oversight

Wells Fargo Bank NA, Fife Branch, Fife, WA, Supervised Mortgagee - Loan Underwriting

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-03-24.

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

                                                        Issue Date
                                                                 March 24, 2005
                                                        Audit Report Number
                                                                     2005 SE 1004




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


FROM:
           Frank E. Baca, Regional Inspector General for Audit, Northwest Region, 0AGA


SUBJECT: Wells Fargo Bank NA, Fife Branch
         Fife, WA
         Supervised Single Family Mortgagee - Loan Underwriting


                                   HIGHLIGHTS

 What We Audited and Why

             We audited Wells Fargo Bank NA’s Fife Branch Office (Wells Fargo-Fife)
             because of the high rate of claims on defaulting Federal Housing Administration-
             insured single-family loans approved by this branch. Our audit objective was to
             determine whether Wells Fargo-Fife acted in a prudent manner and complied with
             HUD regulations, procedures, and instructions in its approval of the Federal
             Housing Administration-insured single-family mortgages selected for review and
             whether the mortgagee’s quality control plan, in relation to the loans reviewed,
             met HUD requirements.

 What We Found

             Wells Fargo-Fife did not always process and approve the defaulting Federal
             Housing Administration-insured loans in accordance with HUD regulations and
             guidance. Of the 20 loans reviewed, Wells Fargo-Fife approved 13 Federal
             Housing Administration-insured loans totaling over $1.7 million, which did not
           meet HUD underwriting requirements. The underwriting deficiencies included
           approving loans with unsupported income, unsupported assets, underreported
           liabilities, unexplained derogatory credit information, inadequate qualifying
           ratios, and unclear and/or inadequate documentation of important file
           discrepancies. We also determined that Wells Fargo-Fife’s quality control plan,
           as implemented, complied with HUD requirements.

What We Recommend


           We recommend that HUD take appropriate administrative action up to and
           including recovery of losses on $667,181 in paid claims and indemnification
           against future losses on loans totaling $882,319 identified in appendixes C and D
           of this report.

Auditee’s Response


           We provided Wells Fargo Home Mortgage, Wells Fargo-Fife’s home office, a
           draft report on February 18, 2005, and held an exit conference with them on
           March 2, 2005. Wells Fargo Home Mortgage provided written comments on
           March 11, 2005. The written comments generally agreed with our report findings.
           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in Appendix B of this report.




                                            2
TABLE OF CONTENTS

                                                                              Page

Background and Objectives                                                      4

Results of Audit
      Finding: Wells Fargo-Fife Did Not Always Comply with HUD Underwriting    5
                Requirements

Scope and Methodology                                                          7

Internal Controls                                                              8

Appendixes
  A    Schedule of Questioned Costs and Funds To Be Put to Better Use          9
  B    Auditee Comments and OIG’s Evaluation                                   11
  C    Summary of Underwriting Deficiencies                                    16
  D    Narrative Case Presentations                                            17




                                            3
                      BACKGROUND AND OBJECTIVES

The National Housing Act, as amended, established the Federal Housing Administration, an
organizational unit within the U.S. Department of Housing and Urban Development (HUD). The
Federal Housing Administration provides insurance to private mortgagees against loss on
mortgages financing homes. The basic home mortgage insurance program is authorized under
Title II, section 203(b), of the National Housing Act and governed by regulations in Title 24,
Code of Federal Regulations, section 203.

Under the Direct Endorsement program, the mortgagee underwrites and closes the mortgage loan
without prior HUD review or approval. The purpose of mortgage credit analysis is to determine
the borrowers’ ability and willingness to repay the mortgage debt and, thus, limit the probability
of default or collection difficulties. The four major elements typically evaluated in assessing a
borrower’s ability and willingness to repay the mortgage debt are stability and adequacy of
income, funds to close, credit history, and qualifying ratios and compensating factors. The
lender is responsible for asking sufficient questions to elicit a complete picture of the borrower’s
financial situation, source of funds for the transaction, and the intended use of the property.

Wells Fargo Bank NA is a supervised direct endorsement lender with its home office located in
Des Moines, IA. Wells Fargo Bank NA’s Fife Branch Office (Wells Fargo-Fife) is one of Wells
Fargo Bank NA’s 98 currently active HUD-approved direct endorsement mortgagee branch
offices nationwide. HUD approved Wells Fargo-Fife, lender ID number 2299503873, on
February 25, 1994.

Wells Fargo-Fife, located at 5005 Pacific Highway East, Fife, WA, is a loan processing and
underwriting center for loans originated by various Wells Fargo Bank branches in the State of
Washington. According to HUD’s Neighborhood Watch system, Wells Fargo-Fife originated
2,764 Federal Housing Administration-insured loans with beginning amortization dates from
May 1, 2002, to April 30, 2004. Wells Fargo-Fife’s 2.17-percent (60 of 2,764 loans) default rate
within the first 2 years for this period was only 67 percent of the 3.17 percent national average
default rate. However, 16.67 percent of Wells Fargo-Fife’s defaulting loans (10 of 60) went into
claims status, nearly double the national average claims-to-defaults rate of 8.99 percent.

The audit objectives were to determine whether Wells Fargo-Fife acted in a prudent manner and
complied with HUD regulations, procedures, and instructions in its approval of the Federal
Housing Administration-insured single-family mortgages selected for review and whether the
mortgagee’s quality control plan met HUD requirements for the loans reviewed.




                                                 4
                                RESULTS OF AUDIT

Finding 1: Wells Fargo-Fife Did Not Always Comply with HUD
            Underwriting Requirements

We reviewed 20 single-family loans processed by Wells Fargo-Fife and found that 13 of these
loans, totaling over $1.7 million, had serious underwriting deficiencies. The deficiencies
included unsupported income, unsupported assets, underreported liabilities, unexplained
derogatory credit information, inadequate qualifying ratios, and/or inadequate explanations of
significant file discrepancies. According to Wells Fargo-Fife, the underwriting problems
occurred because it did not have enough staff to accommodate an increasing volume of mortgage
business. As a result, HUD was put at risk for over $1.7 million in loans to unqualified
borrowers approved by Wells Fargo-Fife.




 HUD Handbook Requirements

              Paragraph 2-5 of HUD Handbook 4000.4, REV-1, “Single Family Direct
              Endorsement Program,” requires the mortgagee to obtain and verify information
              with at least the same care that would be exercised in originating the loan in which
              the mortgagee would be entirely dependent on the property as security to protect its
              investment.

              HUD Handbook 4155.1, REV-4, “Mortgage Credit Analysis for Mortgage
              Insurance,” describes the basic mortgage credit underwriting requirements for single
              family mortgage loans insured under the National Housing Act. For each loan HUD
              insures, the lender must establish that the borrower has the ability and willingness to
              repay the mortgage debt. This decision must be predicated on sound underwriting
              principles consistent with the guidelines, rules, and regulations described throughout
              the Handbook and must be supported by sufficient documentation.

   Wells Fargo-Fife Approved
   Federal Housing
   Administration Loans with
   Serious Underwriting
   Deficiencies.

              We reviewed 20 loans underwritten by Wells Fargo-Fife that were in default within
              the first 6 months, in claims status, in the process of foreclosure, and/or given a
              “poor” underwriting mortgage credit rating by HUD’s Processing and Underwriting
              Division. For 13 of these loans, we found that Wells Fargo-Fife did not comply with
              HUD underwriting requirements. Wells Fargo-Fife did not


                                                 5
          •   Provide valid or sufficient compensating factors when the borrower’s debt to
              income ratios exceeded HUD’s benchmark ratios of 29 and 41 percent (2 loans),

          •   Document the stability of borrower income in accordance with HUD
              underwriting requirements (4 loans),

          •   Properly verify the source of funds used for the downpayment and/or closing
              costs (5 loans),

          •   Ensure compliance with HUD borrower credit requirements (5 loans), or

          •   Clarify and/or adequately document important file discrepancies (7 loans).


          As of March 21, 2005, the status of the 13 loans was as follows:

                                                   Number of           Loan
                     Status of Loans                 Loans            Amounts
           Current - reinstated or partially
           reinstated by mortgagor                      4             $ 542,097
           In process of foreclosure                   1              $ 123,621
           Foreclosure completed                        1             $ 216,601
           Accelerated claim disposition                3             $ 290,325
           Property conveyed to insurer                 4             $ 595,458
           Total loans                                 13            $ 1,768,102

          Appendix C to this report provides details of the loan underwriting deficiencies
          for each of the 13 loans. These deficiencies have caused Federal Housing
          Administration fund losses totaling $667,181 and potential losses of $882,319.

          According to Wells Fargo-Fife’s Production Manager, the underwriting problems
          occurred because the mortgage industry was growing during our audit period, and
          Wells Fargo-Fife did not have sufficient staffing to meet the increased demand for
          Federal Housing Administration loans.

Recommendations

          We recommend that the Assistant Secretary for Housing-Federal Housing
          Commissioner, Chairman, Mortgagee Review Board

          1 A. Take appropriate administrative action up to and including recovery of
               losses on $667,181 in paid claims and indemnification against future losses
               on loans totaling $882,319 identified in appendixes C and D of this report.




                                               6
SCOPE AND METHODOLOGY

Our review covered the period from April 1, 2002 to March 31, 2004, and was modified as
needed to achieve our objectives.

To accomplish our objectives, we reviewed relevant HUD rules, regulations, and guidance
regarding mortgage underwriting and quality assurance review, 33 HUD loan files and 18 lender
loan files, and the lender’s quality assurance plans for Federal Housing Administration loans.
We interviewed Wells Fargo-Fife’s Production Manager, Quality Control Analyst, Quality
Assurance Manager, and underwriting staff and conducted conferences with officials from Wells
Fargo Bank NA national headquarters.

To determine our sample of loans for review we

•   Downloaded from HUD’s Neighborhood Watch system a list of all loans underwritten by
    Wells Fargo-Fife with beginning amortization dates from April 1, 2002, to March 31, 2004,
    which defaulted within the first 3 years. The list contained 101 loans.

•   Selected 35 loans from the 101 loans identified above that were either early payment
    defaults, in claims status, in the process of foreclosure, and/or given a “poor” underwriting
    mortgage credit rating by HUD’s Processing and Underwriting Division. We reviewed the
    HUD files for 33 of these loans (two of the loan files were unavailable for review and
    dropped from our sample).

•   Selected 20 of the 33 loans that had indications of underwriting deficiencies.

The sample selection method resulted in our review of 20 loans underwritten and approved by
Wells Fargo-Fife.

We performed our audit work from June 17 through October 26, 2004. We conducted the field
work at the Wells Fargo-Fife located in Fife, WA.

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




                                                 7
                             INTERNAL CONTROLS

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

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

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



 Relevant Internal Control
              We determined the following internal control was relevant to our audit objectives:

                  •   Underwriting - Policies and procedures that management has in place to
                      reasonably ensure that the loan underwriting process complies with HUD
                      program requirements.

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


 Significant Weakness
           Wells Fargo-Fife did not underwrite 13 loans in accordance with all applicable HUD
           requirements (finding 1).




                                                8
Appendix A

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



     Recommendation                   Type of Questioned Cost                   Funds To Be Put to
         Number                 Ineligible 1/        Unsupported 2/               Better Use 3/
           1A                     $ 66,455              $ 600,726                   $882,319

1/       Ineligible costs are costs charged to a HUD-financed or HUD-insured program/activity
         that the auditor believes are not allowable by law; contract; or Federal, State, or local
         polices or regulations. The amount shown includes loss mitigation incentive payments
         and net claims. A net claim is the total claim paid by HUD, including loss mitigation
         incentives, less any proceeds from HUD’s sale of the insured property.

2/       Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
         or activity when we cannot determine eligibility at the time of 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. The amount shown is for gross claims. A gross
         claim is the amount of the claim paid by HUD before any recovery from the sale of the
         property by HUD. At the time of the audit, HUD had not yet sold the properties.

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. For this
         review, these funds consist of loans and guarantees not made because of indemnification.




                                                   9
Appendix A
13 Loans Containing Serious Underwriting Deficiencies

                             Ineligible                             Funds To Be Put to
                                      Loss                              Better Use
                                   Mitigation      Unsupported       (Loan Amount on
   Case Number       Net Claims    Incentives     (Gross Claim)   currently insured loans)

    561-7398861                                                          $ 216,601
    561-7489470                                     $114,404
    561-7498935                                     $139,671
    561-7504396                                                          $ 123,621
    561-7529976                       $500                               $ 106,823
    561-7532917        $31,106
    561-7534924                                                          $ 125,130
    561-7535676        $33,899
    561-7539777                                     $ 88,598
    561-7587020                       $950                               $ 150,143
    561-7658705                                     $ 98,173
    561-7787311                                                          $ 160,001
    561-7870953                                     $159,880


     TOTALS            $65,005        $1,450        $600,726             $882,319




                                             10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         11
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         12
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         13
Ref to OIG Evaluation                Auditee Comments



Comment 1




                        OIG Evaluation of Auditee Comments




                                       14
                        OIG Evaluation of Auditee Comments


Comment 1   Wells Fargo Home Mortgage officials agreed with the audit finding on the Wells
            Fargo-Fife branch.




                                           15
              Appendix C

          SUMMARY OF UNDERWRITING DEFICIENCIES


                                          Deficiencies              Default Status Per
                                                                   Neighborhood Watch
   Case No.      Loan Amount       A     B     C     D      E            3/21/05

 561-7398861       $ 216,601                   X                   Foreclosure completed
                                                                     Accelerated claim
 561-7489470       $ 107,758                         X     X            disposition

 561-7498935       $ 135,584             X     X           X        Conveyed to insurer

 561-7504396       $ 123,621       X                       X        Foreclosure started
                                                                   Current – reinstated by
 561-7529976       $ 106,823                   X           X            mortgagor

 561-7532917       $ 155,190                         X              Conveyed to insurer
                                                                     Current – partial
 561-7534924       $ 125,130       X           X                      reinstatement

 561-7535676       $ 156,291                         X     X        Conveyed to insurer
                                                                     Accelerated claim
 561-7539777        $ 87,066                         X                  disposition
                                                                   Current – reinstated by
 561-7587020       $ 150,143             X     X           X            mortgagor
                                                                     Accelerated claim
 561-7658705        $ 95,501             X                              disposition
                                                                   Current – reinstated by
 561-7787311       $ 160,001             X                              mortgagor

 561-7870953       $ 148,393                         X     X        Conveyed to insurer
Total             $1,768,102

Deficiencies
A. Wells Fargo-Fife did not provide valid or sufficient compensating factors when HUD’s
benchmark debt to income ratios of 29 and 41 percent were exceeded.
B. Wells Fargo-Fife did not document the stability of income in accordance with HUD
requirements.
C. Wells Fargo-Fife did not properly verify the source of funds used for the downpayment and/or
closing costs.
D. Wells Fargo-Fife did not fully comply with HUD credit requirements.
E. Wells Fargo-Fife did not clarify and/or adequately document important file discrepancies.


                                              16
Appendix D

                   NARRATIVE CASE PRESENTATIONS


Case Number:                  561-7398861
Original Loan Amount:         $216,601
Endorsement Date:             08/13/02
Insurance Status:             Active
Loan Status:                  Foreclosure completed

Wells Fargo-Fife did not properly verify the source of funds used for the downpayment
and/or closing costs.

The lender failed to adequately verify that a donor had the available funds to provide a
downpayment gift to the borrower as required by HUD Mortgagee Letter 00-28. The files did
not contain adequate documentation that the funds were received directly from the donor and not
the seller. The HUD and lender case files contained a copy of a cashier’s check for $7,000 to
support a downpayment gift from a relative of the borrower. However, there was no
documentation in the loan files showing that the $7,000 gift came from the donor’s personal
savings account.

Other Details:

The lender did not adequately assess the probability that the borrower would be able to repay the
mortgage by analyzing layers of risk in accordance with Section 5 of HUD Handbook 4155.1,
REV-4, CHG-1. Our review disclosed that the borrowers had an $826 increase in housing costs
and did not have any documented savings, indicating a lack of resources to absorb such a large
increase in housing costs.


Case Number:                         561-7489470
Original Loan Amount:                $107,758
Endorsement Date:                    04/30/02
Insurance Status:                    Claim
Loan Status:                         Accelerated claim disposition

Wells Fargo-Fife did not fully comply with HUD credit requirements.

The lender did not obtain the borrower’s nonparticipating spouse’s credit report as required by
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-1D and 2-2D. The mortgaged property
for this case is located in Washington, a community property state. As noted below, the
underwriter did not establish the borrower’s true marital status. The Deed of Trust for the
mortgaged property shows the borrower as married. However, there were no documents
included in the HUD or lender files to support that the marriage was dissolved. Without such


                                               17
documentation, the lender should have included the nonparticipating spouse’s credit report in its
analysis of the borrower’s ratios.

Wells Fargo-Fife did not clarify and/or adequately document important file discrepancies.

The lender failed to clarify loan file documentation discrepancies as required by Mortgagee
Letter 92-5. The Deed of Trust indicated the borrower was married; other documentation in the
file indicated the borrower was single. The underwriter approved the loan without verifying the
borrower’s marital status, which would affect the borrower’s liabilities from a current or
previous marriage. There was no documentation of valid marriage dissolution or divorce decree.


Case Number:                         561-7498935
Original Loan Amount:                $135,584
Endorsement Date:                    05/07/02
Insurance Status:                    Claim
Loan Status:                         Conveyed

Wells Fargo-Fife did not document the stability of income in accordance with HUD
requirements.

The lender did not document the stability of the borrower’s income as required by Chapter 2,
Section 2 of HUD Handbook 4155.1, REV-1, CHG-1. The ratios for this loan were calculated
by the Loan Prospector automated underwriting system using inadequately supported income
amounts. Total monthly income shown on the Mortgage Credit Analysis Worksheet was $4,237,
consisting of $2,500 of borrower income, $1,151 of coborrower income, and $586 of other
income earned by the coborrower. The borrower’s monthly income was based on the $1,250
shown on each of two handwritten biweekly pay stubs containing no information identifying the
borrower. However, the borrower’s Internal Revenue Service W-2 forms only support a monthly
income of $1,981. The support for the coborrower’s other income was incomplete as it did not
contain a verbal Verification of Employment form or pay stubs required by the Loan Prospector
system. Thus, total borrower and coborrower income was overstated by $1,105 since the total
supported income was only $3,132 ($1,981 plus $1,151).

Wells Fargo-Fife did not properly verify the source of funds used for the downpayment
and/or closing costs.

The lender failed to follow paragraph 2-10 of HUD Handbook 4155.1, REV-4, CHG-1 and did
not adequately verify the source of the funds used to close. According to the Mortgage Credit
Analysis Worksheet, $6,052 was required from the borrower to close. The borrower’s
Verification of Deposit form verified a balance of $1,919. The remaining support for the amount
needed to close was an undated deposit receipt from the borrower’s bank for $4,640 with the
handwritten comment, “Deposit Made From Employer Bonus.” The loan files contained no
other documentation to support that the borrower had received a bonus from his employer, nor
was there any other documentation to verify the source of this deposit to the borrower’s account.




                                               18
Wells Fargo-Fife did not clarify and/or adequately document important file discrepancies.

The lender did not process the loan in accordance with Mortgagee Letter 92-5 because it failed to
document discrepancies between the incomes listed on the Loan Profile that was generated by
the Loan Prospector automated underwriting system and the income documentation in the loan
files. The Loan Profile printout shows $4,237 in total monthly income for the borrower and
coborrower, $1,105 higher that the income supported by the loan file documents.


Case Number:                          561-7504396
Original Loan Amount:                 $123,621
Endorsement Date:                     06/26/02
Insurance Status:                     Active
Loan Status:                          Foreclosure started

Wells Fargo-Fife did not provide valid or sufficient compensating factors when HUD’s
benchmark debt to income ratios of 29 and 41 percent were exceeded.

Although this loan was approved by the Loan Prospector automated underwriting system, it
should have been manually underwritten since there were discrepancies in the amounts shown
for borrower debt (see below). Using a figure of $141 for borrower installment debt, the
automated underwriting system calculated a total fixed payment to income ratio of 39.7 percent.
Our review found that the credit report and credit-consulting agency documents in the loan files
show actual total monthly installment debt of $1,238. The correct total fixed payment to income
ratio using the $1,238 monthly installment debt is 76.96 percent. The loan files contained no
compensating factors to support the approval of this loan as required by paragraph 2-13 of HUD
Handbook 4155.1, REV-4, CHG-1.

Wells Fargo-Fife did not clarify and/or adequately document important file discrepancies.

The Loan Profile printout from the Loan Prospector automated underwriting system showed
$141 of borrower installment debt; however, the credit report and other credit documentation in
the loan files disclosed $1,238 of installment debt. The Credit Report Processing Information
section of the Loan Profile printout states, “…if you determine a significant inaccuracy on the in-
file credit report, downgrade to REFER and order RMCR, merged credit report or third party
documentation to clarify.” This loan received an approval from the Loan Prospector automated
underwriting system since the lender did not downgrade the accepted loan to a “REFER” or
obtain further documentation as required.


Case Number:                          561-7529976
Original Loan Amount:                 $106,823
Endorsement Date:                     06/25/02
Insurance Status:                     Active
Loan Status:                          Current




                                                19
Wells Fargo-Fife did not properly verify the source of funds used for the downpayment
and/or closing costs.

The lender failed to follow the requirements of Mortgagee Letter 00-28 because it did not verify
that $2,997 in downpayment gift funds from a nonprofit organization were deposited into the
loan escrow account before closing.

Wells Fargo-Fife did not clarify and/or adequately document important file discrepancies.

The lender failed to clarify loan file documentation discrepancies as required by Mortgagee
Letter 92-5. Our review disclosed that the amount of income contained on the Mortgage Credit
Analysis Worksheet is overstated by $397 per month from the amounts found in the supporting
income documentation provided in the file. In addition, the credit report shows the current
housing payment as $495 while the Mortgage Credit Analysis Worksheet and Uniform
Residential Loan Application show the current housing payment as $550.

Other Details:

The lender did not adequately assess the probability that the borrower would be able to repay the
mortgage by analyzing layers of risk as required by Section 5 of HUD Handbook 4155.1, REV-
4, CHG-1. Our review disclosed that the borrowers had a $435 increase in monthly housing
costs and did not have a documented history of sufficient savings or other resources to absorb
such a large increase in housing costs.


Case Number:                          561-7532917
Original Loan Amount:                 $155,190
Endorsement Date:                     08/09/02
Insurance Status:                     Claim
Loan Status:                          Conveyed

Wells Fargo-Fife did not fully comply with HUD credit requirements.

The lender did not analyze the borrower’s credit as required by Chapter 2 of HUD Handbook
4155.1, REV-4, CHG-1. Two of the coborrowers were cosigners for a conventional mortgage
for their daughter’s home, but the lender did not include this obligation in the calculation of the
total payment to income ratio for the subject loan. The credit report for these coborrowers
disclosed three late payments on the cosigned mortgage with the latest delinquency occurring in
February 2002, only 3 months before the approval of the subject loan. The lender obtained
copies of the checks used to make the payments on the cosigned loans, but a check was missing
for the February 2002 payment. The missing payment was made up on March 14, 2002. Since
the cosigned loan was a contingent obligation of two of the coborrowers, it should have been
included in the calculation of the total payment to income ratio. Doing so increases the total
fixed payment to income ratio from 44.5 to 67.89 percent.




                                                20
Case Number:                          561-7534924
Original Loan Amount:                 $125,130
Endorsement Date:                     07/23/02
Insurance Status:                     Active
Loan Status:                          Current

Wells Fargo-Fife did not provide valid or sufficient compensating factors when HUD's
benchmark debt to income ratios of 29 and 41 percent were exceeded.

According to the Mortgage Credit Analysis Worksheet for this loan, the total fixed payment to
income ratio was 50.3 percent; however, there were no compensating factors shown as required
by paragraph 2-13 of HUD Handbook 4155.1, REV-4, CHG-1. Furthermore, the interest rate
was a buy down rate. The initial interest rate of 6.375 percent was to increase by 1 percent the
next year. Mortgagee Letter 97-26 states that when buy down rates are used, ratios should rarely
be exceeded, and consideration must be given to the borrower’s ability to absorb future payment
increases. The lender disregarded this requirement.

Wells Fargo-Fife did not properly verify the source of funds used for the downpayment
and/or closing costs.

The lender failed to adequately verify that a donor had the available funds to provide a
downpayment gift to the borrower as required by HUD Mortgagee Letter 00-28. The lender
obtained a copy of a cashiers check for $4,000 to evidence the deposit of gift funds into the loan
escrow account. However, the lender was unable to produce documentation showing that the
$4,000 gift came from the donor’s personal savings.

Other Details:

The lender did not adequately assess the probability that the borrower would be able to repay the
mortgage by analyzing layers of risk as required by Section 5 of HUD Handbook 4155.1, REV-
4, CHG-1. Our review disclosed that the borrower had a $577 increase in monthly housing
costs. The borrower’s bank statements disclosed multiple overdrafts and did not show a history
of sufficient savings to absorb such a large increase in housing costs.


Case Number:                          561-7535676
Original Loan Amount:                 $156,291
Endorsement Date:                     10/17/02
Insurance Status:                     Claim
Loan Status:                          Conveyed

Wells Fargo-Fife did not fully comply with HUD credit requirements.

The lender did not properly analyze the borrower’s credit as required by HUD Handbook 4155.1,
REV-4, CHG-1, paragraph 2-3. The underwriter did not include the monthly payment of $53
from the second mortgage or a $10 monthly payment with a balance of $115 as shown on the
credit report; these were not considered in the borrower’s debt to income ratio.


                                                21
Additionally, the lender did not obtain sufficient written explanations from the borrowers for
derogatory credit problems. The borrowers’ credit report disclosed two collection accounts
established within 2 years of the mortgage loan application. The credit report also contained two
student loans with histories of recent late payments. Another account showed two 30-day late
payments, two 60-day late payments, and four 90-day late payments.

Further, the lender did not determine the purpose of a debt opened only 4 months before closing.
The credit report disclosed a debt of $14,223 that was opened in March 2002; the settlement date
for the home purchase was July 9, 2002.

Wells Fargo-Fife did not clarify and/or adequately document important file discrepancies.

The borrowers’ tax returns disclosed that the coborrower was self-employed and had experienced
significant business losses that were not used for the calculation of borrower income. The
underwriter did not obtain documentation explaining that the coborrower had discontinued the
self-employment, nor was there clarification as to why her business losses were not used to
reduce household income for the calculation of the borrowers’ debt to income ratios.

Other Details:

Wells Fargo-Fife did not adequately assess the probability that the borrower would be able to
repay the mortgage by analyzing layers of risk as required by Section 5 of HUD Handbook
4155.1, REV-4, CHG-1. Our review disclosed that the borrowers had a $423 increase in
monthly housing costs. The two bank statements in the loan file disclosed numerous overdrafts
and did not support any pattern of savings.


Case Number:                         561-7539777
Original Loan Amount:                $87,066
Endorsement Date:                    07/30/02
Insurance Status:                    Claim
Loan Status:                         Accelerated claim disposition

Wells Fargo-Fife did not fully comply with HUD credit requirements.

The lender did not properly analyze the borrower’s credit as required by HUD Handbook 4155.1,
REV-4, CHG-1, paragraph 2-3. The lender did not obtain sufficient written explanations from
the borrower for derogatory credit problems. The borrower’s credit report disclosed eight
collection accounts. The loan file contained a written explanation of the collection accounts, but
the borrower’s explanation, claiming he was not aware of any of the collections, was incomplete.
There was no other documentation in the loan files indicating that the lender followed up on the
borrower’s incomplete explanation of his derogatory credit history.




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Case Number:                         561-7587020
Original Loan Amount:                $150,143
Endorsement Date:                    03/25/03
Insurance Status:                    Active
Loan Status:                         Current

Wells Fargo-Fife did not document the stability of income in accordance with HUD
requirements.

The loan was approved by the Loan Prospector automated underwriting system. According to
the Employment Information section of the Loan Profile printout, the lender is required to
“obtain most recent YTD [year-to-date] pay stub documenting 1 full month earnings and a verbal
Verification of Employment form to verify current employment.”

The loan file contained incomplete documentation and verification of the borrower’s income.
The Verification of Employment form in the loan file was incomplete, as it did not contain any
salary information. The loan files contained the prior 2 years’ Internal Revenue Service W-2
forms; however, they did not include any pay stubs.

Wells Fargo-Fife did not properly verify the source of funds used for the downpayment
and/or closing costs.

The lender failed to follow the requirements of Mortgagee Letter 00-28 because it did not verify
that $4,575 in downpayment gift funds from a nonprofit organization were deposited into the
loan escrow account before closing.

Wells Fargo-Fife did not clarify and/or adequately document important file discrepancies.

The lender did not follow the requirements of Mortgagee Letter 92-5 because it failed to
document discrepancies between the income listed on the Loan Profile that was generated by the
Loan Prospector automated underwriting system and the income documentation in the loan files.
The Loan Profile printout shows $2,667 in total monthly income for the borrower; however, the
documentation in the loan file was incomplete and only supports a monthly income of $2,588
(see above).

Other Details:

The lender did not adequately assess the probability that the borrower would be able to repay the
mortgage by analyzing layers of risk as required by Section 5 of HUD Handbook 4155.1, REV-
4, CHG-1. Our review disclosed that the borrowers had an $818 increase in housing payments
and did not have sufficient savings to absorb such a payment increase.


Case Number:                         561-7658705
Original Loan Amount:                $95,501
Endorsement Date:                    02/03/03
Insurance Status:                    Claim
Loan Status:                         Accelerated claim disposition

                                               23
Wells Fargo-Fife did not document the stability of income in accordance with HUD
requirements.

The lender did not document the stability of the borrower’s income as required by chapter 2,
Section 2 of HUD Handbook 4155.1, REV-1, CHG-1. The loan file contained incomplete
documentation and verification of the borrowers’ incomes. The verbal Verification of
Employment forms for both the borrower and coborrower were incomplete, as neither
verification form contained salary information. The Internal Revenue Service W-2 forms for the
borrower and coborrower covered only 1 year. Further, the loan files for both the borrower and
coborrower contained only one pay stub each.

Other Details:

We noted that Wells Fargo-Fife did not adequately assess the probability that the borrower
would be able to repay the mortgage by analyzing layers of risk as required by Section 5 of HUD
Handbook 4155.1, REV-4, CHG-1. Our review disclosed that the borrowers had a $342 increase
in monthly housing costs and did not have a documented history of sufficient savings or other
resources to absorb this increase.


Case Number:                         561-7787311
Original Loan Amount:                $160,001
Endorsement Date:                    07/08/03
Insurance Status:                    Active
Loan Status:                         Current

Wells Fargo-Fife did not document the stability of income in accordance with HUD
requirements.

The lender did not document the stability of the borrower’s income as required by Chapter 2,
Section 2 of HUD Handbook 4155.1, REV-1, CHG-1. The income shown on the Mortgage
Credit Analysis Worksheet was overstated by $263. Although the borrower had only been
working at her current job for approximately 4 months, the underwriter improperly included
overtime pay as part of the borrower’s monthly income. Without the inclusion of the overtime
pay in the borrower’s income, the ratios would have been 47.61 and 57.1. Further, the lender did
not establish the borrower’s employment stability. The loan files documented that, for the
previous 2 years, the borrower had been employed by temporary agencies and had numerous
gaps in employment history.


Case Number:                         561-7870953
Original Loan Amount:                $148,393
Endorsement Date:                    09/19/03
Insurance Status:                    Claim
Loan Status:                         Conveyed



                                              24
Wells Fargo-Fife did not fully comply with HUD credit requirements.

The lender did not include all of the installment debts of the borrower in the calculation of the
total payment to income ratio as required by HUD Handbook 4155.1, REV-4, CHG-1, paragraph
2-11A. The borrower’s credit report included a loan with a $398 monthly payment with a
greater than 10-month payoff. This obligation was not input into the Loan Prospector automated
underwriting system and, therefore, was not used in the calculation of the total fixed payment to
income ratio. If this debt had been properly included, the total fixed payment to income ratio
would have increased from 52.1 to 65.95 percent. The lender provided us documentation that
the $398 debt was paid off 10 months after the closing date; however, the subject loan went into
foreclosure 4 months before the payoff of the $398 debt.

Wells Fargo-Fife did not clarify and/or adequately document important file discrepancies.

A $398 installment debt that was present on the borrower’s credit report was not included in the
amount of debt shown on the Loan Profile printout generated by the Loan Prospector automated
underwriting system. The lender failed to document or otherwise justify this discrepancy as
required by Mortgagee Letter 92-5.


         Criteria cited in the above narrative case presentations
HUD Handbook 4155.1, REV-4, CHG-1

Paragraph 2-2D, requires lenders to consider the debts of nonparticipating spouses of borrowers
in the qualifying ratios if the insured property is located in a community property state.
Paragraph 2-1D further requires the lender to obtain a credit report on the nonparticipating
spouse.

Chapter 2, Section 2 requires that the anticipated amount of income and likelihood of its
continuance must be established to determine the borrower’s capacity to repay the mortgage
debt. Income from any source that cannot be verified, is not stable, or will not continue may not
be used in calculating the borrower’s income for use in the debt ratios for qualifying the
borrower. Documentation of income must be in accordance with paragraph 3-1 of this
handbook.

Paragraph 2-10 states “The cash investment in the property must equal the difference between
the amount of the insured mortgage, excluding any upfront MIP [Mortgage Insurance Premium],
and the total cost to acquire the property, including prepaid expenses, etc. (see paragraph 1-9).
All funds for the borrower’s investment in the property must be verified.”

Paragraph 2-11B defines borrower contingent liabilities that the lender must consider and states,
“… 2) Co-signed obligations. If the individual applying for a FHA [Federal Housing
Administration]-insured mortgage is a cosigner or otherwise co-obligated on a car loan, student
load, or any other obligation including a mortgage, contingent liability applies unless the lender
obtains documentation that the primary obligor has been making payments on a regular basis and
does not have a history of delinquent payments on the loan over the past twelve months.”


                                               25
Chapter 2, Section 5 states “…Conversely, we also recognize the danger of ‘layering
flexibilities’ in assessing mortgage insurance risk and that simply establishing that a loan
transaction meets minimal standards does not necessarily constitute prudent underwriting. The
lender is responsible for adequately analyzing the probability that the borrower will be able to
repay the mortgage obligation in accordance with the terms of the loan.”

Paragraphs 2-12A and B, allow the borrower mortgage payment expense to effective income
ratio to exceed 29 percent and the total fixed payment expense to effective income ratio to
exceed 41 percent only in the presence of compensating factors. Paragraph 2-13 lists acceptable
compensating factors and requires lenders to list these factors on the Mortgage Credit Analysis
Worksheet.

Paragraph 2-20 requires lenders to document the transfers of gift funds from the donor to the
borrower.

Mortgagee Letters

Mortgagee Letter 92-5 states, “Processing loans without reconciling discrepancies in file
documentation. Too often on-site monitoring reviews identify situations where there is
conflicting information regarding a mortgagor’s income/assets/liabilities/credit or where the file
documentation simply does not make sense. For example, debts on the credit report, original
application and HUD92900 [Uniform Residential Loan Application] must all be consistent. It is
the mortgagee’s responsibility to resolve any and all discrepancies of this nature.”

Mortgagee Letter 00-28 states, “Regardless of when the gift funds are made available to the
homebuyer, the lender must be able to determine that the gift funds were not ultimately provided
from an unacceptable source and were indeed the donor’s own funds. When the transfer occurs
at closing, the lender remains responsible for obtaining verification that the closing agent
received funds from the donor for the amount of the purported gift.”




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