oversight

National City Mortgage Company, Nonsupervised Lender, Miamisburg, Ohio, Did Not Comply with HUD's Requirements Regarding Underwriting of Loans and Quality Control Reviews

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-31.

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

                                                                 Issue Date
                                                                         July 31, 2006
                                                                 Audit Report Number:
                                                                         2006-CH-1014




TO:        Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing
             Commissioner, H
           John W. Herold, Associate General Counsel for Program Enforcement, CE


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: National City Mortgage Company, Nonsupervised Lender, Miamisburg, Ohio,
           Did Not Comply with HUD’s Requirements Regarding Underwriting of
           Loans and Quality Control Reviews

                                    HIGHLIGHTS

 What We Audited and Why

             We audited National City Mortgage Company (National City), a nonsupervised
             lender approved to originate, underwrite, and submit insurance endorsement
             requests under the U.S. Department of Housing and Urban Development’s (HUD)
             single family-direct endorsement program. The audit was part of the activities in
             our fiscal year 2005 annual audit plan. We selected National City for audit as a
             continuation to our previous audit of its late requests for endorsement (see audit
             report 2005-CH-1015, dated August 23, 2005). Our objectives were to determine
             whether (1) National City complied with HUD’s regulations, procedures, and
             instructions for underwriting Federal Housing Administration loans and (2) its
             quality control plan met HUD’s requirements and was properly implemented.

 What We Found

             National City approved 20 of 41 Federal Housing Administration loans in our
             statistical sample that did not fully meet HUD’s requirements. The 20 loans
             defaulted early and/or went to claim between February 1, 2004, and August 31,
           2005. The underwriting deficiencies were material as well as technical and included
           errors and documentation omissions clearly contrary to prudent lending practices.
           Further, National City incorrectly certified to the integrity of the data supporting the
           underwriting deficiencies and to the due diligence used in underwriting the 20 loans.
           While National City’s Federal Housing Administration lending decisions overall
           have proved well within acceptable risk levels, its quality control plan was not fully
           implemented during our audit period and may have contributed to the underwriting
           deficiencies. For the loans in question, the risk to the Federal Housing
           Administration fund was increased as HUD paid more than $94,000 in claims for
           two loans and incurred a loss of nearly $48,000 for another two loans.

What We Recommend


           We recommend that HUD’s assistant secretary for housing-federal housing
           commissioner require National City to indemnify HUD for any future losses on
           nine loans with a total mortgage value of more than $1 million, reimburse HUD
           more than $94,000 for the claims paid on two loans once the associated properties
           are sold, reimburse HUD nearly $48,000 for the loss incurred on two loans since
           the properties were already sold, buy down two active loans by $2,900, improve
           its existing procedures and controls to ensure its underwriters follow HUD’s
           underwriting requirements, implement its quality control plan for reviewing loans
           with early payment defaults, and ensure that quality control reviews under its
           quality control plan are timely, accurate, and properly documented.

           We also recommend that HUD’s associate general counsel for program
           enforcement determine legal sufficiency and if legally sufficient, pursue remedies
           under the Program Fraud Civil Remedies Act against National City and/or its
           principals for the 20 incorrect certifications cited in this audit report.

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


Auditee’s Response

           We provided the results of our underwriting and quality control reviews to
           National City’s management during the audit. We also provided our discussion
           draft audit report to National City’s president, senior vice president, and vice
           president of operations risk asset management and HUD’s staff during the audit.
           We conducted an exit conference with National City’s management on June 1,
           2006.




                                              2
We asked National City’s president to provide written comments on our
discussion draft audit report by July 3, 2006. National City’s president provided
written comments to the discussion draft report dated June 30, 2006. National
City generally disagreed with our findings, but agreed with finding 2’s
recommendations. The complete text of the written comments, except for four
attachments that were not necessary to understand the comments, along with our
evaluation of that response, can be found in appendix B of this report. We
provided HUD’s director of quality assurance division with a complete copy of
National City’s written comments plus the four attachments.




                                 3
                              TABLE OF CONTENTS

Background and Objectives                                                              5

Results of Audit

        Finding 1: National City’s Underwriting of 20 Federal Housing Administration
                   Loans Contained Deficiencies                                        6
        Finding 2: National City Did Not Always Perform Adequate Quality Control       12
                   Reviews on Early Payment Defaulted Loans

Scope and Methodology                                                                  15

Internal Controls                                                                      16

Followup on Prior Audits                                                               18

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use                 19
   B.   Auditee Comments and OIG’s Evaluation                                          21
   C.   Federal Requirements and National City’s Requirements                          30
   D.   Summary of Underwriting Deficiencies                                           33
   E.   Summary of Quality Control Deficiencies Using HUD’s Requirements               34
   F.   Summary of Quality Control Deficiencies Using National City’s Requirements     35
   G.   Narrative Case Presentations                                                   36




                                              4
                      BACKGROUND AND OBJECTIVES

National City Mortgage Company (National City), a division of National City Bank of Indiana, is
headquartered in Miamisburg, Ohio. In May 1955, the Federal Housing Administration approved
National City as a nonsupervised direct endorsement lender to originate Federal Housing
Administration-insured loans. As a direct endorsement lender, National City determines that the
proposed mortgage is eligible for insurance under the applicable program regulations and submits
the required documents to U.S. Department of Housing and Urban Development (HUD) without
its prior review of the origination and closing of the mortgage loan. National City is responsible for
complying with all applicable HUD regulations and handbook instructions.

As of July 24, 2006, National City had 113 loan correspondents, 314 principals, and 138
authorized agents. National City is a full service mortgage company, originating, marketing, and
servicing loans. National City has 300 mortgage offices in 37 states as of July 2006. It also
services the continental United States through its direct-to-consumer telephone and Internet
preferred lending centers in Ohio and California.

We audited National City as part of the activities in our fiscal year 2005 annual audit plan. We
selected National City for audit as a continuation to our previous audit of its late requests for
endorsement (see audit report 2005-CH-1015, dated August 23, 2005). Between February 1,
2004, and August 31, 2005, National City originated/sponsored 34,838 Federal Housing
Administration loans totaling more than $4.5 billion in original mortgage amounts. Of these, 1,476
loans totaling more than $190 million in original mortgage amounts went to claim and/or the
borrowers defaulted on their mortgage payments within the first six payments. National City’s
default to claim rate was 2.18 percent for February 2004 through August 2005.

Our objectives were to determine whether (1) National City complied with HUD’s regulations,
procedures, and instructions in underwriting Federal Housing Administration loans and (2) its
quality control plan met HUD’s requirements and was properly implemented.




                                                  5
                                 RESULTS OF AUDIT

Finding 1: National City’s Underwriting of 20 Federal Housing
            Administration Loans Contained Deficiencies
National City approved 20 of 41 Federal Housing Administration loans in our statistical sample that
did not fully meet HUD’s requirements. The 20 loans defaulted early and/or went to claim between
February 1, 2004, and August 31, 2005. The underwriting deficiencies were material as well as
technical and included errors and documentation omissions clearly contrary to prudent lending
practices. Further, National City incorrectly certified to the integrity of the data supporting the
underwriting deficiencies and to the due diligence used in underwriting the 20 loans. The problems
occurred because National City lacked adequate procedures and controls over its underwriting of
Federal Housing Administration-insured loans, and failed to implement its HUD-approved quality
control plan. As a result of the improperly underwritten loans, the risk to the Federal Housing
Administration fund was increased, and HUD paid more than $94,000 in claims for two loans and
incurred a loss of nearly $48,000 for another two loans.



 Underwriting Deficiencies of
 Federal Housing
 Administration Loans

               National City sponsored and closed 34,838 Federal Housing Administration-
               insured loans totaling more than $4.5 billion between February 1, 2004, and
               August 31, 2005. Of these, 1,476 loans totaling more than $190 million in
               original mortgage amounts went to claim and/or the borrowers defaulted on their
               mortgage payments within the first six payments. Of the 1,476 loans, we
               statistically selected using EZ-Quant computer software 41 to review for
               compliance with HUD’s underwriting requirements.

               National City improperly underwrote 20 of the 41 loans reviewed with a total
               mortgage value of more than $2.6 million. Of the 20 loans, 10 were refinances
               and 10 were purchase loans. As of July 24, 2006, HUD had paid $94,372 in
               claims on two loans with underwriting violations, HUD lost $47,829 on two other
               loans since the properties were already sold, and five loans were paid in full. The
               remaining 11 loans hold active Federal Housing Administration insurance as of
               July 24, 2006.

               Excessive Debt-to-Income Ratios

               National City improperly approved two loans (case numbers 492-7198799 and
               137-2892405) when the borrowers’ debt-to-income ratios exceeded HUD’s
               requirements and submitted them for insurance endorsement without valid



                                                 6
compensating factors. Paragraphs 2-12 and 2-13 of HUD Handbook 4155.1,
REV-4 and REV-5, specify that the ratio of mortgage payments to effective
income (front ratio) generally may not exceed 29 percent and the ratio of total
fixed payments to effective income (back ratio) may not exceed 41 percent unless
significant compensating factors are presented. The handbook allows greater
latitude in considering compensating factors for the front ratio than the back ratio.
However, National City approved the loans when the borrowers’ mortgage
payments to effective income were 31.6 and 31.5 percent, respectively, without
valid compensating factors.

Delinquent Mortgage Accounts and Related Expenses

For six refinanced loans (case numbers 381-7487573, 151-7563379, 261-
8815770, 023-1991951,483-3481641, and 292-4480217), National City included
mortgage payments due and/or delinquent expenses when calculating the
mortgage amounts for their new Federal Housing Administration loans. Although
the borrowers had the current month’s mortgage payment due, there was no
documentation in the loans’ casebinders or National City’s files to support that the
payments or delinquent expenses were made before or at settlement. The
mortgage payments, ranging from $485 to $1,583, were refinanced into the new
loans.

Credit Discrepancies

National City did not comply with HUD’s credit report requirements. For two
loans (case numbers 151-7671875 and 201-3401739), the borrowers did not
provide adequate written explanations for the derogatory accounts identified on
their credit reports. For one loan (case numbers 492-7198799), the casebinder
contained a residential merged credit report that did not (1) include a detailed
account of the borrowers’ employment history or a statement attesting to the
certification of employment and date verified, and (2) verify the borrowers’
current employment and income.

Underwriting Approval Conditions

National City did not ensure that the borrowers satisfied their underwriting
approval conditions. For six loans (561-8087045, 483-3481641, 561-8072040,
381-7487573, 031-3181600, and 023-1991951), the liabilities required to be paid
and/or required documentation for loan approval were not documented in the
loans’ casebinders or National City’s loan files.

Inaccurate Documentation

National City did not verify that a borrower provided accurate information before
approving the loan. For loan number 492-7198799, the borrower’s prior address,
the verification of employment form, and the utility company credit reference in



                                  7
the borrower’s loan file were not accurate. When we contacted the borrower’s
employer and the utility company, we were informed that the borrower was never
employed by the company and utility service was never provided to the
borrower’s residence. Also, the borrower’s prior address listed on such
documentation as the uniform residential loan application and the verification of
employment in the loan’s casebinder does not exist.

Overstated/Unsupported Assets or Income

National City did not properly assess income or employment history for two
loans. For loan numbers 561-8072040 and 137-2892405, a two-year work history
was not verified for the borrowers. For example, for loan number 137-2892405,
the uniform residential loan application and the verfication of employment form
showed the coborrower was employed for two years by her present employer.
However, when we contacted the coborrower’s employer, we determined the
coborrower was employed by the company for less than two years. Also, the
coborrower’s employer reported that the coborrower’s employment information
on the verification of employment form was not accurate.

For loan number 151-7712123, overtime income was included in the borrower’s
income calculation without National City developing an average of overtime and
establishing an earnings trend. In accordance with HUD’s requirements, we
excluded the income in our analysis and calculated the borrower’s debt-to-income
ratio at 31.3 percent, which exceeds HUD’s requirement of 29 percent. For loan
number 201-3401739, the borrower’s income was supported by a letter from the
employer; however, the information reported did not correspond to the
verification of employment form or the borrower’s actual earning statements
obtained by National City. Using the borrower’s pay statements, we calculated
the borrower’s monthly income as $3,207 which differs from the $3,791 amount
listed on the mortgage credit analysis worksheet prepared by National City.
Therefore, the borrower’s fixed payment-to-income ratio exceeded HUD’s
requirements.

Insufficient Gift Documentation

For all 41 loans reviewed that received gift funds from a charitable organization,
National City did not document the transfer of the funds in accordance with
HUD’s requirements. We contacted the settlement/closing agents to obtain the
missing documentation. For loan number 137-2900156, the borrower received an
income and tax credit; however, there was no documention in the loan’s
casebinder or National City’s file to support the credit. For loan number 137-
2892405, the borrower received a gift of equity without the relationship of the
donor to the borrower being disclosed on the gift letter.




                                  8
            Overinsured Mortgages

            For six loans, National City overestimated the financing costs or unpaid principal
            balances, thereby exceeding HUD’s maximum insurable mortgage limit as
            outlined in Mortgagee Letter 2001-12 and HUD Handbook 4155.1, REV-5.
            These six loans were funded in the amount of $677,099 instead of the maximum
            amount of $671,570. Therefore, the six loans exceeded HUD’s maximum
            mortgage limit by $5,529. The following table identifies the overinsured loans.
            HUD later paid a claim from the Federal Housing Administration insurance fund
            for loan number 483-3481641.

                                         Mortgage        Maximum          Overinsured
                       Loan number        amount       mortgage amount     amount
                       483-3481641       $85,670           $85,149           $521
                       137-2840495        94,547            93,749            798
                       381-7487573       118,669           118,143            526
                       151-7653379       156,411           156,087            324
                       493-7780858       111,779           109,677           2102
                       261-8815770       110,023           108,765           1,258
                          Totals        $677,099          $671,570          $5,529


Incorrect Underwriters’
Certifications Submitted to
HUD

            Of the 20 improperly underwritten loans, 17 were underwritten manually and
            three were underwritten using an automated system. We reviewed the
            certifications for all 20 loans for accuracy. National City’s direct endorsement
            underwriters incorrectly certified the integrity of the data for three loans and that
            due diligence was used in underwriting the remaining 17 loans.

            After underwriting a loan using an automated underwriting system, HUD requires
            direct endorsement underwriters to certify the integrity of the data supplied for a
            lender used to determine the quality of the loans and that the loans were eligible
            for insurance. When underwriting a loan manually, HUD requires a direct
            endorsement lender to certify that it used due diligence and reviewed all assocated
            documents during the underwriting of a loan.

            Appendix C of this report provides details of federal requirements regarding the
            underwriting of Federal Housing Administration loans as well as a citation under
            the Program Fraud Civil Remedies Act.




                                              9
National City’s Underwriting
Procedures and Controls
Inadequate

            National City needs to improve its existing procedures and controls over its
            underwriting of Federal Housing Administration-insured loans by implementing
            its HUD-approved quality control plan. Additionally, it needs to ensure that
            underwriters continue to receive necessary training on HUD’s underwriting
            requirements. Such procedures and controls should ensure the accuracy of
            National City’s underwriting certifications submitted to HUD.

            HUD’s Office of Inspector General (OIG) issued four prior audit reports on
            National City’s underwriting practices. The four reports were issued between
            August 2004 and September 2005 (see Followup on Prior Audits section in this
            report). The four reports include underwriting findings that are repeated in this
            report. Further, HUD’s Quality Assurance Division performed quality assurance
            reviews of National City in July 2004 and April, July, and August 2005. The
            reviews resulted in findings related to loan origination and underwriting. The
            underwriting deficiencies cited in this audit report, along with the prior OIG
            audits and HUD’s reviews, clearly demonstrate that National City’s existing
            underwriting procedures and controls need to be improved to ensure compliance
            with HUD’s requirements.

            As previously mentioned, National City incorrectly certified the integrity of the
            data or that due diligence was used in underwriting 20 loans. Using the 20 loans
            with incorrect certifications from the 41 we tested (26 active loans with
            $3,223,966 in outstanding mortgage amounts, four loans that HUD paid $492,466
            in claims, three loans where the properties were sold and HUD lost $89,750, and
            eight loans paid in full as of July 24, 2006), we estimate the risk to the Federal
            Housing Administration to be at least $379,832 for the next year if National City
            does not improve its underwriting certification procedures and controls.

Recommendations

            We recommend that HUD’s assistant secretary for housing-federal housing
            commissioner require National City to

            1A.    Indemnify HUD for any future losses on the nine loans with a total
                   mortgage value of $1,027,177 cited in this finding. The estimated risk to
                   the Federal Housing Administration insurance fund is $297,881.

            1B.    Buy down the two overinsured loans ($798 for loan number 137-2840495
                   and $2,102 for loan number 493-7780858) by $2,900.




                                            10
1C.   Reimburse HUD for any future losses from the $94,372 in claims paid on
      two loans (483-3481641 and 151-7712123) with a total mortgage value of
      $144,613 once the associated properties are sold.

1D.   Reimburse HUD $47,829 for the actual losses it incurred on two loans
      (429-7198799 and 137-2900156) improperly underwritten since the
      associated properties were sold.

1E.   Improve existing procedures and controls to ensure its underwriters follow
      HUD’s underwriting requirements. These procedures and controls include
      but should not be limited to implementing its HUD-approved quality
      control plan (see finding #2), continuing to provide training to its
      underwriters regarding HUD’s underwriting requirements to adequately
      resolve any discrepancies involving documentation associated with the
      loans, adequately supporting borrowers’ income, obtaining and reviewing
      documentation that adequately supports the borrowers’ income stability
      and expenses, including only the proper amounts when calculating the
      loan amounts to be funded, and providing effective oversight or
      monitoring of its underwriting certifications before submission to HUD.
      These procedures and controls should help reduce risks to the Federal
      Housing Administration fund by $379,832.

We recommend that HUD’s associate general counsel for program enforcement

1F.   Determine legal sufficiency and if legally sufficient, pursue remedies
      under the Program Fraud Civil Remedies Act against National City and/or
      its principals for incorrectly certifying the integrity of the data and/or that
      due diligence was exercised during the underwriting of the 20 loans.




                                11
Finding 2: National City Did Not Always Perform Adequate Quality
          Control Reviews on Early Payment Defaulted Loans
National City did not adequately perform quality control reviews on loans that went into early
payment defaults. It did not always ensure that reviews were performed accurately and in a
timely manner and that review results were properly documented. The problems occurred
because National City did not use its quality control plan when performing quality control
reviews on the loans that defaulted within the first six payments. Further, in July 2005, when its
early payment default quality control plan received HUD’s approval, National City did not
monitor its staff’s quality control reviews. As a result, National City did not always minimize or
prevent improper underwriting of loans, thus increasing the risk to the Federal Housing
Administration insurance fund.



 Loan Universe and Sample
 Selections

               Using HUD’s Single Family Data Warehouse system, we identified 1,476 loans
               totaling more than $190 million in original mortgage amount that were sponsored
               or originated by National City and closed between February 1, 2004, and August 31,
               2005. The loans went to claim and/or the borrowers defaulted within the first six
               payments. Of the 1,476 loans, we statistically selected using EZ-Quant computer
               software 41 loans to review National City’s compliance with HUD’s quality control
               requirements.

               Further, we obtained a listing of 399 loans from National City to identify the early
               payment default loans that were quality control reviewed after August 31, 2005. Of
               the 399 loans, we statistically selected using Audit Command Language computer
               software 39 loans to review National City’s compliance with its early payment
               default quality control plan and HUD’s quality control requirements.


 Inadequate Quality Control
 Reviews

               National City performed inadequate quality control reviews for loans that defaulted
               within the first six payments. National City uses the Loan Review System to review
               the underwriting performed on early payment defaulted loans. The Loan Review
               System checklist consists of a series of questions that require a yes, no, or not
               applicable answer. When we reviewed the results of National City’s quality control
               reviews, we determined that 33 of the 41 loans reviews (80.5 percent) were not
               adequately performed as follows:

                      Thirty quality control review checklists did not contain responses to
                      pertinent questions,


                                                12
                   Six quality control reviews identified questions on the Loan Review System
                   checklist that were incorrectly answered, and

                   Four quality control loan reviews were not performed in a timely manner.

Quality Control Reviews
Performed under HUD-
Approved Plan

            In July 2005, National City’s quality control plan for reviewing early payment
            defaults was approved by HUD. As previously mentioned, we statistically selected
            39 loans that closed after August 31, 2005, and were reviewed after National City’s
            plan was approved. For the 39 loans, 27 (69.2 percent) contained deficiencies as
            follows:

            •      Nine of the quality control review checklists indicate that the loans’
                   reviews were not performed in a timely manner,

            •      Fourteen quality control review checklists contained discrepancies in their
                   data, and

            •      Fourteen quality control review checklists contained relevant questions that
                   were marked incorrectly or not answered at all.

Quality Control Process
Inadequate

            National City did not implement its quality control plan’s procedures for
            reviewing loans that went to early payment default. In 2004, National City
            implemented the Loan Review System to efficiently review loans that defaulted
            within the first six payments. However, it did not use the procedures identified in
            its quality control plan because it believed the procedures were too stringent.

            In July 2005, National City established and HUD approved a supplemental plan in
            addition to its quality control plan for reviewing loans that defaulted within the
            first six months.

            Due to the delayed implementation of National City’s approved quality control
            plan, it cannot assure quality control reviews were performed in accordance with
            HUD’s requirements. Additionally, it did not adequately monitor the quality
            control reviews performed by its staff to ensure they were performed accurately
            and in a timely manner and were properly documented. As a result, National City
            did not always minimize or prevent improper underwriting of loans, thus
            increasing the risk to the Federal Housing Administration insurance fund.


                                             13
          Appendix E of this report provides a summary of the quality control deficiencies
          by National City using HUD’s requirements. Appendix F of this report provides a
          summary of the quality control deficiencies by National City using its
          requirements.

Recommendations

          We recommend that HUD’s assistant secretary for housing-federal housing
          commissioner require National City to

          2A.     Implement its quality control plan for reviewing loans that are early
                  payment defaults to ensure compliance with HUD’s requirements and the
                  HUD-approved plan.

          2B.     Implement procedures and controls to ensure that reviews performed
                  under its quality control plan are timely, accurate, and properly
                  documented.




                                          14
                          SCOPE AND METHODOLOGY

We performed our audit work between August 2005 and March 2006. We conducted the
fieldwork at National City’s Miamisburg, Ohio, office and HUD’s Chicago Regional Office.
The audit covered the period of February 1, 2004, through August 31, 2005. We extended this
period as necessary. We conducted the audit in accordance with generally accepted government
auditing standards.

To achieve our objectives, we relied on computer-processed data contained in HUD’s Single Family
Data Warehouse and National City’s electronic data files. In addition, we interviewed HUD’s and
National City’s management and staff, borrower’s employers. Further, we reviewed HUD’s
rules, regulations, and guidance for the underwriting and quality control review of Federal
Housing Administration loans.

Using HUD’s data systems, we identified that National City originated/sponsored 34,838 Federal
Housing Administration loans with closing dates from February 1, 2004, to August 31, 2005.
The total mortgage value of these loans is more than $4.5 billion. Of these, 1,476 loans totaling
more than $190 million in original mortgage amounts went to claim and/or the borrowers
defaulted on their mortgage payments within the first six payments. Of the 1,476 loans, we
statistically selected using EZ-Quant computer software 41 to review for compliance with HUD’s
underwriting and quality control requirements. Our sampling criteria used a 90 percent
confidence level, 15 percent estimated error rate, and a precision of plus or minus 10 percent.
We also reviewed the certifications for all 20 loans that were improperly underwritten for
accuracy.

Further, we obtained a listing of 399 loans from National City to identify early payment defaults
that were quality control reviewed after August 31, 2005. Of the 399 loans, we statistically selected
using Audit Command Language computer software 39 loans to review National City’s compliance
with its early payment default quality control plan and HUD’s quality control requirements.




                                                 15
                             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,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

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



 Relevant Internal Controls

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

              •       Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       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.

              •       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.

              We assessed the relevant controls identified above.

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




                                               16
Significant Weaknesses


           Based on our audit, we believe the following items are significant weaknesses:

           •      National City needs to implement adequate procedures and controls for
                  underwriting and quality control reviewing Federal Housing Administration
                  loans (see findings 1 and 2).

           •      National City needs to implement its quality control plan for reviewing
                  loans that are early payment defaults to ensure compliance with HUD’s
                  requirements and its HUD-approved plan (see finding 2).




                                            17
                         FOLLOWUP ON PRIOR AUDITS

HUD’s OIG issued four prior audit reports on National City’s underwriting practices. The four
reports include findings that are repeated in this report. All of the four reports’
findings/recommendations except for one were closed as of July 25, 2006.

            OIG report                                                              Status of
             number           Issue date                  Findings              recommendations
                                               National City did not comply
                                                 with HUD’s underwriting
          2005-SE-1002    December 16, 2004            requirements                 Closed
                                                   Two branch offices of
                                                 National City did not fully
                                                    comply with HUD’s
          2005-AT-1014    September 15, 2005     underwriting requirements           Open
                                                   National City failed to
                                                resolve questionable credit
                                               and employment documents
                                                when underwriting Federal
                                                  Housing Administration
          2005-LA-1006     August 10, 2004                  loans                   Closed
                                                Inadequate loan origination
                                               practices resulted in approval
                                                 of HUD Federal Housing
                                               Administration-insured loans
          2001-NY-1004     August 23, 2001       for unqualified borrowers          Closed

The two most recent independent auditor’s reports for National City covered the years ending
December 31, 2003 and 2004. Both reports resulted in no findings.

In July 2004 and April, July, and August 2005, HUD’s Quality Assurance Division performed
quality assurance reviews of National City. The reviews resulted in findings related to loan
origination and underwriting. All of the findings were closed as of April 5, 2006.




                                                  18
                                      APPENDIXES
Appendix A

                 SCHEDULE OF QUESTIONED COSTS
                AND FUNDS TO BE PUT TO BETTER USE
               Recommendation       Ineligible    Unsupported     Funds to be put
                   number               1/            2/          to better use 3/
                      1A                                             $297,881(A)
                      1B              $2,900
                      1C                              $94,372
                      1D              47,829
                      1E                                              379,832(B)
                     Totals          $50,729          $94,372        $677,713


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 when we cannot determine eligibility 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(A)/ “Funds to be put to better use” are estimates of amounts that could be used more
      efficiently if an Office of Inspector General (OIG) recommendation is implemented.
      This includes reductions in outlays, deobligation of funds, withdrawal of interest subsidy
      costs, costs not incurred by implementing recommended improvements, avoidance of
      unnecessary expenditures noted in preaward reviews, and any other savings which are
      specifically identified. Implementation of our recommendation to indemnify loans that
      were not originated in accordance with Federal Housing Administration requirements
      will reduce the Federal Housing Administration’s risk of loss to the insurance fund. The
      amount above reflects that, upon sale of the mortgaged property, the Federal Housing
      Administration’s average loss experience is about 29 percent of the claim amount based
      upon statistics provided by HUD.

3(B)/ In this instance, if National City implements our recommendation, it will reduce the risk
      to the Federal Housing Administration insurance fund for loans that do not meet HUD’s
      underwriting requirements and that have an incorrect underwriting certification and,
      instead will make available insurance funds for loans that meet HUD’s underwriting
      requirements. Once National City successfully improves its controls, this will be a
      recurring benefit. Our estimate reflects only the initial year of these recurring benefits


                                                 19
and reflects that, upon sale of the mortgaged property, the Federal Housing
Administration’s average loss experience is about 29 percent of the claim amount based
upon statistics provided by HUD.




                                       20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation        Auditee Comments




                        Auditee Comments


                               21
Auditee Comments




       22
            Auditee Comments




Comment 1



Comment 2



Comment 3




                   23
            Auditee Comments




Comment 4



Comment 5

Comment 6

Comment 7

Comment 8




                   24
            Auditee Comments




Comment 9




                   25
             Auditee Comments




Comment 10




                    26
                         OIG Evaluation of Auditee Comments

Comment 1   Although loan number 137-2892405 may have only exceeded one of HUD’s
            qualifying ratios by 1 percent, the coborrower’s income was not verified for the
            required two year period. When we contacted the coborrower’s employer, we
            were informed that information contained on the verification of employment form
            in the loan file was inaccurate, in particular the coborrower’s dates of
            employment. Therefore, the stability of the coborrower’s income was not
            properly assessed, and excluding this unstable income the qualifying ratio was
            exceeded by a greater percentage. Additionally, the mortgage credit analysis
            worksheet stated stable employment as the compensating factor. This
            compensating factor was not justifiable considering the coborrower’s income
            stability was not properly verified and the borrowers’ housing expense was going
            to increase by more than $300 monthly. Additionally, the borrowers had two
            judgments on their credit report that were not explained.

            We also did not remove the remaining loan 492-7198799 because based on our
            recalculation of the borrower’s income; HUD’s qualifying ratio was exceeded by
            more than 3 percent. Furthermore, the borrower’s address was not consistent
            throughout the file, and the credit reference letters, which contained another
            address for the borrower, was inaccurate. Additionally, the borrower’s
            employment was questionable.

Comment 2   We disagree with National City’s comment regarding the over insurance of loan
            number 381-7487573. Based on our calculations, this loan was overinsured due
            to the inclusion of the overdue mortgage payment as indicated on the mortgage
            payoff statement. Further, the amount indicated on the HUD-1 settlement
            statement exceeds the amount on the payoff statement, which includes the
            payment that was currently due on the borrower’s prior mortgage.

            For loan number 292-4480217, no letter was provided for our review from the
            borrower explaining the delinquent mortgage account in the borrower’s loan file.
            The mortgage account was not current and the borrower received $250 at closing,
            instead of paying the amount due on the mortgage. We acknowledge that HUD
            has since permitted this practice on loans in late 2005; however, the loans selected
            for review closed before HUD allowed the inclusion of delinquent expenses in the
            financing for the refinanced loan.

Comment 3   For loan number 521-6046673, we agree that even though the lender used the
            used a residential merged credit report that did not (1) include a detailed account
            of the borrowers’ employment history or (2) a statement attesting to the
            certification of employment and date verified, the borrower was rated acceptable
            using an automated underwriting system. Therefore, we removed the loan from
            this audit report.




                                             27
                         OIG Evaluation of Auditee Comments

Comment 4   According to the Notification of Loan Action-Approval forms contained in the
            borrowers’ files for loan numbers 561-8087045, 483-3481641, 023-1991951, and
            381-7487573, as a condition for approval, the underwriters required that the
            mortgage payments currently due of the borrowers’ accounts be paid at or prior to
            closing; however, the payments were not made (see comment 2). For loan
            number 561-8072040, the the feedback certificate conditioned that the
            underwriter verify a two-year work history; however, the loan file did not contain
            evidence of this documentation. In addition, National City’s Quality Control
            Department reviewed the loan and cited the loan for the same underwriting
            deficiency. Without verfication of a two-year work history, the borrower’s
            income/job stability was not supported. Further, the borrowers’ income and value
            of their assets as inputted on the automated underwriting system was overstated.

            For loan number 031-3181600, we agree that HUD does not require collections to
            be paid; however, the collections/liabilities were included on the automated
            feedback certification as being paid when they were not. Additionally, the
            certificate required that documentation be included in the file to support the
            omission of these liabilties in the borrower’s debt reconciliation.

Comment 5   We disagree with National City that loan number 492-7198799 does not contain
            inaccurate information. The credit references in the borrower’s file were not
            accurate. For instance, one of the credit references was from a utility company;
            however, we confirmed with the company that service was never provided to the
            borrower’s address and the person never had an account. Additionally, the
            borrower’s documentation, such as W-2s, loan application, credit references, and
            credit report, which did not contain any address, contained conflicting
            information. We also contacted the U.S. Postal Service to verify the varying
            addresses and were informed the borrower’s address does not exist. Also, we
            contacted the borrower’s employer and were informed the borrower never worked
            for the company.

Comment 6   We disagree that three of the loans were supported. For loan numbers 561-
            8072040 and 137-2892405, the lender did not verify a two-year work hsitory for
            the borrowers. For loan number 151-7712123, overtime income was included in
            the borrower’s income calculation without the underwriter developing an average
            of overtime and establishing am earnings trend to determine whether this income
            will more than likely continue for a least three years. Therefore, excluding the
            overtime income, this loan exceeds one of HUD’s qualifying ratios.

Comment 7   National City’s response indicated that our audit report only cited one loan for
            insufficient gift documentation. However, our report cites two loans.

Comment 8   See comment 2.




                                             28
                           OIG Evaluation of Auditee Comments

Comment 9     We agree that one of the loans in our draft audit report was counted twice;
              therefore, the number should be 36 instead of 37. We further reduced this number
              based on National City’s comments. We adjusted this report and appendix
              accordingly. National City contends that only 21 of the 30 Loan Review Data
              quality control review sheets contained unanswered questions; however, we
              disagree. All 30 loans contained unanswered questions, majority if not all,
              pertained to the Uniform Residential Loan Application, which is required to be
              reviewed for both refinance and purchase loans. According to National City,
              updates made to the loan review sheets changed some of the answers on the
              quality control sheets. Therefore, this is a weakness in National City’s system
              controls. National City’s inability to maintain documentation supporting its
              quality control reviews and its results do not comply with HUD’s quality control
              requirements.

              All of the questions contained of the Loan Review System checklist serve as a
              control mechanism to ensure underwriting deficiencies are minimal. Therefore,
              questions answered incorrectly or not at all reduce the effectiveness of the quality
              control system.

              We agree that two of the six quality control reviews were performed timely;
              therefore, we removed them for this audit report. However, the remaining four
              remained in this report. Additionally, we also agree that the one quality control
              checklist was completed within acceptable timeframes. This audit report was
              adjusted to reflect the one checklist.

Comment 10 Based on the information provided, we reduced the number of loans included in
           this audit report as being reviewed untimely to nine. We disagree with National
           City regarding the 14 quality control review sheets that contained inaccurate/data
           discrepancies, and the 14 loan review sheets that contained questions that were
           marked incorrectly or not at all. The Loan Review System, if used correctly,
           would prevent some of the underwriting errors; therefore, the questions contained
           on the sheet should all be answered.




                                               29
Appendix C

       FEDERAL REQUIREMENTS AND NATIONAL CITY’S
                    REQUIREMENTS

                                Loan Underwriting Requirements

Mortgagee Letter 2001-12, dated May 7, 2001, provides mortgage amount calculations for
streamlined refinances. The mortgagee letter states that borrowers are expected to make their
monthly mortgage payments when due even when refinancing, and it is not appropriate to
include in the new mortgage amount the sum of any mortgage payments “skipped” by the
homeowner. Borrowers are not permitted to roll payments due into the new Federal Housing
Administration loan amount. Borrowers must make the payment due or bring the mortgage
payment check to settlement.

HUD Handbooks 4155.1, REV-4, CHG-1, chapter 1, section 1-12 (d)(7), and REV-5, section 1-
12 (d)(6), state that delinquent mortgages are generally not eligible for streamline refinancing
until the loan is brought current; however, if two months or less delinquent, the lender may pay
the mortgage current providing the borrower is under no obligation to repay the funds used to
bring the mortgage current.

Chapter 2, section 2-3, of the handbooks states that when delinquent accounts are revealed, the
lender must determine whether late payments were due to a disregard for or inability to manage
financial obligations or to factors outside of the borrower’s control. Major indications of
derogatory credit, including judgments or collections or recent credit problems require sufficient
written explanation from the borrower. When reviewing the borrower’s credit report, the lender
must pay particular attention to recent and undisclosed debts. The lender must account for any
significant debt shown on the credit report but not listed on the loan application and must obtain
explanation for all credit report inquiries.

Chapter 2, section 2-7(a), of the handbooks states that both overtime and bonus income may be
used to qualify if the borrower has received such income for the past two years and it is likely to
continue. The lender must develop an average of bonus or overtime income for the past two
years and the employment verification must not state that such income is unlikely to continue.
Periods of less than two years may be acceptable provided the lender justifies and documents in
writing the reason for using the income for qualifying purposes.

Chapter 2, section 3, paragraph 2-10, of the handbooks states that all funds for the borrower’s
investment in the property must be verified and documented. Paragraph 2-10c states that the
lender must document the gift funds by obtaining a gift letter signed by the donor and borrower
that specifies the dollar amount of the gift; states that no repayment is required; shows the
donor’s name, address, and telephone number; and states the nature of the donor’s relationship to
the borrower. In addition, the lender must document the transfer of funds from the donor to the
borrower.



                                                30
Chapter 2, section 5, paragraph 2-12, of the handbooks states that debt to equity ratios are used to
determine whether the borrower can reasonably be expected to meet the expenses involved in
homeownership. If the mortgage payment expense-to-effective income ratio exceeds 29 percent
and/or the total fixed payment-to-effective income exceeds 41 percent, significant compensating
factors should be documented and recorded on the mortgage credit analysis worksheet.

                                  Quality Control Requirements

HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” chapter 6, requires

   •   The quality control plan to be in writing. Lenders must have fully functioning quality
       control programs from the date of their initial Federal Housing Administration approval
       until final surrender or termination of the approval.

   •   Quality control of servicing must be an ongoing function. Due to the importance of the
       aspects of servicing, lenders must perform monthly reviews of delinquent loan servicing,
       claims, and foreclosures.

   •   The quality control program must provide for the review and confirmation of information
       on all loans selected for review.

   •   A new credit report must be obtained for each borrower whose loan is included in a
       quality control review unless the loan was a streamline refinance or was processed using
       a Federal Housing Administration-approved automated underwriting system that is
       exempted from this requirement.

   •   Documents contained in the loan file should be checked for sufficiency and subjected to
       written reverification. Examples include the borrower’s employment or other sources of
       income, deposits, gift letters, alternate credit sources, rent payments, and other sources of
       funds.

   •   Each direct endorsement loan selected for a quality control review must be reviewed for
       compliance with HUD’s underwriting requirements, sufficiency of documentation, and
       soundness of the underwriting.

   •   Each loan selected for quality control review must be reviewed to determine whether
       required conditions were met before closing, and the quality control review report and
       followup, including review findings and actions taken plus procedural information, must
       be retained by the lender for a period of two years.

           National City’s Early Payment Default Quality Control Plan Requirements

National City’s servicing department generates a report for the Fidelity Servicing system to
identify all loans that went 60 days delinquent within the first six payments. All government
loans that are 60 days delinquent are targeted for review, and the selection of the loans is based
solely upon the timing of the defaults. The purpose of the review of the early payment default is


                                                31
to evaluate the accuracy, validity, and completeness of the loan’s origination operation and note
any patterns of deficiencies.

The review process includes verifying the accuracy of the residential loan application as
compared to the documents in the loan file; comparing the new credit report to the original credit
report in the file and noting any discrepancies or additional debts to aid in the determination of
the delinquency; verifying the automated underwriting system findings as compared to the
documents in the file; verifying that the underwriting conditions are documented in the loan file;
verifying the accuracy of the income and assets as compared to documents in the loan file;
performing verbal reverification of employment for the borrower/coborrower and if
unobtainable, forwarding a written verification of employment to the employer; verifying the
accuracy of the purchase contract as compared to documents in the loan file; reviewing the
appraisal for issues using the history pro/prefunding report and if discrepancies are noted,
ordering automated value models; and verifying unallowable service fees and requesting refund
to borrower if applicable.

All loans are rated good, average, or poor based on the investment quality standards. The
reviewer is responsible for completing the loan review detail report. This report will include
results of the review and possible general comments as a result of findings. The early payment
default does not seek missing documentation, which may affect the final review results. All
loans suspected of possible fraud are forwarded to National City’s special investigative unit.
Each early payment default review will include a Loan Review System detailed audit report, all
re-verification documents, an updated credit report, and a prefunding report of automated value
models if applicable.

                          Program Fraud Civil Remedies Act Of 1986

Title 31, United States Code, section 3801, “Program Fraud Civil Remedies Act of 1986,”
provides federal agencies, which are the victims of false, fictitious, and fraudulent claims and
statements, with an administrative remedy to recompense such agencies for losses resulting from
such claims and statements; to permit administrative proceedings to be brought against persons
who make, present, or submit such claims and statements; and to deter the making, presenting,
and submitting of such claims and statements in the future.




                                                32
         Appendix D

                       SUMMARY OF UNDERWRITING DEFICIENCIES

                                                                              Skipped
                                                                             mortgage
                                                                            payment or                             Overstated/
                                                                             included                              unsupported   Determine     Over-
               Mortgage    Underwriting   Insurance   Amount     Exceed     unallowable   Credit     Inaccurate      assets or    income      insured
Loan number     amount       method         status    of claim    ratios     expenses     issues   documentation      income      stability     loan
241-7423366    $69,882       Manual          Paid                                X                                                               X
483-3481641     85,670       Manual         Claim     $30,103                    X                                                               X
561-8072040    223,300     Automated         Paid                                                                      X             X
492-7198799     97,470       Manual         Claim     103,780      X                        X           X
352-5189728    169,302       Manual          Paid                  X                        X                          X
151-7671875    120,785       Manual         Active                                          X                          X
137-2840495     94,547       Manual         Active                                                                                              X
381-7487573    118,669       Manual         Active                              X                                                               X
151-7563379    156,411       Manual         Active                              X                                                               X
137-2892405    154,812       Manual         Active                 X                                                   X
201-3401739    103,279       Manual         Active                                          X                          X
493-7780858    111,779       Manual         Active                                                                                              X
241-7453453    207,973       Manual          Paid                                                                                               X
031-3181600     70,887     Automated        Active                                          X
561-8087045    203,453       Manual          Paid                  X
137-2900156     89,483     Automated        Claim      99,908                                                          X
261-8815770    110,023       Manual         Active                              X                                                               X
023-1991951    115,517       Manual         Active                              X
151-7712123     58,943       Manual         Claim      64,269                                                          X
292-4480217     76,794       Manual         Active                              X
   Totals     $2,438,979                              $298,060     4            7           5           1              7             1          8




                                                                           33
Appendix E

 SUMMARY OF QUALITY CONTROL DEFICIENCIES USING
             HUD’S REQUIREMENTS


                           All relevant                 Untimely
                            questions      Questions    quality
                Loan        were not       answered     control
               number       answered      incorrectly   review
             031-3181600        X
             521-6046673        X
             137-2892405        X                          X
             261-8815770        X
             493-7790021        X
             151-7549007        X
             241-7453453                                   X
             137-2840495        X
             151-7563379        X             X
             137-2900156        X             X
             352-5242195        X             X
             201-3401739        X
             381-7487573        X             X
             151-7671875        X
             493-7780858        X
             151-7585368        X
             105-1750980        X
             581-2602152        X
             461-3916389        X
             352-5189728        X
             271-9085200        X
             249-4949210        X             X
             521-5939934        X
             241-7423366        X
             352-5214897        X
             151-7712123        X
             023-1947964        X
             492-7198799        X                          X
             561-8072040        X
             132-1762615        X
             052-3525382        X
             052-3501334                                   X
             105-1764451                      X
                 Totals        30             6            4




                                    34
Appendix F

 SUMMARY OF QUALITY CONTROL DEFICIENCIES USING
        NATIONAL CITY’S REQUIREMENTS


                       Untimely
                        quality                      Questions answered
                        control       Data        incorrectly/did not answer
        Loan number     review    discrepancies     all relevant questions
         052-3333828      X                                   X
         161-2119111      X
         411-3852924                                          X
         023-2155918      X                                   X
         381-7674151                   X
         372-3160787      X            X                      X
         095-0038635      X                                   X
         261-8890867                   X
         571-0731929                                          X
         052-3619024                   X                      X
         541-7200743                                          X
         151-7813964                   X
         052-3621273                                          X
         262-1573029                   X                      X
         137-3129369                                          X
         151-7806141                                          X
         137-3191019                   X
         052-3653303                   X
         413-4373100                   X
         052-3295476      X            X
         031-3172065      X
         561-8108066                   X
         261-8793357      X            X
         531-0221192                   X                      X
         441-7614348                                          X
         441-3819278                   X
         352-5189366      X
            Totals        9            14                    14




                                       35
Appendix G

                   NARRATIVE CASE PRESENTATIONS


Loan number: 241-7423366

Mortgage amount: $69,882

Section of Housing Act: 203(b)

Date of loan closing: May 19, 2004

Status as of April 5, 2006: Terminated, paid in full

Prior status: Active

Payments before first default reported: Not available

Summary:

National City’s underwriter (AZ97) over estimated the financing costs; therefore, the loan was
overinsured by more than $856. At settlement, the borrower was provided with a credit to his
escrow accounts. This credit reduced the amount of prepaid expenses due for the loan.

Additionally, the borrower was not current with his prior mortgage payments. According to the
payoff statement in the borrower’s loan file, the loan was current, and the May 1, 2004, payment
was not due. However, at settlement, the amount due to payoff the prior mortgage included the
May 1, 2004, principal and interest payments. The borrower did not pay any funds at closing
and received cash back in the amount of $200.




                                                36
Loan number: 483-3481641

Mortgage amount: $85,670

Section of Housing Act: 203(b)

Date of loan closing: September 24, 2004

Status as of July 24, 2006: Claim

Prior status: Active

Payments before first default reported: Five

Claim paid by HUD: $30,103

Summary:

National City’s underwriter (O001) overestimated the financing costs; therefore, the loan was
overinsured by more than $521. Additionally the payoff amount from the prior mortgage listed
on the HUD-1 settlement statement included delinquent expenses and late charges. The
borrower paid money at closing; however, the amount of funds was not sufficient to pay the
delinquent charges from the prior mortgage.




                                               37
Loan number: 561-8072040

Mortgage amount: $223,300

Section of Housing Act: 203(b)

Date of loan closing: August 30, 2004

Status as of July 24, 2006: Terminated, paid in full

Prior status: Not applicable

Payments before first default reported: Not available

Summary:

National City underwrote this loan using Fannie Mae’s Desktop automated underwriting system.
The automated feedback certificate listed conditions for approval that included providing
documentation to support the borrower’s employment for the most recent full two years.
However, when we reviewed the loan’s files, we determined that the underwriter did not verify
or provide documentation to support the borrower’s employment history. Therefore, the lender
did not verify the borrower’s income stability.

Additionally, the borrower’s assets were overstated. The automated underwriting system
indicated that the borrower had $1,164 in available assets; however, the borrower’s bank account
in National City’s and HUD’s files listed the borrower’s assets as $615. Further, the
coborrower’s income was overstated and the information entered in the automated underwriting
system was not accurate.




                                                38
Loan number: 492-7198799

Mortgage amount: $97,470

Section of Housing Act: 203(b)

Date of loan closing: May 21, 2004

Status as of July 24, 2006: Claim

Prior status: Active

Payments before first default reported: One

Claim paid by HUD: $103,780

Loss to HUD: $20,473

Summary:

National City’s underwriter (AK25) approved this loan, which contained significant
underwriting deficiencies. The borrower’s file contained a residential merged credit report or a
factual data credit report that did not provide a detailed account of the borrower’s employment
history, contain verification of the borrower’s current employment and income (if obtainable),
and include a statement attesting to the certification of employment and date verified in
accordance with HUD Handbook 4155.1, REV-5.

Further, although the borrower’s spouse was a nonpurchaser, her liabilities must be included in
the calculation of the qualifying ratios. The credit report obtained for the coborrower did not
comply with the credit report requirements outlined in HUD Handbook 4155.1, REV-5. In
particular, the credit report did not contain a valid Social Security number.

The borrower’s qualifying ratios without the inclusion of the coborrower’s debt exceeded HUD’s
effective payment-to-income ratio by 2.25 percent.

Additionally, the borrower’s previous homes address was not accurate. We determined the
address listed for the borrower does not exist; however, there was a verification of rental history
form in the loan’s file. The borrower did not have a credit history so he provided a letter from a
utility company to show he made the required payments in a timely manner; however, when we
contacted the company, we were informed that service was never provided to the borrower’s
address as identified on the letter.

When we reverified the borrower’s employment, we were informed by the office manager that
the borrower was never employed by the company.




                                                39
Loan number: 352-5189728

Mortgage amount: $169,302

Section of Housing Act: 203(b)

Date of loan closing: March 5, 2004

Status as of April 5, 2006: Terminated, paid in full

Prior status: Not applicable

Payments before first default reported: Five

Summary:

National City’s underwriter (L778) did not document compensating factors for exceeding the
income ratios. Additionally, the borrower did not provide evidence that all of the collection and
judgment accounts were paid off before closing. The borrower also did not provide written
explanations for the judgment accounts.

National City did not document the gift funds by obtaining a gift letter signed by the donor and
the borrower. Additionally, the gift letter did not state that no repayment was required.
Although the gift letter identified the borrower, it did not provide the borrower’s address and
telephone number. Further, National City did not document the transfer of funds from the donor
to the borrower.

The borrower’s income was overstated, which resulted in the income ratios, which already
exceeded HUD’s requirement, to be even higher. The coborrower’s income was inflated due to
the inclusion of overtime income; however, National City did not develop an average of bonus or
overtime income for the past two years or justify and document in writing the reason for using
the income for qualifying purposes in accordance with HUD Handbook 4155.1, REV-5.




                                                40
Loan number: 151-7671875

Mortgage amount: $120,785

Section of Housing Act: 203(b)

Date of loan closing: August 18, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: Four

Summary:

National City’s underwriter (P396) did not obtain written explanations from the borrower for the
collections and judgments identified on the borrower’s credit report. According to HUD’s
requirements, major indications of derogatory credit including judgments, collections, and any
recent credit problems require sufficient written explanation from the borrower. The borrower
must explain in writing all collections and judgments.

Additionally, the verification of deposit form used to support to borrower’s downpayment was
not accompanied by a bank statement. According to HUD Handbook 4155.1, REV-5,
verification of deposit, along with the most recent bank statement, may be used to verify savings
and checking accounts.




                                               41
Loan number: 137-2840495

Mortgage amount: $94,547

Section of Housing Act: 203(b)

Date of loan closing: February 2, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: Not available

Summary:

National City’s underwriter (N208) included inappropriate expenses in the calculation of the
mortgage amount; therefore, the inclusion of these expenses, such as commitment fees and
overdue taxes, resulted in the loan being overinsured by more than $785.




                                               42
Loan number: 381-7487573

Mortgage amount: $118,669

Section of Housing Act: 203(b)

Date of loan closing: September 20, 2004

Status as of April 5, 2006: Refinanced

Prior status: Active

Payments before first default reported: Not available

Summary:

The borrower’s prior mortgage loan was due for the next payment. The payoff amount indicated
on the HUD-1 settlement statement included the payment that was due on the prior loan. Instead
of the borrower paying the prior mortgage payment at closing, the amount was netted against the
new insured mortgage amount.

Additionally, National City’s underwriter (AZ97) wrote on the notification of loan action form
that the September 2004 payment must be made at/before closing. The loan file did not contain
any documentation to determine that the payment was made. Also, this loan was overinsured by
more than $526 due to the underwriter’s overestimation of the financing costs.




                                               43
Loan number: 137-2892405

Mortgage amount: $154,812

Section of Housing Act: 203(b)

Date of loan closing: February 24, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: Not available

Summary:

National City’s underwriter (T398) did not provide sufficient compensating factors for exceeding
one of HUD’s qualifying ratios. It stated on the mortgage credit analysis worksheet that the
borrower had stable employment. Although this may have been accurate, it was not a justifiable
compensating factor since the borrower’s housing expense was going to increase from the
amount the borrower paid for rental expenses.

When we reverified the coborrower’s employment, we were informed that some of the salary
information provided on the form was not completed by her, such as the date of the coborrower’s
salary increase and the coborrower’s start date. Therefore, using the employment date provided
by the employer, we determined that National City did not verify a two-year period of
employment history for the coborrower.

The borrowers had two judgments identified on their credit report. One of the judgments was
satisfied; however, there was no documentation in the loan file to determine that the other
judgment was also satisfied. The borrowers did not provide written explanations for both of the
judgment accounts.




                                               44
Loan number: 201-3401739

Mortgage amount: $103,279

Section of Housing Act: 203(b)

Date of loan closing: June 29, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: 10*

Summary:

National City’s underwriter (U640) did not properly determine the borrower’s income. The
underwriter used a written letter from the borrower’s employer to determine the borrower’s
income. However, the borrower’s earnings statements and verification of employment form,
also completed by another person at the same company, identified two different amounts. The
underwriter did not resolve the inconsistencies with the borrower’s employer. Therefore, using
the start date indicated on the verification of employment form and the borrower’s earnings
statements, we determined the borrower’s income was overstated.

The borrower’s credit report identified collection accounts and a civil judgment. However, the
borrower did not provide any written documentation to explain the collections and the judgment.




   •   - In HUD’s Neighborhood Watch system, this loan is not reported as an early payment
       default. However, in HUD’s Single Family Data Warehouse system and National City’s
       Loan Review System, the loan is reported as an early payment default.




                                              45
Loan number: 493-7780858

Mortgage amount: $111,779

Section of Housing Act: 203(b)

Date of loan closing: April 30, 2004

Status as of July 24, 2006: Active

Prior status: Not Applicable

Payments before first default reported: 13*

Summary:

The loan was overinsured by more than $2,100. At closing, National City provided the borrower
with a credit to closing expenses; however, this credit was not included on the mortgage credit
analysis worksheet when National City’s underwriter (7777) determined the maximum insurable
mortgage amount for this loan.




* - In HUD’s Neighborhood Watch system, this loan is not reported as an early payment default.
However, in HUD’s Single Family Data Warehouse system and National City’s Loan Review
System, the loan is reported as an early payment default.




                                              46
Loan number: 241-7453453

Mortgage amount: $207,973

Section of Housing Act: 203(b)

Date of loan closing: April 26, 2004

Status as of April 5, 2006: Terminated, paid in full

Prior status: Active

Payments before first default reported: Not available

Summary:

National City’s underwriter (AZ97) overestimated the maximum mortgage amount for this
streamline refinanced loan. The principal payoff amount due on the prior mortgage was
overestimated; therefore, the loan was overinsured by more than $698.

The borrower received $450 cash back when the maximum amount that the borrower can receive
on a streamline refinance is $250. According to HUD’s requirements, streamline refinances are
designed to lower the monthly principal and interest payments on a current Federal Housing
Administration-insured mortgage and must not involve cash back to the borrower, except for
minor adjustment at closing not to exceed $250.




                                                47
Loan number: 031-3181600

Mortgage amount: $70,887

Section of Housing Act: 203(b)

Date of loan closing: May 28, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: 12*

Summary:

This loan was underwritten using an automated underwriting system, Fannie Mae Desktop. All
of the collections listed on the automated underwriting feedback certificate as needing to be paid
were not.

The borrowers received gift funds from a parent; however, the gift funds were not properly
documented. For instance, the source of funds and the transfer of the funds were not disclosed.




* - In HUD’s Neighborhood Watch system, this loan is not reported as an early payment default.
However, in HUD’s Single Family Data Warehouse system and National City’s Loan Review
System, the loan is reported as an early payment default.




                                                48
Loan number: 561-8087045

Mortgage amount: $203,453

Section of Housing Act: 203(b)

Date of loan closing: October 08, 2004

Status as of April 5, 2006: Terminated, paid in full

Prior status: Active

Payments before first default reported: Three

Summary:

National City’s underwriter (5525) underwrote the loan when one of HUD’s qualifying ratios
was exceeded and did not provide compensating factors. The borrower provided bank
statements for two months; however, the ending balance recorded on the first month’s statement
was not the beginning balance on the next month’s statement. The verification of deposit in
National City’s file was for a recently opened account. The borrower did not provide
explanations for the bank statements and the source of funds for the recently opened account,
which was opened four days before the loan closed.




                                                49
Loan number: 137-2900156

Mortgage amount: $89,483

Section of Housing Act: 203(b)

Date of loan closing: March 19, 2004

Status as of July 24, 2006: Claim

Prior status: Active

Payments before first default reported: Five

Claim paid by HUD: $99,908

Loss to HUD: $27,356

Summary:

This loan was underwritten using an automated underwriting system, Fannie Mae’s Loan
Prospector. The borrower’s file did not contain any documentation to support the downpayment
assistance provided to the borrower in the amount of $3,803 or a tax credit in the amount of
$2,750. Without the supporting documentation, the borrower did not have enough funds to
close.




                                               50
Loan number: 261-8815770

Mortgage amount: $110,023

Section of Housing Act: 203(b)

Date of loan closing: August 25, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: Not available

Summary:

National City’s underwriter overestimated the financing costs; therefore, this loan exceeded
HUD’s maximum mortgage amount. Due to the overestimation, this loan was overinsured by
more than $1,258.

The borrower did not make the prior mortgage payment that was due before or at the settlement
closing. Before closing on the new mortgage, the borrower was due for the current month’s
mortgage payment. The amount listed on the borrower’s payoff statement included the current
month’s mortgage payment, and when the loan settled, the amount listed on the HUD-1
settlement statement included the principal and interest payment for current month. The
borrower did not pay any money at closing, and the borrower’s file did not indicate that the
borrower made this payment before closing.




                                               51
Loan number: 023-1991951

Mortgage amount: $115,517

Section of Housing Act: 203(b)

Date of loan closing: February 13, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: Not available

Summary:

National City’s underwriter (O112) approved this loan without determining whether the
borrower made the payment that was currently due on his previous Federal Housing
Administration-insured mortgage. The payoff amount listed on the HUD-1 settlement statement
included interest payments for January and February 2004; therefore, the borrower did not make
his mortgage payment before closing. The borrower paid $892 and received $15 at closing as
reflected on the HUD-1 settlement statement. This amount does not accurately represent the
monthly mortgage payment amount of $938 as shown on the borrower’s mortgage credit report.




                                               52
Loan number: 151-7712123

Mortgage amount: $58,943

Section of Housing Act: 203(b)

Date of loan closing: August 25, 2004

Status as of July 24, 2006: Claim

Prior status: Not applicable

Payments before first default reported: One

Claim paid by HUD: $64,269

Summary:


National City’s underwriter (U674) used overtime income in the borrower’s income calculation
without averaging the income over a two-year period or establishing an earnings trend for the
income. Therefore, we excluded the borrower’s overtime income and determined HUD’s
qualifying ratio was exceeded by 2.3 percent.




                                              53
Loan number: 292-4480217

Mortgage amount: $76,794

Section of Housing Act: 203(b)

Date of loan closing: April 20, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: Not available

Summary:

National City’s underwriter (N748) did not ensure that the borrower made the prior mortgage
payment that was due before or at the settlement. Before closing on the new mortgage, the
borrower was due for the prior mortgage’s April 2004 payment. The amount listed on the
borrower’s payoff statement included the April 2004 mortgage payment, and when the loan
settled, the amount listed on the HUD-1 settlement statement included the principal and interest
for the prior mortgage’s April 2004 payment. The borrower received cash back at closing in the
amount of $250.




                                               54
Loan number: 151-7563379

Mortgage amount: $156,411

Section of Housing Act: 203(b)

Date of loan closing: April 30, 2004

Status as of July 24, 2006: Active

Prior status: Not applicable

Payments before first default reported: Not available

Summary:

National City’s underwriter (AR96) approved this loan without determining whether the
borrower made the payment that was currently due on his previous Federal Housing
Administration-insured mortgage. The payoff dated April 21, 2004, indicated that the loan was
due for the April 1, 2004 payment. However, the payoff amount shown on the HUD-1
settlement statement included the due payment of $880 and late charges of $47.




                                               55