 settlement
statement, which was paid by the borrower on August 15, 2003 (closing date). However, the
lock-in agreement document, dated December 18, 2002, indicated that the borrower did not
choose a lock-in. Therefore, the $495 is an ineligible fee.




                                                 57
                                                                                   Appendix D-9

                                                                                          page 1 of 2
Case number:           352-5069903
Loan amount:           $422,890
Settlement date:       August 25, 2003
Status:                First legal action to commence foreclosure

Pertinent Details

A.     Excessive Debt to Income Ratios with Inadequate Compensating Factors

HUD 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 lender identifies compensating factors to
justify exceeding these ratios. Security Atlantic computed debt to income ratios of 44.53 and
55.90 percent, respectively. The compensating factors listed on the mortgage credit analysis
worksheet were “credit explanation for derogatoriness, borrower has been paying mom’s bills, he
will be occupying property, wife’s income is comp factor, income, job stability, and savings
reserves, and property self-sufficient.” The first and sixth compensating factors are not valid
because they are loan requirements. The second and third factors are not valid factors according
to HUD Handbook 4155.1, REV-4, CHG 1, section 2-13. Concerning the eighth factor, it is
questionable whether the property is self-sufficient since it suffered a devastating fire and the file
did not indicate whether or when the units would be rentable. The file includes a document from
the contractor in charge of 203k repairs of the property in which he estimates the total repair
costs at $176,659. The fact that the property needed extensive repairs during the time of closing
may indicate that the property’s ability to generate rental income was impaired. The seventh
factor is not adequate because the borrower did not have enough funds to close (See section B).
The fourth factor is valid; however, given the condition of the property, we question whether
these were adequate compensating factors to justify ratios of 44.53 and 55.90 percent.

B.     Inadequate Funds to Close on HUD-1 Settlement Statement

Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that all of the funds for the borrower’s
investment in the property must be verified and documented. Based on the HUD-1 settlement
statement, the borrower was required to have funds amounting to $64,675 to close (cash due
from borrower $64,172 plus paid-outside-closing costs of $503). However, the borrower did not
appear to have sufficient funds to close. First, there was no documentation to show that paid-
outside-closing items were paid before closing without reducing the funds available to close.
Second, bank documents disclosed that the borrower had assets available of $12,688, and other
documents supported a $49,219 gift of equity (which was not recorded on the HUD-1 settlement
statement). Consequently, the borrower would have had a $2,768 deficit at closing. Further,
there was a letter from the borrower explaining that savings were reduced from $35,000 to
$4,000. If this pertains to the bank balance after the documented $12,688 balance, then a larger
deficit would result at closing. The borrower defaulted after four payments.




                                                 58
                                                                                  Appendix D-9

                                                                                        page 2 of 2



C.     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 $450 for an appraisal fee and a credit report fee of $53.
Although, the file contains an appraisal report showing that an appraisal was performed, it does
not contain documentation showing the cost of the appraisal or whether the appraisal or credit
report fees were paid. 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.

D.     Closing Not in Compliance with Loan Approval

Handbook 4155.1, REV-4, CHG 1, section 3-12B, provides that the loan must close in the same
manner in which it was underwritten and approved. The HUD-1 settlement statement did not
disclose a $49,219 gift of equity that the seller of the property gave to the borrower. In addition,
a $15,000 seller concession listed on the mortgage credit analysis worksheet was not listed on the
HUD 1 settlement statement. The undisclosed gift of equity and seller concession was needed
for closing.

E.     Unsupported Credit Report Fee

HUD Handbook 4000.2, REV-2, paragraph 5-3, permits the lender to charge the actual costs of
credit reports. The file contained a credit report at a cost of $24; however, the borrower was
charged $53. Consequently, the $29 is an unsupported fee.

F.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $495 was included on the HUD-1 settlement
statement, which was paid by the borrower on August 25, 2003 (closing date). However, the
lock-in agreement, dated July 1, 2003, indicated that the borrower did not choose a lock-in.
Therefore, the $495 is an ineligible fee.




                                                 59
                                                                                  Appendix D-10

                                                                                          page 1 of 3

Case number:           352-5083379
Loan amount:           $157,426
Settlement date:       August 28, 2003
Status:                Foreclosure completed
Pertinent Details

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

The ratios calculated by Security Atlantic are incorrect due to an overstatement of income by
$1,025. Security Atlantic calculated the borrower’s estimated monthly income of $5,062 based on
foster care payments for the period from July 1-31, 2003. The file did not contain a document
supporting the continuance of this income. We calculated monthly income of $4,037, based on the
contractual income indicated in the letter provided by the borrower’s contracting house, which
resulted in debt to income ratios of 36.89 and 38.27 percent, respectively, instead of 29.42 and 30.52
percent calculated by Security Atlantic.

C.     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 two 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 period, along with original payroll
tax forms from the previous 2 years. Mortgagee Letter 97-26 provides that the lender may perform
telephone verification of current employment when the alternate procedure is used. HUD
Handbook 4155.1, REV-4, CHG 1, section 2-7, provides that the income of each borrower to be
obligated for the mortgage debt must be analyzed to determine whether it can reasonably be
expected to continue through at least the first three years of the mortgage loan. The file contained a
letter from a care service indicating the borrower had a contractual relationship with it for the past
three years and provided the income earned for the last two years. However, there was no
document to support the reasonable continuance of the borrower’s income for the next three years.

D.     Closing Not in Compliance with Loan Approval

Handbook 4155.1, REV-4, CHG 1, section 3-12B, provides 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 $8,000, which was $233 higher than the amount of $7,767 indicated
on the mortgage credit analysis worksheet, and the principal mortgage amount was $155,100 on
the HUD-1 settlement statement, while it was $157,426 on the mortgage credit analysis
worksheet, mortgage, and note.




                                                 60
                                                                                 Appendix D-10

                                                                                         page 2 of 3

E.     Inadequate Documentation of Earnest Money Deposit

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 the source of funds.
The mortgage credit analysis worksheet listed the earnest money as $5,676, which was more than
2 percent of the sales price ($159,900 x 2 percent = $3,198). While the file contained supporting
documents for $5,243, we were unable to locate support for the remaining $433.

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 prepaid expenses of $1,887
and discount points of $2,069 as stated on the good faith estimate. In addition, the mortgage
credit analysis worksheet listed an overstated earnest money amount of $433 as stated in section
E. After offsetting against the borrower’s assets and seller’s concession, the borrower would
have a negative cash reserve of $323.

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, provides 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 $433 had been paid before closing without reducing the funds available to close.
Cash due from the borrower on the HUD-1 settlement statement was $2,724. If the $433 paid-
outside-closing amount were added to the $2,724 owed by the borrower and offset against $617
in available assets, the borrower would have a $2,540 deficit at closing.

I.     Inadequate Bank Account Documentation
J.     Verification of Deposits Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 3-1F, provides that as an alternative to obtaining a
verification of deposit, the lender may choose to obtain the borrower’s original bank statements for
the most recent three-month period. The bank statements in the file only covered one month. The
borrower also deposited $1,143 in cash to the bank account on July 31, 2003, without explanation.
This amount was needed for closing.




                                                 61
                                                                                 Appendix D-10

                                                                                        page 3 of 3


K.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $495 was included on the HUD-1 settlement
statement, which was paid by the borrower on August 28, 2003 (closing date). However, the
lock-in agreement, dated July 13, 2003, indicated that the borrower did not choose a lock-in.
Therefore, the $495 is an ineligible fee.




                                                 62
                                                                               Appendix D-11

                                                                                      page 1 of 2
Case number:          352-5094184
Loan amount:          $238,500
Settlement date:      October 14, 2003
Status:               First legal action to commence foreclosure
Pertinent details

A.     Inadequate Compensating Factors

HUD 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 lender identifies compensating factors that could justify
exceeding these ratios. Security Atlantic computed ratios of 37.97 and 50.83 percent. “Excellent
credit, very good job stability, reserved savings pattern, and 203k with repairs” were listed as
compensating factors. However, except for “reserved savings pattern,” the factors cited are not
allowable compensating factors as defined in section 2-13. Section 2-13 provides that if the
borrower has demonstrated an ability to accumulate savings and has a conservative attitude toward
the use of credit, it may be considered as an allowable compensating factor. The bank statements
in the file indicated the borrower had numerous unexplained nonpayroll deposits as mentioned in
section C. As a result, the borrower has not demonstrated a reserved savings ability.

B.     Closing Not in Compliance with Loan Approval

Handbook 4155.1, REV-4, CHG 1, section 3-12B, provides 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 $4,772, which was $495 lower than the amount of $5,267 indicated
on the mortgage credit analysis worksheet. The earnest deposit was $1,000 on HUD-1
settlement statement, while it was $503 as listed on mortgage credit analysis worksheet.

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 lender must obtain an
explanation and evidence of the source of funds from the borrower. During the period August
18-October 7, 2003, the borrower made numerous nonpayroll deposits totaling $12,874.
Security Atlantic did not obtain an explanation from the borrower. It is important to note that
this amount was needed for closing.


D.     Ineligible Shipping Fee

The borrower was charged $50 for a Federal 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.




                                               63
                                                                            Appendix D-11

                                                                                   page 2 of 2


E.     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 $14. However, the borrowers were
charged $58 for credit reports on the HUD-1 settlement statement. Consequently, the $44 is an
unsupported fee.




                                              64
                                                                                Appendix D-12

                                                                                       page 1 of 2
Case number            352-4957069
Loan amount:           $253,953
Settlement date:       July 31, 2003
Status:                First legal action to commence foreclosure

Pertinent Details

A.     Excessive Debt to Income Ratios without Compensating Factors

HUD 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 lender identifies compensating factors to
justify exceeding these ratios. Security Atlantic computed debt to income ratios of 30.90 and
48.04 percent, respectively, without listing compensating factors. While LoanProspector was
used to underwrite this loan, there are questions about the integrity of the data used in the risk
assessment. First, there was no amount provided for reserves on the LoanProspector sheet when
we calculated a negative reserve as noted in D below. Second, as noted in C below, Security
Atlantic appears to have underestimated the borrower’s income. Accordingly, compensating
factors would be required.

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 overtime may be used as
qualifying income if the borrower has received such income for approximately the past two years
and there are reasonable prospects of its continuance. The lender must develop an average of
overtime income for the past two years. The ratios calculated by Security Atlantic were incorrect
due to overstated overtime income of $281. We calculated the two years’ monthly average
overtime income as $454 based on the employment verification information, while Security
Atlantic calculated $735. Based upon our calculation, the debt to income ratios would be 32.24
and 50.11 percent, respectively.

D.     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 should 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
mortgage credit analysis worksheet listed the borrower’s available assets as $8,683 and a seller
concession of $7,921. However, the borrower needed $18,434 to close. Therefore, the
borrower’s cash reserves would be negative $1,830.




                                                65
                                                                                 Appendix D-12

                                                                                        page 2 of 2


E.     Closing Not in Compliance with Loan Approval

Handbook 4155.1, REV-4, CHG 1, section 3-12B, provides 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 $6,628, which was $1,293 lower than the amount of $7,920 indicated
on the mortgage credit analysis worksheet, and did not list a $7,000 gift. In addition, the HUD-1
settlement statement indicated that the borrower made a $3,000 earnest money deposit, while the
mortgage credit analysis worksheet listed it as $1,000. We located a canceled checked (check
no. 0510) for $1,000 as support for the earnest deposit in the file. The remaining $2,000 was
unsupported. Both the gift and earnest money were needed for closing.

F.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $445 was included on the HUD-1 settlement
statement, which was paid by the borrower on July 31, 2003 (closing date). However, the file
did not contain the lock-in confirmation document. Therefore, the $445 is an unsupported fee.




                                                 66
                                                                               Appendix D-13

                                                                                       page 1 of 2
Case number:          352-5090016
Loan amount:          $275,674
Settlement date:      July 31, 2003
Status:               Reinstated by borrower who retains ownership

Pertinent Details

A.     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 exceeds 2 percent of the sales price or appears excessive, based on the
borrower’s history of accumulating savings, the lender must verify the amount of deposit and the
source of funds. A HUD-1 settlement statement in the file listed an earnest money deposit of
$4,000. An escrow letter in the file stated that the borrower’s realtor was in possession of $1,000
of a $5,000 earnest money deposit. To support the amount held by the realtor, the file included a
canceled check and corresponding bank statements from the borrower for $1,000. The escrow
letter also stated that the remaining $4,000 portion of the earnest money deposit was being held
by the borrower’s attorney. The file, however, did not include attorney correspondence,
supporting bank statements, or a cancelled check to adequately source the remaining $4,000
earnest money deposit. In addition, available bank statements in the file revealed the borrower’s
inability to accumulate savings. The $4,000 earnest deposit claimed on the HUD-1 settlement
statement was needed for closing, and the borrower went into default after one payment.

B.     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 lender must obtain an
explanation and evidence of the source of funds from the borrower. There was a large increase
in the borrower’s personal funds without explanation. The file included two bank statements for
the period February 27 to April 26, 2003, that disclosed negative beginning and ending balances
of ($96) and ($137), respectively. A third bank statement for the period May 28 to June 25,
2003, disclosed a beginning and ending balance of $5,827 and $2,043, respectively. This would
indicate that in excess of $6,000 was deposited into the borrower’s bank account between April
27 and May 27, 2003. However, the bank statement for this period was not in the file. This
significant increase should have been sourced according to HUD Handbook 4155.1, REV-4,
CHG 1, section 2-10B. This amount was needed for closing.




                                                67
                                                                                 Appendix D-13

                                                                                        page 2 of 2


C.     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 $450 as an appraisal fee and a broker fee of $2,068.
Although, the file contains an appraisal report showing that an appraisal was performed, the file
does not contain documentation showing the cost of the appraisal or whether fees were paid. 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.

D.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $445 was included on the HUD-1 settlement
statement, which was paid by the borrower on July 31, 2003 (closing date). However, the case
file did not contain a lock-in sheet or other document explaining the $445 commitment fee
charge. Therefore, the $445 was an unsupported fee.




                                                 68
                                                                                Appendix D-14

                                                                                        page 1 of 1
Case number:           352-4961335
Loan amount:           $211,678
Settlement date:       September 12, 2003
Status:                Delinquent

A.     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 exceeds 2 percent of the sales price or appears excessive, based on the
borrower’s history of accumulating savings, the lender must verify the amount of deposit and the
source of funds. The HUD-1 settlement statement lists an earnest deposit of $9,000, which
exceeds 2 percent of the sales price. The endorsement file contains supporting documentation
showing that the borrowers made an earnest deposit of $8,500, not $9,000. Moreover, the file
did not contain bank documentation showing the borrower’s history of accumulating savings.
The borrowers needed the earnest money deposit to close on the property.

B.     Ineligible/Unsupported Commitment Fee

Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee 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. A commitment fee of $395 was included on the HUD-1 settlement
statement, which was paid by the borrower on September 12, 2003 (closing date). However, the
case file did not contain a lock-in sheet or other document explaining the $395 commitment fee
charge. Therefore, the $395 was an unsupported fee.

C.     Inadequate Underwriting Documentation

HUD Handbook 4155.1, REV-4, CHG 1, section 3-1, provides 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. The file contained seven
Internal Revenue Service W-2 forms from different employers for the year 2002 (one year before
closing). These employers did not match with the employment information on the verification of
employment forms in the loan file.




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                                                                                    page 1 of 2
Case number:         352-5052966
Loan amount:         $263,088
Settlement date:     August 28, 2003
Status:              Repayment

Pertinent Details

A.     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 lender must obtain an
explanation and evidence of the source of funds from the borrower. Security Atlantic did not
obtain an explanation for numerous nonpayroll deposits totaling more than $11,000 ($1,000 on
May 13, 2003, $2,691 on May 29, 2003, $1,500 on June 16, 2003, and $6,000 on June 16, 2003).
We also noted that the account’s beginning balance was zero, which may indicate that this
account was recently opened. These deposits were needed for closing.

B.     Inadequate Evaluation of Savings Pattern

HUD Handbook 4155.1, REV-5, section 2-1, requires the lender to evaluate the borrower’s
capacity to make payments. Section 3-1 also requires that when standard documentation does
not provide enough information to support this decision, the lender must provide additional
explanatory statements, consistent with other information in the application, to clarify or to
supplement the documentation submitted by the borrower. The file contained bank statements
with a beginning balance of zero and an ending balance of $150 for the period of May 12 to July
17, 2003. As mentioned in section A, the borrower made $11,191 in nonpayroll deposits into the
bank account during the same period and withdrew $11,041 in two months. The file contained a
canceled check for $2,000 for the first down payment; however, this amount was not disclosed
on the HUD-1 settlement statement. No other explanation about the remaining $9,041 expenses
was provided in the file. As a result, we concluded that the borrower did not demonstrate her
savings ability, and may lack the capacity to make mortgage payment. Security Atlantic did not
evaluate the borrower’s ability to repay as required.

C.     Inadequate Funds to Close on Mortgage Credit Analysis Worksheet

A mortgage credit analysis worksheet, dated August 26, 2003, did not list discount points of
$1,973 as stated on the HUD-1 settlement statement, and discount points on the good faith
estimate were $2,863. Since the interest rate was 3 percent on the good faith estimate but 6
percent on the mortgage credit analysis worksheet, we concluded that the underwriting was not
conducted based on the good faith estimate. Therefore, we used the discount points on the HUD-
1 settlement for our calculation. The mortgage credit analysis worksheet listed assets as




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$11,009. Based on the bank statements and other supporting documents, such as canceled checks,
we noted that the borrower had a bank balance of $150 as of July 17, 2003, and an earnest deposit
of $2,000 (which was not disclosed on the HUD-1 settlement statement or mortgage credit analysis
worksheet) according to the real estate sales contract and a canceled check. Considering the
overstated available assets and omitted discount points, the borrower would have a negative cash
reserve of $4,619, instead of $6,218 as reported. In addition, the worksheet indicated that the
seller concession was $7,997, of which $3,437 was used to pay closing costs. Therefore, with
the remaining seller concession of $4,560, the cash reserve would be negative $59.

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

HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides 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. Cash due from the borrower on the HUD-1 settlement
statement was $3,037. As of July 17, 2003, the borrower’s available assets were $150 according
to the bank statement. After including $2,000 nondisclosed earnest money as stated in section B,
the borrower would have an $887 deficit at closing.




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                                                                                         page 1 of 3
Case number:           352-5033337
Loan amount:           $166,639
Settlement date:       October 30, 2003
Status:                Foreclosure completed

Pertinent Details

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

The ratios calculated by Security Atlantic are incorrect due to an overstatement of income by
$2,275. After considering this deficiency, we calculated the debt to income ratios to be 35.07
and 35.07 percent, respectively, instead of 21.655 and 21.655 percent as listed on mortgage
credit analysis worksheet. The overstatement of income appears to be due to a number of
factors. First, Security Atlantic double counted the borrower’s base salary of $1,533 per month.
Second, Security Atlantic included monthly income of $767 derived from seminars provided by
the borrower; however, there is no evidence that this income would continue as required by HUD
Handbook 4155.1, REV-5, section 2-7. Third, we noted payments from the U.S. Department of
Veterans Affairs for one coborrower was $429, while Security Atlantic used $404, and we could
not determine how Security Atlantic computed the Social Security income of $748, for which we
calculated $838.

C.     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 two 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 period, along with original payroll
tax forms from the previous two years. In addition, Mortgagee Letter 97-26 provides that the lender
may perform telephone verification of current employment when the alternate income
documentation procedure is used. The file contained a letter from one coborrower, who was the
president of a not-for-profit organization. This letter indicated the borrower’s job title and salary
information but did not provide the organization’s address or telephone number or starting date of
employment. The file also contained a verification of employment from the same organization,
which verified the borrower’s current employment as well as prior employment in another
company. Therefore, we consider that Security Atlantic did not properly verify the borrower’s prior
employment.




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D.     Closing Not in Compliance with Loan Approval

Handbook 4155.1 REV-4, CHG 1, section 3-12B, provides 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 $10,000, which was $183 higher than the amount of $9,817 indicated
on the mortgage credit analysis worksheet.

E.     Verification of Paid-Outside-Closing Costs Not Obtained

Handbook 4155.1, REV-4, CHG 1, section 2-10, provides 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 an appraisal fee of $450 had been paid before closing without reducing the funds
available to close.

F.     Inadequate Credit Analysis

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. Section 2-3 also requires that
the lender develop a credit history from utility payment records, rental payments, automobile
insurance payments, or other means of direct access from the credit provider for the borrowers
who do not use traditional credit. The credit report in the file indicated that the three borrowers
did not have sufficient credit histories. Alternative credit support provided, such as receipts from
a drug store, a hunting club membership, and a magazine subscription, are not acceptable.
Further, the credit report listed numerous collections that were unexplained.

G.     Inadequate Disclosure of Liabilities

According to HUD Handbook 4155.1, REV-4, CHG 1, 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. The HUD-1 settlement statement indicated
$3,250 was used to satisfy judgments; however, no creditor information was provided.

H.     Inadequate Verification of Power of Attorney

Handbook 4155.1, REV-5, section 3-5 B, provides that the lender must provide evidence that the
signer has authority to purchase the property and to obligate the borrower. Acceptable evidence
includes a durable power of attorney specifically designed to survive incapacity and avoid the
need for court proceedings. We noted that the borrower signed as power of attorney on behalf of
both co-borrowers for the documents such as the sales contract, mortgage applications, HUD-1
settlement statement, and mortgage and adjustable rate note before or on the closing date of
October 30, 2003. However, one power of attorney for one co-borrower was dated October 29,
2003, and the other October 31, 2003, which was one day after closing. Therefore, we




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concluded that the borrower signed certain documents for the two co-borrowers before the power
of attorney was effective.

I.     Nonitemized Lender Credit

HUD Handbook 4155.1, Rev-4, section 1-9A, part 1, provides 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 HUD-1 settlement statement listed a realtor closing cost
credit of $380 without providing itemized information.

J.     Inadequate Underwriting Documentation

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, indicated that when standard
documentation does not provide enough information to support a lender’s decision, the lender
must provide additional explanatory statements, consistent with other information in the
application, to clarify or to supplement the documentation submitted by the borrower. The age
of one coborrower was inconsistent. On the application the age was listed as 67 years, while a
U.S. Department of Veterans Affairs hospital memorandum indicated the age would be 74, and a
life insurance document indicated 66.




                                                74
     Appendix E

       page 1 of 3




75
     Appendix E

       page 2 of 3




76
     Appendix E

       page 3 of 3




77
Appendix F
       SCHEDULE OF INELIGIBLE AND UNSUPPORTED FEES

                                                                             page 1 of 1


                        Ineligible/Unsupported Fees
      FHA Case #        Ineligible   Ineligible   Unsupported Unsupported
                        Commitment   Shipping     Credit Report Commitment
                        Fee          Fee          Fee           Fee
      352-4762508          $395
      352-4927551          $395                       $21
      352-4779975          $495                       $16
      352-4894655          $495                       $44.
      352-5049757          $495
      352-5069903          $495                       $29
      352-5083379          $495
      352-5097014          $495
      352-5167620          $495
      351-4404800                                                  $495
      352-4779692                                                  $395
      351-4475365                                                  $395
      352-5089740                                                  $495
      352-4957069                                                  $445
      352-5049179                                                  $395
      352-5090016                                                  $445
      352-4734667                                                  $395
      352-4735633                                                  $445
      352-4758844                                                  $395
      352-4779549                                                  $395
      352-4835578                                                  $445
      352-4891251                       $70                        $395
      352-4961335                                                  $395
      352-5010076                                                  $395
      352-5135809                                                  $395
      352-5094184                        $50         $44
      Total: 26 cases      $4,255       $120         $154         $6,720




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