oversight

BSM Financial LP Originated Loans on Overvalued Properties to Less Than Creditworthy Borrowers, Putting Borrowers and HUD at Risk

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-03-31.

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

                                                         Issue Date
                                                                 March 31, 2006
                                                         Audit Report Number
                                                                 2006-FW-1007




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

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

SUBJECT: BSM Financial LP Originated Loans on Overvalued Properties to Less Than
         Creditworthy Borrowers, Putting Borrowers and HUD at Risk

                                  HIGHLIGHTS

 What We Audited and Why

             We audited BSM Financial LP (lender) because of an unusually high ratio of
             defaults compared to the average default rate of lenders in the U.S. Department
             of Housing and Urban Development’s (HUD) San Antonio, Texas, office
             jurisdiction. Forty-seven percent of the defaults involved one seller, Palm
             Harbor Homes, Inc., a manufactured home producer that owned 50 percent of
             the lender. We reviewed all of the defaulted loans (51 of 109) that involved
             Palm Harbor as the seller in the San Antonio area that closed between
             February 1, 2003, and January 31, 2005, and in the Austin, Texas, area that
             closed between January 2, 2002, and June 30, 2004.

             Our objective was to determine whether BSM followed HUD loan origination
             requirements for the 51 loans selected for review.

 What We Found

             The lender approved mortgages on overvalued properties for borrowers that
             were less than creditworthy. This occurred because the lender allowed an
             identity-of-interest seller to add ineligible and unsupported costs to the home
             construction costs, and inadequately reviewed the appraisals. Also, the lender
           did not adequately document analyses of borrowers’ credit. Further, the
           lender’s processing had technical deficiencies such as not ensuring the
           borrowers signed off on construction draws and permitted the seller to process
           employment, bank, and credit verification documents. Lender officials told us
           they were unfamiliar with Federal Housing Administration requirements for
           manufactured housing loans when they first started originating such loans.
           Consequently, HUD and the borrowers unnecessarily incurred increased risks
           through higher insurance exposure and higher mortgage payments. The
           unqualified borrowers defaulted on their mortgage obligations (finding 1).


What We Recommend

           We recommend that you require the lender to reimburse the insurance fund
           $1,989,588 for foreclosure losses incurred on 19 loans, buy down 28 loans by
           $319,267 for the amounts added to the loans, and after the buy down re-
           amortize and indemnify HUD for the $2,765,619 remaining balance on these
           28 loans. In addition, we recommend that you ensure the lender implements
           adequate procedures to originate construction-permanent loans in accordance
           with HUD requirements.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.6, REV-3.
           Please furnish us with copies of any correspondence or directives issued
           because of the audit.

Auditee’s Response


           We provided a copy of the draft report to the lender on January 24, 2006, and
           met with the lender for an exit conference on February 22, 2006. The lender
           provided a written response at the exit conference. The lender disagreed with
           the findings. We made some revisions to the report based on the lender’s
           response but the response generally did not change our position. The complete
           text of the lender’s response, without the voluminous exhibits, along with our
           evaluation of the response, can be found in appendix B of this report.




                                          2
                           TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
  Finding: The Lender Originated Loans on Overvalued Properties to Less Than     5
           Creditworthy Borrowers, Putting Borrowers and HUD at Risk

Scope and Methodology                                                           19

Internal Controls                                                               20

Appendixes
   A.    Schedule of Questioned Costs and Funds to Be Put to Better Use          21
   B.    Auditee Comments and OIG’s Evaluation                                   22
   C-1   Recommended HUD Loss Reimbursements, Indemnifications, and Buy-Downs    79
   C-2   Schedule of Loan Deficiencies                                           80
   C-3   Case Narratives                                                         81
   D.    Criteria                                                               131




                                           3
                    BACKGROUND AND OBJECTIVES

The National Housing Act, Section 203(b)(1), authorizes the U.S. Department of Housing and
Urban Development (Department or HUD) to provide mortgage insurance for single-family
homes. The Department must approve a mortgage company that originates Federal Housing
Administration-insured loans. Participating mortgage companies must follow the National
Housing Act and Department instructions when originating Federal Housing Administration-
insured loans. Mortgage companies that do not follow the requirements are subject to
administrative sanctions.

The National Housing Act authorized the construction/permanent mortgage program, and
HUD announced it in 1992. The loan program combines the features of a construction loan, a
short-term interim loan for financing the cost of construction, and a traditional long-term
permanent residential mortgage with one closing. Borrowers must secure the loan in their
name, contract with a builder and provide a copy of the contract to the lender, own or be
purchasing a lot, and approve each payment before disbursement to the contractor. The lender
is responsible for normal processing and underwriting plus obtaining the borrowers’ approval
for contractor payments, verifying if the loan was fully drawn and if not, applying any
remaining funds to the loan balance, obtaining a borrower certification that the property is free
and clear except for the mortgage, and performing the final inspection.

We audited BSM Financial LP (lender), located at 16479 Dallas Parkway, #211, Addison,
Texas 75001. The lender is a nonsupervised direct endorsement lender. HUD approved the
lender on August 24, 2000, to originate single-family loans under Section 203 (b) (1) of the
National Housing Act. BSM Financial LP is a limited partnership. KJ Financial owns 50
percent and is the general partner. Palm Harbor Homes owns 50 percent and is the limited
partner. For the period between June 1, 2003, and May 31, 2005, the lender’s ratio of defaults
within the first year was 186 percent of the average of all lenders in the San Antonio HUD
office jurisdiction.

Our objective was to determine whether the lender followed (HUD) loan origination
requirements for the 51 loans selected for review.




                                                4
                                      RESULTS OF AUDIT

Finding: The Lender Originated Loans on Overvalued Properties to
Less Than Creditworthy Borrowers, Putting Borrowers and HUD at
Risk

The lender approved mortgages on overvalued properties for borrowers that were less than
creditworthy. This occurred because the lender allowed an identity-of-interest seller to add
unallowable and unsupported costs to the home construction costs, and inadequately reviewed
the appraisals. Also, the lender did not adequately document analyses of borrowers’ credit.
Further, the lender’s processing had technical deficiencies, such as not ensuring the borrowers
signed off on construction draws and permitting the seller to process loan and credit
documents. Lender officials told us they were unfamiliar with Federal Housing
Administration requirements for manufactured housing loans. Consequently, HUD and the
borrowers unnecessarily incurred increased risks through higher insurance exposure and
higher mortgage payments, and unqualified borrowers defaulted on their mortgage obligations.


    The Seller Added Unallowable
    and Unsupported Costs


                  The lender allowed the seller, Palm Harbor Homes, to add unallowable and
                  unsupported costs to the construction costs in 46 of 51 loans reviewed. To
                  determine the maximum financing available to a borrower building a house on
                  land already owned or being acquired, the lender should apply the appropriate
                  loan-to-value limits to the lesser of the appraised value plus allowable closing
                  costs or the documented acquisition cost of the property.1 If the lender or seller
                  adds unallowable and unsupported costs to the construction cost, the mortgage is
                  inappropriately increased. However, to the construction costs, Palm Harbor
                  added

                       •   Closing costs that it agreed to pay in the purchase memo;
                       •   The gift and fee used for the downpayment;
                       •   Trade-in loan payoffs;
                       •   Referral fees;
                       •   Gift cards;
                       •   Moving expenses;
                       •   A big screen television, a pool table, and playgound equipment; and

1
     Documented cost of the property includes the builder’s price or the sum of all subcontractors’ bids,
     materials, etc.; cost of land; interest and other costs associated with any construction loan obtained by the
     borrower to fund construction; the closing costs to be paid by the borrower; and reasonable discount points.


                                                         5
   •    Unsupported costs.

The lender used a purchase memo provided by the seller to calculate the
maximum mortgage. The purchase memo states it is not a binding contract for
either the buyer or the seller. The lender’s files had copies of the required
construction contracts that were not executed until the dates the loans were
closed. The sales prices on these two documents for the loans were usually
different and inconsistent with the HUD-1 settlement statement. The lender did
not resolve the differences, although HUD requires lenders to review all legal
instruments and other documents executed at closing and certify to HUD that
the transaction and loan meet statutory and regulatory requirements, and that
the loan has been closed in accordance with the terms and sales price as
specified in the sales contract.

Contrary to HUD requirements, the seller’s “contributions to a nonprofit” for
downpayment assistance were used to fund the closings in seven of ten cases
for which we reviewed the closing agent’s receipts and disbursement ledger.
We did not review the receipts and disbursements ledger for the remaining 25
cases that involved downpayment assistance. The seller’s proceeds from the
sales were reduced by the downpayment assistance contributions as shown by
the settlement statements. The closings were held and funded by the lender and
the closing agent disbursed the funds. The “gifts” from the nonprofit were not
received until after the disbursement of funds and were not available to pay the
borrowers’ downpayments at the closings. After receiving the funds from the
nonprofit, the closing agent returned the funds plus the agreed fee, still in
escrow, to the nonprofit. HUD Handbook 4155-1, paragraph 2-10 C, provides
that an outright gift of the borrower’s cash investment is acceptable but the gift
donor may not be a person or entity with an interest in the sale of the property,
such as the seller, real estate agent or broker, builder, or any entity associated
with them. Gifts from these sources are considered inducements to purchase
and must be subtracted from the sales price. No repayment of the gift may be
expected or implied. Also, when gift funds are provided at closing, the lender
is responsible for obtaining verification that the closing agent received funds
from the donor for the amount of the purported gift and that those funds came
from an acceptable source.

We interviewed 9 of 51 borrowers, and all but one told us the price increased
from what the seller initially told them, without an explanation for the
increases.

To illustrate, case number 495-6384702 shows the seller added unallowable
and unsupported costs to the sales price. Palm Harbor provided documentation
of construction costs that showed the following:




                                6
Sales price of $96,440 from the
purchase memo, which differs from the
$94,508 price on the residential
construction contract.




Seller’s representation to pay
costs for buyer from the
purchase memo




Palm Harbor commission sheet
showing summary of sale and the
sale price of $82,487.




                                   7
The seller added unallowable costs of $15,453 to the sales price shown on the
seller documentation, including closing costs of $9,925, the gift and fee of
$3,375 used for the downpayment, a $1,500 big screen television, and an
unsupported amount of $653. The lender used the sales price shown on the
purchase memo to calculate the maximum mortgage without considering the
seller’s concessions. Also, the lender’s closing agent used the seller’s proceeds
to fund the downpayment. The “gift” funds from the nonprofit was not
received until five days after closing, which the closing agent returned with the
fee provided by the seller.

In case number 495-7006330, the lender did not provide a resolution or
explanation of the difference in the sales price. Palm Harbor’s sales price for
the manufactured home on the contract and the purchase memo was $58,707.
The sales price on the HUD-1 settlement statement was $58,087. When we
asked the lender and Palm Harbor to explain the sales price difference to verify
the construction costs, they provided the following:


Sales price of $58,707 from the
purchase memo




Sales price of $58,087
from the HUD-1




                                  8
         Palm Harbor commission
         sheet showing summary of
         sale (Does not support the
         HUD-1 sales price.)




         If lender staff had asked the seller for additional information to resolve the
         difference in sales prices, it would have found the seller added $11,787 in
         unsupported costs to the sales price.

         Manufactured home cost from commission sheet                  $ 31,109

                 Setup charge                           $ 2,000
                 Air conditioner                          1,750
                 Warranty                                   750
                 Listed land improvements                11,191          15,191

                          Total allowable cost                         $ 46,300

         HUD-1 sales price                                               58,087

         Unsupported amount of sales price                             $ 11,787


The Underwriters Did Not
Adequately Review the
Appraisals



         The underwriters did not adquately review the appraisals in 45 of the 51 cases
         reviewed. Also, they did not resolve or obtain explanations of appraisal
         deficiencies that would indicate lower property values. Forty-Six of the 51


                                          9
cases had inflated acquisition costs. In 43 of the 46 cases with inflated
acquisition costs, the lender and appraiser overvalued the properties by more
than 10 percent, based on appraisals by the county appraisal districts. Also, in
33 instances, the appraisers and underwriters did not reduce the sales prices
used to calculate the maximum loans by the amount of seller concessions that
were more than 6 percent of the sales prices. The appraisers used property
sales for comparables that were

    1. In different neighborhoods and environments (39 of 51);
    2. More than six months old, which may reflect a different or changing
       market (26 of 51);
    3. Not similar to the subject in size, age, and design (15 of 51); and
    4. Inappropriately adjusted (42 of 51).

To obtain a perspective of the values, we compared the lender’s values with the
local appraisal districts’ values. The lender’s value averaged 32 percent higher
than the appraisal districts’ value for the 51 loans. The lender’s property values
ranged from 7 percent less to 63 percent more than the local appraisal district
values. According to state law, all Texas appraisal districts must set property
tax values at market value. We confirmed this with the deputy chief appraiser
for Bexar County (San Antonio). State law also requires the districts to use the
same standards used by all licensed appraisers, the Uniform Standards of
Professional Appraisal Practice.

The following two examples illustrate inadequate appraisal reviews.

Case number:                  495-6556052
Valuation date:               April 15, 2003
Sales price:                  $ 82,640
Lender appraised value:       $ 90,000
Appraisal district value:     $ 38,880
Difference in value:          $ 51,120

The lender did not reduce the sales price used to calculate the maximum
mortgage for seller concessions over 6 percent of the sales price. This resulted
in an overvalued property and an overinsured mortgage. The lender should
have reduced the mortgage by at least $1,740, the difference between the
concession in sales contract and 6 percent of the sales price. The mortgage
credit analysis worksheet listed the 6 percent limit as $4,958, and the sales
contract states the seller will pay up to $6,700 in closing costs.

The underwriter did not adequately review the appraisal. The underwriter
wrote a note in the file saying the value was $90,000 according to the appraiser,
but the comparables indicated the value should have been $88,500. The
underwriter indicated the value did not need to be adjusted since the sales price
was much lower than the value. The appraiser stated the market was good and



                                10
statistics showed stable to increasing prices and decreasing marketing times.
The appraiser also stated the home had additional features that included front
and rear steps, a vaulted ceiling, ceiling fans, a built-in kitchen, and an indoor
utility room as additional features. However, appraisal deficiencies noted
below indicate a lower value.

   1. The three comparables were 5 miles, 10 miles, and 25 miles from the
      subject property, respectively. The comparables were not in the same
      neighborhood.
   2. Comparables one and two were more than six-months old. The
      appraiser did not provide the required explanation. If the market had
      been good, as the appraiser indicated, there should have been sufficient
      comparables in the neighborhood within the six-month requirement.
   3. The appraiser did not adjust the comparables consistently with land
      values of the subject property. The subject property’s lot size was .57
      acres and cost $25,500. The appraiser adjusted comparables one and
      two, each five acres, down by $5,000 for lot size ($1,000 per acre) and
      did not adjust comparable three for a lot almost twice the size of the
      subject property (1.12 acres).
   4. The subject property had 1,216 square feet of living area at $68 per
      square foot.
          a. Comparable one was 856 square feet larger and adjusted down
              by $8,600 or about $10 per square foot. The appraiser listed
              comparable one’s price per square foot as $53, indicating a
              downward adjustment closer to $45,000.
          b. Comparable two was 96 square feet smaller and adjusted up by
              $1,000 or about $10 per square foot. The appraiser listed
              comparable two’s price per square foot as $79, indicating an
              upward adjustment closer to $7,500.
          c. Comparable three was 180 square feet larger and adjusted down
              by $1,800 or about $10 a square foot. The appraiser listed
              comparable three’s price per square foot as $64, indicating a
              downward adjustment closer to $11,000.
   5. Comparable two had an unexplained downward adjustment of $5,000
      for “below grade quarters.”
   6. Comparables one and three appeared to be either traditionally built or
      doublewides and not similar to the subject, which was a singlewide
      home.
   7. The underwriter did not require an explanation for the highline tower in
      the back yard. The appraisal showed “Based on the plat map available,
      no adverse easements or encroachments were noted.” However,
      according to HUD requirements, if the overhead transmission lines were
      within engineering (designed) fall distance (tower height), the appraiser
      should have sent the appraisal back to the lender unfinished, and the
      appraiser should have rejected the property.




                                11
Street view of subject property




Closer view of subject property




                12
                       Close-up view of subject property


Case number:                  495-6749841
Date appraised:               September 16, 2003
Sales price:                  $ 81,513
Lender appraised value:       $ 93,000
Appraisal district value:     $ 58,980
Difference in value:          $ 34,020

The underwriter did not adequately review the appraisal. The deficiencies
noted below indicate a lower value.

   1. The four comparables were not in the same neighborhood, being 9.29
      miles, 9.71 miles, 13.40 miles, and 14.51 miles from the subject,
      respectively.
   2. The appraiser noted the balanced market in the area and stated the
      average time on market was three to six months. However, in addition
      to not being in the same neighborhood, comparable two had been on the
      market 10 months and may have reflected a different or a changing
      market. The appraiser did not provide the required explanation. The
      selection of comparables seems inconsistent with the appraiser’s
      statement that the market was in balance and average time on the
      market was three to six months. If this had been true, there should have
      been sufficient comparables in the neighborhood within the six-month
      requirement.



                               13
3. The comparables were not similar to the subject property, which was a
   singlewide manufactured home. Comparable one was a traditionally
   built house, and comparables two, three, and four were doublewides.
4. The appraiser did not make proper adjustments for the lot sizes. The
   subject had .53 acres and cost $25,000.
       a. Comparable one had four acres that cost $25,000. The appraiser
           did not adjust for the lot size.
       b. Comparable two had 4.9 acres that cost $25,000. The appraiser
           did not adjust for the lot size.
       c. Comparable three had 12 acres that cost $40,000. The appraiser
           adjusted the lot down by only $15,000.
5. The appraisal indicated the subject property had a patio deck and porch
   balcony; however, the home only had stoops with steps.




               Front side view showing stoop and steps




                          14
       Front view showing stoop and steps




Rear view showing stoop and steps




               15
Lender Did Not Adequately
Document Credit Analyses

            In 13 of 51 cases, we found no evidence to show the lender adequately
            documented its analysis of the borrowers’ late payments. The lender should
            have determined whether the late payments were because of a disregard for
            financial obligations, an inability to manage debt, or factors beyond the
            borrowers’ control. Further, the lender did not require the borrowers to provide
            a sufficient written explanation that was logical and consistent with credit
            information in the file.

            The lender is responsible for asking sufficient questions to elicit a complete
            picture of the borrower’s financial situation and all aspects of the property
            being financed. However, in seven cases the lender did not resolve conflicting
            information. For example, for case number 495-6861163, the lender did not
            question why the fee inspector conducted the final property inspection before
            the appraisal for this construction-permanent loan. In this case, the seller had
            already finished the house. With pictures from the inspection showing a
            completed home and pictures from the appraisal showing vacant land, the
            lender had enough documentation to seriously question the appraisal. The final
            inspection was done on January 12, 2004, before the appraisal, dated January
            20, 2004. Also, the lender did not question why the wrong picture of the
            subject property was included with the appraisal. If the appraiser had taken a
            picture of the correct property, the picture would have shown a completed
            house, and the property would not have qualified under the construction-
            permanent loan program. Therefore, the lender should have limited the loan-
            to-value ratio to 90 percent. Further, the borrower worked 157 miles from the
            property he purchased. The lender did not determine how the borrower
            intended to commute to his job. This was a first payment default and resulted
            in HUD paying a claim.

Technical Deficiencies in
Lender’s Processing

            The lender’s processing had technical deficiencies, including not ensuring the
            borrowers signed off on construction draws, allowing the seller to process
            borrower loan documents, and not determining or certifying the application of
            remaining escrow funds.

            In all cases we reviewed, the lender did not require the borrowers to approve
            any construction draws before payment as required by HUD. Also, for at least
            3 of the 51 loans the lender allowed the seller to process borrower loan and
            credit documents. All nine of the borrowers we spoke with confirmed that they
            dealt only with the seller. However, in each instance, the lender verified



                                           16
           employment information without passing the information through the seller. In
           addition, the lender relied on alternative credit documents handled by the seller
           to approve and justify credit decisions. We found two credit confirmations
           from companies that do not provide that information.

           The lender did not determine whether there were any remaining funds left in
           escrow after all work was completed or certify that it applied any remaining
           escrowed funds to reduce the outstanding loan as required by HUD.


 Lender Needs to Implement
 Adequate Procedures for
 Manufactured Housing Loans

           Lender officials told us they were unfamiliar with Federal Housing
           Administration requirements for manufactured housing loans when they first
           started originating such construction permanent loans. Other lenders told them
           they were just like traditionally built homes, but they found them very different.
           However, the seller continued to do business as usual, and would process the
           loans, send in the packages, and expect funding. Lender officials said they had
           to educate the seller, but still had a 50 percent default rate. They said they
           began a follow up program with the borrowers and this turned around the
           defaults. HUD needs to ensure the lender has implemented adequate
           procedures to originate manufactured housing loans.


Lender Needs to Reimburse and
Indemnify HUD for 47 of 51
Loans Reviewed

           Because of the relationship between the lender and the seller, the lender should
           have known that the seller added amounts that did not add to the value of the
           collateral and were in excess of what should have been the acquisition cost of
           the manufactured home, land improvements and profit. The seller owns 50
           percent of the lender. Further, the seller generally interfaces with the
           borrowers, processes the loan documentation, and submits the loan
           documentation to the lender for underwriting, so the underwriters should have
           examined all documentation very closely. The lender should buy down 28
           loans by $319,267; the amount of unallowable costs the seller was permitted to
           add to the sales prices which the borrowers should not have to pay. Also, after
           the buy down, the lender should indemnify HUD for the $2,765,619 remaining
           balance on the 28 loans. Further, the lender should reimburse HUD $1,989,588
           for 19 loans in which HUD has paid claims and realized losses. As of the date
           of this report, HUD had resold six of the 19 properties at a $428,992 loss.
           HUD had not resold the other 13 the properties on which it had paid claims of
           $1,560,596 (see appendixes C-1, C-2, and C-3 for details on the 47 loans).



                                           17
Recommendations


    We recommend that you

    1A.   Require the lender to reimburse the insurance fund for foreclosure losses
          incurred on19 loans in the amount of $1,989,588 (see appendix C-1).

    1B.   Require the lender to buy down 28 loans by the $319,267 in ineligible costs
          added to the loans (see appendix C-1).

    1C.   Require the lender to reamortize and indemnify HUD for the 28 loans totaling
          $2,765,619 after the buy down (see appendix C-1).

    1D.   Ensure that the lender implements procedures to originate construction-
          permanent loans in accordance with HUD requirements.




                                          18
                       SCOPE AND METHODOLOGY

We conducted an in-depth review of 51 loans. Initially, we briefly reviewed all (61) of the
San Antonio defaulted loans between February 1, 2003, and January 30, 2005, and found 24
loans involved one seller that owned half of the lender. We selected these 24 loans for an in-
depth review because we found the sales price differed among the documents in the HUD
mortgage file. We expanded our scope to include the Austin/San Marcos area. We briefly
reviewed an additional 48 loans originated between January 2, 2002, and June 30, 2004, and
selected for in-depth review another 27 loans involving the same seller in the Austin/San
Marcos area. We reviewed relevant Federal regulations, HUD handbooks, and Federal
Housing Administration and the mortgage company’s loan origination files. Our review of the
loan origination files included

           •   Collecting certain data to determine whether a pattern of defaults existed;
           •   Examining loan documents for inconsistent and derogatory information;
           •   Comparing the final application with the preliminary application, verifications
               of deposit and employment, credit reports, and any other relevant
               documentation available for inconsistency;
           •   Examining the appraisal and comparing the subject property with the values
               from the local appraisal district;
           •   Interviewing the borrowers; and
           •   Reviewing the title company closings.

We interviewed HUD Quality Assurance Division staff and held an entrance conference with
the lender’s executives on May 16, 2005. We performed our fieldwork at the lender’s office
and HUD’s office in San Antonio, Texas, from April 25 to November 30, 2005. We
performed our review in accordance with generally accepted government auditing standards.




                                              19
                              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:

       •   Requirements for loan originations.

We assessed the relevant controls identified above.

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

 Significant Weaknesses


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

       •   The lender originated loans on overvalued properties to less than creditworthy
           borrowers, putting borrowers and HUD at risk (finding 1).




                                                 20
                                    APPENDIXES

Appendix A

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

                  Recommendation            Ineligible 1/ Funds to be put
                     number                               to better use 2/
                         1A                  $1,989,588
                         1B                                       $ 319,267
                         1C                                        2,765,619

                               Totals        $1,989,588           $3,084,886




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 polices 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.




                                              21
Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                        22
23
24
25
26
27
Comment 1




            28
Comment 2




Comment 3




            29
Comment 3




Comment 1
Comment 2

Comment 4




Comment 2



Comment 1




            30
Comment 2



Comment 5




Comment 6




            31
Comment 2
Comment 3

Comment 5




Comment 2

Comment 5

Comment 1




Comment 2


Comment 7




            32
Comment 3

Comment 1




Comment 2



Comment 8



Comment 3

Comment 2




            33
Comment 1




Comment 2

Comment 9


Comment 3


Comment 2


Comment 1




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Comment 10



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Comment 12


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Comment 13


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Comment 14


Comment 3


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Comment 15


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Comment 16

Comment 19




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Comment 25




Comment 26




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Comment 26



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Comment 27




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Comment 28




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            72
73
                           OIG Evaluation of Auditee Comments

Comment 1 We have reviewed the auditee’s responses to the finding and we have revised
parts of our report in consideration of the comments or to make our points clearer. However,
the comments did not materially change our position on issues raised in the report.

Comment 2 The lender used purchase memos for the manufactured home to calculate the
mortgage amounts. They clearly indicate they are not binding contracts on the buyer or the
seller. At loan settlement, the lender obtained executed residential construction contracts that
included the contractor’s price to build. The sales prices shown on the purchase memos,
construction contracts, and the HUD-1 settlement statements were inconsistent. The lender
had reason to question the sales prices. The lender did not resolve the differences. If the
lender had attempted to resolve the differences, it should have found that the seller, the
lender’s 50 percent owner, added costs that did not add to the value of the collateral. Further,
it should have found costs that exceeded the maximum amount of seller concessions that
should have been used to reduce the maximum mortgage.

Comment 3 We appreciate the auditee’s cooperation in obtaining from its related company
the additional documentation requested during our audit. In our opinion, the additional
documentation would have been available to the lender at the time of the loan originations.

Comment 4 The lender is responsible for ensuring downpayment assistance funds are
provided by the donor at closing are received for the amount of the purported gift and that the
funds came from an acceptable source. As stated in the revised finding the seller increased its
price and the seller’s proceeds were reduced at closing. As mentioned in the finding, in seven
of ten cases for which we reviewed the closing agent’s receipts and disbursements records,
these funds were used to fund the closing. We did not review the receipts and disbursements
records for the remaining 25 cases involving downpayment assistance. For the seven cases,
the nonprofit funds were not received until after the closing and the loan proceeds and funds in
escrow had been disbursed.

Comment 5 The residential construction contract from the lender’s file shows the
contractor’s price to be $94,598. The purchase memo, stating it is not a binding contract,
shows the price to be $96,440 and that the lender related seller is paying as much as $13,300
in costs for the buyer. The purchase memo did not disclose the seller also provided the big
screen television valued at $1,500, shown on the additional information provided by the seller.
The seller’s concessions exceeded the maximum allowed by HUD (6 percent of the sales
price) without reducing the maximum mortgage.

Comment 6 We appreciate the lender’s comment regarding our recommendation for
principal reduction and indemnification of certain loans. The comment does not change our
position. In those cases where we are recommending principal reduction and indemnification,
we do not believe the borrowers should be penalized, if they do not default, by having to pay
the unauthorized amounts included in what they thought were FHA loans. Any
indemnification should be for an amount after the principal reduction, in the event of default.



                                               74
Comment 7 The residential construction contract from the lender’s file shows the
contractor’s price to be $71,585. The purchase memo shows the price as $73,100 and that the
lender related seller is paying as much as $11,089 in costs for the buyer. The lender did not
resolve the differences in sales prices shown on various documents. The lender also did not
reduce the mortgage by the amount in excess of the maximum amount (6 percent of the sales
price) allowed for seller concessions.

Comment 8 The residential construction contract from the lender’s file shows the
contractor’s price to be $126,666. The purchase memo shows the price to be $129,134 and
that the lender related seller is paying as much as $17,223 in costs for the buyer. The seller’s
concessions exceeded the maximum (6 percent of the sales price, or $9,579 in this case)
allowed by HUD without reducing the maximum mortgage.

Comment 9 The residential construction contract from the lender’s file shows the
contractor’s price to be $79,477. The purchase memo shows the price to be $81,100 and that
the lender related lender was paying as much as $12,004 in costs for the buyer. The lender did
not resolve the differences in sales prices shown on various documents. The lender also did
not reduce the mortgage by the amount in excess of the maximum amount (6 percent of the
sales price, or $6,300 in this case) allowed by HUD without reducing the maximum mortgage.

Comment 10 In this case the lender either did not obtain a residential construction contract or
did not provide a copy of it in the file provided to us. However, the construction note
principal is generally the same as the contractor’s price and shows it to be $101,083. The
purchase memo shows the price as $103,100 and that the lender related seller is paying as
much as $16,261 in costs for the buyer. The lender did not resolve the differences in sales
prices shown on various documents and did not reduce the mortgage by the amount in excess
of the maximum amount (6 percent of the sales price, or $7,716 in this case) allowed by HUD.

Comment 11 The residential construction contract from the lender’s file shows the
contractor’s price was $104,235. The purchase memo shows the price to be $105,034 and that
the lender related seller is paying as much as $12,863 in costs for the buyer. The lender did
not resolve the differences in sales prices shown in various documents and did not reduce the
mortgage by the amount in excess of the maximum amount of seller concessions allowed by
HUD.

Comment 12 The residential construction contract from the lender’s files shows the
contractor’s price to be $72,190. The purchase memo shows the price as $73,100 and shows
the lender will pay $13,425 in costs for the buyer. This exceeds the maximum amount of
seller concessions allowed by HUD. The lender did not reduce the mortgage amount by the
excess of the maximum allowed.

Comment 13 The residential sales contract from the lender’s file shows the contactor’s price
to be $98,987. The purchase memo shows the price as $101,150 and that the lender related
seller was paying as much as $15,879 in costs for the buyer. The lender did not resolve the




                                               75
differences in sales price or reduce the mortgage amount by the excess of the maximum
allowed.

Comment 14 The residential construction contract from the lender’s file shows the
contractor’s price to be $67,676. The purchase memo shows the price as $68,500 and that the
lender related seller was paying as much as $12,809 in costs for the buyer. The lender did not
resolve the differences in sales price or reduce the mortgage amount by the excess of the
maximum allowed.

Comment 15 In response to the auditee’s comments we clarified our finding and case
narratives. In cases involving downpayment assistance, the seller’s nonprofit contribution,
amounting to the gift and fee, were deducted from the seller’s proceeds at the closing. The
seller’s “contributions” to the nonprofit were used to satisfy fund requirements for closing 7 of
10 cases for which we reviewed the closing agent’s receipt and disbursement ledger. In these
cases, the “gifts” were not received from the nonprofit until after closing. The lender did not
obtain verification that the closing agent received all the funds before closing and that those
funds came from an acceptable source.

Comment 16 As listed on the purchase memos and other documentation, the seller added
concessions that exceeded 6 percent of the sales price. As previously indicated, there were
differences in sales prices shown on different documents. If the lender had resolved the
differences the lender should have found that the seller added other unallowable and
unsupported costs to the sales prices used to calculate the mortgages. Regarding “cost
borrowers are not permitted to satisfy,” HUD handbook 4155.1, paragraph 1-9, contains items
for which the borrower will need cash to pay at closing in addition to the minimum required
investment. Items such as title insurance are included in the list. Since items such as this were
included, as an amount the seller would pay, they should have been considered seller’s
concessions and used in calculating the amounts by which to reduce the mortgages.

Comment 17 As stated in the finding, the purchase memo used to calculate the mortgage
shows the seller was going to pay the buyer’s closing costs up to $7,500, FHA non allowable
closing costs of $1,100, title policy of $1,325, and the gift and fee $3,375. The lender related
seller did not disclose the value of the $1,500 big screen television or the other amount
included in the sale price shown on the purchase memo. However, if the lender had
investigated the differences in the sales prices on the residential sales contract and other
documentation, the lender should have determined the $15,453 in costs being added to the
manufactured home sales price. Although HUD currently allows seller contributions to
nonprofits for downpayment assistance, in this case the seller’s contribution was used to fund
the closing. The nonprofit “gift” was not available and the lender did not ensure the gift funds
were received at closing.

Comment 18 As stated in our case narrative, the purchase memo used to calculate the
mortgage shows the seller was going to pay the buyer’s closing costs up to $5,633, FHA non
allowable closing costs of $875, title policy of $1,200, and the gift and fee of $3,381. The
lender did not investigate the difference in sales prices shown on various documents and did
not reduce the sales price by the amount of concessions over 6 percent of the sales price.



                                               76
Comment 19 Regardless of the amount the lender related seller actually paid in borrower
expenses, the seller added $21,418 to the manufactured home sales price. The purchase memo
shows the seller will contribute as much as $7,830 in prepaids and closing expenses, $1,100 in
FHA non allowable closing costs, $1,400 for a title policy, and $5,931 for the gift and fee.
The purchase memo did not disclose the $1,000 gift certificate given by the seller and shown
on other documentation.

Comment 20 Regardless of the amount the lender related seller actually paid in borrower
expenses, the purchase memo lists the seller concessions as up to $6,763 in buyer closing costs
and prepaids, $1,100 in FHA non allowable closing costs, $1,225 for a title policy, and $3,715
for the downpayment assistance gift and fee. There was also an unexplained increase of $460.
We could not determine all of the costs added because the seller did not provide the
acquisition cost documentation. The lender did not investigate or resolve the difference in
sales prices shown on various documents.

Comment 21 Regardless of the amount the lender related seller actually paid in borrower
expenses, the purchase memo lists the seller concessions as up to $8,394 in buyer closing costs
and prepaids, $1,250 in FHA non allowable closing costs, $1,393 for a title policy, and $4,842
for the downpayment assistance gift and fee. There was also an unexplained increase of $322.
We could not determine all of the costs added because the seller did not provide the
acquisition cost documentation. The lender did not investigate or resolve the difference in
sales prices shown on various documents.

Comment 22 Under the direct endorsement program the lender shall have the property
appraised in accordance with such standards and requirements as the Secretary may prescribe.
A direct endorsement lender that submits an appraisal that does not satisfy FHA requirements
is subject to administrative sanction by the Mortgagee Review Board, depending on whether
the lender knew or had reason to know the appraisal was deficient. In the cases we reviewed,
the lender had reason to question the appraisals but did not. The appraisers compared
singlewide manufactured homes to doublewide manufactured homes and traditionally built
homes. We noted initial lot photographs that were different from the final inspection pictures.
We noted final inspection pictures that showed new homes that appeared to be used homes.
Upon closer review, the appraisers used comparables that were over six months old and that
were not next-door, down the street or in the same subdivision, but were miles from the
subject. The appraiser adjustments appeared unjustified. Generally, the appraisers did not
adequately explain most of the differences and that some explanations conflicted with the
facts. As we stated in the report, the appraisal districts’ values were lower and OIG believes
the appraisal discrepancies indicated a lower value. Not all the discrepancies in the report
were significant by themselves; however, we noted multiple discrepancies on each of the
appraisals in the report. The lender’s appraisal reviews should have noted the discrepancies
and the lender should have resolved them by getting appropriate answers from the appraiser or
another appraisal.

Comment 23 We used the appraisal district values to gain a perspective on the lender’s
values. As indicated by the finding, the appraisal districts follow the same professional



                                              77
appraisal standards as required for appraisers of HUD insured properties. State law requires
appraisal districts to value properties at market value. The appraisal district in each county
sets the value of property each year.

Comment 24 We have no reason to believe that any manufactured home increased in value
by 10 percent or more in the state of Texas. Therefore, we do not believe the ceiling on the
value increase for properties with homestead exemptions established by the appraisal districts
would apply in these cases. Further, the values determined by HUD after the claims and sales
indicate the appraisal district appraisals were more in line with the market values.

Comment 25 In case 495-4844999, the appraiser stated in the appraisal report,
“Demand/supply factors are in balance, marketing times typically range three to six months.”
On the form 1004C, Manufactured Home Appraisal Report Addendum, the appraiser states
there are seven sales between $24,500 and $147,000 and 37 listings between $25,000 and
$199,000. If marketing time ranged between three and six months, the appraiser should have
been able to find sales less than six months old and the lender should have noticed the
inconsistency and questioned the appraiser.

Comment 26 In case 495-6673573, the appraiser dated the appraisal June 21, 2003 and two
comparables were dated July 3, 2002, and July 25, 2002, almost a year before the appraisal.
Comparables four and five were within a mile of the subject but these are traditionally built
homes and not comparable to the subject, a manufactured home. Comparables one, two, and
three are seven miles from the subject and more than 300 square feet smaller than the subject.
They were 25, 23, and 15 percent, respectively, smaller than the subject. The lender should
have questioned the comparables.

Comment 27 In case 495-6460736, the comparables were located in a different
neighborhood. The appraiser did not explain what upgrades were worth $6,000, which was
five percent of the sales price. The quality of the pictures of the comparables was such that
one could not determine whether the homes were similar. The lender should have questioned
the appraiser.

Comment 28 We correctly calculated the borrowers’ income. However we revised our
narrative in this case to include the effect in the debt to income ratio. This ratio would change
from about 44 percent to 47 percent, which exceeds HUD’s guidelines.




                                               78
79
80
Appendix C-3

                                CASE NARRATIVES


FHA Case Number(s):           495-6861163
Lender Number(s):             4010036
Loan Amount:                  $99,439
Contract Sales Price:         $70,002
Endorsement Date:             March 24, 2004
Default Date:                 April 1, 2004
Current Loan Status:          Foreclosed
Claim Paid:                   $105,389

Deficiencies in loan origination:

1. The lender did not adequately review the appraisal indicating the value of the property to
   be $120,000, whereas the local appraisal district valued the property at $90,920. The
   appraiser overvalued the property by $29,080. The following deficiencies indicate a lower
   value.
   a. The lender did not reduce the sales price used to calculate the maximum mortgage for
        the seller concessions over 6 percent of the sales price. This resulted in an overvalued
        property and an over-insured mortgage. The lender should have reduced the
        mortgage by at least $4,171, the difference between the concession in the sales
        contract and 6 percent of the sales price. The Mortgage Credit Analysis Worksheet
        listed the 6 percent limit as $6,060, and the sales contract states the seller will pay up
        to $10,231 in closing costs.
   b. The initial picture of the empty lot is not the same as the subject lot. The initial
        picture shows no trees and the finished house has seven trees.
   c. The inspector did the final inspection, January 12, 2004, before the appraisal dated
        January 20, 2004. Final inspections are normally after the appraisals in such cases.
   d. Comparables one and three sales dates are over six months old.
   e. The closest comparable was listed as 5 miles from the subject; however, the actual
        distance was closer to 14 miles.
   f. The acreage adjustments are not logical. The subject property has 1.36 acres that cost
        $31,000:
         • Comparable one has nine acres more and was adjusted down by $9,000;
         • Comparable two has five acres more and was adjusted down by $5,000; and
         • Comparable three has eleven acres more and was adjusted down by $11,000.
   g. There is a $22,000 difference in the final adjusted values between the highest and
         lowest comparables. The adjusted values should be closer to subject property’s
         value.




                                               81
2. The lender did not resolve why and how the borrower was going to commute between the
   subject property and his place of employment 157 miles away.

3. The lender did not limit the loan ratio to 90 percent, and therefore the loan is over-insured
   by $7,130. The seller built this home as a speculative house. The lender did not issue the
   Conditional Commitment before construction started or obtain a 10-year warranty.


FHA Case Number:              495-7006330
Lender Number:                4050091
Loan Amount:                  $64,020
Contract Sales Price:         $58,708
Endorsement Date:             October 8, 2004
Default Date:                 January 2005
Current Loan Status:          Reinstated

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The contract
   sales price was $58,708 and the sales price shown on the HUD-1 Settlement Statement
   was $58,087. The closing documents also showed that the seller added $11,787 in
   unsupported costs to the sales price.

2. The lender did not adequately review the appraisal that valued the property at $103,000,
   whereas the local appraisal district valued the property at $58,370. The appraiser
   overvalued the subject property by $44,630. The following deficiencies indicate a lower
   value:
   a. The lender did not reduce the sales price used to calculate the maximum mortgage for
       seller concessions over 6 percent of the sales price. This resulted in an overvalued
       property and an over insured mortgage. The lender should have reduced the mortgage
       by at least $1,789, the difference between the concessions in the sales contract and 6
       percent of the sales price. The Mortgage Credit Analysis Worksheet listed the 6
       percent limit as $3,942 and the sales contract states the seller will pay up to $5,732.
   b. The sales dates for comparables two and three are over six months old.
   c. The closest comparable is about four miles from the subject.
   d. The subject property was not similar to the comparables. The subject was new,
       generally smaller and a single-wide manufactured home:
       • Comparables two and three were at least 250 square feet larger than the subject.
       • Comparables one and two were double-wide manufactured homes.
       • Comparable three was a traditionally built home.
   e. The site value from the cost approach was $19,000 more than the property cost.
   f. The appraiser did not adjust the comparables consistently with land values of the
       subject. The subject had 1.19 acres that cost $7,000:
       • Comparable one had five acres more and was adjusted down by $1,000.
       • Comparable two had six acres more and was adjusted down by $2,000.
       • Comparable three had three acres less and was adjusted up by $8,000.


                                                82
   g. There was a $40,000 difference in the final adjusted values between the lowest and
      highest comparable. The adjusted values should be closer to the subject property’s
      value.

3. The lender did not adequately evaluate the borrower’s credit history or provide adequate
   explanations for derogatory credit items. The mortgage credit analysis worksheet shows
   the borrowers only assets included a gift of $3,215 and $1,200 deposited in the closing
   agent’s escrow account on June 10, 2004, to be refunded at closing according to the
   closing agent. The borrower apparently had no bank account. The lender did not confirm
   the source of the deposit.

   The lender did not confirm the source of funds used to pay delinquent debts. The file
   contained evidence that the borrower owed creditors on accounts that were significantly
   past due and out for collection prior to applying for the mortgage to purchase the home.
   The lender related seller obtained credit reports on the borrower on March 11, April 20,
   and May 1, 2004 as evidenced by the lender’s credit report dated May 4, 2004. The
   lender’s credit report indicated the borrower owed the Department of Education $1,347 on
   a defaulted student loan, $1,117 to a former landlord for rent incurred prior to moving in
   October 2003, and $1,253 to a fitness club that reported it was unable to contact the
   borrower because he had moved and left no forwarding address. The borrower also owed
   for medical services and other delinquent debts amounting to more than $1,000 that dated
   back to 2002. The lender’s files contained correspondence dated March 31, 2004 and
   April 21, 2004 from the former landlord and the Department of Education, respectively,
   indicating the past due amounts had been satisfied. The lender did not obtain confirmation
   as to the source of funds used to satisfy these debts.

   The lender included the student loan on the Mortgage Credit Analysis Worksheet but did
   not address the delinquent fitness club debt or other delinquent debts that would indicate
   the borrower’s attitude toward his obligations.


FHA Case Number(s):           495-6844999
Lender Number(s):             3120578
Loan Amount:                  $92,793
Contract Sales Price:         $94,250
Endorsement Date:             May 20, 2004
Default Date:                 August 1, 2004
Current Loan Status:          Foreclosed
Claim Paid:                   $ 95,015

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts was $75,157, whereas and the sales price shown on the HUD-1 Settlement
   Statement was $89,597. The closing documents also showed that the seller added $31,367
   in unsupported and unallowable costs, including costs the seller agreed to pay on behalf of



                                               83
   the buyer. The seller added $12,412 to pay off the trade-in, $350 to haul the trade-in to the
   seller’s lot, a $1000 referral fee, $9,512 in closing costs, $4,535 for the downpayment
   assistance gift and processing fee, and a $3,558 unexplained price increase.

2. The lender did not adequately review the property appraisal of $108,000 or reduce the
   sales price for seller concessions over 6 percent. This resulted in overvalued collateral.
   The Mortgage Credit Analysis Worksheet lists the 6 percent as $5,655 and the HUD-1
   shows the seller and lender paid $9,456 in closing costs. We could not determine the
   current value, because the local appraisal district had not performed an appraisal. Several
   of the discrepancies indicate a lower value:
   a. The closest comparable is 2.7 miles from the subject property.
   b. Three of the comparable sales are over six months old.
   c. The cost approach shows the lot cost $14,450, and the file shows $7,406. The
       appraiser overstated the comparable land adjustments by $7,406, thus overstating the
       value of the subject property.

3. The borrower was not creditworthy; three of the five active credit accounts were in
   collection status with no explanation. The seller provided the lender with two alternate
   credit letters, one of which was false, and the other we could not verify.


FHA Case Number:              495-6555425
Lender Number:                3041302
Loan Amount:                  $109,385
Contract Sales Price:         $75,000
Endorsement Date:             September 9, 2003
Current Loan Status:          Forbearance

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $97,150, whereas the sales price
   shown on the HUD-1 Settlement Statement was $99,470. The closing documents also
   showed that the seller added unsupported costs of $2,319 to the total sales price.

2. The lender did not adequately review the appraisal that valued the property at $120,000,
   whereas the local appraisal district valued the property at $77,240. The appraiser
   overvalued the property by $42,760. The following discrepancies indicate a lower value:
   d. The sales dates for comparables one and three were at least six months old.
   e. The closest comparable is about five miles from the subject property.
   f. The subject property is not similar to the comparables:
      • All three comparables are at least 200 square feet larger.
      • The appraiser adjusted the square footage differences by $10 per square foot;
          however, the cost approach used $58 per square foot.
   g. The subject property has 2.11 acres which cost $22,150, and the appraiser’s
      adjustments do not appear reasonable:


                                              84
      • Comparable one has five acres and was adjusted down by $2,000.
      • Comparable two and three had ten acres and were adjusted down by $5,000.
   h. There is a $39,200 difference in the final adjusted values between the lowest and
      highest comparable.

3. The lender did not document the borrower’s source of funds as required by the Loan
   Prospector Feedback sheet.


FHA Case Number:              495-6673573
Lender Number:                3062252
Loan Amount:                  $104,362
Contract Sales Price:         $92,000
Endorsement Date:             October 23, 2003
Default Date:                 December 1, 2003
Current Loan Status:          Reinstated

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts was $92,000 while the sales price shown on the HUD-1 Settlement
   Statement was $92,103. If the lender had reviewed the closing, they would have found the
   seller added unsupported costs of $6,674 to the sales contract price.

2. The lender did not adequately review the appraisal that valued the property at $106,000,
   whereas the local appraisal district valued the property at $74,700. The appraiser
   overvalued the subject property by $31,300. The following deficiencies indicate a lower
   value:
   a. Comparables two and three sales dates were over six months old.
   b. The closest comparable is seven miles from the subject.
   c. The property is not similar to the comparables: All three comparables were about 300
       square feet smaller, and were adjusted up for fewer rooms and less square footage.

3. The borrower was not creditworthy, and had more than five accounts in collection or
   charged off. The lender did not require the borrower to provide an explanation for the
   poor credit. The borrower’s only asset was a 401K retirement account balance of $1,785
   listed on the loan application and a different amount of $1,467 listed on the Mortgage
   Credit Analysis Worksheet. The loan application shows the borrower’s net worth to be a
   negative $105,685. The vested amount shown on the 401K account verification did not
   agree with the amount shown on other lender documents. The lender certified that the
   verifications of employment and deposits were requested and received by the lender
   without passing through the hands of any third person. The lender files show the
   verifications of employment and the 401K retirement account passed through the lender
   related seller, as evidence by the identity of the sender shown on the faxed documents.




                                             85
   The lender listed compensating factors as “good job stability” and “not a lot of debt.” The
   lender did not require an explanation of the accounts in collection and written off that were
   shown on the credit reports to address the deficiencies in the borrower’s past credit history.


FHA Case Number:              495-6487745
Lender Number:                3021318
Loan Amount:                  $138,914
Contract Sales Price:         $135,000
Endorsement Date:             May 15, 2003
Default Date:                 September 2003
Current Loan Status:          Reinstated

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $15,785 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the buyer. The seller added $7,972 in closing costs, $1,250 for FHA non-allowable costs,
   $1,412 for a title policy, $500 for appliances, $5,386 for the downpayment assistance gift
   and processing fee, and a $735 unexplained credit.

2. The seller’s contribution for downpayment assistance was used to fund the closing. The
   downpayment assistance contribution was deducted from the seller’s proceeds. The
   closing was held on March 24, 2003, and funded by the lender on March 25, 2003. The
   closer disbursed the funds on March 27, 2003. The “gift” funds from the nonprofit were
   not received until April 2, 2003. The “gift” and the fee were returned to the nonprofit on
   April 4, 2003.

3. The lender did not adequately review the appraisal that valued the property at $140,000,
   whereas the local appraisal district valued the property at $121,540. The appraiser
   overvalued the subject property by $18,460. The following deficiencies indicate a lower
   value:
   a. Comparable one and two sales dates were over six months old.
   b. Comparable one is two miles away, and comparables two and three are over ten miles
       away.
   c. The lender and appraiser did not reduce the sales price or value of the subject property
       by the amount of excess seller contribution over 6 percent of the purchase price of the
       home. The total contract price on the Mortgage Credit Analysis Worksheet is
       $135,000 and the 6 percent limitation is $8,100. The contract to purchase the home
       included $16,020 in seller contributions or concessions.
   d. The property site has .51 acres and cost $31,150, and the adjustments do not appear
       reasonable:
       • Comparable one had five acres more and was adjusted down by $5,000;
       • Comparable two had nine acres more and was adjusted down by $10,000; and
       • Comparable three had one acre more and was adjusted down by $1,000.




                                              86
   e. The difference between the final adjusted values is $41,000 between the lowest and
      highest comparable values. The values should be closer.


FHA Case Number:              495-6581533
Lender Number:                3033027
Loan Amount:                  $113,223
Contract Sales Price:         $115,000
Endorsement Date:             September 18, 2003
Current Loan Status:          Foreclosed April 7, 2005
Claim Paid:                   $115,713

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $16,045 in unsupported costs to the sales price, including costs the seller agreed to
   pay on behalf of the buyer. The seller added $6,102 in closing costs, $1,250 for FHA non-
   allowable costs, $1,300 for a title policy, $2,125 for an unspecified rental, $5,377 for the
   downpayment assistance gift and processing fee and a $109 unexplained credit.

2. The seller’s contribution for downpayment assistance was used to fund the closing. The
   closing was held on June 17, 2003 and funded by the lender on June 18, 2003. The closer
   disbursed the funds on June 18, 2003. The “gift” from the nonprofit was not received until
   September 2, 2003. The “gift” and the fee were returned to the nonprofit on September 2,
   2003.

3. The lender did not adequately review the appraisal that valued the property at $135,000,
   whereas the local appraisal district valued the property at $73,820. The appraiser
   overvalued the subject property by $61,180. The following deficiencies indicate a lower
   value:
   a. The closest comparable is over two miles away. Comparable one is six miles away
       and comparable three is over eleven miles from the subject,
   b. The lender and appraiser did not reduce the sales price or value of the subject property
       by the amount of excess seller contribution over 6 percent of the purchase price of the
       home. The total contract price on the Mortgage Credit Analysis Worksheet is
       $115,000 and the 6 percent limitation is $6,900. The purchase contract for the home
       included $14,029 in seller contributions or concessions.
   c. Comparable one is not a manufactured home but a site built traditional home, and the
       appraiser's adjustments do not appear reasonable or adequately explained. Comparable
       one was:
       • Adjusted down by $10,000 for design and appeal without explanation;
       • Adjusted up $2,000 for having 3 less rooms; and
       • Adjusted down $3,000 for a two-car garage. The subject property had a parking
           pad.
   d. There are no photos of comparable two and comparable three.




                                              87
   e. The subject property has 7.28 acres that cost $15,900. The appraiser's adjustments do
      not appear reasonable and were not adequately explained:
      • Comparable one had .75 acres and was adjusted up by $1000;
      • Comparable two had 1 acres and was adjusted up by $9,000; and
      • Comparable three had .5 acres and was adjusted down by $9,000.
   f. The subject has a living area of 2077 square feet and the appraiser did not compute the
      price per square foot. The comparables price per square foot range from $60 to $76,
      however, the appraiser used approximately $13 per square foot to adjust the
      comparables:
      • Comparable one had 77 feet less in living area and was adjusted up by $1,000;
      • Comparable two had 291 feet more in living area and was adjusted down by
          $3,800; and
      • Comparable three had 621 feet less in living area and was adjusted up by $8,100.
   g. The appraiser's adjustments for age are not reasonable or consistent and are not
      adequately explained. Comparable one is a year older and was adjusted up by $2,000
      and comparable three is four years older than the subject property and was adjusted up
      by $3,700.
   h. The subject's appraised value was $135,000; however, the final adjusted values of the
      comparables range from $113,000 to $144,773. The values should be closer.

3. The lender overstated the borrowers income, thus the borrower’s debt to income ratio
   exceeded the limit. The borrower’s debt to income ratio was 55 percent and the limit was
   41 percent.


FHA Case Number:              495-6482731
Lender Number:                3032675
Loan Amount:                  $80,733
Contract Sales Price:         $82,000
Endorsement Date:             June 27, 2003
Current Loan Status:          Foreclosed February 1, 2005
Claim Paid:                   $87,046

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $11,153 in unsupported costs to the sales price, including costs the seller agreed to
   pay on behalf of the buyer. The seller added $5,881 in closing costs, $1,250 for FHA non-
   allowable costs, $1,000 for a title policy, $2,196 for the downpayment assistance gift and
   processing fee, and an unidentified amount of $826.

2. The lender did not adequately review the appraisal that valued the property at $82,000,
   whereas the local appraisal district valued the property at $45,907. The appraiser
   overvalued the subject property by $36,093. The following deficiencies indicate a lower
   value:
   a. The comparables are not similar to the subject,


                                              88
      • The closest comparable is 5 miles away out of the area,
      • The comparables are at least 130 square feet larger, and
      • The comparables are doublewides whereas the subject is a singlewide.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contribution in excess of 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is $82,000
      and the 6 percent limitation is $4,920. The purchase contract of the home included
      $10,327 in seller contributions or concessions.
   c. The subject had .519 acres that cost $12,000. The appraiser’s adjustments to the
      comparables for land do not appear reasonable.
      • Comparable one had at least two acres more than the subject property and was
          adjusted down $2,481.
      • Comparable two had at least four acres more and was adjusted down by $4,490.
      • Comparable three had a half-acre more than the subject property and was adjusted
          down by $841.


FHA Case Number:              495-6384702
Lender Number:                34487
Loan Amount:                  $123,068
Contract Sales Price:         $125,000
Endorsement Date:             March 24, 2003
Current Loan Status:          Modified July 27, 2004

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $15,452 in unsupported and unallowable costs to the sales price, including costs the
   seller agreed to pay on behalf of the buyer. The seller added $7,500 in closing costs,
   $1,100 for FHA non-allowable costs, $1,325 for a title policy, $1,500 for a big screen
   television, $3,375 for the downpayment assistance gift and processing fee, and an
   unidentified cost of $652.

2. The seller’s contribution for downpayment assistance was used to fund the closing. The
   contribution was deducted for the seller’s proceeds. The closing was held on January 28,
   2003 and funded by the lender on January 29, 2003. The closer disbursed the funds on
   January 30, 2003. The “gift” from the nonprofit was not received until February 4, 2003.
   The gift and the fee were returned to the nonprofit on March 13, 2003.

3. The lender did not adequately review the appraisal that valued the property at $138,000,
   whereas the local appraisal district valued the property at $92,200. The appraiser
   overvalued the subject property by $45,800. The following deficiencies indicate a lower
   value:
   a. Comparables two and four sales dates were over six months old.
   b. The closest comparable is 25 miles from the subject.



                                             89
   c. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contributions or concessions in excess of 6 percent of the
      purchase price of the home. The total contract price on the Mortgage Credit Analysis
      Worksheet is $125,000 and the 6 percent limitation is $7,500. The contract to purchase
      the home included $13,300 in seller contributions or concessions.
   d. The subject had one acre that cost $28,560 and the appraisers adjustments do not
      appear reasonable:
      • Comparable one had almost eight acres more and was adjusted down by $7,820;
      • Comparable two had seven acres more and was adjusted down by $7,190;
      • Comparable three had five acres more and was adjusted down by $5,070; and
      • Comparable four had four acres more and was adjusted down by $4,000.

4. The lender did not adequately evaluate the borrowers’ credit history or provide adequate
   explanations for derogatory credit. The borrowers credit report shows 24 accounts in
   collection or written off. The borrowers have 14 student loans totaling $66,558 that can
   only be deferred another 30 months.

5. The lender overstated the borrowers’ income by $334.


FHA Case Number:              495-6601956
Lender Number:                3053181
Loan Amount:                  $157,182
Contract Sales Price:         $159,650
Endorsement Date:             September 4, 2003
Current Loan Status:          Foreclosed July 1, 2005
Claims Paid:                  $160,944

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $18,335 in unsupported costs to the sales price, including costs the seller agreed to
   pay on behalf of the buyer. The seller added $9,912 in closing costs, $8,259 for the
   downpayment assistance gift and fee, $900 for moving, $224 for storage, and an
   unexplained credit of $960.

2. The seller’s contribution for downpayment assistance was used to fund the closing. The
   contribution was deducted from the seller’s proceeds at closing. The closing was held and
   funded on May 30, 2003. The closer disbursed the funds on June 2, 2003. The “gift” from
   the nonprofit was not received until August 26, 2003. The gift and the fee were returned
   to the nonprofit on August 27, 2003.

3. The lender did not adequately review the appraisal that valued the property at $162,000,
   whereas the local appraisal district valued the property at $83,400. The appraiser
   overvalued the subject property by $78,600. The following deficiencies indicate a lower
   value:


                                              90
   a. Comparable two’s sales date is over six months old.
   b. The closest comparable is almost three miles from the subject property.
   c. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of excess seller contribution over 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $159,650 and the 6 percent limitation is $9,579. The contract to purchase the home
      included $18,171 in seller contributions or concessions.
   d. Comparable one is not a manufactured home like the subject, but is a traditionally built
      home and is 700 square feet smaller than the subject property.
   e. The difference in final adjusted values of the comparables is $46,000. The lowest
      adjusted value is $146,000 and the highest is $192,000. The values should be closer.


FHA Case Number:              495-6719550
Lender Number:                3072393
Loan Amount:                  $93,390
Contract Sales Price:         $93,893
Endorsement Date:             November 13, 2003
Current Loan Status:          Modified February 14, 2005

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $93,893, while the sales price shown
   on the HUD-1 Settlement Statement was $84,246. If the lender staff had reviewed the
   closing, it would have found the seller added unallowable and unsupported costs of $4,174
   to the sales price, including a $700 gift certificate/customer reimbursement, $670 for
   insurance, and an unidentified amount of $2,804.

2. The lender did not adequately review the appraisal that valued the property at $97,000,
   whereas the local appraisal district valued the property at $46,761. The appraiser
   overvalued the subject property by $50,239. The following deficiencies indicate a lower
   value:

   a.   Comparables one, two and three sales dates were over six months old.
   b.   The comparables were at least 300 square feet larger than the subject.
   c.   Comparable four is not a manufactured home but a traditionally built home.
   d.   The subject property has one acre that cost $24,500 and the adjustments do not appear
        reasonable:
        • Comparable one has the same amount of land and was adjusted up by $4,000.
        • Comparable two had four acres more land and was adjusted down by $4,000.
        • Comparable four had one and a half acres more land and it was adjusted down by
            $4,000.

The lender did not adequately evaluate the borrower’s credit history, which showed seven
recent accounts either written off or placed in collection. Further, the lender did not obtain an


                                               91
adequate borrower explanation for the bad credit. The lender listed the compensating factors
as “two months reserves” and “not a lot of debt” but did not require a sensible explanation for
the borrower’s poor credit characteristics as it should have. Letters documenting alternative
credit were faxed from the seller.


FHA Case Number:              495-6749841
Lender Number:                3081544
Loan Amount:                  $87,187
Contract Sales Price:         $81,513
Endorsement Date:             September 4, 2003
Current Loan Status:          Claim with out conveyance March 9, 2005
Claim Paid:                   $89,073.44

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $78,858, whereas, the sales price
   shown on the HUD-1 Settlement Statement was $81,513. If the lender staff had reviewed
   the closing, they would have found the seller added $4,983 in unsupported costs to the
   sales price.

2. The lender did not adequately review the appraisal that valued the property at $93,000,
   whereas the local appraisal district valued the property at $58,980. The appraiser
   overvalued the subject property by $34,020. The following deficiencies indicate a lower
   value:
   a. The closest comparable is nine miles away from the subject property.
   b. Comparable one is a traditional site built home and not a manufactured home like the
       subject.
   c. Comparable two sales date is over six months old.
   d. The subject property is a half-acre that cost $25,000. The adjustments for land for the
       comparables do not appear reasonable:
       • Comparable one and two have more than three acres and were not adjusted.
       • Comparable three has more than eleven acres and was adjusted down by $15,000.

3. The lender did not require the borrower to provide an explanation for the poor credit. The
   borrower had 14 recent accounts in collection or written off. The lender listed
   compensating factors as “two months reserves” and “homebuyer education,” but did not
   require a sensible explanation regarding the borrower’s 14 accounts in collection totaling
   $2,261 and the poor credit characteristics.




                                              92
FHA Case Number:              495-6727403
Lender Number:                3080164
Loan Amount:                  $96,485
Contract Sales Price:         $98,000
Endorsement Date:             October 21, 2003
Current Loan Status:          Foreclosed February 1, 2005

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $95,080, whereas the sales price
   shown on the HUD-1 Settlement Statement was $98,000. If the lender staff had reviewed
   the closing, they would have found the seller added $12,100 in unallowable and
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the buyer. The seller added $5,633 in closing costs, $1,200 for the title policy, $875 for
   FHA non-allowables, $3,381 for the gift and fee used as the downpayment, and an
   unidentified price increase of $1,011.

2. The lender did not adequately review the appraisal that valued the property at $98,000,
   whereas the local appraisal district valued the property at $64,800. The appraiser
   overvalued the subject property by $33,200. The following deficiencies indicate a lower
   value:
   a. The closest comparable is almost three miles from the subject property.
   b. Sales dates for comparable one and three were over six months old.
   c. The lender and appraiser did not reduce the sales price or value of the subject property
       by the amount of seller contribution or concessions in excess of 6 percent of the
       purchase price of the home. The total contract price on the Mortgage Credit Analysis
       Worksheet is $98,000. The 6 percent limitation is $5,880. The contract to purchase
       the home included $12,180 in seller contributions or concessions.
   d. Comparable one is a traditional site built home, not a manufactured home like the
       subject.
   e. Comparables one and three are about 400 square feet larger, and comparable two is
       about 100 square feet smaller than the subject property.
   f. The subject has a half-acre lot that cost $24,900; however, the land adjustments for the
       comparables do not appear reasonable:
       • Comparable one is the same size and was adjusted up by $5,000.
       • Comparable two had more than 4 acres more than the subject property and was not
           adjusted.
       • Comparable three had almost eleven acres more than the subject property and was
           adjusted down by $15,000.

3. The borrower was not creditworthy. The lender did not require the borrower to explain
   five accounts placed in collection or written off.




                                              93
FHA Case Number:              495-6578006
Lender Number:                3040572
Loan Amount:                  $118,176
Contract Sales Price:         $80,940
Endorsement Date:             October 1, 2003
Current Loan Status:          Partial reinstatement

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $103,940, whereas the sales price
   shown on the HUD-1 Settlement Statement was $104,443. If the lender staff had reviewed
   the closing, it would have found the seller added $5,475 in unallowable and unsupported
   costs to the sales price. The seller added $3,000 for an item called transport, a $200 gift
   card, an electric deposit of $400, and an unidentified amount of $1,875.

2. The lender did not adequately review the appraisal that valued the property at $125,000,
   whereas the local appraisal district valued the property at $64,800. The appraiser
   overvalued the subject property by $60,200. The following deficiencies indicate a lower
   value:
   a. The closest comparable is five miles from the subject.
   b. All three comparables are at least 200 square feet larger than the subject.
   c. Comparable three’s sales date is over six months old.
   d. The subject property had two acres that cost $23,000. The appraiser’s adjustments do
       not appear reasonable:
       • Comparable one had almost eight more acres than the subject property. It was
           adjusted down $12,000.
       • Comparable two had a half-acre and was adjusted up by $3,000.
       • Comparable three had almost three acres more than the subject property, and was
           adjusted down by $7,000.


FHA Case Number:              495-6545687
Lender Number:                3021791
Loan Amount:                  $157,182
Contract Sales Price:         $169,650
Endorsement Date:             November 12, 2003
Current Loan Status:          Special Forbearance February 6, 2004

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $17,538 in unallowable and unsupported costs to the sales price, including costs the
   seller agreed to pay on behalf of the buyer. The seller added $10,793 in closing costs, a
   $500 set of playground equipment, $6,430 for the gift and fee for the downpayment, and
   an unidentified credit of $185.


                                              94
2. The seller’s contribution for downpayment assistance was used to fund the closing. The
   contribution was deducted from the seller’s proceeds at closing. The closing was held on
   June 25, 2003 and funded by the lender on June 28, 2003. The closer disbursed the funds
   on July 3, 2003. The “gift” from the nonprofit was not received until September 2, 2003.
   The “gift” and the fee were returned to the nonprofit on September 2, 2003.

3. The lender did not adequately review the appraisal that valued the property at $160,000,
   whereas the local appraisal district valued the property at $106,860. The appraiser
   overvalued the subject property by $53,140. The following deficiencies indicate a lower
   value:
   a. The closest comparable is two miles away.
   b. The closest comparable sales date is over a year old.
   c. The lender and appraiser did not reduce the sales price or value of the subject property
       by the amount of seller contribution in excess of 6 percent of the purchase price of the
       home. The total contract price on the Mortgage Credit Analysis Worksheet is
       $159,650 and the 6 percent limitation is $9,579. The Purchase Contract of the home
       included $17,223 in seller contributions or concessions.
   d. Comparable three is a traditional site built home, not a manufactured home like the
       subject property.
   e. The subject property had slightly over two acres that cost $31,000. The appraiser’s
       adjustments do not appear reasonable:
       • Comparable one had almost six acres and was adjusted down by $4,000.
       • Comparable two had almost three acres more and was adjusted up by $16,000.
       • Comparable three had two acres less than the subject property, and it was adjusted
           up by $11,000.

4. The lender did not resolve the discrepancy between occupancy of their new home with the
   lease of their old home. The seller appears to have completed the new home in August
   2003, as indicated by the final inspection dated August 22, 2003 and septic license dated
   August 26, 3003. The borrowers leased their old home to a tenant on April 22, 2003.
   There is no indication that the borrowers were renting or living anywhere between
   April 22, 2003, and August 22, 2003.


FHA Case Number:              495-6529962
Lender Number:                3030699
Loan Amount:                  $103,377
Contract Sales Price:         $105,000
Endorsement Date:             July 29, 2003
Current Loan Status:          Delinquent

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added unsupported costs of $19,968 to the sales price, including costs the seller agreed to


                                              95
   pay on behalf of the buyer. The seller added $8,603 in closing costs, $2,801 for the gift
   and fee used for the downpayment, and an unidentified amount of 8,564.

2. The lender did not reduce the sales price or value of the subject property by the amount of
   seller contributions in excess of 6 percent of the sales price, resulting in overvalued
   collateral. The total contract price on the Mortgage Credit Analysis Worksheet is
   $105,000 and the 6 percent limitation is $6,300. The contract to purchase the home
   included $12,004 in seller contributions or concessions.


FHA Case Number:              495-6470914
Lender Number:                3020941
Loan Amount:                  $154,574
Contract Sales Price:         $157,000
Endorsement Date:             July 2, 2003
Current Loan Status:          Foreclosed March 1, 2005
Claim Paid:                   $157,110

Deficiencies in loan origination:

1. The lender did not support the sales price on the contracts. We found the seller added
   $20,015 in unsupported and unallowable costs to the acquisition price, including costs the
   seller agreed to pay on behalf of the buyer. The seller added $10,953 in closing costs the
   seller agreed to pay, $1,250 for unallowable closing costs, $2,000 for a pool table, $4,160
   for the downpayment assistance, and an unidentified amount of $1,652.

2. The seller’s contribution for downpayment assistance was used to fund the closing. The
   seller’s proceeds from the sale were reduced by the downpayment assistance contribution
   to a nonprofit as shown by the settlement statement. The closing was held March 28, 2003
   and funded on March 31, 2003. The closer disbursed the funds on April 1, 2003. The
   “gift” from the nonprofit was not received until April 15, 2003. The “gift” and the fee
   were pending return to the nonprofit on April 17, 2003.

3. The lender did not reduce the sales price or value of the subject property by the amount of
   seller contributions in excess of 6 percent of the sales price. This resulting in overvalued
   collateral. The total contract price on the Mortgage Credit Analysis Worksheet is
   $157,000 and the six percent limitation is $9,420. The contract to purchase the home
   included $16,363 in seller contributions or concessions.

4. The lender did not adequately evaluate the borrowers’ credit. The borrowers had eight
   accounts in the past two years that were either written off or placed in collection. The
   lender did not obtain an explanation or identify compensating factors.




                                              96
FHA Case Number:              495-6454616
Lender Number:                3031223
Loan Amount:                  $118,145
Contract Sales Price:         $116,400
Endorsement Date:             May 6, 2003
Current Loan Status:          Modified

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $116,400, whereas the sales price
   shown on the HUD-1 Settlement Statement was $120,000. If the lender staff had reviewed
   the closing, they would have found the seller added $16,303 in unsupported costs to the
   sales price, including costs the seller agreed to pay on behalf of the buyer. The seller
   added $8507 in closing costs, $5,455 for the gift and fee used for the downpayment, and
   an unidentified amount of $2,341.

2. The lender did not adequately review the appraisal that valued the property at $120,000,
   whereas the local appraisal district valued the property at $66,370. The appraiser
   overvalued the subject property by $53,630. The following deficiencies indicate a lower
   value:
   a. Comparables one, two, and three are ten miles from the subject property, and
       comparable four is five miles from the subject property.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
       by the amount of seller contribution in excess 6 percent of the purchase price of the
       home. The total contract price on the Mortgage Credit Analysis Worksheet is
       $120,000. The 6 percent limitation is $7,200. The Purchase Contract of the home
       included $13,962 in seller contributions or concessions.
   c. The Subject had 10 acres that cost $31,400 ($3,140 per acre) and the appraiser’s
       adjustments for land do not appear reasonable:
       • Comparable one had 15 acres more than the subject and was adjusted down by
           $15,000.
       • Comparable two had about 6 acres less and was adjusted up by $6,000.
       • Comparables three and four had 5 acres more and were adjusted up by $5,000.
   d. Three of the four comparables have at least 200 square feet in living space more than
       the subject property.




                                              97
FHA Case Number:              495-6456442
Lender Number:                3031731
Loan Amount:                  $122,815
Contract Sales Price:         $112,336.29
Endorsement Date:             June 25, 2003
Current Loan Status:          Reinstated
Claims Paid:                  $200 Forbearance

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts was $94,107, whereas the sales price shown on the HUD-1 Settlement
   Statement was $112,336. If lender staff had reviewed the closing, they would have found
   the seller added unsupported costs of $14,567 to the sales price.

2. The lender did not adequately review the appraisal that valued the property at $133,500,
   whereas the local appraisal district valued the property at $103,850. The appraiser
   overvalued the subject property by $29,650. The following deficiencies indicate a lower
   value:
   a. The closest comparable is eight miles away.
   b. The appraiser’s adjustments do not appear reasonable. The subject property had 9.5
       acres that cost $37,278.
       • Comparable one has 15 acres more than the subject and was adjusted down by
           $15,000.
       • Comparables two and three had 4.5 acres less and were adjusted up by $4,800.
       • Comparable four had 8 acres less and was adjusted up by $8,000.
   c. The comparables were adjusted up $7,500 because the subject had a swimming pool.
       But no sufficient explanation was given.
   d. The adjusted values ranged from $125,251 to $162,861. The adjusted values should be
       closer.


FHA Case Number:              495-6471830
Lender Number:                3032531
Loan Amount:                  $94,516
Contract Sales Price:         $96,000
Endorsement Date:             June 10, 2003
Current Loan Status:          Modification

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $13,602 in unsupported costs to the sales price, including costs the seller agreed to
   pay on behalf of the buyer. The seller added $7,415 in closing costs, $5,095 for the




                                              98
     downpayment assistance gift and processing fee, an “Overcharge on Guzman” for $3,500,
     and an unexplained credit of $2,408.

2.   The lender did not adequately review the appraisal that valued the property at $100,000,
     whereas the local appraisal district valued the property at $56,790. The appraiser
     overvalued the subject property by $43,210. The following deficiencies indicate a lower
     value:
     a. The closest comparable is five miles away.
     b. The lender and appraiser did not reduce the sales price or value of the subject property
         by the amount seller contributions in excess of 6 percent of the purchase price of the
         home. The total contract price on the Mortgage Credit Analysis Worksheet is $96,000.
         The 6 percent limitation is $5,760. The contract to purchase the home included
         $10,162 in seller contributions or concessions.
     c. Comparable three’s sales date was over six months old.
     d. The subject has a living area of 1809 square feet and the appraiser did not compute the
         price per square foot. The comparables price per square foot range from $49 to $69;
         however, the appraiser used approximately $20 per square foot to adjust the
         comparables:
         • Comparable one had about 321 square feet more and adjusted down $6,421.
         • Comparable two had about 459 square feet less and adjusted up $9180.
         • Comparable three had about 319 square feet more and adjusted down $6,380.
     e. Comparable three was adjusted down by $10,000 for strict deed restrictions without an
         adequate explanation.



FHA Case Number:               495-66476765
Lender Number:                 3020944
Loan Amount:                   $123,068
Contract Sales Price:          $125,000
Endorsement Date:              November 12, 2003
Current Loan Status:           Delinquent May 1, 2005
Claims Paid:                   $200 Special Forbearance

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $17,600 in unsupported costs to the sales price, including costs the seller agreed to
   pay on behalf of the buyer. The seller added $6,593 in closing costs, $1,400 for the title
   policy, $1,250 for FHA non-allowables, $6,613 for the gift and fee used as the
   downpayment, and an unidentified price increase of $1,744.

2. The lender did not adequately review the appraisal. According to the local appraisal
   district, the appraiser overvalued the property by $24,100 ($130,000 mortgagee appraisal
   less $105,900 local appraisal district). Several of these discrepancies indicate a lower
   value:
   a. All the comparables are 5 miles away from the subject.


                                               99
   b. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contribution in excess of 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $125,000 and the 6 percent limitation is $7,500. The contract to purchase the home
      included $15,856 in seller contributions or concessions.
   c. The subject property has 6.67 acres of land that cost $20,805. The appraiser's
      adjustments do not appear reasonable and were not adequately explained:
      • Comparable one had 10 acres and was adjusted down by $1,000;
      • Comparable two had 3 acres and was adjusted up by $1,000; and
      • Comparable three had 5 acres and was not adjusted.
   d. Comparable one and three are manufactured homes like the subject; however,
      comparable two is a traditional site built home and was adjusted down by $10,000.
   e. The subject has a living area of 2,240 square feet and the appraiser computed a $57
      price per square foot. The comparables’ price per square foot ranged from $59 to $80;
      however, the appraiser used approximately $10 per square foot to adjust the
      comparables:
      • Comparable one had 640 feet less living area and was adjusted up by $6,400;
      • Comparable two had 330 feet less living area and was adjusted up by $3,300; and
      • Comparable three had 192 feet less living area, and was adjusted up by $1,900.
   f. The appraiser's adjustment for age does not appear reasonable or consistent, and is not
      adequately explained.
      • Comparable one is 6 years older and was adjusted up by $6,000.
      • Comparable two is one year older and was adjusted up by $1,000.
      • Comparable three is 9 years older than the subject, and it was only adjusted up by
          $10,000.
   g. The appraiser made upward adjustments of $1,000 to all the comparables for condition
      without adequate explanations.
   h. The subject property did not have a garage or carport. The appraiser's adjustments for
      this were not adequately explained and do not appear consistent:
      • Comparables one and two had a 2-car garage/carport and was adjusted down by
          $1,000 and $2,000, respectively.
      • Comparable three had a 3-car garage\carport and was adjusted down by $4,500.
   i. The final values of the comparables ranged from $121,900 to $144,300. The values of
      the comparables should be closer to the value established by the subject.

3. The lender did not adequately evaluate the borrower's credit. The borrower has a poor
   credit history with major unexplained derogatory credit accounts, including delinquent
   federal debts. Specifically, the borrower did not adequately explain the major derogatory
   credit that included 29 accounts, totaling $22,043 that were placed for collection or written
   off. In addition, there were 41 payments past due totaling $5,099, and five accounts
   showing defaulted federal student loans. The borrower should not be eligible until the
   federal student loans are brought current, paid, or otherwise satisfied. A satisfactory
   repayment plan should have been made between the borrower and the federal agency, and
   then verified in writing.




                                              100
4. The borrower did not appear to have the necessary funds to close. The borrower did not
   have any cash reserves. Also, the borrower did not appear able to save the amount of
   money indicated on the budget plan. The lender did not report any assets, or savings or
   checking accounts. The lender used a budget plan to show that the borrower could save
   $2,105 every month; however, any cash savings were not verified. In addition, the budget
   plan was not realistic because the plan only included rent, utilities, food, gas, and
   telephone. It did not include many ordinary expenses such as car insurance or the $87 in
   loan or credit card payments that were on the Mortgage Credit Analysis Worksheet and the
   Loan Application.


FHA Case Number:              495-6505803
Lender Number:                3021785
Loan Amount:                  $128,483
Contract Sales Price:         $84,000
Endorsement Date:             July 18, 2003
Current Loan Status:          Repayment December 1, 2004

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $83,993.31 and the sales price shown
   on the HUD-1 Settlement Statement was $84,000. If the lender staff had reviewed the
   closing, they would have found the seller added $11,986 in unsupported costs to the sales
   price, including costs the seller agreed to pay on behalf of the buyer. The seller added
   $4,718 in closing costs, $1,063 for the title policy, $1,250 for FHA non-allowables, $4,463
   for the gift and fee used as the downpayment, and an unidentified price increase of $512.

2. The seller’s contribution for downpayment assistance was used to fund the closing. The
   seller’s proceeds from the sale were reduced by the downpayment assistance contribution
   to a nonprofit as shown by the settlement statement. The closing was held March 28, 2003
   and funded on March 31, 2003. The closer disbursed the funds on April 1, 2003. The
   “gift” funds from the nonprofit were not received until April 4, 2003. The “gift” and fee
   were returned to the nonprofit on April 8, 2003.

3. The lender did not adequately review the appraisal. According to the local appraisal
   district, the appraiser overvalued the property by $53,320 ($105,000 mortgagee appraisal
   less $51,680 local appraisal district). Several of these discrepancies indicate a lower
   value:
   a. Comparable one is 5 miles away, and comparables two and three are 10 miles from the
       subject.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
       by the amount of excess seller contribution over 6 percent of the purchase price of the
       home. The total contract price on the Mortgage Credit Analysis Worksheet is $84,000
       and the 6 percent limitation is $5,040. The contract to purchase the home included
       $11,474 in seller contributions or concessions.



                                             101
   c. The subject had 1.25 acres of land that cost $23,393.31. The appraiser's adjustments
      do not appear reasonable and were not adequately explained:
      • Comparable one had 10 acres and was adjusted down by $5000;
      • Comparable three had 5 acres and was adjusted down by $5000; and
      • Comparable two had 1.8 acres and was not adjusted.
   d. Comparable two and three were manufactured homes like the subject; however,
      comparable one is a traditional site built home and was not adjusted.
   e. The subject has a living area of 1,792 square feet and the appraiser computed a $44
      price per square foot. The comparables’ price per square foot range from $49 to $68,
      however, the appraiser used approximately $10 per square foot to adjust the
      comparables:
      • Comparable one had 192 feet less living area and was adjusted up by $1,900;
      • Comparable two had 336 feet more living area and was adjusted down by $3,400;
          and
      • Comparable three had 256 feet less living area and was adjusted down by $2,600.
   f. The appraiser's adjustment for age does not appear reasonable or consistent, and was
      not adequately explained. Comparable one is six years older and was adjusted up by
      $6,000. Comparable two is three years older and was adjusted up by $2,000.
      Comparable three is nine years older than the subject and was only adjusted up by
      $10,000.
   g. All the comparables were adjusted up by $1,000 for condition without adequate
      explanations.
   h. The subject property did not have a garage or carport and the appraiser's adjustments
      for this were not adequately explained, and do not appear consistent:
      • Comparable one had a 2-car garage\carport and was adjusted down by $1,000; and,
      • Comparable three had a 3-car garage\carport and was adjusted down by $4,500.
   i. The subject's appraised value was $105,000. The final values of the comparables
      range from $103,100 to $118,900. The values of the comparables should be closer to
      the subject’s value.

3. The lender did not adequately evaluate the borrower's credit. The borrower has a poor
   credit history and the lender did not consider all the current debts nor did they obtain
   explanations for the borrower' numerous collection accounts. The lender should have
   included an additional $62 per month in current debts listed on the Credit Report. The
   current debt payments should have been $653 instead of $591. The additional debt
   payment would cause the debt to income ratio to increase from 46 percent to 48 percent.
   This exceeds HUD guidelines of 41 percent. The borrower had 16 accounts with a $7,455
   balance that were recently placed for collection or were charged off.




                                            102
FHA Case Number:              495-6037036
Lender Number:                32646
Loan Amount:                  $128,483
Contract Sales Price:         $130,500
Endorsement Date:             February 3, 2003
Current Loan Status:          Modification December 1, 2003
Claims Paid:                  $500 Modification

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $21,418 in
   unsupported costs to the sales price, including costs the seller agreed to pay on the buyer’s
   behalf. The seller added $7,830 in closing costs, $1,400 for the title policy, $1,100 for
   FHA non-allowables, $5,931 for the gift and fee used as the downpayment, a $1,000 gift
   certificate, and an unidentified price increase of $4,157.

2. The lender did not adequately review the appraisal that valued the property at $132,000,
   whereas the local appraisal district valued the property at $100,670. The appraiser
   overvalued the property by $31,330. Several discrepancies indicate a lower value:
   a. Comparables one and three are 5 miles away, and comparable two is 8 miles from the
      subject property.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contributions in excess of 6 percent of the purchase price. The
      total contract price on the Mortgage Credit Analysis Worksheet is $130,500. The 6
      percent limitation is $7,830. The contract to purchase the home included $16,261 in
      seller contributions or concessions.
   c. The subject property has 1.04 acres that cost $27,400. The appraiser's adjustments do
      not appear reasonable and were not adequately explained:
      • Comparable one had 3.3 acres and was adjusted down by $2,000;
      • Comparable two had 21 acres and was adjusted down by $18,000; and
      • Comparable three had .267 acres and was adjusted up by $2,000.
   d. The subject has a living area of 2,368 square feet and the appraiser did not compute the
      price per square foot. The comparables price per square foot range from $59 to $71;
      however, the appraiser used approximately $20 per square foot to adjust the
      comparables:
      • Comparable one had 240 feet less living area and was adjusted up by $4,800;
      • Comparable two had 588 feet less living area and was adjusted up by $11,800; and,
      • Comparable three had 448 feet less living area and was adjusted up by $9,000.
   e. The appraiser's adjustment for age does not appear reasonable or consistent and is not
      adequately explained. Comparable one is eight years older than the subject property
      and was adjusted up by $1,200, and comparable two is five years older and was only
      adjusted up by $600.
   f. The appraiser's adjustment for condition does not appear reasonable or consistent, and
      is not adequately explained. Comparable one was adjusted up by $6,000 for good
      condition.


                                              103
   g. The subject property's appraised value was $132,000. The final values of the
      comparables ranged from $121,500 to $134,000. The values of the comparables
      should be closer to the subject property’s value.


FHA Case Number:              495-6114990
Lender Number:                90203023
Loan Amount:                  $125,352
Contract Sales Price:         $130,000
Endorsement Date:             August 7, 2002
Current Loan Status:          Foreclosed April 1, 2005
Claims Paid:                  $132,997

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $15,434 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the borrower. The seller added $7,800 in closing costs, $1,375 for the title policy, $1,100
   for FHA non-allowables, $7,015 for the gift and fee used as the downpayment, a $1,000
   referral fee, and an unidentified credit of $2,856.

2. The lender did not adequately review the appraisal that valued the property at $137,000,
   whereas local appraisal district valued the property at $108,637. The appraiser overvalued
   the property by $28,393. Several discrepancies indicate a lower value:
   a. Comparable three is seven miles from the subject property.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
       by the amount of seller contributions in excess of 6 percent of the purchase price. The
       total contract price on the Mortgage Credit Analysis Worksheet is $130,000. The 6
       percent limitation is $7,800. The contract to purchase the home included $17,290 in
       seller contributions or concessions.
   c. The subject property has a living area of 1,536 square feet and the price per square foot
       was not computed. The appraiser’s adjustments do not appear reasonable. The
       comparables price per square foot range from $86 to $95; however, the appraiser used
       approximately $20 per square foot to adjust the comparables:
       • Comparable two had 48 feet less living area and was adjusted up by $960; and
       • Comparable three had 192 feet less living area and was adjusted up by $3,840.
   d. The appraiser made upward adjustments of $3,000 to all comparables for not having an
       FHA foundation, but did not explain the adjustments.
   e. The appraiser made upward adjustments of $2,500 to all the comparables for the porch
       and patio, but did not explain these adjustments.




                                             104
FHA Case Number:              495-6285316
Lender Number:                31345
Loan Amount:                  $132,094
Contract Sales Price:         $136,992
Endorsement Date:             January 10, 2003
Current Loan Status:          Reinstatement March 1, 2005

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $17,645 in unsupported costs to the sales price, including costs the seller agreed to
   pay on behalf of the borrower. The seller added $7,600 in closing costs, $1,600 for the
   title policy, $1,100 for FHA non-allowables, and $7,345 for the gift and fee used for
   downpayment assistance.
2. The lender did not adequately review the appraisal that valued the property at $137,000,
   whereas the local appraisal district valued the property at $90,865. The appraiser
   overvalued the subject property by $46,135. Several discrepancies indicate a lower value:
   a. Comparable three was four miles from the subject property.
   b. The sales date for comparable three was over nine months old.
   c. The lender and appraiser did not reduce the sales price or value of the subject property
        by the amount of seller contributions in excess of 6 percent of the purchase price. The
        total contract price on the Mortgage Credit Analysis Worksheet is $136,992 and the 6
        percent limitation is $8,220. The contract to purchase the home included $17,645 in
        seller contributions or concessions.
   d. The subject property has 1.86 acres of land that cost $48,500. The appraiser’s
        adjustments do not appear reasonable and were not adequately explained:
        • Comparable one had 2.28 acres and was not adjusted;
        • Comparable two had 3.568 acres and was adjusted down by $3,000; and
        • Comparable three had 1.205 acres and was not adjusted.
   e. The subject property has a living area of 1,944 square feet and the appraiser did not
        compute the price per square foot. The comparables price per square foot range from
        $66 to $74; however, the appraiser used approximately $20 per square foot to adjust
        the comparables which does not appear reasonable:
        • Comparable one had 104 feet more living area and was adjusted down by $2,100;
        • Comparable two had 152 feet less living area and was adjusted up by $3000; and,
        • Comparable three had 264 feet less living area and was adjusted up by $5,300.
   f. The subject's appraised value was $137,000 however; the final values of the
        comparables range from $130,300 to $140,000. The values of the comparables should
        be closer.




                                              105
FHA Case Number:              495-6295517
Lender Number:                32121
Loan Amount:                  $79,748
Contract Sales Price:          $81,000
Endorsement Date:             March 21, 2003
Current Loan Status:          Repayment July 1, 2005
Claims Paid:                  $500 Modification

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. We found that the seller
   added $8,049 in unsupported costs to the sales price, including costs the seller agreed to
   pay on behalf of the buyer. The seller added $4,860 in closing costs, $1,035 for the title
   policy, $1,100 for FHA non-allowables, and $1,054 for the gift and fee used as the
   downpayment.

2. The lender did not adequately review the appraisal. Several discrepancies indicate a lower
   value:
   a. Comparables one, two, and three are over 5 miles, 15 miles, and 14 miles from the
       subject property, respectively.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
       by the amount of excess seller contribution over 6 percent of the purchase price of the
       home. The total contract price on the Mortgage Credit Analysis Worksheet $81,000
       and the 6 percent limitation is $4,860. The contract to purchase the home included
       $8,049 in seller contributions or concessions.
   c. The subject has five acres with an estimated value of $48,000. The appraiser’s
       adjustments do not appear reasonable and were not adequately explained:
       • Comparable one had one acre and was adjusted up by $8,000;
       • Comparable two had .80 acres and was adjusted up by $8,000; and
       • Comparable three had two acres and was adjusted up by $6,000.
   d. The appraiser did not adjust the comparables for age, nor was any explanation
       provided. Comparable one is eight years older, comparable two is four years older,
       and comparable three is five years older than the subject.
   e. Comparable two was adjusted down by $4,500 for a 2-car garage without adequate
       explanation.
   f. The subject has a living area of 1,547 square feet with a price of $52 per square foot.
       The comparables’ price per square foot ranged from $38 to $54, however, the appraiser
       used approximately $15 per square foot to adjust the comparables without an adequate
       explanation:
       • Comparable one had 273 feet more living area and was adjusted down by $4,100;
       • Comparable two had 133 feet more living area and was adjusted down by $2,000;
           and
       • Comparable three had 453 feet more living area and was adjusted down by $6,800.
   g. The subject's appraised value was $81,000. The final values of the comparables range
       from $75,220 to $86,200. The values should be closer.


                                              106
3. The lender did not calculate the current debt obligations and did not establish the
   borrower's credit worthiness. The lender did not consider all the current debts (including
   the non-purchasing spouse) and did not explain the derogatory credit items for both the
   borrower and non-purchasing spouse. The lender should have included an additional $299
   in current debts that were listed on the credit report. The current debt payments should be
   $483 instead of $185. The total debt payments of $483 will affect the borrower's ability to
   make the mortgage payment after the loan closing and increase the debt to income ratio
   from 41 percent to 55 percent. The borrower and the non-purchasing spouse had nine
   recent credit accounts with a balance of $5,532 that were placed for collection or charged
   off.


FHA Case Number:              495-6334452
Lender Number:                34468
Loan Amount:                  $122,035
Contract Sales Price:         $123,000
Endorsement Date:             April 30, 2003
Current Loan Status:          Delinquent April 1, 2004

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contracts. The sales price
   on the contracts (land and manufactured home) was $122,540, whereas the sales price
   shown on the HUD-1 Settlement Statement was $123,000. Closing documents also
   showed that the seller added $13,223 in unsupported costs to the sales price, including
   costs the seller agreed to pay on behalf of the buyer. The seller added $6,763 in closing
   costs, $1,100 for the title policy, $1,285 for FHA non-allowables, $3,715 for the gift and
   fee used as the downpayment, and an unidentified sales price increase of $460.

2. The lender did not adequately review the appraisal that valued the property at $123,000,
   whereas the local appraisal district valued the property at $90,042. The appraiser
   overvalued the subject property by $32,958. Several discrepancies indicate a lower value:
   a. The closest comparable is over five miles from the subject. Comparable two is over 21
      miles from the subject, and comparable one is over 18 miles from the subject.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contributions in excess of 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $123,000 and the 6 percent limitation is $7,380. The purchase memo for the home
      included $12,863 in seller contributions or concessions.
   c. The subject has 1.27 acres that costs $17,800. The appraiser’s adjustments do not
      appear reasonable and were not adequately explained:
      • Comparable one had .5 acres and was adjusted up by $5,000; and
      • Comparable three had .5 acres and was not adjusted.
   d. Comparable three is a site built home and not a manufactured home like the subject. It
      was adjusted down by $13,000 without adequate explanation. In addition, the



                                             107
      appraiser adjusted comparable three down by (1) $3,000 for quality of construction, (2)
      $3,000 for a covered patio, and (3) $5,000 for a two-car garage.
   e. The appraiser adjusted the comparables $1,000 per year for the age without adequate
      explanation. Comparable one is 6 years older than the subject property and was
      adjusted up $6,000, comparable two is five years older and was adjusted up $5,000,
      and comparable three is three years older and was adjusted up $3,000.
   f. The subject property has a living area of 2,355 square feet with a price of $52 per
      square foot. The comparables price per square foot range from $59 to $73, however,
      the appraiser used approximately $15 per square foot to adjust the comparables without
      adequate explanations:
      • Comparable one had 507 feet less living area and was adjusted up by $7,500;
      • Comparable two had 639 feet less living area and was adjusted up by $9,500; and
      • Comparable three had 536 feet less living area and was adjusted up by $8,000.

3. The current monthly debt obligations as reported appear to be supported. However, the
   lender did not verify the status of four students loans noted on the credit report. The credit
   report states that the loans were opened on April 2001 and were placed for collection. The
   borrower stated that the student loans were delinquent but did not say that the loans were
   deferred, were in repayment, or were paid off. A current federal debt, such as a delinquent
   Sallie Mae- student loan, would disqualify the borrower. Although the non-purchasing
   spouse did not have current obligations to include in the borrower's debts, the non-
   purchasing spouse had a poor credit history and currently had five accounts placed for
   collection. The borrower would still be liable for these obligations in a community
   property state such as Texas.


FHA Case Number:              495-6394485
Lender Number:                33628
Loan Amount:                  $72,877
Contract Sales Price:         $63,896.40
Endorsement Date:             July 31, 2003
Current Loan Status:          Reinstated April 1, 2005

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $62,829. The sales price shown on
   the HUD-1 Settlement Statement was $63,896. Closing documents showed that the seller
   added $1,067 in unsupported costs to the sales price.

2. The lender did not adequately review the appraisal that valued the property at $95,000,
   whereas local appraisal district valued the property at $64,125. The appraiser overvalued
   the property by $30,875. Several discrepancies indicate a lower value:
   a. All the comparables are five to eleven miles from the subject;
   b. The subject has 1.71 acres of land that the appraiser estimated the value to be $25,500.
       The appraiser’s adjustments do not appear reasonable.



                                              108
        • Comparable one had approximately five acres and was adjusted down $5,000;
        • Comparables two and four had .5 acres and were adjusted up $2,000; and
        • Comparable three had one acre and was adjusted up by $1,000.
   c.   The appraiser adjusted the comparables for the condition without adequate
        explanations. Comparables one, two, three, and five were all adjusted up by $5,000 for
        inferior condition.
   d.   The appraiser adjusted the comparables for two-car garages or carports without
        adequate explanations. Comparables two, three, and five were adjusted down by
        $7,500, and comparable one was adjusted down by $5,000.
   e.   The appraiser did not adjust any of the comparables’ age and did not provide any
        explanations for the lack of adjustments. Comparables one and five were 5 years older
        than the subject property, while comparables three and six were 6 years and 17 years
        older, respectively.
   f.   The appraiser, without adequate explanations, adjusted comparable four up by $3,000
        for not having a fence.
   g.   The subject property has a living area of 1,203 square feet and the appraiser did not
        determine the price per square foot. The comparables price per square foot ranged
        from $60 to $84; however, the appraiser's adjustments ranged from $10 to $25 per
        square foot and do not appear reasonable:
        • Comparable one had 925 more living area and was adjusted down by $9,250;
        • Comparable two had 645 feet more living area and was adjusted down by $6,450;
        • Comparables three and five had 83 feet less living area and were not adjusted; and
        • Comparable four had 108 feet more living area and was adjusted down by $2,720.
   h.   The subject’s appraised value was $95,000. The final values of the comparables
        ranged from $85,500 to $128,250. The values should be closer.


FHA Case Number:              495-6400545
Lender Number:                3041553
Loan Amount:                  $112,610
Contract Sales Price:         $113,500
Endorsement Date:             August 29, 2003
Current Loan Status:          Foreclosed May 1, 2004
Claims Paid:                  $117,005

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts was $113,500, whereas the sales price shown on the HUD-1 Settlement
   Statement was $117,500. Closing documents show that the seller added $17,400 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the buyer. The seller added $6,725 in closing costs, $1,250 for the title policy, $1,250 for
   FHA non-allowables, $4,175 for the gift and fee used as the downpayment, and an
   unidentified price increase of $4,000.




                                              109
2. The lender did not adequately review the appraisal that valued the property at $125,000,
   whereas the local appraisal district valued the property at $79,025. The appraiser
   overvalued the property by $45,975. Several discrepancies indicate a lower value:
   a. Comparables one and two are over eight miles from the subject property.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of excess seller contribution over 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $113,500 and the 6 percent limitation is $6,810. The purchase memo included $13,400
      in seller contributions or concessions.
   c. The subject property has 1.65 acres that cost $38,850 and the appraiser’s adjustments
      do not appear reasonable:
      • Comparable three had 1.47 acres and was not adjusted;
      • Comparable one had 3.30 acres and was only adjusted down by $3,000; and
      • Comparable two had six acres and was only adjusted down by $5,000.
   d. Comparables one and two were adjusted up by $3,000 based on condition without
      adequate explanation.
   e. Comparables one and two were five years older than the subject and were adjusted up
      by $600 without adequate explanation.
   f. Comparable two was adjusted down by $3,000 for a deck.
   g. The subject has a living area of 1,344 square feet, and the appraiser did not determine
      the price per square foot. The adjustments were not consistent or reasonable. The
      comparables’ price per square foot range from $76 to $94; however, the appraiser used
      approximately $20 per square foot to adjust comparable two and $58 per square foot to
      adjust comparable three.
      • Comparable one had 51square feet more living area. The value was not adjusted.
      • Comparable two had 112 square feet more living area. The value was adjusted
          down by $2,200.
      • Comparable three had 160 feet more living area and was adjusted down by $9,200.
   h. The subject's appraised value was $125,000. The final values of the comparables
      range from $121,400 to $132,718. The values should be closer.

3. The lender did not adequately verify or support the borrower's cash assets of $1,938, as
   reported on the Mortgage Credit Analysis Worksheet and the loan application. There are
   no bank statements in the lender or HUD file to support this amount. There is a
   verification of deposit dated May 21, 2003 that confirmed the balance; however, the
   settlement date on the HUD-1 was one day before the verification of deposit was signed.
   In addition, two amounts or deposits needed to be verified with at least bank statements
   but were not. The amounts were represented as a $1,000 gift from the borrower's mother
   and $1,000 in cash saved at home, according to the budget letter.




                                             110
FHA Case Number:              495-6419246
Lender Number:                3030353
Loan Amount:                  $115,090
Contract Sales Price:         $116,000
Endorsement Date:             July 7, 2003
Current Loan Status:          Reinstated October 1, 2004

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $12,672 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the borrower. The seller added $6,700 in closing costs, $4,375 for downpayment
   assistance, $1,250 for FHA non-allowable costs, $1,100 for the title policy and an
   unidentified credit of $1,133.

2. The lender did not adequately review the appraisal that valued the property at $123,000,
   whereas the local appraisal district valued the property at $73,707. The appraiser
   overvalued the subject property by $49,293. The following discrepancies indicate a lower
   value:
   a. The sales dates for comparables one and two were over six months old.
   b. The subject has one acre that cost $42,900. The appraiser’s adjustment does not
       appear reasonable. Comparable three had 5.92 acres of land, and the appraiser made a
       downward adjustment of $10,000.
   c. Comparables two and three were adjusted up by $3,000 for condition without adequate
       explanation.
   d. Comparable two was 18 years older than the subject and was adjusted up by $1,800.
       Comparable three is 22 years older than the subject and was adjusted up by $2,400.
       The appraiser made both adjustments without adequate explanation.
   e. Comparable two was adjusted down by $6,000 for a 2-car garage\carport without an
       adequate explanation.
   f. Comparable three was adjusted down by $3,000 for trees without an adequate
       explanation.
   g. The subject property has a living area of 1,488 square feet and the appraiser
       determined the price per square foot at $78. The appraiser’s adjustments do not appear
       reasonable. The comparables price per square foot ranged from $77 to $92; however,
       the appraiser used approximately $20 per square foot to adjust all the comparables:
       • Comparable one had 240 square feet more living area and was adjusted down by
           $4,800;
       • Comparable two had 24 square feet more living area and was not adjusted; and
       • Comparable three had 188 square feet less living area and was adjusted up by
           $3,800.
   h. The subject property’s appraised value was $123,000. The final values of the
       comparables ranged from $116,200 to $129,059. The values should be closer to the
       subject property’s value.




                                             111
   i. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contributions in excess of 6 percent of the purchase price. The
      total contract price on the Mortgage Credit Analysis Worksheet is $116,000. The 6
      percent limitation is $6,960. The contract to purchase the home included $13,425 in
      seller contributions or concessions.

3. The lender did not adequately evaluate the borrower's credit history or provide adequate
   explanations for derogatory credit items. The lender did not include all the current debt of
   the borrower or explain why they did not include all the open accounts from the credit
   report. The borrower would not have qualified with a 96 percent fixed payment ratio. The
   borrowers did not adequately explain the major derogatory credit that included seven
   accounts recently placed for collection or written off with a balance of $65,866. This
   amount includes a $59,092 mortgage included in a bankruptcy that was recently reported
   by a mortgage company. The bankruptcy was not disclosed or explained by the borrower
   or lender.


FHA Case Number:              495-6425206
Lender Number:                3031708
Loan Amount:                  $111,617
Contract Sales Price:         $112,500
Endorsement Date:             May 9, 2003
Current Loan Status:          Reinstated December 1, 2004
Claims Paid:                  $700 Loss Mitigation

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $10,973 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the borrower. The seller added $5,730 for closing costs, $4,125 for downpayment
   assistance, $1,250 for FHA non-allowable costs, $1,220 for the title policy, and an
   unidentified credit of $1,352.

   We interviewed the borrower to obtain support that shows the land and home acquisition
   prices are closer to our audited amount of $101,527 and not the $112,500 sales price on the
   HUD-1 Settlement Statement. The borrowers:
   a. Did not have a copy of the final purchase memo for $99,000; however, they provided
       support for the cost of the mobile home, which was $85,207.
   b. Stated that the seller never provided a breakdown or invoices showing the cost of the
       house and improvements.
   c. Did not understand why the final costs increased by $13,793 ($99,000 less $85,207).
       They thought the price increased because of the closing costs they were financing.
   d. Believe the loan of $111,617 was high because they were getting a loan with no
       downpayment and they were financing all the closing costs. They believed the loan
       would be less because they were getting $3,472 in downpayment assistance that the
       seller said was available.



                                             112
   e. Stated that the seller took the loan application and verified their income, bank
      statements, W-2 forms, and employment records.
   f. Never met with the lender, and stated that the seller said they would pay nothing down
      at closing.

2. The lender did not adequately review the appraisal that valued the property at $115,000,
   whereas the local appraisal district valued the property at $89,584. The appraiser
   overvalued the subject property by $25,416. Several discrepancies indicate a lower value:
   a. The subject has 1.39 acres that cost $13,500. The appraiser’s adjustments do not
      appear reasonable. Comparable one had .33 acres and the appraiser only adjusted it up
      $2,000. Comparable two and three each had approximately .66 acres and were
      adjusted up by $1,000.
   b. Comparable two was adjusted down up by $3,000 for the view without adequate
      explanation.
   c. The appraiser’s adjustment for age does not appear reasonable and is not adequately
      explained. Comparable one is 12 years older than the subject property and was
      adjusted up by $1,200. Comparable two is six years older and was adjusted up by
      $800.
   d. The appraiser adjusted comparable one down by $4,500 for a 2-car garage without an
      adequate explanation.
   e. The subject property has a living area of 1,749 square feet and the appraiser did not
      determine the price per square foot. The appraiser’s adjustments for living area do not
      appear reasonable. The comparables’ price per square foot range from $63 to $78,
      however, the appraiser used approximately $25 per square foot to adjust all the
      comparables:
      • Comparable one 43 square feet more living area and was adjusted down by $1,100.
      • Comparable two had 203 square feet less living area and was adjusted up by
          $5,100.
      • Comparable three had 419 square feet less living area and was adjusted up by
          $10,500.
   f. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of excess seller contribution over 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $122,500 and the 6 percent limitation is $6,750. The purchase contract included
      $12,325 in seller contributions or concessions.




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FHA Case Number:              495-6460736
Lender Number:                39393
Loan Amount:                  $133,941
Contract Sales Price:         $135,000
Endorsement Date:             July 2, 2003
Current Loan Status:          Foreclosed February 1, 2004
Claims Paid:                  $141,515

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contracts. The sales price
   on the contracts (land and manufactured home) was $134,000, whereas the sales price
   shown on the HUD-1 Settlement Statement was $135,000. Closing documentation
   showed that the seller added $38,869 in unsupported costs to the sales price. The seller
   added at least $13,704 to the sale price to pay off the trade-in and an unidentified amount
   of $25,165.

2. The lender did not adequately review the appraisal that valued the property at $138,000,
   whereas the local appraisal district valued the property at $91,079. The appraiser
   overvalued the property by $46,921. Several discrepancies indicate a lower value:
   a. All the comparables are two miles away from the subject property.
   b. The subject has 1.39 acres that cost $18,000 and the appraiser’s adjustments for land
      do not appear reasonable:
      • Comparable two had 1.738 acres and was not adjusted.
      • Comparable one had 2.29 acres and was only adjusted down by $2,000.
      • Comparable three had five acres and was only adjusted down by $4,000.
   c. The appraiser adjusted comparable three up by $6,000 because of condition without
      adequate explanation.
   d. The appraiser adjusted comparable three up by $6,000 because of the quality of
      construction without adequate explanation.
   e. The appraiser adjusted comparable three down by $4,000 for a 2-car detached garage
      without adequate explanation.
   f. The subject has a living area of 2,077 square feet. The appraiser did not determine the
      price per square foot nor make reasonable adjustments to the comparables. The
      comparables’ price per square foot ranged from $59 to $69, however, the appraiser
      used $20 per square foot to adjust all the comparables:
      • Comparable two had 51 square feet more living area and was adjusted down by
          $1,000.
      • Comparable three had 101 square feet more in living area and was adjusted down
          by $2,000.
   g. The appraiser adjusted comparable three down by $7,500 for having fence and shop
      without an adequate explanation.
   h. The subject’s appraised value was $138,000; however; the final values of the
      comparables ranged from $129,000 to $143,288. The values should be closer.




                                             114
   i. The appraisal does not include a photo of comparable one. The homes in the photos of
      comparables two and three appear to be site built (traditional) homes and not
      manufactured homes as reported.


FHA Case Number:              495-6462585
Lender Number:                3021221
Loan Amount:                  $121,152
Contract Sales Price:         $122,110
Endorsement Date:             May 21, 2003
Current Loan Status:          Foreclosed May 1, 2004
Claims Paid:                  $126,317

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $12,672 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the borrower. The seller added $6,022 for closing costs, $1,270 for the title policy, $1,250
   for FHA non-allowables, $3,780 for the gift and fee used as the downpayment, and $350
   for a rear deck.

2. The lender did not adequately review the appraisal that valued the property at $155,000,
   whereas the local appraisal district valued the property at $108,472. The appraiser
   overvalued the subject property by $46,528. Several discrepancies indicate a lower value:
   a. Comparable three is over eight miles away from the subject property.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of excess seller contribution over 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $122,110 and the 6 percent limitation is $7,327. The contract to purchase the home
      included $12,672 in seller contributions or concessions.
   c. The subject has five acres that cost $52,500. The adjustments of the comparables for
      the land do not appear reasonable. Comparables one and two each had 1.85 acres and
      were only adjusted up by $4,700. Comparable three had 19.8 acres but the appraiser
      only adjusted it down by $14,800.
   d. The appraiser made an upward adjustment of comparable three by $5,000 based on
      condition without an adequate explanation.
   e. The appraiser made an upward adjustment of comparable three by $6,000 for being six
      years older than the subject without an adequate explanation.
   f. The subject property has a living area of 2,046 square feet and the appraiser did not
      determine the price per square foot. The adjustments to the living area of the
      comparables do not appear reasonable. The comparables’ price per square foot range
      from $72 to $80, however, the appraiser used $35 per square foot to adjust all the
      comparables;
      • Comparable one had 82 square feet more living area and was adjusted down by
          $2,870.




                                             115
       • Comparable two had 102 square feet less living area and was adjusted up by
         $3,570.
      • Comparable three had 46 square feet less living area. The appraiser adjusted it up
         by $1,610.
   g. Comparable three was adjusted down $7,500 for having fence and shop without
      adequate explanation.


FHA Case Number:              495-6465024
Lender Number:                3032125
Loan Amount:                  $101,200
Contract Sales Price:         $102,000
Endorsement Date:             July 8, 2003
Current Loan Status:          Reinstated June 1, 2004

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $11,635 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the borrower. The seller added $6,096 in closing costs, $1,250 for unallowable closing
   costs, $1,205 for the title policy, $4068 for downpayment assistance, and an unidentified
   credit of $983. We interviewed the borrower to obtain support for the cost of the home
   and land. The borrower:
   a. Did not have a copy of the final purchase memo of the manufactured home for
       $86,000; however, she provided a copy of a signed purchase memo for $82,572.
   b. Stated that the seller never broke down or explained the actual cost of the home and
       land. The seller told her the house and land cost $86,000.
   c. Believed the loan amount of $101,200 was high because it included insurance and
       other costs.
   d. Stated the house was not new. The seller told her she did not qualify for a new house
       and had to purchase the house as-is. The seller only allowed one modification to the
       master bathroom.
   e. Stated that the seller took the loan application and verified their income, bank
       statements, W-2 forms, and employment records. She provided a letter from the seller
       to confirm that the seller processed the loan application and verified the credit, income,
       and employment items.
   f. Never met with the lender and stated that the seller said the borrowers would pay
       nothing down at closing.

2. The lender did not adequately review the appraisal that valued the property at $102,000,
   whereas the local appraisal district valued the property at $97,920. The appraiser
   overvalued the subject property by $4,080. Several discrepancies indicate a lower value:
   a. The closest comparable is three miles from the subject property. Comparable one is
      eight miles and comparable two is five miles from the subject;
   b. The sales date for comparable one was over eight months old,




                                              116
   c. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contributions in excess of 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $102,000 and the 6 percent limitation is $6,120. The contract to purchase the home
      included $8,907 in seller contributions or concessions.
   d. The subject has .09 acres that cost $16,000. The appraiser’s adjustments do not appear
      reasonable and were not adequately explained:
      • Comparable one had 1.86 acres and was adjusted down by $10,000;
      • Comparable two had .23 acres and was not adjusted; and
      • Comparable three had .14 acres and was not adjusted.
   e. The subject has a living area of 1,203 square feet. The appraiser did not compute the
      price per square foot. The appraiser’s adjustments do not appear reasonable. The
      comparables price per square foot range from $81 to $92; however, the appraiser used
      approximately $27 per square foot to adjust the comparables:
      • Comparable one had 205 square feet more in living area and was adjusted down by
          $5,700;
      • Comparable two had 51 square feet less in living area and was adjusted up by
          $1,400; and
      • Comparable three had 83 square feet less in living area and was adjusted up by
          $2,300.
   f. The appraiser adjusted the value of comparable two up by $2,000 for quality of
      construction, and up by $3,000 for average condition without adequate explanations.
   g. The value of comparable three was adjusted up by $400 because it is four years older
      than the subject, and adjusted up by $1,000 for very good condition without adequate
      explanations.
   h. Comparable one was adjusted down by $3,000 for a 2-car carport and $3,000 down for
      a large deck without adequate explanations.

3. The borrowers did not make the required minimum cash investment. The borrowers did
   not have any cash assets reported on the Mortgage Credit Analysis Worksheet and the loan
   application. The borrowers did not have assets to close. The files only have a budget plan
   that shows the borrowers had $1,800 cash on hand. The lender did not verify the amount.
   In addition, the borrowers paid nothing at closing and did not provide any earnest money.


FHA Case Number:              495-6482719
Lender Number:                3010236
Loan Amount:                  $137,837
Contract Sales Price:         $110,000
Endorsement Date:             June 5, 2003
Current Loan Status:          Foreclosure Completed May 1, 2004

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $138,031, whereas the sales price


                                             117
   shown on the HUD-1 Settlement Statement was $140,000. Closing documentation
   showed that the seller added $16,200 in unsupported costs to the sales price, including
   costs the seller agreed to pay on behalf of the buyer. The seller added $8,394 in closing
   costs, $1,393 for the title policy, $1,250 for FHA non-allowables, $4,842 for the gift and
   fee used as the downpayment, and an unidentified price increase $321.

2. The lender did not adequately review the appraisal that valued the property at $140,000,
   whereas the local appraisal district valued the property at $102,595. The appraiser
   overvalued the subject property by $37,405. Several discrepancies indicate a lower value.
   a. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contributions in excess of 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $140,000 and the 6 percent limitation is $8,400. The contract to purchase the home
      included $15,879 in seller contributions or concessions.
   b. The subject property has 1.4 acres that cost $38,850. The adjustment for land does not
      appear reasonable. Comparable two has five acres and was adjusted down by $6,000.
   c. The appraiser adjusted comparables two and three up by $6,000 based on condition
      without an adequate explanation.
   d. The appraiser adjusted comparable three up by $600 based on the quality of
      construction and upgrades without an adequate explanation.
   e. The appraiser’s adjustment for age does not appear reasonable. Comparables two and
      three are five years older than the subject and were only adjusted up by $900.
   f. The subject has a living area of 1,798 square feet and the appraiser did not determine
      the price per square foot. The adjustments for living area do not appear reasonable.
      The comparables’ price per square foot ranged from $64 to $87, however, the appraiser
      used approximately $26 per square foot to adjust the comparables:
      • Comparable two had 348 feet less living area and was adjusted up by $8,900.
      • Comparable three had 80 feet less living area and was adjusted up by $2,100.
   g. The appraiser adjusted all the comparables up by $5,000 for a graded drive without an
      explanation.
   h. The appraiser adjusted comparable three up by $3,000 for having only average
      landscaping without an adequate explanation.
   i. The subject’s appraised value was $140,000. The final values of the comparables
      ranged from $133,995 to $145,052. The values should be closer to the subject
      property’s value.




                                             118
FHA Case Number:              495-6483454
Lender Number:                3032132
Loan Amount:                  $104,176
Contract Sales Price:         $105,000
Endorsement Date:             June 25, 2003
Current Loan Status:          Reinstated June 1, 2005

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $12,809 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the borrower. The seller added $6,272 for closing costs, $4,114 for downpayment
   assistance, $1,250 for FHA non-allowable costs, and $1,173 for the title policy.

2. The lender did not adequately review the appraisal that valued the property at $115,000,
   whereas the local appraisal district valued the property at $88,747. The appraiser
   overvalued the subject property by $26,253. Several discrepancies indicate a lower value:
   a. All the comparables sales dates are seven to nine months old.
   b. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contribution in excess of 6 percent of the purchase price. The
      total contract price on the Mortgage Credit Analysis Worksheet is $105,000. The 6
      percent limitation is $6,300. The contract to purchase the home included $12,809 in
      seller contributions or concessions.
   c. The subject has a living area of 1,848 square feet with a square foot price of $57. The
      appraiser’s adjustments for living area do not appear reasonable. The comparables
      price per square foot ranged from $60 to $95; however, the appraiser used $20 per
      square to adjust all the comparables:
      • Comparable one had 390 square feet less in living area and was adjusted up by
          $7,800.
      • Comparable three had 728 feet less in living area and was up by $14,560.
      • Comparable two had 72 feet more in living area and was adjusted down by $1,440.
   d. The final values of the comparables ranged $114,381 to $120,955. The values should
      be closer to the subject property’s value.


FHA Case Number:              495-6487853
Lender Number:                3032127
Loan Amount:                  $109,137
Contract Sales Price:         $110,000
Endorsement Date:             September 8, 2003
Current Loan Status:          Reinstated March 1, 2004

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $13,515 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of


                                              119
   the borrower. The seller added $2,065 for closing costs, $1,250 for FHA non-allowable
   costs, $1,205 for the title policy, and an unidentified amount of $8,995. The borrower
   provided documents to support the audited figures for the land and home.

   We interviewed the borrower to obtain support for the cost of the home and land. The
   borrowers:
   a. Did not have a copy of the final purchase memo for the mobile home for $75,341;
      however, they provided a copy of signed purchase memo for the mobile home for
      $61,985.
   b. Stated that the seller promised to pay the closing costs; however, at closing they had
      problems and the contracts and closing documents were changed.
   c. Stated they overheard the closing agent speaking with the seller or the lender and heard
      the closing agent say that the seller would not be paying closing costs as agreed.
   d. Understood that the price of the home increased by $13,356 because the seller did not
      want to pay the closing costs as agreed. This was their first home and thought that that
      these things just happen. The borrowers had put $8,000 down in earnest money and
      just wanted to finish the deal.
   e. Stated that the seller took the loan application and verified their income, bank
      statements, W2 forms, and employment records.
   f. Never met with the lender, and stated the seller said they would pay nothing down at
      closing.

2. The lender did not adequately review the appraisal that valued the property at $135,000,
   whereas the local appraisal district valued the property at $96,035. The appraiser
   overvalued the subject property by $38,965. Several discrepancies indicate a lower value:
   a. The closest comparables are two miles from the subject property, and comparable one
      is ten miles away.
   b. The sales dates of comparables two and three were over seven months old.
   c. The appraiser’s adjustment for age does not appear reasonable. Comparable three was
      13 years older than the subject and was adjusted up $1,400.
   d. Comparable three was adjusted up by $6,000 because of condition, and $6000 based
      on quality of construction without adequate explanations.
   e. Comparable three was adjusted down by $4,000 for a carport without an explanation.
   f. The subject property had 1.08 acres with a cost of $34,500 and the appraiser’s
      adjustment for land does not appear reasonable:
      • Comparable three had 3.92 acres more and adjusted down by $5,000.
      • Comparable two had 1.12 acres more and adjusted down by $3,000.
   g. The final values of the comparables range from $130,400 to $140,122. The values
      should be closer to the subject property’s value.
   h. The appraisal does not include a photo of comparable two.




                                            120
FHA Case Number:              495-6489197
Lender Number:                3023372
Loan Amount:                  $113,223
Contract Sales Price:         $115,000
Endorsement Date:             September 25, 2003
Current Loan Status:          Reinstated December 1, 2004

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $114,854, whereas the sales price
   shown on the HUD-1 Settlement Statement was $115,000. Closing documentation
   showed that the seller added $14,711 in unsupported costs to the sales price, including
   costs the seller agreed to pay on behalf of the buyer. The seller added $6,446 in closing
   costs, $5,515 in downpayment assistance, $1,250 in non-allowables, and $1,500 for the
   title policy.

2. The lender did not adequately review the appraisal that valued the property at $115,000,
   whereas the local appraisal district valued the property at $92,275. The appraiser
   overvalued the property by $22,725. Several discrepancies indicate a lower value:
   a. Comparable one is over five miles away,
   b. The sales dates of comparable one and three are over ten months old.
   c. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of excess seller contribution over 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $115,000 and the 6 percent limitation is $6,900. The contract to purchase the home
      included $14,711 in seller contributions or concessions.
   d. The appraiser adjusted comparable one up by $5,000 for being five years older than the
      subject without an adequate explanation.
   e. The subject has a living area of 1,782 square feet and the appraiser computed a $63
      price per square foot. The appraiser’s adjustments do not appear reasonable. The
      comparables price per square foot range from $54 to $78; however, the appraiser used
      approximately $25 per square foot to adjust the comparables:
      • Comparable one had 102 square feet less in living area and was adjusted up by
          $2550,
      • Comparable three had 324 square feet less in living area as was adjusted up $8,100,
          and
      • Comparable two had 66 square feet more in living area as was adjusted down by
          $1,650.
   f. The appraiser adjusted comparable one down by $4,000 for two detached
      garage/carports without an explanation.
   g. The final values of the comparables ranged from $99,422 to $122,451. The values
      should be closer to the subject property’s value.




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FHA Case Number:              495-8494883
Lender Number:                3020038
Loan Amount:                  $104,165
Contract Sales Price:          $105,800
Endorsement Date:             August 15, 2003
Current Loan Status:          Default - Modification June 1, 2005
Claims Paid:                  $950 for Special Forbearance and Modification

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $105,641, whereas the sales price
   shown on the HUD-1 Settlement Statement was $105,800. Closing documentation
   showed that the seller added unsupported costs of $4,876 to the sales price.

2. The lender did not adequately review the appraisal that valued the property at $116,000,
   whereas the local appraisal district valued the property at $51,386. The appraiser
   overvalued the subject property by $64,614. Several discrepancies indicate a lower value:
   a. Comparable two is 3 miles away, and comparable three is five miles away from the
      subject property.
   b. The appraiser adjusted comparable three up by $3,000 because of good condition, and
      comparable two up $1,000 for excellent condition. Both adjustments were without
      adequate explanations.
   c. The appraiser’s adjustments for age do not appear reasonable. Comparable three is
      five years older than the subject property and was adjusted up $900. Comparable two
      is three years older and was adjusted up by $600.
   d. The subject property has a living area of 1,749 square feet and the appraiser had not
      computed a price per square foot. The appraiser’s adjustments for living area do not
      appear reasonable. The comparables’ price per square foot ranged from $59 to $83;
      however, the appraiser used approximately $20 per square foot to adjust the
      comparables:
      • Comparable one had 235 square feet more living area and it was adjusted down by
           $4,700.
      • Comparable three had 211 square feet more living area. It was adjusted down by
           $4,200.
      • Comparable two had 438 square feet more in living area as was adjusted up $8,800.
   e. The appraiser adjusted comparable three down by $4,000 for a shop/storage building
      without an adequate explanation.
   f. The appraiser’s adjustments for land do not appear reasonable. The subject property
      had 1.03 acres that cost $15,800.
      • Comparable three had 1.08 acres more and adjusted down by $2,000.
      • Comparable two had 1.97 acres more and adjusted down by $4,000.

3. The lender understated the borrower's monthly payments by $250, thus increasing the debt
   to income ratio from 44 to 53percent. This ratio exceeds HUD's guidelines for loan
   approval.


                                             122
FHA Case Number:              495-6521654
Lender Number:                3032745
Loan Amount:                  $117,476
Contract Sales Price:         $105,874.57
Endorsement Date:             June 24, 2003
Current Loan Status:          Property Conveyed to Insurer January 1, 2005
Claims Paid:                  $120,740

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $75,283, whereas the sales price
   shown on the HUD-1 Settlement Statement $105,874. The land price or payoff is not
   supported by a contract or other documents.

2. The lender did not adequately review the appraisal that valued the property at $129,000,
   whereas the local appraisal district valued the property at $57,860. The appraiser
   overvalued the subject property by $71,140. Several discrepancies indicate a lower value:
   a. The closest comparable is three miles from the subject property and comparables two
      and three are ten miles away.
   b. The sales date of comparable three was over ten months old.
   c. Comparable three was adjusted up by $6,000 based on the condition, without an
      adequate explanation.
   d. The appraiser’s adjustment for age does not appear reasonable. Comparable three is
      five years older than the subject and was adjusted up $600.
   e. The subject has a living area of 1,456 square feet. The appraiser did compute the price
      per square foot. The appraiser’s adjustment for living area does not appear reasonable.
      The comparables price per square foot range from $71 to $91; however, the appraiser
      used approximately $20 per square foot to adjust the comparables:
      • Comparable one had 336 square feet more living area. It was adjusted down by
              $6,700.
      • Comparable three had 112 square feet more living area and was adjusted down by
          $2,200.
   f. The appraiser’s adjustment for land does not appear reasonable. The subject property
      had .46 acres with an estimated value of $25,000 and:
      • Comparable three had 4.54 acres more and adjusted down by $6,000.
      • Comparable two had 1.48 acres more and adjusted down by $3,000.
      • Comparable one had .56 acres more and was adjusted down by $2,000.
   g. The final values of the comparables ranged from $123,258 to $131,570. The values
      should be closer to the subject property’s value.
   h. The photo of the front view of the subject property is not the subject property, and the
      appraisal does not include a photo of comparable two.




                                             123
FHA Case Number:              495-6556052
Lender Number:                3030471
Loan Amount:                  $81,362
Contract Sales Price:         $82,640
Endorsement Date:             August 21, 2003
Current Loan Status:          Foreclosed April 1, 2005
Claim Paid:                   $84,778

Deficiencies in loan origination:

1. The lender could not support the sales price on the contracts. The seller added $10,628 in
   unsupported costs to the sales price, including costs the seller agreed to pay on behalf of
   the buyer. The seller added $6,700 for the title policy, survey, non-allowable costs, and
   construction costs, and an unidentified cost of $3,928.

2. The lender did not adequately review the appraisal that valued the property at $90,000,
   whereas the local appraisal district valued the property at $38,880. The appraiser
   overvalued the subject property by $51,120. Several discrepancies indicate a lower value:
   a. The closest comparable is five miles from the subject and comparable three is 25 miles
      away.
   b. Sale dates for comparables one and two were over eight months old.
   c. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contribution in excess of 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is $82,640.
      The 6 percent limitation is $4,958. The contract to purchase the home included $6,700
      in seller contributions or concessions.
   d. The appraiser adjusted down comparable two by $5,000 for finished rooms below
      grade, but there was no explanation.,
   e. All the comparables were adjusted up $3,000 based on the condition, but there was no
      explanation.
   f. The appraiser’s adjustment for age does not appear reasonable. Comparable two is 19
      years older than the subject and was adjusted up $7,000. Comparables one and three
      are four years older and were adjusted up by $1,000.
   g. The subject’s price per square foot is $68 and the price per square foot for the
      comparables ranged from $53 to $78. The appraiser used approximately $10 per
      square foot for adjustments. The adjustments for the living areas do not appear
      reasonable or consistent:
      • The appraiser adjusted comparable one down by $8,600 for having 856 square feet
          more living area,
      • The appraiser adjusted comparable three down by $1,800 for having 180 square
          feet more living area, and
      • The appraiser adjusted comparable two up by $1,000 for having 96 square feet less
          living area.
   h. The subject property has .57 acres that cost $25,500. The adjustments made by the
      appraiser do not appear reasonable:




                                             124
       • The appraiser adjusted down both comparables one and two, which had
         approximately 4.43 acres more than the subject did.
      • The appraiser did not adjust comparable three, which has .55 acres more than the
         subject did.
   i. The final values of the comparables ranged from $87,000 to $98,400. The values
      should be closer to the subject property’s value.


FHA Case Number:              495-6708780
Lender Number:                3070989
Loan Amount:                  $85,271
Contract Sales Price:         $86,610
Endorsement Date:             November 3, 2004
Current Loan Status:          Reinstated by Mortgagor, May 5, 2005

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $85,708, whereas the sales price
   shown on the HUD-1 Settlement Statement was $86,610. Closing documentation showed
   that the seller added $11,610 in unsupported costs to the sales price, including costs the
   seller agreed to pay in behalf of the buyer. The seller added $5,233 in closing costs,
   $1,250 for non-allowable closing costs, $1,200 for the title policy, $3,774 for
   downpayment assistance, and an unidentified cost of $153. The borrower provided
   documents to support the audited acquisition amount.

2. The lender did not adequately review the appraisal that valued the property at $90,000,
   whereas the local appraisal district valued the property at $58,970. The appraiser
   overvalued the subject property by $31,030. Several discrepancies indicate a lower value:
   a. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of seller contributions in excess of 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is $86,610.
      The 6 percent limitation is $5,196. The contract to purchase the home included
      $11,457 in seller contributions or concessions.
   b. The closest comparable is two miles from the subject property.
   c. Comparable three’s sales date is over nine months old.
   d. The photo of comparable one does not include the manufactured home, yet the
      appraiser made adjustments for the age, condition, and a deck.
   e. Comparable three was adjusted down $6,000 on the quality of construction and
      upgrades, but there was no explanation.
   f. All the comparables were adjusted up $3,000 based on the condition, but there was no
      explanation.
   g. The appraiser’s adjustment for age does not appear reasonable. All the comparables
      were five years older than the subject and were adjusted up $600.
   h. The subject property had 1.834 acres with a cost of $25,000. The appraiser’s
      adjustments do not appear reasonable:



                                             125
       •  Comparable one had .406 acres more than the subject property and was not
          adjusted,
      • Comparable two had 1.494 acres less and was adjusted up by $4,000, and
      • Comparable three had 1.956 acres more land, and was adjusted down by $4,000.
   i. The subject property has a living area of 1,344 square feet. The appraiser did not list
      the subject’s price per square foot. The appraiser’s adjustment for living area does not
      appear reasonable. The comparables price per square feet ranged from $56 to $69.
      The appraiser used approximately $28 per square foot to adjust down comparable three
      by $9,400 for having 336 square feet more living area.
   j. The final values of the comparables ranged from $85,180 to $99,700. The values
      should be closer to the subject property’s value.


FHA Case Number:              495-6727274
Lender Number:                3071470
Loan Amount:                  $112,868
Contract Sales Price:         $104,424
Endorsement Date:             November 12, 2004
Current Loan Status:          Default - Repayment

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $101,424, whereas the sales price
   shown on the HUD-1 Settlement Statement was $100,419. The sales price of the home is
   unsupported. Closing documentation showed that the seller added $6,569 in unsupported
   costs to the sales price, including costs the seller agreed to pay on behalf of the buyer. The
   seller added $5,564 for downpayment assistance, and an unidentified cost of $1,005.

2. The lender did not adequately review the appraisal that valued the property at $115,000,
   whereas the local appraisal district valued the property at $67,350. The appraiser
   overvalued the subject property by $47,650. Several discrepancies indicate a lower value:
   a. All the comparables are four miles away from the subject property.
   b. The subject property has 4.69 acres that cost $30,000. The appraiser’s adjustments do
      not appear reasonable nor were they adequately explained:
      • Comparable one had 2.6 acres and was adjusted up by $4,180,
      • Comparable two had 3.1 acres and was adjusted up by $3,180, and
      • Comparable three had 2.86 acres and was adjusted up by $3,660.
   c. The subject property has a living area of 1,239 square feet and the price per square foot
      was not reported. The comparables price per square foot ranged from $77 to $81;
      however, the appraiser used approximately $15 per square foot to adjust the
      comparables without adequate explanations. The adjustments do not appear
      reasonable:
      • Comparables one and three had 161 square feet more in living area and were
          adjusted down by $2,415; and



                                              126
       •   Comparable two had 273 square feet more in living area and was adjusted down by
           $4,095.

3   The borrowers did not make the required minimum cash investment. The borrowers did
    not have any cash assets reported on the Mortgage Credit Analysis Worksheet and the loan
    application. The borrowers did not have assets to close. The files only have a budget plan
    indicating the borrowers had $1,875 cash on hand. This amount was not verified. In
    addition, the borrowers paid nothing down at closing, did not receive a gift for a
    downpayment, and did not provide any earnest money.


FHA Case Number:              495-6735474
Lender Number:                3080349
Loan Amount:                  $99,841
Contract Sales Price:         $94,488
Endorsement Date:             March 31, 2004
Current Loan Status:          First Legal Action to Commence Foreclosure June 1, 2005

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contract was $59,240 and the sales price shown on the HUD-1 Settlement Statement
   was $94,488. The file does contain support for the land sales price. Closing
   documentation showed that the seller added at least $40,340 in unsupported costs to the
   sales price, including costs the seller agreed to pay in behalf of the buyer. The seller added
   $5,092 for the gift used for downpayment assistance, and an unidentified cost of $35,248.

2. The lender did not adequately review the appraisal that valued the property at $117,000,
   whereas the local appraisal district valued the property at $63,140. The appraiser
   overvalued the subject property by $53,860. The following discrepancies indicate a lower
   value.
   a. The closest comparable is two miles from the subject property.
   b. The sales dates of all comparables were over seven months old.
   c. The appraiser made a $6,000 downward adjustment to the value of comparable one
       based on quality of construction and $2,000 based on condition without adequate
       explanations.
   d. The appraiser adjusted the condition of comparable two up by $2,000 without an
       adequate explanation.
   e. The appraiser’s adjustments for age are not reasonable or explained. Comparable one
       is five years older than the subject property and was adjusted up $600. Comparable
       two is two years older than the subject and was adjusted up $400.
   f. The subject property has a living area of 1,344 square feet. The appraiser did not list
       the subject’s price per square foot. The price per square foot of the comparables
       ranged from $80 to $94; however, the appraiser’s adjustments ranged from $24 to $26
       per square foot. The adjustments for the living areas do not appear reasonable or
       consistent. The appraiser adjusted:



                                              127
      • Comparable one down by $1,300 for having 51 feet more in living area,
      • Comparable two up by $2,900 for having 122 feet less in living area, and
      • Comparable three down by $6,100 for having 233 feet more in living area.
   g. The subject had 1.004 acres of land. The appraiser estimated the land value to be
      $48,000; however, some of the appraiser’s adjustments do not appear reasonable:
      • Comparable two was similar and was not adjusted.
      • Comparable one had 3.30 acres more and was adjusted down by $4,000.
      • Comparable three had 1.308 acres more and was not adjusted.


FHA Case Number:              495-6748318
Lender Number:                3081793
Loan Amount:                  $112,601
Contract Sales Price:         $106,426.11
Endorsement Date:             December 29, 2003
Current Loan Status:          First Legal Action to Commence Foreclosure August 1, 2005

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $105,091, whereas the sales price
   shown on the HUD-1 Settlement Statement was $106,426. Closing documentation
   showed that the seller added $7,313 in unsupported and unallowable costs to the sales
   price, including costs the seller agreed to pay on behalf of the buyer. The seller added
   $5,773 in lender fees that appear to be used for downpayment assistance, $55 for a gift
   basket, $150 in customer reimbursement liabilities, and an unidentified amount of $1,335.

2. The lender did not adequately review the appraisal that valued the property at $129,000,
   whereas the local appraisal district valued the property at $89,100. The appraiser
   overvalued the subject property by $39,900. Several discrepancies indicate a lower value:
   a. The closest comparable is 3 miles from the subject property.
   b. Comparable one’s sales date is over six months old.
   c. The subject property has a living area of 1,782 square feet. The appraiser did not list
      the subject’s price per square foot. The appraiser’s adjustment for living area does not
      appear reasonable. The comparables price per square feet ranged from $68 to $75;
      however, the appraiser used $21 per square foot to adjust down comparable three by
      $2,670 for having 178 square feet more in living area.
   d. Comparables two and three were adjusted up by $3,500 for FHA foundations without
      an adequate explanation.
   e. The subject property had .91 acres that cost $38,000, however, some of the
      adjustments made by the appraiser do not appear reasonable:
      • The appraiser adjusted comparable one down by $2,775 for having 1.12 acres
          more, and
      • The appraiser adjusted comparable two down by $1,875 for having .75 acres more.




                                             128
FHA Case Number:              495-6593271
Lender Number:                3043127
Loan Amount:                  $115,710
Contract Sales Price:         $120,000
Endorsement Date:             September 16, 2003
Current Loan Status:          Foreclosed April 1, 2005
Claim Paid:                   $118,552

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $119,870, whereas the sales price
   shown on the HUD-1 Settlement Statement was $120,000. Closing documentation
   showed that the seller added $15,586 in unsupported costs to the sales price, including
   costs the seller agreed to pay in behalf of the buyer. The seller added $6,461 in closing
   costs, $1,250 for non-allowable closing costs, $1,600 for the title policy, and $6,275 for
   downpayment assistance.

2. The lender did not adequately review the appraisal that valued the property at $120,000,
   whereas the local appraisal district valued the property at $92,061. The appraiser
   overvalued the subject property by $27,939. Several discrepancies indicate a lower value:
   a. Two of the comparables were at least eight miles from the subject.
   b. The sales date for comparable three is over six months old.
   c. The lender and appraiser did not reduce the sales price or value of the subject by the
      amount of seller contributions in excess of 6 percent of the purchase price. The total
      contract price on the Mortgage Credit Analysis Worksheet is $120,000. The 6 percent
      limitation is $7,200. The contract to purchase the home included $15,586 in seller
      contributions or concessions.
   d. Comparable three was adjusted up $3,000 for not having upgrades, but there was no
      explanation,
   e. The appraiser did not adequately explain the adjustments for condition. Comparable
      one is two years older and was adjusted up $3,000. Comparables two and three are
      over 4 years older and were adjusted up $6,000 for condition.
   f. The subject has a living area of 2,077 square feet with a price per square foot of $58.
      The comparables price per square foot ranged from $56 to $58; however, the appraiser
      used approximately $20 per square foot to adjust the comparables without adequate
      explanations. Comparables two and three had 229 more square feet in living area and
      were each adjusted up by $4,600.
   g. The appraiser adjustment for number of rooms does not appear reasonable and
      explained. All three comparables had one room less than the subject and were adjusted
      up $2,000.




                                             129
FHA Case Number:              495-6644061
Lender Number:                3042272
Loan Amount:                  $129,228
Contract Sales Price:         $130,250
Endorsement Date:             October 6, 2003
Current Loan Status:          Foreclosed August 1, 2005

Deficiencies in loan origination:

1. The lender did not insure the loan closed according to the sales contract. The sales price
   on the contracts (land and manufactured home) was $130,012, whereas the sales price
   shown on the HUD-1 Settlement Statement was $130,250. Closing documentation
   showed that the seller added $14,575 in unsupported costs to the sales price, including
   costs the seller agreed to pay in behalf of the buyer. The seller added $7,350 in closing
   costs, $1,250 for non-allowable closing costs, $1,350 for the title policy, $4,335 for
   downpayment assistance, $1,000 for a gift card, and an unidentified credit of $710.

2. The lender did not adequately review the appraisal that valued the property at $137,000,
   whereas the local appraisal district valued the property at $91,478. The appraiser
   overvalued the property by $45,522. Several discrepancies indicate a lower value:
   a. The closest comparable is three miles from the subject property.
   b. Comparable one’s sales date is over six months old.
   c. The lender and appraiser did not reduce the sales price or value of the subject property
      by the amount of excess seller contribution over 6 percent of the purchase price of the
      home. The total contract price on the Mortgage Credit Analysis Worksheet is
      $130,250 and the 6 percent limitation is $7,815. The contract to purchase the home
      included $14,285 in seller contributions or concessions.
   d. The subject property has a living area of 2,052 square feet and the appraiser did not
      compute the price per square foot. The appraiser’s adjustment for living area does not
      appear reasonable. The comparables price per square foot range from $67 to $72;
      however, the appraiser used approximately $18 per square foot to adjust the
      comparables:
      • Comparable one has 92 square feet less living area and adjusted up by $1,656.
      • Comparables two and three had 232 square feet less living area and were adjusted up
         by $4,176.
   e. Comparables two and three were adjusted up by $3,500 for FHA foundations without
      adequate explanations.
   f. The subject property had 2.42 acres that cost $18,000. The appraiser’s adjustment for
      land does not appear reasonable. Comparable two has a half-acre more than the
      subject property and was adjusted down by $1,350.




                                             130
Appendix D
                                        CRITERIA


Minimum Investment, 24 CFR [Code of Federal Regulations] 203.19

“(a) At the time the mortgage is insured, the mortgagor shall have paid in cash or its
equivalent the following minimum amount:
   (1) In all cases (except those involving a veteran meeting the requirements of Sec. 203.18(b)
or a disaster victim meeting the requirements of Sec. 203.18(e)), the minimum investment
shall be at least 3 percent of the Commissioner’s estimate of the cost of acquisition (excluding
the amount of any one-time mortgage insurance premium payable in accordance with Sec.
203.280) or such other larger amount as the Commissioner may determine.”

Due Diligence, 24 CFR [Code of Federal Regulations] 203.5(c)

“(c) Underwriter due diligence. A Direct Endorsement mortgagee shall exercise the
same level of care, which it would exercise in obtaining and verifying information for a
loan in which the mortgagee would be entirely dependent on the property as security to
protect its investment. Mortgagee procedures that evidence such due diligence shall be
incorporated as part of the quality control plan required under Sec. 202.5(h) of this
chapter. The Secretary shall publish guidelines for Direct Endorsement underwriting
procedures in a handbook, which shall be provided to all mortgagees approved for the
Direct Endorsement procedure. Compliance with these guidelines is deemed to be the
minimum standard of due diligence in underwriting mortgages.”

Mortgage Lender Review, HUD Handbook 4000.4, REV-1, CHG-2, “Single Family Direct
Endorsement Program,” Chapter 2, Paragraph 2-5

“The lender must review all closing statements, certifications on the closing statements, legal
instruments and other documents executed at closing. The lender must certify to HUD that the
transaction and loan meet statutory and regulatory requirements of the National Housing Act
and HUD, and that the lender closed the loan in accordance with the terms and sales price as
specified in the sales contract.”

The Complete Picture, HUD Handbook 4155.1, “Mortgage Credit Analysis,” REV-5,
Chapter 3, Introduction

“The lender is responsible for asking sufficient questions to elicit a complete picture of the
borrower’s financial situation, source of funds for the transaction, and the intended use of the
property. All information must be verified and documented.”

Construction-Permanent Mortgage Program, HUD Handbook 4155.1, “Mortgage Credit
Analysis,” REV-5, Chapter 2, Paragraph 17



                                               131
“The loan program combines the features of a construction loan, a short-term interim loan for
financing the cost of construction, and a traditional long-term permanent residential mortgage
with one closing. The borrower must secure the loan in their name, contract with a builder
and provide a copy, must own or be purchasing a lot, and approve each payment before
disbursement to the contractor. The lender is responsible for normal processing and
underwriting plus obtaining the borrowers’ approval for contractor payments, verifying if the
loan was fully drawn and if not applying any remaining funds to the loan balance, obtaining a
borrower certification the property is free and clear except for the mortgage, and the final
inspection.”

Maximum Mortgage, HUD Handbook 4155.1, “Mortgage Credit Analysis,” Chapter 1,
Paragraph 1-7A and B

“A. The seller (or other interested third parties such as real estate agents, builders, developers,
etc., or a combination of parties) may contribute up to six percent of the property’s sales price
toward the buyer’s actual closing costs, prepaid expenses, discount points, and other financing
concessions. Contributions exceeding six percent of the sales price or exceeding the actual
cost of prepaid expenses, discounts points, and other financing concessions will be treated as
inducements to purchase, thereby reducing the amount of the mortgage. Closing costs
normally paid by the borrower are considered contributions if paid by the seller. Inducements
to purchase are described in paragraph B, below.

“The six percent limitation also includes seller payment for permanent and temporary interest
rate buydowns and other payment supplements, payments of mortgage interest for fixed rate
mortgages and GPMs [Graduated Payment Mortgages] only (but not principal), mortgage
payment protection insurance, and payment of UFMIP [Up Front Mortgage Insurance
Premium].

“Fees typically paid by the seller under local or state law, or local custom, such as real estate
commissions, charges for pest inspections, fees paid for trustees to release a deed of trust, etc.,
are not considered contributions. The dollar limit for seller contributions is calculated by
using Attachment A on the HUD-92900-PUR/HUD-92900WS. Each dollar exceeding FHA's
[Federal Housing Administration] six percent limit must be subtracted from the property’s
sales price before applying the appropriate LTV [Loan to Value] ratio.

“B. Certain expenses (beyond those described above) paid on behalf of the borrower, as well
as other inducements to purchase, result in a dollar-for-dollar reduction to the sales price
before applying the appropriate LTV [Loan to Value] ratio. These inducements include
decorating allowances, repair allowances, moving costs, and other costs as determined by the
appropriate HOC [Homeownership Center]. We also require dollar-for-dollar reductions to
the sales price for excess rent credit (see 2-10 N), as well as for gift funds not meeting the
requirements stated in Chapter 2.

“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



                                               132
not already done so by the appraiser) before applying the LTV [Loan to Value] ratio.
However, certain items, depending upon local custom or law, may be considered as part of the
real estate transaction with no adjustment to the sales price or appraised value necessary.
These items include ranges, refrigerators, dishwashers, washers, dryers, carpeting, window
treatments, and other items as determined by the jurisdictional HOC [Homeownership Center].
That office determines if these items affect value and are considered customary. Replacement
of existing equipment or other realty items by the seller before closing, such as carpeting or air
conditioners, does not require a value adjustment provided no cash allowance is given to the
borrower.

“In addition, if the seller or builder of the property agrees to pay any portion of the borrower’s
sales commission on the sale of the borrower’s present residence, the amount paid by the seller
or builder is an inducement to purchase and must be subtracted dollar for dollar from the sales
price before the LTV ratio is applied. Similarly, a borrower not paying real estate commission
on the sale of a present home constitutes a sales concession, if the real estate broker or agent is
involved in both transactions and the seller of the property purchased by the borrower pays a
real estate commission exceeding that typical for the area. In these situations, the amount paid
by the seller above the normal real estate commission is considered an inducement to purchase
and must be subtracted from the sales price of the property being purchased before applying
the LTV [Loan to Value] ratio.”

Building on Land Owned, Maximum Mortgage, HUD Handbook 4155.1, “Mortgage Credit
Analysis,” Chapter 1, Paragraph 1-8D

“The appropriate loan-to-value limits are applied to the lesser of:

   1)      The appraised value plus the allowable closing costs, or
   2)      The documented acquisition cost of the property, which includes the builder’s
           price, or sum of all the subcontractors’ bids, materials, etc.; cost of the land (if the
           land has been owned more than six months, or was received as an acceptable gift,
           the value of the land may be used instead of its cost); interest and other costs
           associated with any construction loan obtained by the borrower to fund
           construction of the property; the closing costs to be paid by the borrower; and
           reasonable discount points.”

Review of the Appraisal Report, HUD Handbook 4150.2, “Approaches to Valuation,”
Chapter 9, Paragraph 9-2

“A. It is incumbent upon the reviewer to carefully analyze the report for reasonableness and a
logical conclusion of value. Large adjustments should suggest that a comparable may not be
suitable, and in such a case, the reviewer should check the office data for other comparables,
which the appraiser could have used. The pictures of the comparables will aid the reviewer in
confirming information in the appraisal report. The reviewer must also be aware of the values
of central air conditioning, storm windows, and other such items which affect market value.




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“B. If found to be acceptable, and the property is eligible for mortgage insurance, the reviewer
signs, dates the report, and computes the maximum mortgage amount for the property.

“C. If the reviewer concludes that the appraisal report findings are inconsistent, or are
otherwise unacceptable, the reviewer must contact the appraiser or return the case to the
appraiser for reconsideration. The reviewer may also modify or amend the report in any
manner, which can be supported by HUD valuation policy adequately documented. This
includes the adjusting of value, the removal or addition of repair requirements, and the overall
determinations of property approval and rejection.

“D. The reviewer must determine if the appraiser has provided a fully documented report
about the subject property and if the judgments rendered by the appraiser are reasonable.

“E. The reviewer should review the front page of the appraisal report which encompasses the
neighborhood, typical age, values, rents, etc. This provides a broad picture of the environment
in which the subject property is located. The required photos and map help to enhance the
reviewer’s understanding of the type of property being appraised. Of primary concern to the
reviewer in examining this front page of the appraisal report is:
       1) Is the information consistent?
       2) Is the property in a “Special flood hazard area”?
       3) Has the appraiser inserted the FEMA [Federal Emergency Management Agency]
             map and zone, if available?

“F. On the back page of the Appraisal Report, the reviewer should check the perimeter
dimensions shown in the building sketch for consistency with the gross living area shown in
the sales comparison analysis.

“G. To the right, although the appraiser is not required to complete the cost analysis for a
single-family existing dwelling, the estimated site value must be shown.

“H. When reviewing the sales comparison analysis, the reviewer must carefully examine each
critical area, as mentioned previously, for anything, which appears unreasonable. Taking each
critical area in order, the reviewer examines:

“1) The distance between the comparables and the subject, and if one of them is a
conventional sale, if available. In an urban area, ten or fifteen blocks may appear reasonable,
whereas anything over that could constitute an entirely different neighborhood and
environment.

“2) The comparable sales data should not be over six months old. Anything over six months
may reflect a different market. If a comparable is seven or eight months old, the reviewer
should expect an explanation for its use and possibly an adjustment relating to any upward or
downward trend in the marketplace, if appropriate. Any comparable a year or more old is
unacceptable, except in those rare cases where there are no comparables within a reasonable
distance which were recent sales. This may occur in certain rural areas.




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“3) The comparables should be reasonably equal to the subject in size, age and design. The
reviewer must recognize that it is not always possible to find three comparables very close in
similarity to the subject. If the subject is a Cape Cod, and no recent sales of Cape Cods can be
found, then the reviewer would expect the appraiser to use a one and a half story home, and
make the necessary adjustments. If the subject contained fifteen hundred square feet of
finished living area (not including a finished basement) the reviewer would expect the
comparables to range in size from twelve hundred to eighteen hundred square feet, so that a
reasonable adjustment could be made.

“4) The reasonableness of the adjustments is examined. This is the most important part of the
appraisal report, since the total adjusted values of the comparables bracket the market value of
the subject. The reviewer must be familiar with the neighborhood and what the market is
willing to pay for differences such as central air conditioning, energy-saving features, screened
and unscreened porches, patios, etc. Also, an adjustment may be necessary for a larger or
smaller home, or perhaps an extra bedroom, even if it is small. In reviewing these
adjustments, the reviewer looks for consistency. For example, if the appraiser uses an
adjustment of fifteen hundred dollars for central air conditioning for one comparable, the same
amount of adjustment would be expected to be used for the other comparables in the report; or
if ten dollars per square foot is used for a size adjustment, this same amount would be
expected to be used for the other comparables, considering of course, that they were of
approximately the same age and construction. The reviewer should calculate the dollar
amount per square foot which the appraiser used to adjust for size keeping in mind what a new
house of that type would cost in accordance with cost figures found in the Marshall and Swift
Cost Handbook. This is an area which has been much abused. The reviewer should know
what the market in a particular area is willing to pay for size difference and such figures
should not be exceeded without a clear explanation from the appraiser. The reviewer should,
in such cases, refer to the Marshall and Swift Cost Handbook to determine what the basic cost
per square foot would be for a new, like dwelling before contacting the appraiser. Also,
adjustments for very small differences are questionable.

“5) Along these same lines, the reviewer should look for consistency in land values. There
should not be adjustments for lot sizes in a neighborhood of similarly sized lots. A corner lot,
which may be considerably larger and more desirable, might call for some adjustment. The
typical buyer does not take into consideration a few feet difference. If the location of a lot in a
given subdivision were at the edge of a golf course and considered prime in the area, then a
reasonable adjustment would be acceptable.

“6) The reviewer must analyze the final adjusted value of each comparable. If good
comparables were used, the final adjusted value of each comparable should be very close to
one another, perhaps within ten to fifteen percent. The reviewer then checks to see if the
appraiser has selected the comparable most similar to the subject in arriving at the final
estimate of value.”

Credit, HUD Handbook 4155.1, “Mortgage Credit Analysis,” Section 1




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“Past credit performance serves as the most useful guide in determining a borrower’s attitude
toward credit obligations and predicting a borrower’s future actions. A borrower who has
made payments on previous and current obligations in a timely manner represents reduced
risk. Conversely, if the credit history, despite adequate income to support obligations, reflects
continuous slow payments, judgments, and delinquent accounts, strong compensating factors
will be necessary to approve the loan.

“When analyzing a borrower’s credit history, examine the overall pattern of credit behavior,
rather than isolated occurrences of unsatisfactory or slow payments. A period of financial
difficulty in the past does not necessarily make the risk unacceptable if the borrower has
maintained a good payment record for a considerable time period since the difficulty. When
delinquent accounts are revealed, the lender must document their analysis as to whether the
late payments were based on a disregard for financial obligations, an inability to manage debt,
or factors beyond the control of the borrower, including delayed mail delivery or disputes with
creditors.

“While minor derogatory information occurring two or more years in the past does not require
explanation, major indications of derogatory credit–including judgments, collections, and any
other recent credit problems–require sufficient written explanation from the borrower. The
borrower’s explanation must make sense and be consistent with other credit information in the
file.”




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