oversight

K Hovnanian American Mortgage, LLC, Plano, Texas, Violated Underwriting Requirements and Did Not Meet All Quality Control or Branch Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-01-26.

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

                                                                         Issue Date
                                                                                  January 26, 2006
                                                                         Audit Report Number
                                                                                  2006-FW-1004




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


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

SUBJECT: K Hovnanian American Mortgage, LLC, Plano, Texas, Violated Underwriting
         Requirements and Did Not Meet All Quality Control or Branch Requirements


                                              HIGHLIGHTS

    What We Audited and Why

                  We audited the Plano, Texas, branch office of K Hovnanian American Mortgage
                  Company, LLC (K Hov), part of Hovnanian Enterprises, Inc. We selected K Hov
                  because of its high defaults, specifically defaults involving loans with one
                  underwriter 1 and one appraiser. K Hov is a nonsupervised mortgage company.

                  Our audit objectives were to determine whether K Hov: (1) followed U.S.
                  Department of Housing and Urban Development (HUD) origination requirements
                  (2) complied with HUD branch requirements in its Plano office; and (3)
                  implemented a quality control plan according to HUD requirements.

    What We Found


                  K Hov violated HUD underwriting, quality control, and branch requirements. As
                  a result, K Hov increased the risk to the insurance fund by more than $1.3 million
1
     Although this was the case during the survey stage of the audit, we later reviewed loans originated by another
     underwriter and the automated underwriting system.
           and overcharged borrowers $31,711. This occurred because K Hov ignored or
           misunderstood HUD regulations including meeting all quality control and branch
           requirements.

What We Recommend


           We recommend that HUD’s assistant secretary for housing – federal housing
           commissioner and chairman of the Mortgagee Review Board require K Hov to:

           •   Indemnify the five loans that had significant underwriting deficiencies.
           •   Reimburse HUD for the four loans with significant underwriting deficiencies
               that HUD paid off due to default.
           •   Reimburse borrowers or HUD, as appropriate, for unallowable closing costs.
           •   Meet HUD’s quality control and branch requirements.

           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 a draft report to K Hov on October 27, 2005, with an expected
           written response from K Hov due on November 14, 2005. Due to Hurricane
           Wilma and its impact on K Hov's West Palm Beach, Florida office, we agreed to
           an extension and held an exit conference on December 1, 2005. K Hov provided
           written comments on December 5, 2005. K Hov disagreed with the issues
           regarding down payment assistance and underwriting deficiencies but agreed to
           return fees that it improperly charged to borrowers and to address branch
           deficiencies. Based on K Hov’s comments we revised the report to remove
           discussion of the down payment assistance issue. K Hov’s response along with
           our evaluation is included in Appendix B of this report. We redacted names of
           borrowers and did not include the attachments due to the volume.




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                       4

Results of Audit
Finding 1: K Hov Violated HUD Underwriting Requirements and Charged Unallowed   5
           Closing Costs
Finding 2: K Hov Did Not Meet All Quality Control or Branch Requirements        9

Scope and Methodology                                                           12

Internal Controls                                                               13

Appendixes
   A.   Schedule of Questioned Costs and Funds to be Put to Better Use          15
   B.   Auditee Comments and OIG’s Evaluation                                   16
   C.   Questioned Closing Costs by Loan                                        46
   D.   Underwriting Deficiencies by Loan                                       47
   E.   Case Narratives                                                         48




                                             3
                      BACKGROUND AND OBJECTIVES

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

We audited the Plano, Texas, branch office of K Hovnanian American Mortgage Company, LLC
(K Hov), part of Hovnanian Enterprises, Inc., located at 5808 West Plano Parkway in Plano,
Texas. K Hov is a nonsupervised mortgage company. HUD approved the branch office on
March 15, 2001, to originate single family loans under Section 203(b)(1) of the National
Housing Act. As a condition of approval, HUD requires K Hov to maintain a quality control
plan for the origination and servicing of insured loans. The quality control plan must meet
HUD’s requirements, as well as be a prescribed function of K Hov’s policies, procedures, and
operations.

Hovnanian Enterprises, Inc.’s 2 subsidiaries include K Hov, Goodman Family of Builders
(Goodman Homes), and Fair Land Title, the mortgage company, builder, and title company,
respectively, for the loans reviewed. Founded in 1959, Hovnanian Enterprises, Inc., designs,
constructs, and markets a variety of for-sale houses in 275 residential communities in 13 states.
Further, in the markets in which its mortgage subsidiaries originated loans, a majority of the
mortgages obtained were from its wholly owned mortgage subsidiary. In turn, those mortgages
were sold in the secondary markets.

During our audit scope of January 1, 2003, through December 31, 2004, K Hov originated 197
loans within the Fort Worth and Dallas HUD offices’ jurisdiction. Of those 197 loans, the same
underwriter originated 63 loans with K Hov. Thirteen of the seventy-one loans defaulted during
the audit scope.

As part of our 2005 annual audit plan, we selected K Hov because of its high default rate,
specifically defaults involving loans with one underwriter and one appraiser. According to
HUD’s Neighborhood Watch System, K Hov’s default rate was 7.5 percent.

Our audit objectives were to determine whether K Hov: (1) followed HUD origination
requirements including underwriting and use of gifts; (2) complied with HUD branch
requirements in its Plano office; and (3) implemented a quality control plan according to HUD
requirements.




2
    A Fortune 500 company.


                                                4
                                  RESULTS OF AUDIT

Finding 1: K Hov Violated HUD Underwriting Requirements and
Charged Unallowed Closing Costs
K Hov did not follow underwriting requirements for 17 of 19 loans reviewed and charged the
borrowers $31,711 in 18 of 19 loans reviewed for unallowable closing costs. This occurred
because K Hov ignored or misunderstood HUD regulations and because it did not adhere to
HUD’s quality control and branch requirements as discussed in Finding 2. As a result, K Hov
increased the risk to the insurance fund by more than $1.3 million and overcharged borrowers by
$31,711.




    K Hov Loans Contained
    Underwriting Deficiencies


                K Hov loans contained underwriting deficiencies in 17 of the 19 loans reviewed.
                As a result, K Hov increased the risk to the insurance fund. The loan amounts for
                the 17 loans totaled $2,425,300. These underwriting deficiencies occurred
                because K Hov employees did not follow HUD requirements. K Hov:

                     •   Rolled outstanding debt into the mortgage;
                     •   Did not include compensating factors or debt on the mortgage credit
                         analysis worksheet;
                     •   Did not reduce the sales price by a sales incentive;
                     •   Did not require a written explanation for inquiries regarding a credit
                         report;
                     •   Did not document the gift transfer;
                     •   Allowed interested third parties to fax financial documents; and
                     •   Originated a loan with a bankruptcy and poor borrower financial
                         management.

                For three loans, K Hov rolled outstanding debt into the mortgage. HUD
                regulations state that it is unacceptable underwriting to allow payment of
                consumer debt. 3

                For two loans, K Hov did not include the compensating factors when required or
                all of the outstanding debt on the mortgage credit analysis worksheet. HUD


3
    Mortgagee Letter 2002-02.


                                                  5
                regulations require that the lender must include supported compensating factors 4
                when liability ratios exceeded HUD benchmark guidelines and counting all debts
                lasting longer than 10 months toward a borrower’s liabilities. 5

                For one loan, the borrower received a 51-inch screen television as a sales
                incentive. Goodman Homes documented this sales incentive on the real estate
                purchase agreement, but K Hov did not require Goodman Homes to reduce the
                sales price by the incentive as required by HUD regulations. 6

                K Hov did not require written explanations for recent inquires regarding the credit
                report for three loans. HUD regulations require that borrowers must provide
                sufficient and rational explanation of derogatory credit. 7

                K Hov did not document the transfer for the 16 loans that received gift funds.
                HUD regulations state that the lender must document the transfer of funds from
                the donor to the borrower. 8

                For three loans, K Hov received financial documentation faxed from an interested
                third party. HUD regulations require that lenders may not accept or use
                documents relating to credit, employment, or income by, from, or through an
                interested third party. 9

                Lastly, one loan contained a bankruptcy that the borrower did not show was
                caused by extenuating circumstances beyond their control and the borrower did
                not exhibit the ability to manage their financial affairs in a responsible manner.
                HUD regulations 10 allow a borrower to have a bankruptcy on their credit if the
                borrower can show that the bankruptcy was caused by extenuating circumstances
                beyond their control and has since exhibited an ability to manage financial affairs.
                The borrower quit their job without having another job, which is not beyond the
                borrower’s control. Further, two months' worth of bank statements, provided by
                the borrower, contained numerous overdraft and advance fees, showing that the
                borrower did not manage their financial affairs in a responsible manner. The loan
                defaulted within 15 months of closing.

4
     HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One
     to Four Family Properties,” paragraph 2-13.
5
     HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One
     to Four Family Properties,” paragraph 2-11.
6
     HUD Handbook 4155.1, REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family
     Properties” paragraph 1-7B.
7
     HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One
     to Four Family Properties,” paragraph 2-3B.
8
     HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One
     to Four Family Properties,” paragraph 2-10C.
9
     HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One
     to Four Family Properties,” paragraph 3-1.
10
     HUD Handbook 4155.1, REV-4 CHG-1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four
     Family Properties,” paragraph 2-3E.



                                                   6
                 In our opinion, deficiencies on 9 of the 17 loans were significant enough to
                 warrant indemnification or reimbursement of claims paid (see Appendix D). We
                 recommend indemnification on five loans totaling $737,850 for significant
                 underwriting deficiencies. Further, K Hov should reimburse HUD $577,865 for
                 the claims on four loans with significant underwriting deficiencies. 11


     K Hov Charged Unallowable
     Fees


                 K Hov charged borrowers $5,619 unallowable closing costs in 18 of the 19 loans
                 reviewed. 12 We also reviewed an additional 133 loans for gift processing fees
                 and found $26,092 in unallowable closing costs. Consequently, borrowers paid
                 $31,711 in unallowable closing costs because K Hov did not follow HUD
                 requirements and/or guidelines.

                 The unallowable closing costs included:

                      ƒ   $28,612 in HUD-prohibited gift-processing fees. 13
                      ƒ   $869 in tax service fees on 11 of the 19 loans. 14
                      ƒ   $370 in inspection fees on 6 of 19 loans when the appraisal showed the
                          property 100 percent complete. 15

                 K Hov should reimburse the borrowers or HUD, as appropriate, 16 for the $31,711
                 for the unallowable closing costs.

     K Hov’s Participation in Down
     Payment Assistance Program


                 Our October 27, 2005 draft report included a discussion of K Hov’s activities as
                 participants in a down payment assistance program that involved K Hov,
                 Goodman Homes, and a nonprofit entity. However, during the exit conference
                 and in its response, K Hov cited HUD's response to a recent GAO report 17 and a
                 HUD legal opinion as support for K Hov's position that HUD allowed these

11
     See the case narratives in Appendix E for the specific loans to be indemnified or claim reimbursed.
12
     See Appendix C for specifics.
13
     According to HUD’s Quality Assurance Division, any closing costs not specifically addressed in HUD’s
     guidance are considered unallowable.
14
     HUD Homeownership Center Reference Guide, chapter 2, “Mortgage Credit Guide,” paragraph 2-15.
15
     Ibid.
16
     K Hov should reimburse the borrowers on current loans and HUD on claims paid.
17
     Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment
     Assistance GAO-06-24, November 9, 2005


                                                     7
                 activities if the timing of the gift funds was appropriate. Based on K Hov's
                 comments, we decided to address the issue with HUD and accordingly removed
                 discussion of this issue from the final report.


         Conclusion


                 Seventeen of the nineteen loans reviewed totaling $2,425,300 contained several
                 underwriting deficiencies including charging borrowers $31,711 in unallowable
                 closing costs. We are recommending indemnification on five loans totaling
                 $737,850 and repayment of $577,865 on four loans for which HUD paid a claim
                 that contained underwriting deficiencies.


        Recommendations


                 We recommend that HUD’s assistant secretary for housing – federal housing
                 commissioner and chairman of the Mortgage Review Board require K Hov to:

                 1A. Indemnify five loans totaling $737,850 for underwriting deficiencies.

                 1B. Repay $577,865 to HUD for claims paid on four loans with underwriting
                     deficiencies.

                 1C. Reimburse borrowers or HUD, as appropriate, 18 $31,711 for unallowable
                     closing costs.

                 1D. Ensure K Hov complies with HUD’s underwriting requirements, including
                     charging only allowable closing costs.




18
     K Hov should reimburse the borrowers on current loans and HUD on claims paid.


                                                       8
Finding 2: K Hov Did Not Meet All Quality Control or Branch
Requirements

K Hov did not meet all quality control or branch requirements. Specifically, K Hov’s quality
control plan lacked requirements regarding on-site reviews and review of loans that defaulted
within the first six payments. Further, K Hov’s part-time Plano branch manager also was a full-
time employee of Goodman Homes, which like K Hov is a subsidiary of Hovnanian Enterprises,
Inc. Lastly, the space occupied by K Hov’s Plano branch office did not distinguish to the public
that they entered into a mortgage company. These conditions were contrary to Federal Housing
Administration underwriting requirements and were contributing factors to the underwriting
problems as discussed in Finding 1. K Hov officials indicated that they were unaware of the
requirements. In response to the audit, K Hov has updated its quality control plan and moved to
a separate office.




     K Hov’s Quality Control Plan
     Did Not Contain All HUD
     Requirements


                 K Hov’s quality control plan did not contain all HUD requirements regarding on-
                 site reviews and reviews of loans that defaulted within the first six payments.
                 Although HUD requires annual on-site reviews, K Hov did not conduct any on-
                 site reviews that met HUD branch requirements. After we brought this issue to
                 K Hov’s quality manager’s attention, K Hov revised its quality control plan to
                 include steps for an annual on-site visit to all branches. Before our audit, K Hov
                 performed no annual on-site visits to its branches. HUD requirements 19 required
                 annual visits for offices meeting certain higher risk criteria such as high early
                 default rates, new branches or new key personnel, sudden increases in volume,
                 and past problems.

                 Although K Hov had a procedure in its quality control plan to review early
                 defaults, it did not. Further, its contractor did not implement this procedure as
                 part of its contractual obligations during K Hov’s quality assurance review. HUD
                 requirements 20 state that, in addition to the loans selected for routine quality
                 control reviews, lenders must review all loans going into default within the first
                 six payments.

                 According to K Hov’s quality manager, until a review of the North Carolina
                 branch by HUD’s Quality Assurance Division, K Hov was not aware of the early

19
      HUD Handbook 4060.1, REV-1, CHG-1, “Mortgagee Approval Handbook,” paragraph 6-3G2.
20
      HUD Handbook 4060.1, REV-1, CHG-1, “Mortgagee Approval Handbook,” paragraph 6-6D.


                                                   9
                 default review requirement. However, the quality manager stated that since
                 November 2004, the contractor had accomplished the early default step.

                 Without the loan reviews, K Hov could not ensure it was protecting HUD and
                 itself from unacceptable risk. Also, K Hov could not swiftly identify, address,
                 and correct anomalies or problems that occurred.


     K Hov’s Branch Manager Was
     an Employee of Goodman
     Homes


                 K Hov’s Plano branch manager was a part-time K Hov employee and a full-time
                 employee of Goodman Homes. HUD regulations 21 require K Hov employees,
                 whether full- or part-time, to be exclusively employed by K Hov. Also, contrary
                 to HUD regulations requiring a branch to have at least three employees, K Hov’s
                 Plano office only employed one part-time branch manager.

                 HUD regulations require that only lender employees conduct the business affairs
                 of the lender. As shown in the following e-mail, the Plano branch manager made
                 business decisions for Goodman Homes on loans originated by K Hov. In the e-
                 mail, the K Hov branch manager tells an identity-of-interest title company (Fair
                 Land Title) employee that adding a gift to the sales price is the only way a house
                 will sell. At this point the branch manager is acting in the interests of the builder,
                 her full-time employer.

                 April 2003 E-mail from Goodman Family of Builders (GFB)/K Hov employee
                 to Fair Land Title employee




     Entrance to K Hov’s Plano
     Branch Was Not Clearly
     Identified

                 K Hov did not clearly identify itself; thus, the borrowers and the public may not
                 have known whether they were in the offices of K Hov or its identity-of-interest


21
      HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” paragraph 2-14.


                                                   10
                 company, Goodman Homes. From outside the building, it appeared that Goodman
                 Homes was the only occupant. Additionally,

                       o K Hov located its office on the second floor within space used by Goodman
                         Homes’ administrative personnel.
                       o K Hov conducted its loan originations out of its home office in West Palm
                         Beach, Florida. The Plano office only took applications for and provided
                         information to Goodman Homes’ buyers. K Hov maintained all Plano
                         branch origination files at its home office.
                       o K Hov believed it met HUD’s requirements because it only originated loans
                         for Goodman Homes. Further, it did not believe that it needed to place its
                         name on the door because its offices were located within the Goodman
                         Homes offices.
                       o HUD regulations require K Hov to clearly identify itself so people would
                         know with whom they were doing business. 22


     Recommendation


                 We recommend that HUD’s assistant secretary for housing to:

                 2A.      Ensure K Hov initiated corrective actions that comply with HUD’s quality
                          control and branch requirements.




22
      HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” paragraph 2-16A4.


                                                   11
                         SCOPE AND METHODOLOGY

To accomplish our objectives, we:

       ¾ Reviewed applicable HUD handbooks and mortgagee letters.

       ¾ Reviewed 19 insured loans originated by K Hov between January 1, 2003, and
         December 31, 2004. The 19 loans were part of a universe of 197 loans from the Fort
         Worth and Dallas HUD offices originated by K Hov during the audit period. The results
         of the detailed testing apply to the 19 reviewed loans only and cannot be projected to the
         universe of the other insured loans

       ¾ Expanded our audit scope to include 133 insured loans that received gift funds to
         determine whether the sales price increased by the gift and whether K Hov charged
         borrowers gift processing fees.

       ¾ Examined closing documentation including sales contracts, appraisals, and loan
         applications.

       ¾ Conducted interviews with officials and employees of K Hov, K Hov’s quality
         assurance contractor, Fair Land Title Company, and the HUD Quality Assurance
         Division.

       ¾ Contacted borrowers by mail, telephone, or in-person interviews.

       ¾ Performed site visits to several properties.

In addition, we relied in part on data maintained by HUD in its Neighborhood Watch system. We
did not perform a detailed analysis of the reliability of this computer database.

The audit covered the period from January 1, 2003, through December 31, 2004. We conducted our
fieldwork from March 14 through September 30, 2005. We performed our fieldwork at the offices
of Goodman Homes and Fair Land Title, both located in Plano, Texas. We reviewed the loans at
our Fort Worth, Texas, office. We performed the audit in accordance with generally accepted
government auditing standards.




                                                12
                                 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 Controls


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

              •   Branch requirements—Policies and procedures to ensure that K Hov conducts
                  reviews of its branch activities.

              •   Loan origination process—Policies and procedures that management requires to
                  reasonably ensure that the loan origination process complies with HUD program
                  requirements.

              •   Quality control plan—Policies and procedures that management requires to
                  reasonably ensure implementation of HUD quality control requirements.

              We assessed the relevant controls identified above.

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




                                               13
Significant Weakness



          Based on our review, we believe the following item is a significant weakness:

          •   K Hov did not operate in accordance with HUD requirements as they relate to
              branch, loan origination, and quality control requirements.




                                           14
                                             APPENDIXES

Appendix A

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




                        Recommendation                              Funds to be put
                           numbers     Ineligible 1/                to better use 2/

                                 1A                                        $736,517 23
                                 1B                $576,622 24
                                 1C                    31,711


                               Totals                $608,333                 $736,517




 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/        “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.




23
      Represents the $737,850 total loan amount less $1,333 questioned in recommendation 1C.
24
      Represents the $577,865 total loan amount less $1,243 questioned in recommendation 1C.


                                                        15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         16
Comment 1




            17
18
19
20
21
22
Comment 2




            23
Comment 3




            24
Comment 4




            25
Comment 4




            26
Comment 1




Comment 2




Comment 5




            27
Comment 5




Comment 1




Comment 2




            28
Comment 5




Comment 1




Comment 2




Comment 5




            29
Comment 1




Comment 2




            30
Comment 1




Comment 2




Comment 6




Comment 5




            31
Comment 1




Comment 2




Comment 6




            32
Comment 5




Comment 1




Comment 2




            33
Comment 1




Comment 2




Comment 1




            34
Comment 2




Comment 5



Comment 5



Comment 5




Comment 1




            35
Comment 2




Comment 5




Comment 1




            36
Comment 2




Comment 5




Comment 5




Comment 5




            37
Comment 1




Comment 2




Comment 1




Comment 2




            38
Comment 1




Comment 2




            39
Comment 2




Comment 2




Comment 1




            40
Comment 2




Comment 1




Comment 2




            41
42
43
                               OIG Evaluation of Auditee Comments

Comment 1

Our October 27, 2005 draft report included discussion of K Hov’s activities as participants in a
down payment assistance program that involved K Hov, Goodman Homes, and a nonprofit
entity. However, during the exit conference and in its response, K Hov cited HUD's response to
a recent GAO report 25 and a HUD legal opinion as support for K Hov's position that HUD
allowed these activities if the timing of the gift funds was appropriate. Based on K Hov's
comments, we decided to address the issue with HUD and accordingly removed discussion of
this issue from the final report.

With respect to the wire transfers, we only noted K Hov did not have the wire transfer
documentation in the files as required. K Hov agreed that the wire transfer documentation
should be in their files and added policies to implement. We commend K Hov for taking the
actions to comply with requirements.

Comment 2

K Hov agreed that unallowable closing costs were charged on the settlement statements. K Hov
promised to take actions to ensure these types of closing costs are not charged to the borrower on
future closings. We commend K Hov for addressing the issue.

Comment 3

K Hov agreed that in the 22 instances when it charged gift processing fees to the borrower and
listed the fee on the settlement statement that it was wrong and violated HUD requirements.
K Hov agreed to repay these funds. However, K Hov did not agree that it was wrong in the other
instances cited in the report where K Hov added the gift processing fees to the sales price. We
do not accept K Hov’s distinction that the fee can be charged to the borrower by raising the sales
price, but the same fee could not be shown on the settlement statement as a charge to the
borrower. We maintain HUD prohibited K Hov from charging borrowers a gift-processing fee
irrespective of how K Hov lists it on the settlement statement.

Comment 4

We commend K Hov for taking action to correct deficiencies cited in the report.

Comment 5

In one instance, we revised our case narrative where K Hov provided additional information. In
three instances, K Hov attributed the deficiencies in its underwriting as “aberrations” and will
address these with the responsible associate. Further, K Hov believes there are no circumstances

25
     Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment
     Assistance GAO-06-24, November 9, 2005.


                                                    44
under which it should be required to indemnify poorly underwritten loans and these instances
should only be used for training purposes. OIG disagrees and maintains these loans showed poor
underwriting. Thus, we did not change the recommendation requiring indemnifications or
repayment of claim amounts.

Comment 6

In two instances, K Hov’s response confirmed that it violated Mortgagee Letter 2002-02 by
allowing gift funds to pay consumer debt. In the draft, we did not report that the gift funds paid
the consumer debt; only that K Hov included the consumer debt in the mortgage. K Hov
responded that the borrower had adequate funds to pay the debts if gift funds could be used.
However, Mortgagee Letter 2002-02 specifically states that it is unacceptable underwriting to
allow payment of consumer debt and that payment of consumer debt should be a dollar-for-dollar
reduction in sales price. Therefore, we disagree with K Hov and maintain that the two loans
contained underwriting deficiencies and the sales price should be reduced dollar for dollar for the
payment of consumer debt. Thus, we did not change the recommendation of indemnifying or
repayment to HUD for claim amounts.




                                                45
Appendix C

                 QUESTIONED CLOSING COSTS BY LOAN



                              Tax       Wire                      Gift-
   Loan       Inspection     Service   Transfer   Commitment    Processing   Underwriter   Processing
  Number      Fee              Fee       Fee         Fee          Fee *         Fee           Fee       Totals
492-6943572                     $79                     $350                                             $429
492-7312005                     $79        $50                                                           $129
492-7048388                     $79                                                                       $79
492-7272944                                                          $350                                $350
492-6783078                     $79                                                                       $79
492-6896014                     $79                     $350         $385                                $814
492-7020820            $75      $79                                                                      $154
492-7028013       **           **        **                          $350                                $350
492-7247559                                                          $350                                $350
492-6688777            $40                                           $385                                $425
491-8226744                     $79                                  $350                                $429
492-6623146            $75                 $10                                                            $85
492-6679168            $40                                                                                $40
492-6724976                                                                        $200         $200     $400
492-6788329        $100         $79                     $350                                             $529
492-6909226                     $79                     $350                                             $429
492-6995236            $40      $79                                                                      $119
492-7071238                     $79                                 $350                                 $429
Totals             $370        $869        $60         $1,400      $2,520          $200         $200    $5,619



        * We reviewed 133 additional loans that contained $26,092 in unallowable gift
        processing fees, resulting in $28,612 total questioned gift processing fees and $31,711
        total questioned closing costs.

        ** HUD questioned these closing costs during a loan review.




                                                      46
      Appendix D

                  UNDERWRITING DEFICIENCIES BY LOAN

                                                                  No
                                                             Explanation
                  Sales     Debt                             of Inquiries                  Docs
                Incentive   Rolled   All Debt   Bankruptcy    to Credit         No         thru    No Gift
                Price Not    Into    Not On     Not Beyond   Report/Bad     Compensating   Third   Docs in
Loan Number     Reduced     Loan     MCAW        Control        Debts         Factors      Party    File
 492-6943572                                                                    X           X        X
 492-7312005                                                                                X        X
 492-7048388                                                      X                                  X
 492-7272944                  X                                                                      X
 492-6783078                  X                                   X                                  X
 492-6896014                  X                                                                      X
 492-7020820                                                                                         X
 492-7028013                                                                                         X
 492-7247559       X                    X                                        X                   X
 492-6688777                                                                                X        X
 491-8226744                            X           X             X
 492-6623146                                                                                         X
 492-6679168                                                                                         X
 492-6724976                                                                                         X
 492-6788329                                                                                         X
 492-6995236                                                                                         X
 492-7071238                                                                                         X
    Total          1          3         2           1             3              2           3       16



  Notes:
  Italicized loan number indicates loans that had significant underwriting deficiencies that HUD
  paid a claim. K Hov should reimburse HUD for these payments.
  Bolded loan numbers indicate loans that had significant underwriting deficiencies. K Hov
  should indemnify.
  Unallowable Closing Costs are listed in Appendix C.




                                                   47
Appendix E

                                  CASE NARRATIVES


                  Case Narrative—Loan Number 492-6943572
Mortgage amount: $156,750

Date of loan closing: August 8, 2003

Unallowable closing costs: $429 - $350 commitment fee and $79 tax service fee

Underwriting Deficiencies
             • Gift transfer not documented by lender,
             • Unallowable closing costs charged,
             • No compensating factors when back-end ratio exceeded HUD guidelines, and
             • Financial documents sent through interested third parties.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 26
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $429 in unallowable closing costs, $350 for an unallowable
commitment fee and $79 for a tax service fee. According to HUD’s Homeownership Center
Reference Guide, commitment fees and tax service fees are unallowable.

Required Compensating Factors Not Provided

K Hov did not provide compensating factors for the borrower exceeding the back-end ratio.
HUD Handbook 4551.1 requires K Hov to obtain supporting documentation from the borrower
and record the compensating factor(s) when borrowers exceed mortgage and debt repayments-to-
income ratios to justify mortgage repayment.

Financial Documents Sent through Interested Third Party

Diamond Homes, a subsidiary of Goodman Homes, faxed credit, employment, and financial
documentation to K Hov. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1, states lenders
may not accept or use documents relating to the credit, employment, or income of borrowers that
26
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


                                                 48
are handled by or transmitted from or through interested third parties (e.g., real estate agents,
builders, sellers) or by using their equipment.

Recommendations:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

       •   Reimburse HUD $429 for allowable closing costs paid.
       •   Reimburse HUD $156,376 for the amount of the claim paid on this loan.




                                                 49
                  Case Narrative—Loan Number 492-7312005

Mortgage amount: $163,550

Date of loan closing: October 20, 2004

Unallowable closing costs: $129--$79 for tax service fee and $50 for rush wire transfer fee

Underwriting Deficiencies
             • Gift transaction not documented by lender,
             • Unallowable closing costs charged, and
             • Financial documents through interested third party (real estate agent).

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 27
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $129 in unallowable closing costs; it charged $79 for a tax service
fee and $50 for a wire fee. The borrower paid a $79 tax service fee outside of closing to K Hov.
In addition, K Hov charged the borrower a $50 rush wire fee. Based on an e-mail, K Hov did not
order the gift funds in a timely manner, which resulted in the wire fee. These were unallowable
closing costs per HUD guidelines.

Financial Documents Sent through Interested Third Party

The borrower’s real estate agent faxed credit, employment, and financial documentation to K
Hov. HUD Handbook 4155.1, REV-5, paragraph 3-1, state lenders may not accept or use
documents relating to the credit, employment, or income of borrowers that are handled by or
transmitted from or through interested third parties (e.g., real estate agents, builders, sellers) or
by using their equipment.

Recommendations:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

        •   Reimburse the borrower $129 for unallowable closing costs.
        •   Indemnify HUD for $163,550 against loss for this loan’s underwriting deficiencies.


27
     HUD Handbook 4155.1, REV-5, paragraph 2-10C.


                                                    50
                  Case Narrative—Loan Number 492-7048388
Mortgage amount: $148,800

Date of loan closing: January 28, 2004

Gift amount: $8,743

Unallowable closing costs: $79 tax service fee

Underwriting Deficiencies
             • Gift transfer transaction not documented by lender,
             • Unallowable closing costs charged, and
             • Borrower not required to explain derogatory credit.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 28
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $79 in an unallowable tax service fee closing cost. This was an
unallowable closing cost according to HUD guidelines.

Derogatory Credit Information Not Explained

The borrowers’ did not provide an explanation of a spouse’s derogatory credit information.
Texas is a community property state. HUD Handbook 4155.1, REV-5, paragraph 2-3 requires
the borrower to provide sufficient and rational explanation of the derogatory credit. Also, HUD
Handbook 4155.1, REV-5, paragraph states, “Except for the obligations specifically excluded by
state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying
ratios if the borrower resides in a community property state or the property to be insured is
located in a community property state. Although the non-purchasing spouse’s credit history is
not to be considered a reason for credit denial, a credit report that complies with the requirements
of paragraph 2-4 must be obtained for the non-purchasing spouse in order to determine the debt-
to-income ratio.”

HUD Handbook 4155.1, REV-5, paragraph 2-3C, states that collections and judgments indicate a
borrower’s regard for credit obligations and must be considered in the analysis of
creditworthiness with the lender documenting its reasons for approving a mortgage when the
borrower has collection accounts or judgments. The borrower must explain in writing all
collections and judgments.

28
     HUD Handbook 4155.1, REV-5, paragraph 2-10C.


                                                    51
Recommendations:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

       •   Reimburse the borrower $79 for the unallowable closing costs.
       •   Indemnify HUD for $148,800 against loss for this loan’s underwriting deficiencies.




                                              52
                  Case Narrative—Loan Number 492-7272944
Mortgage amount: $135,100

Date of loan closing: September 10, 2004

Unallowable closing costs: $350 gift processing fee

Underwriting Deficiencies
             • Gift transfer transaction not documented by lender,
             • Unallowable closing costs charged, and
             • Installment loan included in the mortgage.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 29
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov did not require Goodman Homes to reduce the sales price of the house by the unallowable
fee. Goodman Homes charged the borrower an unallowable $350 Home Gift USA gift-
processing fee in the calculation of the mortgage amount. As discussed above, Goodman Homes
added the gift-processing fee to the sales price of the home.

Installment Loan Included in Mortgage

The settlement statement showed that an installment loan to Capitol One in the amount of $338
was rolled into the purchase price of the property. Total closing costs of $9,856 were added to
the contract sales price of $136,244. Of the $9,856, $338 of debt was rolled into the mortgage.
Mortgagee Letter 2002-02 states that it is unacceptable underwriting to allow payment of
consumer debt and that payment of consumer debt should be a dollar-for-dollar reduction in
price.

Recommendations:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

        •   Reimburse the borrower $350 for the gift processing fee.
        •   Indemnify HUD for $135,100 against loss for this loan’s underwriting deficiencies.



29
     HUD Handbook 4155.1, REV-5, paragraph 2-10C.


                                                    53
                  Case Narrative—Loan Number 492-6783078
Mortgage amount: $145,700

Date of loan closing: April 29, 2003

Gift amount: $4,197

Unallowable closing costs: $79 tax service fee

Underwriting Deficiencies
             • Gift transaction not documented by lender,
             • Unallowable closing costs charged,
             • Installment loans included in the mortgage, and
             • Explanation regarding derogatory credit not required.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 30
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $79 in unallowable tax service fee closing costs. This is an
unallowable closing cost according to HUD guidelines.

Installment Loans Included in Mortgage

The settlement statement showed that $253 outstanding debt was included in the $3,479 closing
costs. The $3,479 in total closing costs was added to the contract sales price of $148,000.
Mortgagee Letter 2002-02 states that it is unacceptable underwriting to allow payment of consumer
debt and that payment of consumer debt should be a dollar-for-dollar reduction in price.

One of the compensating factors included in the file was that the borrower’s “High total debt to
income ratio is offset by excellent credit with no lates on current housing for 48 months.”
However, K Hov did not address any outstanding debt issues.

K Hov responded that the “borrower had adequate funds in the account to pay debts as long as the
gift funds were acceptable which, respectfully, they were.” K Hov did not reduce the price dollar-
for-dollar as required by HUD.




30
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


                                                 54
Derogatory Credit Information Not Explained

The borrowers did not provide an explanation of derogatory credit information. HUD Handbook
4155.1, REV-4, CHG-1, paragraph 2-3, requires the borrower to provide sufficient and rational
explanation of the derogatory credit.

This loan went into default, resulting in HUD paying a $146,352 claim on the loan.

Recommendations:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

       •   Reimburse HUD $79 in unallowable closing costs.
       •   Reimburse HUD $146,352 for the claim paid.




                                              55
                   Case Narrative—Loan Number 492-6896014
Mortgage amount: $127,550

Date of loan closing: July 15, 2003

Unallowable closing costs: $814--This amount includes $79 tax service fee, $385 gift-
processing fee, and $350 commitment fee paid outside of closing.

Underwriting Deficiencies:
             • Gift transaction not documented by lender,
             • Unallowable closing costs charged, and
             • Three installment loans on settlement statement.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 31
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $814 in unallowable closing costs. It charged a $350 commitment
fee, $385 gift-service fee that it included in the sale price, and $79 for a tax service fee.

HUD’s Homeownership Center Reference Guide states that it only allows commitment fees to
nonprofits or governmental entities. According to the settlement statement, the borrower paid
this commitment fee to K Hov; thus, the $350 commitment fee was unallowable.

Goodman Homes charged the borrower an unallowable $385 Nehemiah gift-processing fee in the
calculation of the mortgage amount. As discussed above, Goodman Homes added the gift and
the processing fee to the sales price of the home.

The borrower paid a $79 tax service fee outside of closing to K Hov. This is an unallowable
closing cost according to HUD guidelines.

Installment Loans Included in Mortgage

The settlement statement showed that three installment loans totaling $336 32 were included in
the closing cost and subsequently rolled into the mortgage. Mortgagee Letter 2002-02 states that
it is unacceptable underwriting to allow payment of consumer debt and that payment of
consumer debt should be a dollar-for-dollar reduction in price.


31
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.
32
     (Nationwide Recovery $171.78, Credit Management $103, and Park Dansan $61).


                                                    56
K Hov provided the following compensating factor for the borrower: “made a diligent effort to
clean up all credit issues.” However, K Hov’s closing instructions included payment of these
three outstanding installment loans.

In its response, K Hov stated the “borrower had adequate funds in the account to pay debts as long
as the gift funds were acceptable which, respectfully, they were.” K Hov did not reduce the price
dollar-for-dollar as required by HUD.

Loan Defaulted within Six Months But Not Reviewed in Quality Control Plan

The borrower made three payments, and the loan went into claim in July 2004. K Hov did not
review this loan as required by HUD Handbook 4060.1. REV-1. CHG-1, paragraph 6-6D. This
regulation states that in addition to the loans selected for routine quality control reviews, lenders
must review all loans going into default within the first six payments.

Recommendations:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

       •   Reimburse HUD $814 for unallowable closing costs.
       •   Reimburse HUD for $128,402, the amount of the claim paid, against loss for this
           loan’s underwriting deficiencies.




                                                 57
                  Case Narrative—Loan Number 492-7020820
Mortgage amount: $103,500

Date of loan closing: October 30, 2003

Unallowable closing costs $154--$79 in tax service fees paid outside of closing and $75 for a
final inspection when the house was 100 percent complete at appraisal

Underwriting Deficiencies
             • Gift transaction not documented by lender and
             • Unallowable closing costs charged.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 33
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $154 in unallowable closing costs. It charged $79 for a tax service
fee and $75 for an inspection fee when the house was 100 percent complete.

The borrower paid a $79 tax service fee outside of closing to K Hov. This is an unallowable
closing cost according to HUD guidelines.

The borrower paid $75 for an inspection fee when the house was 100 percent complete at
appraisal. HUD Handbook 4145.1, REV-2, CHG-1. Chapter 1, paragraph 6-3A3, states that the
appraisal serves as the final inspection on properties “under construction” if the home is 100
percent complete and the appraiser completed the uniform residential appraisal report and all
necessary exhibits. In this instance, the appraisal served as the final inspection.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

        •   Reimburse HUD for $154 in unallowable closing costs.




33
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


                                                 58
                  Case Narrative—Loan Number 492-7028013
Mortgage amount: $156,100

Date of loan closing: November 21, 2003

Unallowable closing costs: $350

Underwriting Deficiencies
             • Gift transfer transaction not documented by lender and
             • Unallowable closing costs charged.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 34
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower a $350 unallowable gift-processing fee. According HUD’s
Homeownership Center Reference Guide, processing fees are unallowable.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

        •   Reimburse the borrower $350 for the unallowable closing costs.




34
     HUD Handbook 4155.1, REV-5, paragraph 2-10C.


                                                    59
                  Case Narrative—Loan Number 492-7247559
Mortgage amount: $118,800

Date of loan closing: July 29, 2004

Unallowable closing costs: $350 gift-processing fee

Underwriting Deficiencies
             • Gift transfer of funds not documented by lender,
             • Unallowable closing costs charged,
             • No compensating factors on mortgage credit analysis worksheet when
                 front/back-end ratio exceeded, and
             • Borrower received inducement to purchase without a sales reduction.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 35
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $350 in unallowable closing costs for a gift-processing fee. HUD’s
Homeownership Center Reference Guide lists all the allowable fees, and gift-processing fee is
not on that list.

Mortgage Credit Analysis Worksheet Lacked Compensating Factors

K Hov did not provide compensating factors for the borrower exceeding the back-end ratio.
HUD Handbook 4155.1 REV-5, paragraphs 2-12 and 2-13 requires K Hov to obtain supporting
documentation from the borrower and record the compensating factor(s) when borrowers exceed
mortgage and debt repayments-to-income ratios to justify mortgage repayment.

Sales Price Not Reduced by Purchase Inducement

The borrower received a 51-inch Sony television promotion, which was an inducement to
purchase and should reduce the sales price, dollar for dollar per HUD Handbook 4155.1, REV-5,
paragraph 1-7B. Personal property items such as cars, boats, riding lawn mowers, furniture,
televisions, etc., given by the seller to consummate the sale result in a reduction to the mortgage.
The value of the item(s) must be deducted from the sales price and the appraised value of the
property (if not already done so by the appraiser) before applying the loan to value ratio.



35
     HUD Handbook 4155.1, REV-5, paragraph 2-10C.


                                                    60
Recommendations:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

       •   Reimburse the borrower the $350 for the unallowable closing cost.
       •   Indemnify HUD for $118,800 against loss for this loan’s underwriting deficiencies.




                                              61
                  Case Narrative—Loan Number 492-6688777
Mortgage amount: $171,600

Date of loan closing: March 21, 2003

Unallowable closing costs: $425 -- $385 gift-processing fee and $40 overcharge of appraisal

Underwriting Deficiencies
             • Gift transaction not documented by lender,
             • Unallowable closing costs charged, and
             • Credit, employment, and financial documents sent to lender through interested
                 third party.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 36
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $425 in unallowable closing costs. It charged a $385 gift-
processing fee that it included in the sale price and overcharged $40 for the final inspection fee.

Goodman Homes charged the borrower an unallowable $385 Nehemiah gift-processing fee in the
calculation of the mortgage amount. As discussed above, Goodman Homes added the gift-
processing fee to the sales price of the home.

Exceeding the HUD maximum of $60 for a final inspection fee, K Hov charged the borrower
$100 for the final inspection fee; thus overcharging the borrower $40.

Credit, Employment, and Financial Documents Sent through Interested Third Party

Goodman Homes, an identity of interest of K Hov, faxed credit, employment, and financial
documentation to K Hov. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1, states,
“[l]enders may not accept or use documents relating to the credit, employment or income of
borrowers that are handled by or transmitted from or through interested third parties (e.g., real
estate agents, builders, sellers) or by using their equipment.”




36
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


                                                 62
Recommendations:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

       •   Reimburse the borrowers $425 in unallowable closing costs.
       •   Indemnify HUD for $171,600 against loss for this loan’s underwriting deficiencies.




                                              63
                  Case Narrative—Loan Number 491-8226744
Mortgage amount: $164,400

Date of loan closing: October 17, 2003

Gift amount: $9,103

Unallowable closing costs: $79 tax service fee

Underwriting Deficiencies
             • Gift transaction not documented by lender,
             • Unallowable closing costs charged,
             • All debt not included on mortgage credit analysis worksheet,
             • Bankruptcy not beyond the control of the borrower, and
             • No explanation for inquiries on credit report within the last 90 days.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 37
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged $79 in unallowable closing costs for a tax service fee. HUD’s Homeownership
Center Reference Guide states that it does not allow tax service fees.

All Debt Not Included on Mortgage Credit Analysis Worksheet

K Hov did not include all the debt on the mortgage credit analysis worksheet. Two of the
borrowers’ accounts went into collection in July and September 2003. Neither of these accounts
was included in the total installment debt amount on the mortgage credit analysis worksheet.
The borrower had additional outstanding debt of $620. The mortgage credit analysis worksheet
only showed $750. This would have changed the back-end ratio to more than 51 percent. Also,
both of the uniform residential loan applications show that the borrowers had negative assets.
Even without considering all of the non-reported debt, the borrowers had more than $33,000 in
outstanding debts and obligations on the mortgage credit analysis worksheet.




37
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


                                                 64
Bankruptcy Not Beyond Control of Borrower

One of the borrowers had a bankruptcy with more than one and less than two elapsed years.
According to HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3E, an elapsed period of less
than two years (but not less than 12 months) may be acceptable if the borrower can show that the
bankruptcy was caused by extenuating circumstances beyond his or her control and has since
exhibited an ability to manage financial affairs and the borrower’s current situation is such that
the events leading to the bankruptcy are not likely to recur. The borrower needed to show that
the bankruptcy was cause by extenuating circumstances beyond her control and she has exhibited
the ability to manage her financial affairs in a responsible manner.

The borrower quit her job without having another job, which is not beyond her control; the
change in jobs caused the bankruptcy. Also, two months' worth of bank statements that the
borrower provided contained numerous overdraft and advance fees, showing that the borrower
not managing her financial affairs in a responsible manner. The loan defaulted within 15 months
of closing.

Recent Credit Inquiries Not Explained

There were multiple inquiries regarding the borrower’s credit report, which K Hov did not
require the borrower to explain. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3B,
states that a satisfactory explanation must be provided by the borrower to account for the
omission of any significant debt shown on the credit report but not listed on the loan application.
The borrower must explain all inquiries shown on the credit report.

The loan went into default, resulting in HUD paying a $167,116 claim on the loan.

Recommendations:

We recommend that the assistant secretary for housing –federal housing commissioner require
K Hov to:

   •   Reimburse HUD $79 for the unallowable closing costs.
   •   Reimburse HUD for the $167,116 claim paid on this loan.




                                                65
                  Case Narrative—Loan Number 492-6623146
Mortgage amount: $141,450

Date of loan closing: January 9, 2003

Unallowable closing costs: $85 -- $75 for an inspection fee when appraisal showed house was
100 percent complete and $10 wire transfer fee

Underwriting Deficiencies
             • Gift transfer transaction not documented by lender and
             • Unallowable closing costs charged.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 38
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged $85 in unallowable closing costs. It charged $75 for an inspection fee when the
appraisal showed the house was 100 percent complete and $10 for a wire transfer fee.

K Hov charged unallowable closing costs of $75 inspection fee when appraisal showed the house
was 100 percent complete. HUD Handbook 4145.1, REV-2, CHG-1, chapter 1, paragraph 6-
3A3, states that the appraisal serves as the final inspection on properties if the home is 100
percent complete and the appraiser performs the appraisal and completes the uniform residential
appraisal report and all necessary exhibits. In this instance, the appraisal serves as the final
inspection.

K Hov charged the borrower $10 for a wire transfer. This is an unallowable closing cost
according to HUD guidelines.

This loan went into default, resulting in HUD paying a $146,631 claim on the loan.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

        •   Reimburse HUD $85 in unallowable closing costs.



38
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


                                                 66
                  Case Narrative—Loan Number 492-6679168
Mortgage amount: $152,450

Date of loan closing: February 14, 2003

Unallowable closing costs: $40 Overcharged in inspection fee.

Underwriting Deficiencies
             • Gift transaction not documented by lender and
             • Unallowable closing costs charged.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 39
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $100 for a final inspection fee when the appraisal showed the house
was 100 percent complete; thus, no final inspection was needed. HUD does not allow the lender
to charge more than $60 for an inspection fee if the house was 100 percent complete at the time
of appraisal.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

     •   Reimburse the borrower $100 for the unallowable closing cost.




39
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


                                                 67
                  Case Narrative—Loan Number 492-6724976
Mortgage amount: $143,150

Date of loan closing: March 21, 2003

Unallowable closing costs: $400 -- $200 underwriting fee and a $200 processing fee

Underwriting Deficiencies
             • Gift transaction not documented by lender and
             • Unallowable closing costs charged.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 40
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $400 for unallowed costs, a $200 underwriting fee, and a $200
processing fee. According to the HUD Homeownership Reference Guide on Closing Costs and
Other Fees, both underwriting fees and processing fees are unallowable.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

     •   Reimburse the borrower $400 for unallowable closing costs.




40
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


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                 Case Narrative—Loan Number 492-6788329
Mortgage amount: $155,700

Date of loan closing: May 9, 2003

Unallowable closing costs: $529 -- $350 for a commitment fee, $100 for an inspection fee, and
$79 for a tax service fee

Summary:
Unallowable Closing Costs

K Hov charged the borrower $529 in unallowable closing costs, $350 for a commitment fee,
$100 for an inspection fee, and $79 for a tax service fee.

The borrower paid a commitment fee of $350 to K Hov outside of closing. A commitment fee
has to be by a nonprofit or the instrumentality of a government to be allowed. K Hov is not a
nonprofit or an instrumentality of a government. Thus, this is an unallowable closing cost.

K Hov charged unallowable closing costs of a $100 inspection fee when the appraisal showed
the house was 100 percent complete. HUD Handbook 4145.1. REV-2, CHG-1, chapter 1,
paragraph 6-3A3, states that the final inspection on properties “under construction” serves as the
final inspection if the home is 100 percent complete and the appraiser performs the appraisal and
completes the uniform residential appraisal report and all necessary exhibits. In this instance, the
appraisal served as the final inspection.

The borrower paid a $79 tax service fee outside of closing to K Hov. This is an unallowable
closing cost according to HUD guidelines.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

       •   Reimburse the borrower $529 for the unallowable closing fees.




                                                69
                Case Narrative—Loan Number 492-6909226
Mortgage amount: $125,750

Date of loan closing: July 28, 2003

Unallowable closing costs: $429 -- $350 for a commitment fee and $79 for a tax service fee

Summary:
Unallowable Closing Costs

K Hov charged the borrower $429 in unallowable closing costs; the borrower paid $350 for a
commitment fee and $79 for a tax service fee.

The borrower paid a commitment fee of $350 to K Hov outside of closing. A commitment fee
has to be by a nonprofit or the instrumentality of a government to be allowed. K Hov is not a
nonprofit or an instrumentality of a government. Thus, this is an unallowable closing cost.

The borrower paid a $79 tax service fee outside of closing to K Hov. This is an unallowable
closing cost according to HUD guidelines.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

       •   Reimburse the borrower $429 for the unallowable closing fees.




                                              70
                  Case Narrative—Loan Number 492-6995236
Mortgage amount: $123,000

Date of loan closing: October 8, 2003

Unallowable Closing Costs: $119 -- $79 tax service fee and overcharged $40 for an inspection

Underwriting Deficiencies
             • Gift transaction not documented by lender and
             • Unallowable closing costs charged.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 41
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $119 for unallowed costs, $79 for a tax service fee and an
overcharge of $40 for a final inspection. According to the HUD Homeownership Reference
Guide on Closing Costs and Other Fees, tax service fees are unallowable. Further, a final
inspection fee should not exceed $60. K Hov charged $100.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

        •   Reimburse the borrower $119 for unallowable closing costs.




41
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C.


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                  Case Narrative—Loan Number 492-7071238
Mortgage amount: $117,700

Date of loan closing: January 29, 2004

Unallowable closing costs: $429 ($350 gift processing fee and $79 tax service fee)

Underwriting Deficiencies
             • Gift transaction not documented by lender and
             • Unallowable closing costs charged.

Summary:
No Documentation of Gift Funds Transfer

K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 42
state the lender must document the transfer of the funds from the donor to the borrower.

Unallowable Closing Costs

K Hov charged the borrower $429 in unallowable closing costs. It charged $350 in gift-
processing fees and a $79 tax service fee. According to the HUD Homeownership Reference
Guide on Closing Costs and Other Fees, both processing fees and tax service fees are
unallowable.

This loan is currently in default.

Recommendation:

We recommend that the assistant secretary for housing – federal housing commissioner require
K Hov to:

        •   Reimburse the borrower for the $429 in unallowable fees.




42
     HUD Handbook 4155.1, REV-5, paragraph 2-10C.


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