oversight

First Magnus Financial Corporation Did Not Follow HUD Regulations When Underwriting 23 Federal Housing Administration Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-12-12.

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

                                                                 Issue Date
                                                                          December 12, 2005
                                                                 Audit Report Number
                                                                              2006-KC-1002




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

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT: First Magnus Financial Corporation Did Not Follow HUD Regulations When
            Underwriting 23 Federal Housing Administration Loans


                                   HIGHLIGHTS

 What We Audited and Why

             We reviewed 45 Federal Housing Administration loans underwritten by the
             Overland Park, Kansas, branch office of First Magnus Financial Corporation
             (First Magnus). Our audit objectives were to determine whether First Magnus’s
             Overland Park branch properly processed Federal Housing Administration loans
             and to determine whether adequate quality control procedures are implemented at
             the branch office.

             We audited First Magnus because it had a default rate of 183 percent of the U.S.
             Department of Housing and Urban Development (HUD) Kansas City office area
             average for loans that closed from January 2003 through December 2004. We
             reviewed the Overland Park branch because it underwrote the majority of First
             Magnus’s loans in the Kansas City office area.

 What We Found
             First Magnus did not follow HUD regulations when underwriting 23 of the 45
             loans reviewed. These loans contain material deficiencies that affect the
             insurability of the loans. Material deficiencies include unsupported income and
             assets, questionable gift funds, underreported liabilities, and questionable
           employment and credit histories. As a result, HUD insured 23 loans that place the
           Federal Housing Administration insurance fund at risk for $2,239,504.

What We Recommend
           We recommend that the assistant secretary for housing – federal housing
           commissioner take appropriate administrative action against First Magnus for not
           following HUD requirements. At a minimum, HUD should require First Magnus
           to indemnify 21 loans with material deficiencies with original mortgage amounts
           totaling $2,018,167 and to indemnify HUD for future losses on two properties not
           yet sold that HUD paid claims totaling $221,337.

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

Auditee’s Response
           First Magnus agreed with our conclusions and to indemnify HUD for potential
           losses on loans currently insured and loans which HUD has already paid claims.
           We provided the draft report to First Magnus on November 8, 2005, and
           requested a response by December 2, 2005. First Magnus provided written
           comments on December 2, 2005.

           The complete text of the auditee’s response can be found in appendix B of this
           report.




                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                 4

Results of Audit
        Finding: First Magnus Did Not Follow HUD Regulations When         5
                  Underwriting 23 Federal Housing Administration Loans

Scope and Methodology                                                    10

Internal Controls                                                        11

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use   12
   B.   Auditee Comments                                                 13
   C.   Criteria                                                         16
   D.   Schedule of Significant Underwriting Deficiencies                28
   E.   Schedule of Minor Underwriting Deficiencies                      29
   F.   Schedule of Unallowable Fees                                     30
   G.   Case Studies for 23 Questioned Loans                             31




                                              3
                      BACKGROUND AND OBJECTIVES

First Magnus Financial Corporation (First Magnus) is a direct endorsement lender based in
Tucson, Arizona. It was founded in 1996 and became an approved direct endorsement lender for
the Federal Housing Administration the same year. First Magnus has 238 active branch offices.

HUD authorized the Overland Park, Kansas, branch office to sponsor Federal Housing
Administration loans in December of 2001. The branch office underwrites loans originated by
loan correspondents but does not originate loans.

For loans that closed from January 2003 through December 2004, First Magnus had a default
rate of 3.48 percent, which was 183 percent of the U.S. Department of Housing and Urban
Development (HUD) Kansas City office area average. The Overland Park branch office
underwrote 975 Federal Housing Administration loans between January 1, 2003, and December
31, 2004. Of the 975 loans, 65 defaulted within the first two years after closing.

Our audit objectives were to determine whether First Magnus’s Overland Park, Kansas, branch
office properly processed loans by correctly documenting and evaluating income, assets,
liabilities, credit history, qualifying ratios, and borrower eligibility and charging only allowable
fees; and to determine whether it implemented adequate quality control procedures.




                                                  4
                                 RESULTS OF AUDIT

Finding: First Magnus Did Not Follow HUD Regulations When
         Underwriting 23 Federal Housing Administration Loans
First Magnus did not comply with HUD regulations, procedures, and instructions in the
underwriting of 23 Federal Housing Administration-insured single-family mortgages. The loans
contain deficiencies that affect the credit quality (insurability) of the loans. As a result, HUD is
insuring 21 improperly underwritten loans with original mortgage amounts totaling $2,018,167 and
has paid claims of $221,337 on two improperly underwritten loans.


 First Magnus Did Not Follow
 HUD Underwriting
 Requirements


               First Magnus’s Overland Park branch office underwrote 23 loans that contain
               significant underwriting deficiencies. These deficiencies primarily involve the
               following:

               Unsupported Income/Questionable Employment Histories
               First Magnus did not properly assess income or employment history for
               borrowers. Borrower income is either overstated or not adequately supported.
               Lenders must accurately assess borrower income to make informed decisions on
               income stability and the borrower’s ability to repay the mortgage.

               First Magnus also did not adequately assess borrowers’ employment histories.
               Borrowers have unexplained gaps in the two-year employment history required by
               HUD, or the lender did not obtain transcripts for borrowers who claim to have
               been students during the two-year period. HUD requires lenders to evaluate
               borrowers’ employment history to establish stability of income.

               For example, in case number 182-0760589, the lender used $6,193 per month to
               qualify the borrower. However, the $6,193 was computed using the borrower’s
               previous employment that ended almost three months before the loan closed. The
               borrower began new employment during the loan approval process and was
               earning only $5,416 per month at that time ($777 less per month). The lesser
               monthly income resulted in the borrowers’ total debt ratio increasing to 49.2
               percent, well above HUD’s limit of 41 percent.

               Unsupported Assets/Questionable Gift Funds
               First Magnus did not adequately support assets (funds available to close) claimed
               by borrowers. HUD requires a verification of deposit from the financial



                                                 5
institution and the most recent bank statement for automated underwriting
approvals. If a verification of deposit is not available, additional months of bank
statements are required. HUD requires two months of bank statements on manual
approvals. The deficient loans either contain verifications of deposit but no bank
statements to evaluate the source of funds deposited or do not contain a
verification of deposit or bank statements when the borrowers paid closing costs.

One common form of assets is gift funds provided to borrowers. First Magnus
did not always obtain adequate gift documentation. In some cases, it did not
obtain donor bank statements to show that the donor had the funds available,
verifications that the borrower received the gift funds, or explanations of
discrepancies between the gift letter and the gift amount on the HUD-1 settlement
statement. HUD requires extensive gift documentation to ensure the gift funds
are coming from an acceptable source and not from a party related to the sales
transaction.

For example, in case number 132-1665315, the HUD-1 settlement statement
reflects gift funds of $3,135. The gift letter shows that the donor was giving
$1,925 to the borrower, and the money was obtained from a credit card advance.
The advance was applied to the borrower’s credit card debts. The remaining gift
funds of $1,210 are not explained. In addition, the borrower (or someone on the
borrower’s behalf) paid off $2,245 in debt collections before the loan closing.
Therefore, at least $1,210 in gift funds is unsupported and the amount could be as
much as $1,490.

Underreported Liabilities/Questionable Credit Histories
First Magnus did not include all applicable liabilities when approving loans.
Credit reports for the borrowers reflect recurring debts that the underwriter did not
include when calculating borrowers’ total debt ratio. Underwriters must
accurately assess borrower debts to make reasonable decisions on the borrower’s
ability to repay the mortgage.

Also, First Magnus did not adequately assess borrower credit histories. Credit
histories show significant derogatory credit and collection items within the two
years before closing. HUD requires the lender to analyze whether late payments
were a disregard for financial obligations or factors beyond the control of the
borrower. First Magnus did not document its analyses of the credit reports. In
some cases, borrowers did not have credit histories established. These borrowers
are required by HUD to provide letters of credit from utility companies, insurance
companies, landlords, or other credit providers to establish their regard for
financial obligations. The letters of credit used in these cases show either
multiple late payments or no detail of payments for the lender to review.

For example, in case number 291-3183919, the lender did not include a $347
monthly debt on a $14,356 auto loan shown on the credit report. The $347




                                  6
            monthly payment significantly affects the borrowers’ ability to repay the
            mortgage.

            Appendix D summarizes the significant deficiencies and appendix G provides
            details of the deficiencies on each of the 23 questioned loans.

Other Deficiencies

            First Magnus also underwrote 13 loans that contain minor underwriting
            deficiencies. While these deficiencies do not affect the overall credit quality
            (insurability) of the individual loans, they indicate a lack of commitment to
            quality underwriting. Lenders need to ensure that they follow all facets of HUD
            requirements when originating Federal Housing Administration loans. We
            provided details of these deficiencies to First Magnus during our review.
            Appendix E summarizes the deficiencies on each of the 13 loans.

Insurance Status of Improperly
Underwritten Loans


            As of September 23, 2005, HUD systems show that 16 of the 23 materially
            deficient loans are in default or HUD has paid a claim or a claim is in process.

                   Current status of loans with material         Number of   Percent of total
                  deficiencies as of September 23, 2005            loans     deficient loans
            Claim Paid - Property Conveyed to Insurer                2            8.70%
            Claim Paid - Nonconveyance Claim                         1            4.35%
            Foreclosure Process Started                               8          34.78%
            Active Insurance Status - Currently in Default           5           21.74%
            Active Insurance Status - Not Currently in Default       6           26.09%
            Paid In Full                                             1            4.34%
            Totals                                                   23         100.00%



First Magnus Charged
Prohibited Fees to Borrowers

            First Magnus charged unallowable fees totaling $4,611 to 13 borrowers. It
            charged six borrowers commitment fees, which are not allowed unless a written
            agreement of loan terms is present in the loan file, but the files do not contain the
            agreements. The lender also charged borrowers wire transfer, e-mail, and courier
            fees that are allowable only on refinance loans, but none of the loans are
            refinances. First Magnus charged one borrower $1,276 in excess of the 1 percent
            allowed for an origination fee. Other prohibited fees include tax service fees,
            underwriting fees, and excessive credit report fees. Appendix F details the
            prohibited fees charged on the 13 loans.


                                                7
Inadequate Supervision and
Training of Underwriters


             The underwriting deficiencies occurred because First Magnus’s Overland Park
             branch office management did not adequately supervise underwriters approving
             Federal Housing Administration loans or ensure that underwriters were
             adequately trained on HUD requirements.

             HUD requires direct endorsement lenders to conduct their business operations in
             accordance with sound mortgage lending practices, ethics, and standards. HUD
             also requires lenders to practice quality control as a routine function of operations.
             These quality controls must assure compliance with HUD loan processing
             requirements; protect HUD from unacceptable risk; guard against errors,
             omissions, and fraud; and assure swift and appropriate corrective action when
             deficiencies are identified.

             The Overland Park branch office managers did not practice acceptable quality
             control functions, including adequate supervision of underwriters. The managers
             did not identify and take swift action to correct material noncompliance by
             underwriters approving Federal Housing Administration loans. Repeated material
             deficiencies throughout the two-year audit period are evidence of the absence of
             acceptable management oversight.

             Underwriters are an integral part of the loan approval process, but branch office
             managers did not ensure that underwriters processing Federal Housing
             Administration loans received adequate training. HUD requires lenders to ensure
             that underwriters are adequately trained and have completed a direct endorsement
             training program. The current underwriter, who underwrote about 50 percent of
             the 975 Federal Housing Administration loans sponsored during the two-year
             period reviewed, told us that she had not received formal training on underwriting
             Federal Housing Administration loans.

             Lenders need an effective quality control process at all business levels and
             adequately trained underwriters to protect HUD from unnecessary risk. Because
             of inadequate controls at the Overland Park branch office, HUD insured 23 loans
             that place the Federal Housing Administration insurance fund at risk for
             $2,018,167 in outstanding loans and $221,337 in claims.

Conclusion

             First Magnus did not comply with HUD requirements when underwriting 23
             Federal Housing Administration loans. The loans contained the following
             deficiencies:



                                               8
             o    Unsupported income,
             o    Questionable employment histories,
             o    Unsupported assets,
             o    Questionable gift funds,
             o    Underreported liabilities, and
             o    Questionable credit histories.

          Therefore, HUD is unnecessarily at risk for 21 improperly underwritten loans
          with original mortgage amounts totaling $2,018,167, and has paid claims on two
          improperly underwritten loans with claim amounts totaling $221,337.

          First Magnus also charged $4,611 in prohibited fees to 13 borrowers. Because the
          monetary value of the unallowable fees is minimal, we have made no formal
          recommendations to HUD in this regard.

Recommendations

          We recommend that the assistant secretary for housing - federal housing
          commissioner and chairman, Mortgagee Review Board,

          1A. Take appropriate administrative action against First Magnus for not
              complying with HUD underwriting requirements. This action, at a
              minimum, should include requiring First Magnus to indemnify HUD for 21
              actively insured loans with original mortgage amounts totaling $2,018,167
              (see appendix D).

          1B. Take appropriate administrative action against First Magnus for two loans
              for which HUD has already paid claims totaling $221,337, including
              requiring First Magnus to indemnify HUD for future losses on the two
              properties that have not yet been sold (see appendix D).

          1C. Verify that First Magnus implements an adequate quality control process at
              the Overland Park branch office. This process should allow branch office
              management to identify and mitigate problems in underwriting and prevent
              First Magnus from submitting loans for Federal Housing Administration
              endorsement that do not meet HUD requirements.




                                          9
                         SCOPE AND METHODOLOGY

The First Magnus Overland Park, Kansas, branch office processed 975 Federal Housing
Administration loans between January 1, 2003, and December 31, 2004. Of the 975 loans, 65
defaulted within the first two years after the loans closed. We reviewed 45 of the 65 defaulted
loans. We did not review 16 streamline refinance loans because the underwriter’s assessment of
these loans is limited and we also excluded four loans that HUD’s Quality Assurance Division
recently reviewed.

To accomplish our objectives, we reviewed the Federal Housing Administration underwriting
policies and procedures for HUD and the Overland Park branch office and interviewed the branch
office management and staff. We reviewed the HUD and branch office’s loan files for all 45 loans
and provided results of our loan file reviews to HUD’s Quality Assurance Division for feedback.

When identifying underwriting deficiencies, we assessed whether the deficiencies were material and
should have caused the lender to disapprove the loan. We considered any deficiencies that affected
the approval and insurability of the loans as significant and are recommending that HUD take
appropriate action on these loans. When identifying underwriting deficiencies that we considered
minor, we informed First Magnus of the deficiencies but have not recommended that HUD take
action on these loans.

Additionally, we reviewed First Magnus’s companywide quality control plan. First Magnus’s
quality control reviews are performed by its corporate office, not by individual branch offices.
Therefore, we limited our assessment of First Magnus’s implementation of its quality control
process to the quality control responsibilities of the branch office.

We relied on computer-processed data contained in HUD’s Single Family Data Warehouse
system. During the audit, we assessed the reliability of the data, including relevant general and
application controls, and found it to be adequate. We also performed sufficient tests of the data,
and based on the assessments and testing, we concluded that the data are sufficiently reliable to
be used in meeting our objectives.

We performed audit work from April through September 2005 and conducted our audit in
accordance with generally accepted government auditing standards.




                                                10
                             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:

              •       Controls over underwriting of Federal Housing Administration loans.

              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 Weakness


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

              •       First Magnus did not have adequate controls over its underwriters’
                      assessment of information provided by loan correspondents for loan
                      approval (see finding).




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                                    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                                      $ 2,018,167
                        1B                     $ 221,337

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.




                                          12
Appendix B

             AUDITEE COMMENTS




                  13
14
15
Appendix C

                                         CRITERIA

Criteria 1
HUD Handbook 4000.2, chapter 5, section 5-2, paragraph O, says courier fees and wire fees may
be charged only on refinances and only for delivery of the mortgage payoff statement to the lien
holder and for closing documents to the settlement agent. The borrower must agree in writing to
pay for the courier and wire fees, prior to loan closing.

Criteria 2
HUD Handbook 4000.4, REV-1, CHG-2, chapter 1, section 1-11, says that no extra fees and
charges may be collected from the borrower on the basis of direct endorsement processing. Only
those fees normally charged to the borrower in HUD/Federal Housing Administration
transactions—lock-in fee, origination fee, appraisal fee, inspection fees, costs of a credit report,
any charges for verifying deposits, and discount points—may be charged to the borrower in a
direct endorsement case. No underwriting fee may be charged to the borrower.

Criteria 3
HUD Handbook 4000.4, REV-1, CHG-2, chapter 2, section 2-5, says the underwriter’s role and
responsibility are critical elements of the direct endorsement program. The underwriter executes
the underwriter certification, which enables HUD to endorse the mortgage loan without a
detailed technical underwriting review. The underwriter certifies that he or she has personally
reviewed the application documents and finds compliance with the applicable requirements. One
of the underwriter’s responsibilities is the coordination of all phases of the underwriting of the
mortgage loan. This role enables the underwriter to ensure that prudent underwriting procedures
are followed.

Criteria 4
HUD Handbook 4155.1, REV-4, CHG-1, chapter 2, section 2, says that the anticipated amount
of income and likelihood of its continuance must be established to determine the borrower’s
capacity to repay the mortgage debt. Income from any source that cannot be verified, is not
stable, or will not continue may not be used in calculating the borrower’s income ratios.

Criteria 5
HUD Handbook 4155.1, REV-4, CHG-1, chapter 2, section 2-3, says past credit performance
serves as the most useful guide in determining the attitude toward credit obligations that will
govern the borrower’s future actions. A borrower who has made payments on previous or
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 offsetting factors will be necessary to approve the loan.

When analyzing the borrower’s credit record, it is the overall pattern of credit behavior that must
be examined, 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 a good payment
record has been maintained since. When delinquent accounts are revealed, the lender must



                                             16
determine whether the late payments were due to a disregard for or an inability to manage
financial obligations or to factors beyond the control of the borrower including delayed mail 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 and 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.

HUD also recognizes that some prospective borrowers may not have established a credit history.
For those borrowers, and those who do not use traditional credit, the lender must develop a credit
history from utility payment records, rental payments, automobile insurance payments, or other
means of direct access from the credit provider or may elect to use a nontraditional mortgage
credit report developed by a credit reporting agency. Neither the lack of credit history nor the
borrower's decision not to use credit may be used as a basis for rejection.

The basic hierarchy of credit evaluation is the manner of payments made on previous housing
expenses, including utilities, followed by the payment history of installment debts, then
revolving accounts. Generally, an individual with no late housing or installment debt payments
should be considered as having an acceptable credit history unless there is major derogatory
credit on his or her revolving accounts.

Criteria 6
HUD Handbook 4155.1, REV-4, CHG-1, chapter 2, section 2-3, paragraph B, says the lender
must ascertain the purpose of any recent debts as the indebtedness may have been incurred to
obtain part of the required cash investment on the property being purchased. Similarly, a
satisfactory explanation must be provided by the borrower to account for the omission of any
significant debt shown on the credit report but not listed on the loan application. The borrower
must explain all inquiries shown on the credit report.

Criteria 7
HUD Handbook 4155.1, REV-4, chapter 2, section 2-6, says that HUD does not impose an
arbitrary minimum length of time a borrower must have held a position to be eligible. However,
the lender must verify the borrower’s employment for the most recent two full years. If a
borrower indicates he or she was in school or in the military during any of this time, the
borrower must provide supporting evidence, such as college transcripts or discharge papers. The
borrower must also explain any gaps in employment of a month or more. Allowances for
seasonal employment, such as is typical in the building trades, etc., may be made.

Criteria 8
HUD Handbook 4155.1, REV-4, chapter 2, section 2-7, paragraph A, says that overtime and
bonus income may be used to qualify if the borrower has received such income for
approximately the past two years and there are reasonable prospects of its continuance. The
lender must develop an average of bonus or overtime income for the past two years, and the
employment verification must not state categorically that such income is not likely to continue.
Periods of less than two years may be acceptable provided the underwriter adequately justifies
and documents his or her reason for using the income for qualifying purposes.


                                            17
An earnings trend must also be established for either source of income. If either type of income
shows a continual decline, the lender must provide a sound rationalization for including the
income for borrower qualifying. If bonus income varies significantly from year-to-year, a period
of more than two years must be used in calculating the average income.

Criteria 9
HUD Handbook 4155.1, REV-4, chapter 2, section 2-7, paragraph F, says that child support may
be considered as effective income if such payments are likely to be consistently received for
approximately the first three years of the mortgage. The borrower must provide a copy of the
divorce decree, legal separation agreement, or voluntary payment agreement and evidence that
payments have been received during the last 12 months. Periods of less than 12 months may be
acceptable provided the payer’s ability and willingness to make timely payments is adequately
documented by the lender.

Criteria 10
HUD Handbook 4155.1, REV-4, chapter 2, section 2-10, says that all funds for the borrower’s
investment in the property must be verified.

Criteria 11
HUD Handbook 4155.1, REV-4, chapter 2, section 2-10, paragraph B, of the handbook states
that a verification of deposit, along with the most recent bank statement, may be used to verify
savings and checking accounts. If there is a large increase in an account or the account was
opened recently the lender must obtain a credible explanation of the source of those funds.

Criteria 12
HUD Handbook 4155.1, REV-4, chapter 2, section 2-10, paragraph C, says that an outright gift
of the cash investment is acceptable if the donor is a relative of the borrower, the borrower’s
employer or labor union, a charitable organization, a governmental agency or public entity that
has a program to provide homeownership assistance to low- and moderate-income families or
first-time homebuyers, or a close friend with a clearly defined interest in the borrower. A gift
from any other source is considered an inducement to purchase and requires a reduction to the
sales price. No repayment of the gift may be expected or implied.

The lender must document the transfer of the funds from the donor to the borrower. Acceptable
procedures include obtaining a copy of the donor’s withdrawal slip or canceled check, along with
the borrower’s deposit slip or bank statement showing the deposit. If the funds are not deposited
to the borrower’s account before closing, the lender must obtain verification the closing agent
received funds from the donor for the amount of the gift.

Criteria 13
HUD Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph A, states that the borrower’s
liabilities include all installment loans, revolving charge accounts, real estate loans, alimony,
child support, and all other continuing obligations. In computing the debt-to-income ratios, the
lender must include the monthly housing expense and all other recurring charges including
payments on installment accounts, child support or separate maintenance payments, revolving
accounts, alimony, etc., extending 10 months or more. Debts lasting less than 10 months must
be counted if the amount of the debt affects the borrower’s ability to make the mortgage payment


                                            18
during the months immediately after loan closing, particularly if the borrower will have limited
or no cash assets after loan closing.

Criteria 14
HUD Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph C, says, if a debt payment,
such as a student loan, is scheduled to begin within 12 months of the mortgage loan closing, the
lender must include the anticipated monthly obligation in the underwriting analysis unless the
borrower can provide evidence that the debt may be deferred to a period outside this timeframe.
Similarly, balloon notes that come due within one year of loan closing must be considered.

Criteria 15
HUD Handbook 4155.1, REV-4, chapter 2, section 2-12, says that ratios are used to determine
whether the borrower can reasonably be expected to meet the expenses involved in
homeownership and otherwise provide for the family. The lender must compute two ratios:

   A. If the total mortgage payment (principal and interest; escrow deposits for real estate
      taxes, hazard insurance, mortgage insurance premiums, any homeowners' association
      dues, ground rent, and any special assessments; and payments for any acceptable
      secondary financing) does not exceed 29 percent of gross effective income, the
      relationship of the mortgage payment to income is considered acceptable. A ratio
      exceeding 29 percent may be acceptable if significant compensating factors are
      presented. Typically, for borrowers with limited recurring expense, greater latitude is
      permissible on this ratio than the total fixed payment ratio described below.

   B. If the total mortgage payment and all recurring charges does not exceed 41 percent of
      gross effective income, the relationship of total obligations to income is considered
      acceptable. A ratio exceeding 41 percent may be acceptable if significant compensating
      factors are presented.

Criteria 16
HUD Handbook 4155.1, REV-4, section 2-13, says compensating factors that may be used in
justifying approval of mortgage loans with ratios exceeding the guidelines include those listed
below. Underwriters must state on the “remarks” section of the HUD-92900WS the
compensating factors used to support loan approval.

   A.      The borrower has successfully demonstrated the ability to pay housing expenses
           equal to or grater than the proposed monthly housing expense for the new mortgage.
           If the borrower over the past 12-24 months has met his or her housing obligation as
           well as other debts, there should be little reason to doubt the borrower’s ability to
           continue to do so despite having ratios in excess of those prescribed.
   B.      The borrower makes a large down payment toward the purchase of the property.
   C.      The borrower has demonstrated a conservative attitude toward the use of credit and
           an ability to accumulate savings.
   D.      Previous credit history shows that the borrower has the ability to devote a greater
           portion of income to housing expenses.
   E.      The borrower receives compensation or income not reflected in effective income, but
           directly affecting the ability to pay the mortgage, including food stamps and similar
           public benefits.


                                            19
   F.      There is only a minimal increase in the borrower’s housing expense.
   G.      The borrower has substantial cash reserves after closing.
   H.      The borrower has substantial nontaxable income (if no adjustment made previously in
           the ratio computations).
   I.      The borrower has potential for increased earnings, as indicated by job training or
           education in the borrower’s profession.
   J.      The home is being purchased as the result of relocation of the primary wage-earner
           and the secondary wage-earner has an established history of employment, is expected
           to return to work, and there is reasonable prospects for securing employment in a
           similar occupation in the new area. The underwriter must address the availability of
           such possible employment.

Criteria 17
HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, says that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
the decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement the documentation submitted by the
borrower.

Credit documents may be up to 120 days old at the time the loan closes (180 days for proposed
construction). Updated, written verifications must be obtained when the age of the documents
exceed these limits. Verification forms must pass directly between lender and provider without
being handled by any third party.

Criteria 18
HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, paragraph F, says a verification of deposit
and most recent bank statements are typically required for mortgage credit analysis in all
transactions. (By “most recent,” HUD means at the time the initial loan application is made.
Provided the document itself is not more than 120 days old when the loan closes (180 on new
construction), there is no need to update.

Criteria 19
HUD Handbook 4155.1, REV-5, chapter 2, section 2-3, says 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.


                                            20
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.

Neither the lack of credit history nor the borrower’s decision not to use credit may be used as a
basis for rejecting the loan application. HUD also recognizes that some prospective borrowers
may not have an established credit history. For those borrowers, and for those who do not use
traditional credit, the lender must develop a credit history from utility payment records, rental
payments, automobile insurance payments, or other means of direct access from the credit
provider. The lender must document that the providers of non-traditional credit do, in fact, exist
and verify the credit information. Documents confirming the existence of a non-traditional credit
provider may include a public record from the state, county, or city records, or other means
providing a similar level of objective confirmation. To verify the credit information, lenders
must use a published address or telephone number for that creditor.

As an alternative, the lender may elect to use a non-traditional mortgage credit report developed
by a credit-reporting agency, provided that the credit reporting agency has verified the existence
of the credit providers and the lender verifies that the non-traditional credit was extended to the
applicant. The lender must verify the credit using a published address or telephone number to
make that verification.

The basic hierarchy of credit evaluation is the manner of payments made on previous housing
expenses, including utilities, followed by the payment history of installment debts, and then
revolving accounts. Generally, an individual with no late housing or installment debt payments
should be considered as having an acceptable credit history, unless there is major derogatory
credit on his or her revolving accounts.

Criteria 20
HUD Handbook 4155.1, REV-5, chapter 2, section 2-3, paragraph A, says the payment history of
the borrower’s housing obligations holds significant importance in evaluating credit. The lender
must determine the borrower’s payment history of housing obligations through either the credit
report, verification of rent directly from the landlord (with no identity-of-interest with the
borrower) or verification of mortgage directly from the mortgage servicer, or through canceled
checks covering the most recent 12-month period.

Criteria 21
HUD Handbook 4155.1, REV-5, chapter 2, section 2-3, paragraph B, says the lender must
ascertain the purpose of any recent debts, as the indebtedness may have been incurred to obtain
part of the required cash investment on the property being purchased. Similarly, the borrower
must provide a satisfactory explanation for any significant debt that is shown on the credit report
but not listed on the loan application. The borrower must explain in writing all inquiries shown
on the credit report in the last 90 days.




                                             21
Criteria 22
HUD Handbook 4155.1, REV-5, chapter 2, section 2-6, says the anticipated amount of income
and the likelihood of its continuance must be established to determine a borrower’s capacity to
repay mortgage debt. Income may not be used in calculating the borrower’s income ratios if it
comes from any source that cannot be verified, is not stable, or will not continue. This section
describes acceptable types of income, procedures for calculating effective income, and
requirements for establishing income stability.

HUD does not impose a minimum length of time a borrower must have held a position of
employment to be eligible. However, the lender must verify the borrower’s employment for the
most recent two full years. If a borrower indicates he or she was in school or in the military
during any of this time, the borrower must provide supporting evidence, such as college
transcripts or discharge papers. The borrower also must explain any gaps in employment
spanning one month or more. Allowances for seasonal employment, such as is typical in the
building trades, etc., may be made if documented by the lender.

To analyze and document the probability of continued employment, lenders must examine the
borrower’s past employment record, qualifications for the position, previous training and
education, and the employer’s confirmation of continued employment. A borrower who changes
jobs frequently within the same line of work, but continues to advance in income or benefits,
should be considered favorably. In this analysis, income stability takes precedence over job
stability.

Criteria 23
HUD Handbook 4155.1, REV-5, chapter 2, section 2-7, says the income of each borrower to be
obligated for the mortgage debt must be analyzed to determine whether it can reasonably be
expected to continue through at least the first three years of the mortgage loan. If the borrower
intends to retire during this period, the effective income must be the amount of documented
retirement benefits, social security payments, or other payments expected to be received in
retirement. No inquiry may be made regarding possible future maternity leave.

In most cases, the borrower’s income will be limited to salaries or wages. Income from other
sources can be included as effective income with proper verification by the lender. Procedures
for analyzing other acceptable income sources besides salaries and wages are described below:

   M. Rental Income. Rent received for properties owned by the borrower is acceptable if the
      lender can document that the rental income is stable. Examples of stability may include a
      current lease, an agreement to lease, or a rental history over the previous 24 months that
      is free of unexplained gaps greater than three months. (Student, seasonal, or military
      renters, or property rehabilitation would provide such an explanation). A separate
      schedule of real estate is not required for rental properties, provided all properties are
      shown on the loan application.

If the borrower resides in one or more units of a multiple-unit property and charges rent to
tenants of other units, that rent may be used for qualifying purposes. However, projected rent of
additional units only and not the owner-occupied unit(s) may be considered gross income only
after deducting the Home Ownership Center’s vacancy and maintenance factor. It may not be
used as a direct offset to the mortgage payments.


                                            22
The following is required to verify all rental income:

   2. Current Leases. If a property was acquired since the last income tax filing and is not
      shown on Schedule E, a current signed lease or other rental agreement must be provided.
      The gross rental amount must be reduced for vacancies and maintenance by 25 percent
      (or the percentage developed by the jurisdictional Home Ownership Center) before
      subtracting principal, interest, taxes, and insurance, and any homeowners’ association
      dues, etc., and applying the remainder to income (or recurring debts, if negative).

Criteria 24
HUD Handbook 4155.1, REV-5, chapter 2, section 2-10, says that all funds for the borrower’s
investment in the property must be verified and documented.

Criteria 25
HUD Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph B, says a verification of
deposit, along with the most recent bank statement, may be used to verify savings and checking
accounts. If there is a large increase in an account or the account was opened recently, the lender
must obtain a credible explanation of the source of those funds.

Criteria 26
HUD Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph C, says an outright gift of the
cash investment is acceptable if the donor is the borrower’s relative, the borrower’s employer or
labor union, a charitable organization, a governmental agency or public entity that has a program
to provide homeownership assistance to low- and moderate-income families or first-time
homebuyers, or a close friend with a clearly defined and documented interest in the borrower.
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. (As a rule, HUD is not concerned
with how the donor obtains the gift funds provided they are not derived in any manner from a
party to the sales transaction. Donors may borrow gift funds from any other acceptable source
provided the mortgage borrowers are not obligors to any note to secure money borrowed to give
the gift.) This rule also applies to properties of which the seller is a government agency selling
foreclosed properties, such as the Veterans Administration or Rural Housing Services. Only
family members may provide equity credit as a gift on a property being sold to other family
members.

The lender must document the gift funds by obtaining a gift letter, signed by the donor and
borrower, that specifies the dollar amount of the gift, states that no repayment is required, shows
the donor’s name, address and telephone number, and states the nature of the donor’s
relationship to the borrower. In addition, the lender must document the transfer of funds from
the donor to the borrower, as follows:

   1. If the gift funds are in the homebuyer’s bank account, the lender must document the
      transfer of the funds from the donor to the homebuyer by obtaining a copy of the
      canceled check or other withdrawal document showing that the withdrawal is from the



                                            23
       donor's account. The homebuyer’s deposit slip and bank statement that shows the deposit
       is also required.

   2. If the gift funds are to be provided at closing,
           a. If the transfer of the gift funds is by certified check made on the donor’s account,
              the lender must obtain a bank statement showing the withdrawal from the donor’s
              account, as well as a copy of the certified check.
           b. If the donor purchased a cashier’s check, money order, official check, or any other
              type of bank check as a means of transferring the gift funds, the donor must
              provide a withdrawal document or canceled check for the amount of the gift,
              showing that the funds came from the donor’s personal account. If the donor
              borrowed the gift funds and cannot provide documentation from the bank or other
              savings account, the donor must provide written evidence that those funds were
              borrowed from an acceptable source, i.e., not from a party to the transaction,
              including the lender. “Cash on hand” is not an acceptable source of the donor’s
              gift funds.

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

Criteria 27
HUD Handbook 4155.1, REV-5, chapter 2, section 2-11, paragraph A, says the borrower’s
liabilities include all installment loans, revolving charge accounts, real estate loans, alimony,
child support, and all other continuing obligations. In computing the debt-to-income ratios, the
lender must include the monthly housing expense and all other recurring charges extending ten
months or more, including payments on installment accounts, child support or separate
maintenance payments, revolving accounts, alimony, etc. Debts lasting less than 10 months
must be counted if the amount of the debt affects the borrower’s ability to make the mortgage
payment during the months immediately after loan closing; this is especially true if the borrower
will have limited or no cash assets after loan closing.

Criteria 28
HUD Handbook 4155.1, REV-5, chapter 2, section 2-11, paragraph C, says if a debt payment,
such as a student loan, is scheduled to begin within 12 months of the mortgage loan closing, the
lender must include the anticipated monthly obligation in the underwriting analysis, unless the
borrower provides written evidence that the debt will be deferred to a period outside this
timeframe. Similarly, balloon notes that come due within one year of loan closing must be
considered in the underwriting analysis.

Criteria 29
HUD Handbook 4155.1, REV-5, chapter 2, section 2-12, says ratios are used to determine
whether the borrower can reasonably be expected to meet the expenses involved in
homeownership, and otherwise provide for the family. The lender must compute two ratios:




                                            24
   A.     Mortgage payment expense to effective income. If the total mortgage payment
          (principal and interest; escrow deposits for real estate taxes, hazard insurance, the
          mortgage insurance premium, homeowners’ association dues, ground rent, special
          assessments, and payments for any acceptable secondary financing) does not exceed
          29 percent of the gross effective income, the relationship of the mortgage payment to
          income is considered acceptable. A ratio exceeding 29 percent may be acceptable
          only if significant compensating factors are documented and are recorded on the
          mortgage credit analysis worksheet. Typically, for borrowers with limited recurring
          expense, greater latitude is permissible on this ratio than on the total fixed payment
          ratio.

   B.     Total fixed payment to effective income. If the total of the mortgage payment and all
          recurring charges does not exceed 41 percent of the gross effective income, the
          relationship of total obligations to income is considered acceptable. A ratio
          exceeding 41 percent may be acceptable only if significant compensating factors are
          documented and are recorded on the mortgage credit analysis worksheet.

Criteria 30
HUD Handbook 4155.1, REV-5, chapter 2, section 2-13, says compensating factors that may be
used to justify approval of mortgage loans with ratios exceeding our benchmark guidelines are
those listed below. Underwriters must record in the “remarks” section of the HUD 92900-
WS/HUD 92900-PUR the compensating factor(s) used to support loan approval. Any
compensating factor used to justify mortgage approval must be supported by documentation.

   A.     The borrower has successfully demonstrated the ability to pay housing expenses
          equal to or greater than the proposed monthly housing expense for the new mortgage
          over the past 12-24 months.
   B.     The borrower makes a large downpayment (10 percent or more) toward the purchase
          of the property.
   C.     The borrower has demonstrated an ability to accumulate savings and a conservative
          attitude toward the use of credit.
   D.     Previous credit history shows that the borrower has the ability to devote a greater
          portion of income to housing expenses.
   E.     The borrower receives documented compensation or income not reflected in effective
          income, but directly affecting the ability to pay the mortgage, including food stamps
          and similar public benefits.
   F.     There is only a minimal increase in the borrower's housing expense.
   G.     The borrower has substantial documented cash reserves (at least three months’ worth)
          after closing. In determining if an asset can be included as cash reserves or cash to
          close, the lender must judge whether or not the asset is liquid or readily convertible to
          cash and can be done so absent retirement or job termination.
          Funds borrowed against these accounts may be used for loan closing, but are not to be
          considered as cash reserves. "Assets" such as equity in other properties and the
          proceeds from a cash-out refinance are not to be considered as cash reserves.
          Similarly, funds from gifts from any source are not to be included as cash reserves.
   H.     The borrower has substantial non-taxable income (if no adjustment was made
          previously in the ratio computations).



                                           25
   I.      The borrower has a potential for increased earnings, as indicated by job training or
           education in the borrower's profession.
   J.      The home is being purchased as a result of relocation of the primary wage-earner, and
           the secondary wage-earner has an established history of employment, is expected to
           return to work, and reasonable prospects exist for securing employment in a similar
           occupation in the new area. The underwriter must document the availability of such
           possible employment.

Criteria 31
HUD Handbook 4155.1, REV-5, chapter 3, section 3-1, says the application package must
contain all documentation supporting the lender’s decision to approve the mortgage loan. When
standard documentation does not provide enough information to support this decision, the lender
must provide additional explanatory statements, consistent with other information in the
application, to clarify or to supplement the documentation submitted by the borrower.

All documents may be up to 120 days old at the time the loan closes (180 days for new
construction) unless this or other applicable HUD instructions specify a different time frame or
the nature of the document is such that its validity for underwriting purposes is not affected by
being older than the number of prescribed days (e.g., divorce decrees, tax returns). Updated,
written verifications must be obtained when the age of the documents exceed these limits.
Verification forms or documents used as an alternate to these verifications must pass directly
between the lender and the provider without being handled or transmitted by any third party or
using any third party’s equipment. No document used in the processing or underwriting of a
loan may be handled or transmitted by or through an interested third party to the transaction.

The verification of deposit and verification of employment may be faxed documents or printed
pages from the Internet if they clearly identify their sources (e.g., contain the names of the
borrower's employer or depository/investment firm). The lender is accountable for ascertaining
the authenticity of the document by examining information included in a document’s headers and
footers. The lender should verify the authenticity of printed Web pages by examining the pages
for similar information. A printed Web page also must show its uniform resource locator
address, as well as the date and time the document was printed.

Lenders may not accept or use documents relating to the credit, employment or income of
borrowers that are handled by or transmitted from or through interested third parties (e.g., real
estate agents, builders, sellers) or by using their equipment.

Criteria 32
HUD Handbook 4330.1, REV-5, section 4-12, paragraph B, says there are services a lender may
not charge to the borrower, including fees for tax services to furnish tax data and information
necessary to pay property taxes or in some circumstances to make the payments on behalf of the
lender.

Criteria 33
Mortgagee Letter 98-14 states that Federal Housing Administration approved Freddie Mac’s
Loan Prospector for use on Federal Housing Administration-insured mortgages, effective March
2, 1998. The lender remains accountable for compliance with Federal Housing Administration



                                             26
guidelines and those credit, capacity, and documentation aspects not addressed in the Loan
Prospector Users Guide.

Criteria 34
Mortgagee Letter 99-26 approved Fannie Mae’s desktop underwriter automated underwriting
system for Federal Housing Administration loan approvals. The lender remains accountable for
compliance with Federal Housing Administration guidelines and those credit, capacity, and
documentation aspects not addressed in the user’s guides provided by Fannie Mae. A Federal
Housing Administration-registered direct endorsement underwriter must fully underwrite those
applications for which the system refers the file to an individual underwriter.

Criteria 35
Mortgagee Letter 00-28 says that in determining whether an asset can be included as cash
reserves or cash to close, the lender must judge whether or not the asset is liquid or readily
converted to cash absent retirement or job termination. Assets such as 401(k)s, individual
retirement accounts, thrift savings plans, etc., may be included in the underwriting analysis up to
only 60 percent of value unless the borrower provides credible evidence that a higher percentage
may be withdrawn after subtracting any federal income tax and any withdrawal penalties.

Criteria 36
Desktop Underwriter Government Underwriter Service User’s Guide for Federal Housing
Administration Loans, chapter 1, paragraph 3, states that the lender remains accountable for
compliance with all Federal Housing Administration guidelines, as well as for any Federal
Housing Administration eligibility requirements, credit capacity, and documentation
requirements that are not covered in the user’s guide. All data entered into desktop underwriter
or that are downloaded or imported into the system must be true, accurate, and complete.

Criteria 37
Freddie Mac’s Loan Prospector Automated Underwriting Service Training and Users Guide,
section 2, states that the data the user inputs into loan prospector must match the application,
underwriting documentation, and delivery information at the time the data are entered and that
the user is responsible for data integrity.

Criteria 38
HUD Homeownership Center Reference Guide, chapter 2, Mortgage Credit Guidelines, page 2-
15, “Closing Costs and Other Fees,” states that all closing items associated with a HUD-insured
loan, including paid-outside-closing items, must be itemized on the HUD-1 settlement statement
for Real Estate Settlement Procedures Act compliance. Commitment fees are only allowable if
the lock-in or commitment agreement for which a fee is charged is in writing and guarantees the
rate and/or discount points for a period of not less than 15 days before the anticipated closing
date.




                                            27
Appendix D

                       SCHEDULE OF SIGNIFICANT
                      UNDERWRITING DEFICIENCIES




                                                                        Underreported


                                                                        credit history
                                                  Questionable




                                                                        Questionable



                                                                        Questionable
                                                  Unsupported




                                                  Unsupported
                   (1)




                                                  employment
   Federal     Original




                                                                        gift funds

                                                                        liabilities
   Housing      insured        (2)




                                                  income


                                                  history

                                                  assets
Administration mortgage Claim paid
 case number   amount       by HUD
 132-1665315 $     62,208                                                x      x
 181-1985370 $     65,569                         x              x              x
 181-1998771 $ 117,638                            x              x              x     x
 181-2012858 $     63,995                         x              x       x
 181-2021633 $     43,645                         x
 182-0734198      (3)                                            x              x
 182-0760589 $ 177,523                            x              x
 182-0771581 $ 165,404                            x                             x
 182-0783328 $     93,532                                 x                     x
 291-3089848 $     81,216                         x              x              x
 291-3092637 $     97,727                         x
 291-3183919 $ 103,274                                                          x
 291-3224520 $     65,964                         x
 291-3226284 $     63,995                                        x                    x
 291-3232527 $     82,702                         x              x              x     x
 291-3241230 $     89,294                                 x              x
 291-3245514 $     90,074                                        x                    x
 291-3248743 $ 129,862                            x              x
 291-3264571 $ 155,312                            x                             x
 291-3270679              $ 175,328               x              x                    x
 291-3281528              $    46,009                            x       x
 291-3292555 $ 155,759                                           x              x
 291-3300350 $ 113,474                                           x              x

Totals           $ 2,018,167 $     221,337        13      2      14      4     12     5

(1) Loans actively insured as of September 23, 2005.
(2) Loans that have defaulted and HUD has paid a claim and acquired the property. As of
    September 23, 2005, the two properties have not been sold.
(3) Case number 182-0734198 was paid in full during the course of our audit work. The loan
    contained material deficiencies; however, it no longer poses a risk to the insurance fund.




                                             28
Appendix E

        SCHEDULE OF MINOR DEFICIENCIES




                              Underreported


                              credit history
                              Questionable




                              Questionable
                              Unsupported




                              Unsupported
                              employment
                Federal




                              liabilities
                Housing




                              income


                              history

                              assets
             Administration
              case number
              181-2012388     x
              181-2047489     x
              182-0769831                  x
              182-0779194     x
              291-3065065     x
              291-3085449     x
              291-3132004     x
              291-3179683                      x
              291-3219911     x
              291-3245812     x
              291-3250555              x
              291-3252958     x
              291-3317050     x    x

             Totals           10   1   1   1   1




                              29
Appendix F

               SCHEDULE OF UNALLOWABLE FEES




                                                                                     Origination fee
                                    Tax service fee




                                                                                                       Wire transfer
                                                      Underwriting

                                                                     Credit report
                       Commitment




                                                                     overcharge

                                                                                     overcharge




                                                                                                       courier fee
         Federal
         Housing




                                                                                                       E-mail/


                                                                                                                         Total
      Administration
                       fee




                                                      fee




                                                                                                       fee
       case number
       132-1665315                                                                                     $ 75            $    75
       181-2021633 $      275                                                                                          $ 275
       291-3085449                                                                                            $ 40     $    40
       291-3135942                                                                                     $ 30            $    30
       291-3179683 $      350                                                                                          $ 350
       291-3182358 $      350                                                                                          $ 350
       291-3219911                                                   $ 36 $1,276                                       $ 1,312
       291-3226284                 $ 214                                                                               $ 214
       291-3241230 $      350 $ 75 $ 395                                                                      $ 25     $ 845
       291-3245812 $      250                                                                                 $ 25     $ 275
       291-3248743            $ 75 $ 395                                                                               $ 470
       291-3250555 $      250                                                                                          $ 250
       291-3270679            $ 75                                                                            $ 50     $ 125

      Totals       $1,825 $225 $1,004 $ 36 $1,276 $105 $140 $ 4,611




                                                      30
Appendix G

             CASE STUDIES FOR 23 QUESTIONED LOANS

Case number: 132-1665315                 Insured amount: $62,208

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 14th payment

Date of loan closing: May 29, 2003       Underwriter type: Manual


Underreported Liabilities
The lender excluded recurring debts of the borrower when evaluating the loan. The lender
identified an auto loan as a duplicate of another auto loan on the borrower’s credit report and
included only one monthly debt of $292 in the financial ratios. The debt is $292 per month for
each loan. The two loans have the same payment, but the account numbers are different, and the
high balances are different, indicating they may be two different loans. The loan file contained
no other documents to support that the lender verified possible duplications on the credit report.
When including the $292 liability in the total debt ratio, the ratio exceeds HUD’s guidelines.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph A (Criteria 13)
Handbook 4155.1, REV-4, chapter 2, section 2-12 (Criteria 15)

Questionable Gift Funds
The lender did not adequately document gift funds. The HUD-1 settlement statement reflected
gift funds of $3,135. The gift letter showed that the mother is gifting $1,925 to the borrower, and
the money was obtained from a credit card advance. The advance was applied to the borrower’s
credit card debts. The remaining gift funds of $1,210 were not explained. In addition, the
borrower (or someone on the borrower’s behalf) paid off $2,245 in debt collections before the
loan closed. Therefore, undocumented potential gift funds are at least $1,210 and could be as
much as $1,490.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-10, paragraph C (Criteria 12)
Handbook 4155.1, REV-4, chapter 3, section 3-1 (Criteria 17)

Unallowable Charges
The lender charged the borrower a $75 wire transfer fee according to the HUD-1 settlement
statement. Wire transfer fees are allowed only on refinances. This is not a refinance loan.

HUD Requirements – Appendix C
Handbook 4000.2, chapter 5, section 5-2, paragraph O (Criteria 1)




                                            31
Case number: 181-1985370                Insured amount: $65,569

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 12th payment

Date of loan closing: May 15, 2003      Underwriter type: Manual


Unsupported Income
The lender overstated the borrower’s income by at least $376 per month and possibly as much as
$762 per month when approving the loan. The mortgage credit analysis worksheet listed
employment income of $1,992 and child support income of $400 per month (total of $2,392).
The verification of employment stated that the borrower made $9.09 per hour and averaged 44
hours per week, which is $1,630 per month including overtime. The only pay stub provided
showed the borrower worked 38 hours that week, bringing into question the likelihood of an
average of 44 hours per week.

Also, there was no documentation to support the likelihood of future receipt of the child support
income. The divorce decree provided does not identify the child support. The loan file
contained a history of child support payments collected through garnished wages, but the
collection efforts were for past-due child support. There was no indication that the borrower was
likely to receive child support payments due during the first three years of the mortgage. Also,
because the support provider was in arrears before loan closing, it is questionable whether the
borrower would consistently receive child support.

The borrower’s 26.3-month income history supported a monthly income of $2,016. Therefore,
income is overstated between $376 and $762 per month. See below for the effect on the
financial ratios.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2 (Criteria 4)
Handbook 4155.1, REV-4, chapter 2, section 2-7, paragraph F (Criteria 9)
Mortgagee Letter 99-26 (Criteria 34)
Desktop Underwriter Government Underwriter Service User’s Guide for Federal Housing
   Administration Loans, dated July 2002, chapter 2, paragraph 3 (Criteria 36)

Underreported Liabilities
According to the borrower’s credit report, the borrower had two open accounts with payments
totaling $45 per month that were not included in the liabilities on the mortgage credit analysis
worksheet or the loan application. The borrower asserted that one account was a duplicate of the
other account; however, the total amount owed, account number, and payment amount were
different for the two accounts. See below for the effect on the financial ratios.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph A (Criteria 13)




                                           32
Excessive Ratios
The mortgage credit analysis worksheet reflected financial ratios of 24.46 percent and 41.55
percent. No compensating factors were identified on the worksheet. Using only supported
income and all recurring liabilities, the ratios increase to 35.9 percent and 63.8 percent per the
verification of employment, or 29 percent and 51.5 percent using the 26.3-month income history.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-12 (Criteria 15)

Unsupported Assets
The lender did not support assets that it considered available when approving the loan. The
mortgage credit analysis worksheet showed that the borrower needed $3,400 to close the loan,
which was supported by a March 5, 2003, verification of deposit from the borrower’s credit
union. However, the lender obtained only the January 31, 2003, bank statement, which showed a
balance of only $699 in the account. Without the February and March 2003 statements, the
lender could not verify the source of the March 5, 2003 balance of $3,523. An April 22, 2003,
letter from the borrower stated she withdrew $3,000 from a savings account at Bank of America
and deposited it into the credit union account. The Bank of America bank statement as of March
13, 2003, showed a $3,000 withdrawal; however, it also showed an unexplained deposit of
$2,577 on February 28, 2003. The account showed a balance of only $1,549 before the large
deposit.

The loan file also contained Bank of America bank statements as of March 13, 2003, for two
additional accounts with balances of $470 and $2,108. Both of the bank statements had only the
borrower’s nonpurchasing spouse’s name on the accounts. The accounts were opened after the
transaction dates of the $2,577 deposit and the $3,000 withdrawal.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-10 (Criteria 10)
Handbook 4155.1, REV-4, chapter 3, section 3-1, paragraph F (Criteria 17)




                                            33
Case number: 181-1998771                Insured amount: $117,638

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 17th payment

Date of loan closing: May 23, 2003      Underwriter type: Manual


Unsupported Assets
The lender did not adequately evaluate the source of assets available when it approved the loan.
According to the mortgage credit analysis worksheet, the borrower needed $7,256 to close the
loan and had $7,343 in assets available. A May 20, 2003, verification of deposit confirmed that
the borrower had $7,343 available, but the average balance for the previous two months was only
$1,191. The lender obtained no bank statement(s) to support the balance, and the April 22, 2003,
bank statement showed only $590 available. Without bank statements, the lender could not
review for the source of the $6,000 increase from the account average.

The loan file also contained an account statement from another institution, which showed a
balance of $3,420 as of March 31, 2003. The loan file also contained a May 12, 2003,
withdrawal slip on this account showing a withdrawal for $3,482 and an ending balance of $25.
Even if the $3,482 withdrawal was transferred to the first account described above, the transfer
does not explain the $6,000 increase from the average balance.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-10 (Criteria 10)

Underreported Liabilities
The lender did not consider all recurring debts when approving the loan. The credit report
showed a 60-month car loan opened in July 1999, which would not mature until June 2004—
more than a year after the Federal Housing Administration loan closing of May 23, 2003. The
monthly payment of $638 was excluded from the liabilities on the mortgage credit analysis
worksheet and loan application. Even though the loan appeared to pay off in eight months, this
significant debt could have affected the borrower’s ability to repay the mortgage in the months
immediately following closing. The credit report also showed 20 late payments on the auto loan
in the 46 months reviewed, so timely pay off within eight months is questionable.

The loan file also contained a supplement to the credit report that showed a debt of $399, with a
monthly payment of $10, that the lender excluded from liabilities. In addition, the borrower’s
bank statements showed a March 28, 2003, signature loan (identified as “new loan”) for $1,500.
This could indicate an unreported liability. See below for the effect on the financial ratios.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph A (Criteria 13)




                                            34
Derogatory Credit/Open Judgment
The lender did not adequately evaluate the borrowers’ credit history. In addition to the 20 late
payments on an auto loan, the credit report reflected two student loans sent to collections and a
college-related judgment for $1,664. According to the credit report, the status of the judgment
was unknown. The credit report also showed 70 inquiries on the borrower’s credit in the
previous 12 months. The loan file contained no explanation for the derogatory credit or whether
the judgment was resolved.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-3 (Criteria 5)

Unsupported Income
Base pay is overstated by $269 per month. The mortgage credit analysis worksheet reflected a
base pay rate for the coborrower of $2,080. The verification of employment and the pay stubs
supported only $1,811 per month in base pay.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2 (Criteria 4)

Excessive Ratios
The total debt ratio on the mortgage credit analysis worksheet was 28.8 percent. When including
the underreported liabilities and using only the supported income, the debt ratio increases to 42.3
percent, which exceeds HUD’s limit. In addition, the housing expense was increasing from $465
per month to $1,213 per month, or 261 percent.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-12 (Criteria 15)




                                            35
Case number: 181-2012858                 Insured amount: $63,995

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 4th payment

Date of loan closing: July 1, 2003       Current status:
                                             First legal action to commence foreclosure
                                             (August 1, 2005)
Underwriter type: Manual

Unsupported Income
The lender did not verify a two-year work history for the borrower. The 18-year-old borrower
had established only a one year work history. The work history began in May 2002, with the
borrower working part time. An underwriter noted that the borrower started working full time in
May 2003, just two months before the Federal Housing Administration loan closing.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2 (Criteria 4)
Handbook 4155.1, REV-4, chapter 2, section 2-6 (Criteria 7)

Questionable Gift Funds
The lender did not adequately evaluate the source of the gift funds used to qualify for the loan.
A gift letter stated the donor was giving $1,500 to the borrower; however, the donor’s bank
statement did not show sufficient funds to gift the $1,500. The loan file contained copies of
money orders, made out to the title company, to document the gift to the borrower. The money
orders were for the same date (June 26, 2003) as a $1,800 withdrawal from the donor’s bank
account. However, the donor’s bank statement did not indicate a history of having the funds to
provide $1,500. There was an unexplained deposit on June 20, 2003, for $2,000, which appears
to have been used to purchase the money orders for the gift funds. Therefore, the source of gift
funds is questionable.

In addition, the gift was not shown on the HUD-1 settlement statement. The borrower paid
$1,563 at closing, but the loan file did not show that the borrower had the funds to close the loan
(also see Unsupported Assets below).

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-10, paragraph C (Criteria 12)

Unsupported Assets
The lender did not verify borrower assets needed to close the loan. The HUD-1 settlement
statement indicated the borrower paid $1,563 at closing. Bank statements and a verification of
deposit confirmed a balance of only $486, an amount insufficient to close the loan.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-10 (Criteria 10)




                                            36
Case number: 181-2021633                 Insured amount: $43,645

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 9th payment

Date of loan closing:                    Current status:
   November 20, 2003                       Foreclosure started (August 1, 2005)

Underwriter type: Automated

Unsupported Income
The lender overstated income when approving the loan. The lender used $3,767 on the mortgage
credit analysis worksheet to qualify the borrower, but the verification of employment and recent
pay stub supported only $3,500 per month.

The lender derived the $3,767 per month from the year-to-date gross income of $27,461 on the
borrower’s pay stub for pay period ending August 9, 2003. Using the lender’s method yielded
$267 more income per month than supported by the verification of employment and pay stubs.
The employer noted on the verification of employment that overtime and bonuses were not
applicable. Overstating the income by $267 per month causes the total debt ratio to increase to
51.7 percent.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2 (Criteria 4)
Handbook 4155.1, REV-4, chapter 2, section 2-12 (Criteria 15)
Mortgagee Letter 98-14 (Criteria 33)
Freddie Mac’s Loan Prospector Automated Underwriting Service Training and Users Guide,
   section 2 (Criteria 37)

Unallowable Charges
The lender charged the borrower a prohibited closing fee. The HUD-1 settlement statement
showed a $275 commitment fee paid by the borrower. There was no written agreement in the
file that served as an interest rate lock-in/loan discount points agreement. Without the written
agreement, there was no evidence that the lender made the commitment to the borrower and
properly charged the borrower the commitment fee.

HUD Requirements – Appendix C
HUD Homeownership Center Reference Guide, chapter 2, Mortgage Credit Guidelines, page 2-
  15, “Closing Costs and Other Fees,” (Criteria 38)




                                            37
Case number: 182-0734198                Insured amount: $145,847

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 7th payment

Date of loan closing:                   Current status: Paid in full (August 1, 2005)
   February 20, 2003

Underwriter type: Manual

Unsupported Assets
The lender did not adequately support assets available to the borrower when approving the loan.
According to the mortgage credit analysis worksheet, the borrower needed $7,921 to close the
loan and had $14,800 in assets available. A verification of deposit showed $8,109 available as of
February 18, 2003. A copy of an $8,000 check, dated February 14, 2003, from the borrower’s
mother to the borrower was used to support the claim that the borrower sold a truck to his mother
for $8,000. The lender did not obtain bank statements to confirm that the sale of the truck was
the source of the $8,109 in the borrower’s bank account. According to the HUD-1 settlement
statement, the borrower paid $5,690 at closing.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-10 (Criteria 10)
Handbook 4155.1, REV-4, chapter 2, section 2-10, paragraph B (Criteria 11)

Excessive Ratios
The lender identified invalid compensating factors when approving the loan with financial ratios
that exceeded HUD’s limits. Ratios on the mortgage credit analysis worksheet were 30.21
percent and 50.31 percent, both of which exceeded HUD’s guidelines. The compensating factor
on the mortgage credit analysis worksheet stated, “borrower has shown ability to save.” The
compensating factor was invalid because the lender did not obtain bank statements to confirm the
source of funds verified, and the potential source of the funds (the sale of the borrower’s truck)
does not demonstrate the borrower’s ability to save.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, section 2-12 (Criteria 15)

Underreported Liabilities
The lender did not consider all recurring liabilities when evaluating the borrower’s ability to
repay the mortgage. The lender’s loan file contained a $3,000 promissory note between the
borrower and the borrower’s bank. The balloon loan began in December 2002, and was due in
June 2003, four months after the Federal Housing Administration loan closing. Although the
loan was to be paid off in less than 10 months after the mortgage closing, the large amount due
four months after the mortgage closing ($3,000) could have caused a financial hardship for the
borrower, making it difficult to make future mortgage payments, and should have been
considered by the lender.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph A (Criteria 13)
Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph C (Criteria 14)


                                           38
Case number: 182-0760589                Insured amount: $177,523

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 5th payment

Date of loan closing:                   Underwriter type: Manual
   October 13, 2003

Unsupported Income and Excessive Ratios
The lender overstated the borrower’s monthly income when it used income from a previous job
instead of the job held during processing of the loan. The mortgage credit analysis worksheet
showed the lender used $6,193 per month to qualify the borrower. However, the $6,193 was
computed using the borrower’s previous employment that ended before July 28, 2003, almost
three months before the loan was closed. The borrower began new employment during the loan
approval process. The borrower’s verification of employment and pay stub from the new
employer showed a $65,000 salary, or $5,416 per month. As a result, the base employment
income was overstated by $777 per month. Using the supported monthly income of $5,416, the
total debt ratio increases from 42.9 percent shown on the mortgage credit analysis worksheet to
49.2 percent. The lender was aware of, but did not take into account, the significant decrease in
employment income.

The lender identified compensating factors of “borrower has good job stability and lowering
housing,” to justify the loan approval. Job stability is not a valid compensating factor when
income decreases significantly. The housing payment was decreasing from $1,838 per month to
$1,475 per month ($363 decline), but the decline was not sufficient to offset the overstated
income and the excessive total debt ratio of 49.2 percent.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2 (Criteria 4)
Handbook 4155.1, REV-4, chapter 2, section 2-12 (Criteria 15)

Unsupported Assets
The borrower paid fees outside of closing and at closing, but the lender did not verify that the
borrower had the funds available or that the funds were from another allowable source. The
mortgage credit analysis worksheet showed that the borrower did not need cash to close the loan.
The borrower identified $1,200 in bank assets on the loan application, but the lender did not
obtain a verification of deposit or bank statements to verify assets available to the borrower.
However, the HUD-1 settlement statement showed several fees were paid outside of closing, and
the borrower paid $801 at closing, showing that the borrower needed cash assets to close the
loan.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-10 (Criteria 10)




                                            39
Case number: 182-0771581                Insured amount: $165,404

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 1st payment

Date of loan closing:                   Underwriter type: Manual
   January 27, 2004

Unsupported Income
The lender did not adequately support the monthly income claimed when approving the loan.
The lender used a monthly income of $5,307 to qualify the borrower. The verification of
employment stated the borrower’s salary was $63,681 ($5,307 per month) as of January 11,
2004. The borrower did not provide pay stubs. The verification of employment indicated the
borrower recently received a pay increase to $63,681 that would be reflected in February 2004,
after the loan closed. The borrower worked for a federal agency and the federal pay tables
(general schedule and locality) did not show a salary of $63,681 for the borrower’s metropolitan
area. The schedules also did not show the expected pay increase salary of $65,617. The Internal
Revenue Service Forms W-2 for 2002 and 2003 show that the borrower’s income decreased from
$4,556 in 2002 to $4,161 in 2003, but the lender did not explain the decrease. Conversely, the
borrower’s income increased significantly from 2003 to 2004, just before the loan closing. The
borrower’s monthly income increased from $4,161 in 2003 to $5,307 in January 2004, with no
explanation documented in the loan file.

Using the monthly income from the 2003 Internal Revenue Service Form W-2, which was within
two weeks of the underwriting of the loan, the ratios increase and far exceed HUD’s guidelines.
The housing ratio increases from 24.4 percent to 31.07 percent, and the total debt ratio increases
from 44.6 percent to 56.91 percent.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-6 (Criteria 22)
Handbook 4155.1, REV-5, chapter 2, section 2-12 (Criteria 29)
Handbook 4155.1, REV-5, chapter 2, section 2-13 (Criteria 30)
Handbook 4155.1, REV-5, chapter 3, section 3-1 (Criteria 31)

Underreported Liabilities
The lender omitted a significant monthly mortgage debt when evaluating the borrower’s ability
to repay the mortgage. The borrower’s credit report showed a mortgage debt of $1,182 per
month, with a balance of $111,114. The lender did not include the debt in the financial ratios,
nor did the underwriter or borrower explain why it was not included. The borrower’s divorce
decree awarded the related residence to the ex-spouse but did not indicate who was responsible
for the mortgage payment. It is unclear whether the lender should have included (or excluded)
the $1,182 mortgage payment in the borrower’s loan evaluation.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-3, paragraph A (Criteria 20)
Handbook 4155.1, REV-5, chapter 2, section 2-3, paragraph B (Criteria 21)




                                            40
Case number: 182-0783328                 Insured amount: $93,532

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 4th payment

Date of loan closing: June 30, 2004      Current status:
                                           First legal action to commence foreclosure
Underwriter type: Manual                   (July 1, 2005)
                                           Preforeclosure acceptance plan available
                                           (August 1, 2005)

Underreported Liabilities
The mortgage credit analysis worksheet showed the underwriter included no recurring liabilities,
other than the housing payment, in calculating the borrower’s financial ratios. However, the
borrower was likely responsible for monthly child support and auto loan payments. An October
2000 to June 2004 history confirmed child support payments of $162 per month. The borrower’s
pay stub of May 14, 2004, also confirmed that the borrower’s wages were garnished for child
support of $81 per biweekly pay period.

In addition, the borrower’s credit report showed a $366 monthly payment for an auto loan. Even
though the auto debt had less than 10 months remaining to be paid, the $366 payment
substantially affected the borrower’s ability to repay the mortgage in the months immediately
following the loan closing and should have been included in the financial ratios. The borrower
provided a letter to the lender stating that he returned the vehicle to a loan company that
appeared to be related to the $366 per month debt, but the debt remained on the credit report, and
the lender did not verify that the debt was no longer owed.

The mortgage credit analysis worksheet indicated a 35 percent housing ratio, and a 35 percent
total debt ratio. Considering the child support and auto loan the total debt ratio should have been
58.4 percent, which far exceeds HUD’s limit of 41 percent.

Further, the underwriter underestimated the monthly hazard insurance cost on the mortgage
credit analysis worksheet when calculating the housing payment. According to the HUD-1
settlement statement, the insurance escrow was $129 per month ($79 more than estimated).
Using the $129 per month, the housing payment increases from $805 per month to $884 per
month. This further increases the financial ratios to a housing ratio of 38.3 percent and the total
debt ratio becomes 61.9 percent.

The lender noted on the mortgage credit analysis worksheet that the borrower had a few late
payments while off work due to an illness but that he had since been on time with payments.
This is not a compensating factor justifying excessive financial ratios. The lender also noted that
the borrower’s housing expense was not increasing, but this was an invalid compensating factor.
The mortgage credit analysis worksheet and loan application showed that the borrower was
paying $550 per month in rent. The borrower’s new housing expense was to be $805 per month,
a $255 per month increase using the lender’s housing payment or a $333 per month increase
using the actual monthly cost of hazard insurance. Further, the borrower had no reserves,
claiming only $4 in cash assets.




                                             41
HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-11 paragraph A (Criteria 27)
Handbook 4155.1, REV-5, chapter 2, section 2-12 (Criteria 29)
Handbook 4155.1, REV-5, chapter 2, section 2-13 (Criteria 30)

Questionable Employment History
The lender did not verify a two-year work history or explain a six-month gap in employment.
The borrower’s application stated the borrower worked at employer A from January 1999
through January 2003, then worked for employer B for 1.5 years, as of June 30, 2004 (which
indicates a start date of January 2003). The verification of employment for employer B showed
that the borrower did not start employment until July 28, 2003. Therefore, there was no
documentation supporting employment between February 2003 and July 27, 2003.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-6 (Criteria 22)




                                          42
Case number: 291-3089848                 Insured amount: $81,216

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 3rd payment

Date of loan closing: April 3, 2003      Underwriter type: Manual


Unsupported Income
The lender overstated monthly income by $400 per month when approving the loan. The lender
used $3,508 in monthly income to qualify the borrowers. The lender calculated the borrower’s
$2,252 monthly income using the yearly earnings from 2001 and 2002 and the year-to-date
income as of January 15, 2003. However, the borrower’s verification of employment showed a
$4,972 (17 percent) decrease in income from 2001 through 2002. Averaging the two years of
income when income significantly decreased overstated the monthly income for qualifying
purposes. Using only the income from 2002 and year-to-date 2003, the average monthly income
is $2,046, or $206 per month less than the amount used to qualify the borrower.

In addition, the lender used the hourly rate and a full-time schedule of 40 hours per week to
compute the coborrower’s $1,256 monthly income. The verification of employment stated that
the coborrower worked only 34 hours per week, and it did not address the likelihood of the
continuance of commission income. The coborrower showed evidence of receiving commissions
for about six months, but the lender did not use commissions earned in computing the income.
However, the coborrower did not have a history of two years of commission income. Based on
the verification of employment, the coborrower’s supported income was $1,062 per month, or
$194 less than the amount used to qualify.

Using only the supported income of $3,108 per month, the total debt ratio increases above
HUD’s guidelines. According to the lender’s calculations, the total debt ratio was 40.29 percent,
but should have been 45.46 percent. The revised total debt ratio of 45.46 percent does not
consider potential underreported liabilities (see below).

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2 (Criteria 4)
Handbook 4155.1, REV-4, chapter 2, section 2-7, paragraph A (Criteria 8)
Handbook 4155.1, REV-4, chapter 2, section 2-12 (Criteria 15)

Underreported Liabilities
The lender did not adequately identify recurring liabilities considered when approving the loan.
The borrower’s loan application, mortgage credit analysis worksheet, and credit report listed
different amounts for total recurring liabilities. It is unclear what the underwriter included as
recurring liabilities in the $797 per month used to qualify the borrowers. Also, education loans
appeared on the credit report, but it is unclear whether the lender included any of these loans in
evaluating debts. The credit report indicated that the loans were in deferment but did not
indicate when repayment was to begin. There were no documents in the loan file stating when
the borrower must begin repayment.

An underwriter note on the mortgage credit analysis worksheet stated, “auto less than 10
months,” which indicates that the underwriter did not include the borrower’s $343 monthly auto


                                            43
debt in the recurring liabilities. However, the outstanding balance of the auto debt was 10.4
months of payments owed. The $343 auto payment significantly affected the borrower’s ability
to make the mortgage payments during the months immediately after loan closing. When
including the auto payment, the borrowers’ debt ratio increases to 56.5 percent. The borrowers’
reserves were minimal - only $375. The lender did not identify compensating factors.

The coborrower may have had a recurring housing expense that the lender did not consider in the
financial ratios. The coborrower indicated on the loan application that she would not be
occupying the subject property. The coborrower did not appear on any loan documents
processed in January and February 2003 but initially appeared in March 2003 on an addendum to
add the coborrower to the sales contract. If the coborrower was a nonoccupying owner, then her
personal housing expense should have been included in the liabilities.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph A (Criteria 13)
Handbook 4155.1, REV-4, chapter 2, section 2-11, paragraph C (Criteria 14)

Unsupported Assets
The lender did not use current borrower financial information when approving the loan. The
lender listed assets available of $2,794 on the mortgage credit analysis worksheet. The
coborrower had an individual retirement account that contained $3,872, but the statement was
from March 2002, which was not within 120 days of closing as required. In addition, the
coborrower’s bank account of $96 was not allowable because the bank statement was from
February 2002, a year before closing. The lender adequately supported only $375 in assets
available. The borrowers needed only $122 in cash to close the loan, which is supported, but the
unsupported assets claimed significantly affected the lender’s calculated reserves of $2,785.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2 section 2-12 (Criteria 15)
Handbook 4155.1, REV-4, chapter 2 section 2-13 (Criteria 16)
Handbook 4155.1, REV-4, chapter 3, section 3-1 (Criteria 17)
Handbook 4155.1, REV-4, chapter 3, section 3-1, paragraph F (Criteria 18)




                                           44
Case number: 291-3092637                Insured amount: $97,727

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 4th payment

Date of loan closing: May 7, 2003       Current Status:
                                          First legal action to commence foreclosure
                                          (July 1, 2005)

HUD costs incurred:                     Underwriter type: Manual
  Partial claim of $7,140

Unsupported Income
The lender overstated income when approving the loan. The lender approved the loan with the
borrower’s income at $2,037 per month on the mortgage credit analysis worksheet. According to
the verification of employment, the borrower’s income was $1,946 per month, including
overtime. If all borrower income for 2001, 2002, and year to date 2003 is averaged, it equals
$1,868 per month.

Using the verification of employment information, the lender overstated income by $91 per
month. The reduced income increases the housing ratio from 28.65 percent to 29.7 percent and
the total debt ratio from 43.96 percent to 45.5 percent. These ratios exceed HUD’s limits. There
were no compensating factors listed on the mortgage credit analysis worksheet. The borrowers
had no cash assets and had negative reserves. All funds needed to close the loan were from a
nonprofit gift and seller concessions. Also, the borrower’s housing expenses were increasing
significantly, from $225 per month to $787 per month.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2 (Criteria 4)
Handbook 4155.1, REV-4, chapter 2, section 2-12 (Criteria 15)




                                           45
Case number: 291-3183919                  Insured amount: $103,274

Section of Housing Act: 203(b)            Status upon selection: Defaulted on 6th payment

Date of loan closing:                     HUD costs incurred: Loan modification of $1,000
   September 12, 2003

Underwriter type: Manual

Underreported Liabilities
The lender underreported recurring liabilities. It did not include a $14,356 auto loan shown on
the credit report. The $347 monthly payment significantly affected the financial ratios. The
borrower’s bank statements from March 2003 through August 2003 supported payments made to
the auto loan creditor. In addition, according to the mortgage credit analysis worksheet, the
housing payment was to be $794 per month (including an estimate of $75 per month for taxes).
However, the lender significantly underestimated monthly tax payments. The HUD-1 settlement
statement showed that taxes from January 1 to September 12, 2003, were $1,216, or $146 per
month.

The financial ratios significantly increase when all liabilities are included. The financial ratios,
according to the mortgage credit analysis worksheet, were 28.7 percent and 31.7 percent. When
including the auto loan and using the correct housing payment, the ratios are 32.6 percent and
48.2 percent, which exceed HUD’s ratio limits of 29 percent and 41 percent.

The underwriter noted a compensating factor of “borrower has good job stability with
retirement.” A retirement statement, dated June 30, 2003, showed the borrower had $5,646 in
retirement funds available. Using only 60 percent of the balance would provide the borrower
with three months of housing payments, which was not sufficient to offset the excessive total
debt ratio.

HUD Requirements – Appendix C
Handbook 4000.4, REV-1, CHG-2, chapter 2 section 2-5 (Criteria 3)
Handbook 4155.1, REV-4, chapter 2 section 2-3, paragraph B (Criteria 6)
Handbook 4155.1, REV-4, chapter 2 section 2-12 (Criteria 15)
Handbook 4155.1, REV-4, chapter 2 section 2-13 (Criteria 16)
Mortgagee Letter 00-28 (Criteria 35)




                                             46
Case number: 291-3224520                 Insured amount: $65,964

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 7th payment

Date of loan closing:                    HUD costs incurred: Partial claim of $9,113
   December 18, 2003

Underwriter type: Manual

Unsupported Income
The lender overstated income by $434 per month. The lender used a monthly income of $2,184
to qualify the borrower ($1,983 base pay + $201 other income). The base pay of $1,983 came
from a verification of employment showing the borrower made $11.44 per hour on a full-time
basis. However, the calculated base pay was not consistent with the year-to-date earnings on the
pay stubs, nor did the borrower have a history of earning $1,983 per month. The most recent pay
stub, dated November 14, 2003, was approximately six weeks before closing and provided the
most current monthly income of $1,750. The borrower’s 2002 income was only $1,395 per
month.

The lender also included $201 in bonuses per month in monthly income. The year-to-date wages
of $18,372 as of November 14, 2003, included all overtime and bonuses for 2003. Therefore, the
most recent monthly average of $1,750 (including overtime and bonuses) was already less than
the lender’s calculated base pay of $1,983, before adding $201 per month in bonus income.
Further, the verification of employment showed the borrower worked an average of 46 hours per
week, but the six pay stubs for the pay periods immediately before closing averaged only 42.47
hours per week. The pay stubs also did not support the full-time (40 hours) pay of $1,983 per
month.

The borrower’s ratios, according to the mortgage credit analysis worksheet, were 24.3 percent
for a housing ratio and 43 percent for a total debt ratio. The borrower’s actual ratios were 30.5
percent and 53.7 percent for the housing and total debt ratio respectively. The underwriter noted
the following compensating factors:
    • “Good employment” - This is not a valid compensating factor as the borrower’s work
        history does not support a steady or reliable income.
    • “Good verification of rent” - This is not sufficient to offset the correct debt ratio of 53.7
        percent.
    • “Not increasing housing over 125 percent” - This is incorrect because current housing is
        $400 per month and a 125 percent increase is $500. The borrower’s housing expenses
        are actually increasing by 133 percent. A 33 percent increase in housing expenses is not
        minimal, making this an invalid compensating factor.

HUD Requirements – Appendix C
Handbook 4155.1, REV-4, chapter 2, section 2 (Criteria 4)
Handbook 4155.1, REV-4, chapter 2, section 2-12 (Criteria 15)
Handbook 4155.1, REV-4, chapter 2, section 2-13 (Criteria 16)




                                            47
Case number: 291-3226284                 Insured amount: $63,995

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 8th payment

Date of loan closing: March 19, 2004 Current status:
                                       First legal action to commence foreclosure
                                       (August 1, 2005)
Underwriter type: Manual

Unsupported Assets
The lender did not verify all funds needed to close the loan. The mortgage credit analysis
worksheet showed that the borrower needed $1,976 to close the loan, but a nonprofit gift was to
cover nearly all required closing costs. However, the HUD-1 settlement statement showed that
the borrower paid $1,091 in personal funds (in addition to the nonprofit gift). The mortgage
credit analysis worksheet showed the borrower had personal assets of $654. The borrower’s
bank statements of February 29, 2004, showed an ending balance of $1,145, but there was an
unexplained deposit of $1,000 on February 27, 2004. The daily balances on the bank statements
did not support a history of the borrower having adequate funds to close the loan with personal
assets. Without an acceptable explanation of the large deposit, the lender could not be assured
that the funds came from an allowable source.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10 (Criteria 24)
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph B (Criteria 25)

Questionable Credit History
The lender approved the loan even though the borrower had a questionable credit history. The
borrower had insufficient credit for the credit agencies to report a credit score. The borrower’s
credit report listed only derogatory accounts for utilities and one judgment from a previous
landlord. The judgment was paid off at closing. The lender obtained a letter of credit from the
borrower’s life insurance company; however, no payment history was provided to show timely
payment of premiums. The lender also obtained a history of rental payments, which supported
rent payments of $300 per month, but the borrower claimed rental costs of $460 per month on
the loan application. Using the rental history of $300 per month, the borrower’s monthly
housing expense was increasing by 73 percent to $518 per month.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-3 (Criteria 19)

Unallowable Charges
The HUD-1 settlement statement reflects an underwriting fee of $214. This fee is prohibited.

HUD Requirements – Appendix C
Handbook 4000.4, REV-1, CHG-2, chapter 1, section 1-11 (Criteria 2)




                                            48
Case number: 291-3232527                 Insured amount: $82,702

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 9th payment

Date of loan closing:                    Current status:
   January 23, 2004                        First legal action to commence foreclosure
                                           (August 1, 2005)
Underwriter type: Automated

Unsupported Income
The lender overstated income by $108 per month. The borrower was paid twice monthly, and
the earnings on two consecutive pay stubs (check dates of December 15, 2003, and December
31, 2003) were $1,589 per pay period. This equates to an annual salary of $38,136 and a
monthly salary of $3,178. The lender used monthly income of $3,286 to qualify the borrower. It
is unclear how the lender calculated the $3,286 per month. The last paycheck for the year (dated
December 31, 2003) showed gross pay of $37,799, which is $3,150 per month. At most, the
borrower’s supported monthly income was $3,178 per month.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-6 (Criteria 22)

Unsupported Assets
The Desktop Underwriter automated approval findings report reflected assets of $12,448 used to
evaluate the borrower for loan approval, but the lender did not adequately support the assets. Of
the $12,448, only $7,027 was verified. The lender adequately verified two stock accounts of
$4,989 and $1,895 but verified only $143 of $200 claimed in the borrower’s bank account. The
remaining $5,364 in stock funds was not adequately verified because the account statement was
not current. The statement was dated June 30, 2003, and the loan closed more than six months
later on January 23, 2004.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph B (Criteria 25)
Handbook 4155.1, REV-5, chapter 3, section 3-1 (Criteria 31)

Underreported Liabilities
The lender did not consider all recurring liabilities when gaining loan approval from an
automated system. The Desktop Underwriter finding report showed monthly obligations of $721
used to approve the borrower. The lender excluded a $400 debt with a monthly payment of $52.
Because the debt had more than nine payments left before it is paid off, it could have affected the
borrower’s ability to repay the mortgage in the months immediately following the loan closing.
This is especially true considering the $175 (39 percent) monthly increase in the housing
expense.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-3, paragraph A (Criteria 20)
Handbook 4155.1, REV-5, chapter 2, section 2-11, paragraph A (Criteria 27)
Mortgagee Letter 99-26 (Criteria 34)



                                            49
Desktop Underwriter Government Underwriter Service User’s Guide for Federal Housing
   Administration Loans, dated July 2002, chapter 2, paragraph 3 (Criteria 36)

Excessive Ratios
The total debt ratio, according to the mortgage credit analysis worksheet, was 42.55 percent.
Using only supported income of $3,178 per month, and including the $52 monthly payment, the
total debt ratio becomes 44 percent, which exceeds HUD’s limit of 41 percent.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-12 (Criteria 29)
Handbook 4155.1, REV-5, chapter 2, section 2-13 (Criteria 30)

Questionable Credit History (subsequent to bankruptcy)
The lender used rental payments to establish credit history, but the rental receipts reflect
sporadic/late payments. Also, the borrower’s housing expenses were increasing from $450 per
month to $625 per month (39 percent).

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-3, paragraph A (Criteria 20)




                                          50
Case number: 291-3241230                 Insured amount: $89,294

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 7th payment

Date of loan closing:                    Underwriter type: Manual
   February 27, 2004


Questionable Gift Funds
The lender did not adequately verify gift funds used to close the loan. The HUD-1 settlement
statement reflected gift funds to the borrower of $4,050. However, the gift letter indicated a gift
of $4,500 ($450 more), as did a canceled check from the donor. As evidence that the donor
could provide the gift funds, the donor’s bank provided a letter stating the bank account was
sufficient for the donor’s check to clear the account, as of February 11, 2004, but the bank did
not provide a bank statement or activity report showing account activity. Therefore, the lender
did not verify that the donor had a history of funds sufficient to provide the gift, and that the
funds did not come from an unallowable source.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph C (Criteria 26)

Questionable Employment History
The lender did not verify a two-year work history for the coborrower. The verification of
employment, dated February 24, 2004, showed that the coborrower had been employed for six
months at that time (indicating a hire date in August 2003). According to the loan application,
the previous job ended on September 19, 2002. One year of gaps in employment history was not
explained: two months from April 2002 through May 2002 and 10 months from October 2002
through July 2003. The loan application indicated that the coborrower may have been a student
from August 1999 through May 2003, but the lender did not verify that the borrower was a
student by obtaining transcripts or other acceptable evidence.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-6 (Criteria 22)

Unallowable Charges
According to the HUD-1 settlement statement, the borrower was charged the following
prohibited fees, totaling $845:
       • Tax service fee        $75
       • Courier fee            $25
       • Underwriting fee       $395
       • Commitment fee         $350

The loan was not a refinance loan, and the loan file did not contain a written agreement serving
as the interest rate lock-in/loan discount points agreement. Without the written agreement, there
is no evidence that the lender made the commitment for a guaranteed interest rate and/or
discount points for a certain period of time and properly charged the commitment fee.




                                            51
HUD Requirements – Appendix C
Handbook 4000.2, chapter 5, section 5-2, paragraph O (Criteria 1)
Handbook 4000.4, REV-11, CHG-2, chapter 1, section 1-11 (Criteria 2)
Handbook 4330.1, REV-5, chapter 4, section 4-12, paragraph B (Criteria 32)
HUD Homeownership Center Reference Guide, chapter 2, Mortgage Credit Guidelines, page 2-
   15, “Closing Costs and Other Fees,” (Criteria 38)




                                        52
Case number: 291-3245514                Insured amount: $90,074

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 8th payment

Date of loan closing: March 26, 2004 Underwriter type: Manual


Unsupported Assets
The lender did not verify that the borrower had sufficient funds to close the loan. The lender
estimated the funds needed to close at $3,396. The mortgage credit analysis worksheet identified
an expected nonprofit gift of $2,802 and borrower personal assets of $1,812. The verification of
deposit for the borrower’s bank account supported assets of only $202 and an average balance
over the prior 60 days of only $107. The lender did not obtain borrower bank statements.
Without bank statements, the lender could not review for large unexplained deposits.

The HUD-1 settlement statement showed a nonprofit gift of $2,802 and indicated the borrower
paid $2,601 in personal funds to close the loan. The borrower had also paid a $500 earnest
deposit. A loan application in the lender’s loan file indicated the borrower received an insurance
settlement of $4,000. However, there was no documentation to support receipt of the funds, or
the availability of the funds used to pay closing costs. Therefore, the lender did not verify the
source of borrower funds paid on the loan.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10 (Criteria 24)
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph B (Criteria 25)

Excessive Ratios
The lender approved the loan with an invalid compensating factor when the borrower’s total debt
ratio exceeded HUD’s limit of 41 percent. The lender calculated the total debt ratio at 43.23
percent. The only compensating factor identified was “not increased housing.” The lender did
not identify the present housing cost or obtain evidence that the borrower was previously
incurring a housing expense. Further, the credit report did not identify a landlord or indicate
payment of rent. The lack of a current housing expense makes the compensating factor invalid.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-12 (Criteria 29)
Handbook 4155.1, REV-5, chapter 2, section 2-13 (Criteria 30)

Derogatory Credit
The lender approved the loan even though the borrower had defaulted on significant debts in the
year before the loan closed. The borrower’s credit report showed three large accounts (totaling
$3,500) charged off in the previous year.

HUD Requirements – Appendix C
Handbook 4155.1 REV-5, CHG-1, chapter 2, section 2-3 (Criteria 19)




                                            53
Case number: 291-3248743                Insured amount: $129,862

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 3rd payment

Date of loan closing: March 12, 2004 Current status:
                                       First legal action to commence foreclosure
                                       (August 1, 2005)
Underwriter type: Manual

Unsupported Income
The lender did not adequately support the income claimed to qualify the borrower. The only
support for the borrower’s income was a verification of employment. The file did not include
pay stubs, Internal Revenue Service Forms W-2, or tax returns to validate the information on the
verification of employment.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 3, section 3-1 (Criteria 31)

Unsupported Assets
The lender did not verify that borrower assets needed to close the loan were from an allowable
source. The mortgage credit analysis worksheet showed that at the time of loan approval, the
borrower needed $4,279 to close the loan. The borrower expected a nonprofit gift of $3,957;
therefore, the lender needed to verify at least $322 in personal assets. The borrower claimed
assets of $1,552, and the lender obtained a verification of deposit that supported the assets.
However, the lender did not obtain bank statements to review for unexplained deposits that could
have indicated assets obtained from an unallowable source.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10 paragraph B (Criteria 25)

Unallowable Charges
The HUD-1 settlement statement showed that the borrower was charged $395 for an
underwriting fee and $75 for a tax service fee. Neither of these fees is allowed.

HUD Requirements – Appendix C
Handbook 4000.4, REV-11, CHG-2, chapter 1, section 1-11 (Criteria 2)
Handbook 4330.1, REV-5, chapter 4, section 4-12 paragraph B (Criteria 32)
HUD Homeownership Center Reference Guide, chapter 2, Mortgage Credit Guidelines, page 2-
   15, “Closing Costs and Other Fees,” (Criteria 38)




                                           54
Case number: 291-3264571                Insured amount: $155,312

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 4th payment

Date of loan closing: July 7, 2004      Underwriter type: Automated


Unsupported Income
The lender overstated the borrower’s employment income by $689 per month and did not verify
that $637 in monthly rental income was likely to continue in the months following the loan
closing. The mortgage credit analysis worksheet showed monthly income of $4,117 was used to
qualify the borrower. The borrower claimed $3,480 in monthly employment income, but the
lender did not support this amount. Using 2004 year to date income from the verification of
employment, the borrower’s monthly income was $3,380. Using the hourly wage income from
the verification of employment and pay stubs, the monthly income was $3,369. Averaging the
16.25 months of 2003 through May 6, 2004, the monthly income was $3,429. Averaging the
2003 and 2004 income is the most prudent way to calculate the income. Therefore, employment
income was overstated by $689.

The loan was for a two unit dwelling and the borrower planned to live in one of the units and rent
the other unit. The lender qualified the borrower by using rental income of $637 per month in
addition to the borrower’s employment income. The lender’s loan file contained a lease
agreement for one unit, but the lease was to expire within 60 days of the loan closing, and there
was no indication that the renter was renewing the lease.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-6 (Criteria 22)
Handbook 4155.1, REV-5, chapter 2, section 2-7 (Criteria 23)
Handbook 4155.1, REV-5, chapter 3, section 3-1 (Criteria 31)
Mortgagee Letter 99-26 (Criteria 34)
Desktop Underwriter Government Underwriter Service User’s Guide for Federal Housing
   Administration Loans, dated July 2002, chapter 2, paragraph 3 (Criteria 36)

Underreported Liabilities
The lender did not include a $205 auto loan in the borrower’s liabilities, but the borrower
disclosed the debt on the loan application, and the debt appeared on his credit reports. The auto
loan had a balance of $5,639, which was more than 10 months of payments. The lender
indicated in the automated underwriting system used to gain loan approval that the auto loan
would be paid off before the loan closed, but there was no documentation in the file verifying the
payoff, nor was there evidence on the HUD-1 settlement statement that the loan was paid off at
closing.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-3, paragraph A (Criteria 20)
Handbook 4155.1, REV-5, chapter 2, section 2-11, paragraph A (Criteria 27)
Mortgagee Letter 99-26 (Criteria 34)
Desktop Underwriter Government Underwriter Service User’s Guide for Federal Housing
   Administration Loans, dated July 2002, chapter 2, paragraph 3 (Criteria 36)


                                            55
Excessive Ratios
The overstated income and the underreported liabilities significantly affect the ratios.
Recognizing only supported income and all applicable liabilities causes housing and total debt
ratios of 33.69 percent and 57.22 percent respectively, which far exceed HUD’s limits of 29
percent and 41 percent.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-12 (Criteria 29)
Handbook 4155.1, REV-5, chapter 2, section 2-13 (Criteria 30)




                                           56
Case number: 291-3270679                 Insured amount: $168,430

Section of Housing Act: 203(b)           Status upon selection: Defaulted on 1st payment

Date of loan closing: May 3, 2004        HUD costs incurred:
                                          Acquisition costs of $175,328. Property has not
                                          yet been sold (as of September 2005).
Underwriter type: Manual

Unsupported Assets
The lender did not verify the source of funds used to pay off significant debts before the loan
closing. On April 30, 2004, just before the loan closed, the borrowers paid $2,442 to three
creditors to settle credit accounts in collection status. Neither the loan application nor the
mortgage credit analysis worksheet identified funds available to the borrowers. Instead, the
mortgage credit analysis worksheet showed negative assets of $92. The lender was aware of the
substantial payments to clear collection debts before the loan closed but did not obtain bank
statements or an explanation of the source of the funds used to pay off the collection items.
Although a nonprofit gift and broker credit covered all costs of the loan closing and no cash was
required of the borrowers, the lender should have verified the source of the funds used to pay off
the collection accounts to ensure that they were not from an unallowable source.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph B (Criteria 25)

Unsupported Income
The lender used the monthly income from the coborrower’s previous employer instead of the
current employer when processing the loan. According to the loan application, the coborrower
had been employed at the current job for only one month. The lender obtained a verbal
verification of employment for the current job, but the verification did not confirm the hire date,
hours worked per week, or rate of pay. The lender did not obtain a pay stub for the current
employment. The only pay stub present was from a previous job, which the lender used as the
income to calculate the financial ratios.

The lender used $1,733 in coborrower monthly income in approving the loan. According to the
pay stub from the most previous employment, the borrower’s monthly income was $1,470.
Internal Revenue Service Forms W-2 show the coborrower’s income was decreasing from prior
years, as follows:
    2004 $1,470 per month, as of March 16, 2004
    2003 $1,650 per month
    2002 $1,816 per month

Using the current monthly income of $1,470, the borrowers’ total monthly income was $3,439,
which makes the housing ratio 36 percent and the total debt ratio 44.8 percent, both of which far
exceed HUD limits.

The mortgage credit analysis worksheet showed that the lender calculated financial ratios above
HUD’s limits (34.48 percent housing ratio and 42.92 total debt ratio) but did not identify
compensating factors for exceeding the limits.


                                             57
HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-6 (Criteria 22)
Handbook 4155.1, REV-5, chapter 2, section 2-12 (Criteria 29)
Handbook 4155.1, REV-5, chapter 2, section 2-13 (Criteria 30)
Handbook 4155.1, REV-5, chapter 3, section 3-1 (Criteria 31)

Questionable Credit History
The lender obtained a verification of rent, but a loan officer signed the verification of rent as the
“authorized representative” and identified himself as the “owner” of the property on the rent
document. It appears that the verification of rent was not received directly from the landlord,
making the verification of rent questionable.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter, section 2-3, paragraph A (Criteria 20)

Unallowable Charges
The lender charged the borrower two prohibited charges, according to the HUD-1 settlement
statement. A $75 tax service fee paid to the lender is not allowed, nor is a $50 e-mail/courier fee
paid to the title company. This was not a refinance loan.

HUD Requirements – Appendix C
Handbook 4000.2, chapter 5, section 5-2, paragraph O (Criteria 1)
Handbook 4330.1, REV-5, chapter 4, section 4-12, paragraph B (Criteria 32)




                                             58
Case number: 291-3281528               Insured amount: $45,534

Section of Housing Act: 203(b)         Status upon selection: Defaulted on 5th payment

Date of loan closing: June 29, 2004    HUD costs incurred:
                                        Acquisition costs of $46,009. Property has not yet
                                        been sold (as of September 2005).
Underwriter type: Automated

Questionable Gift Funds
The lender did not adequately verify gift funds used to meet closing costs. The borrower’s
fiancé appears to have provided a $450 gift to the borrower. The lender obtained a gift letter
from the fiancé and a copy of a $450 cashier’s check purchased by the fiancé and made payable
to the mortgage company. The lender also included a $450 “other liquid asset” as borrower
assets in the automated underwriting system when gaining loan approval. However, the lender
did not obtain donor bank statements, a verification of deposit, or withdrawal or deposit slips to
confirm that the donor had the funds available and that she transferred the funds to the borrower.

Further, the lender noted that the cashier’s check was a gift to pay for the property appraisal, but
the HUD-1 settlement statement showed that the $400 appraisal was paid from the seller’s funds.
The HUD-1 settlement statement did not credit the borrower with a gift, only a $400 earnest
deposit. The real estate contract also reflected the $400 earnest deposit. Therefore, the inclusion
of a $450 gift to qualify the borrower is questionable.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph C (Criteria 26)
Mortgagee Letter 99-26 (Criteria 34)
Mortgagee Letter 00-28 (Criteria 35)
Desktop Underwriter Government Underwriter Service User’s Guide for Federal Housing
   Administration Loans, dated July 2002, chapter 2, paragraph 3 (Criteria 36)

Unsupported Assets
The lender did not adequately verify the source of funds needed to close the loan. The mortgage
credit analysis worksheet and the Desktop Underwriter findings report showed that the lender
counted $1,416 as asset available to the borrower when obtaining an automated loan approval.
At the time of loan approval, the borrower needed $1,388 to close the loan, and the HUD-1
settlement statement showed the borrower paid $979 in cash to close. However, the lender did
not obtain bank statements but instead obtained a bank activity report of April 12 through May
25, 2004. The report reflected a large, unexplained deposit of $1,206 on April 12, 2004, about
two months before the loan closing. It appears the bank account was opened with this deposit.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10 (Criteria 24)
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph B (Criteria 25)
Mortgagee Letter 99-26 (Criteria 34)
Desktop Underwriter Government Underwriter Service User’s Guide for Federal Housing
   Administration Loans, dated July 2002, chapter 2, paragraph 3 (Criteria 36)



                                             59
Case number: 291-3292555                Insured amount: $155,759

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 2nd payment

Date of loan closing: July 20, 2004     Underwriter type: Manual


Unsupported Assets
The lender did not adequately verify the source of personal assets used in closing the loan. The
mortgage credit analysis worksheet showed that the borrower needed $5,331 to close the loan.
The borrower expected to receive a nonprofit gift of $4,710 so the borrower needed to provide
$621 in personal assets. The lender did not obtain bank statements but instead obtained a bank
report similar to a verification of deposit. The report showed a balance of $3,075 on July 19,
2004 (the day before the loan closing), but no beginning balance or detailed transactions. Using
only the bank report, the lender could not review for large, unexplained deposits that could
indicate funds from an unallowable source. In addition, the HUD-1 settlement statement
reflected that the borrower paid $1,999 to close the loan, considerably more than the lender’s
initial estimate of $621.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10 (Criteria 24)
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph B (Criteria 25)

Underreported Liability
The lender did not adequately assess all recurring liabilities when approving the loan. The
borrower’s pay stubs showed a weekly deduction of $320, or $1,387 per month. There was no
explanation for the deduction from either the lender or the borrower. The pay stub indicated the
deduction was paid to a credit union, which could be a periodic savings transfer but could also be
an undisclosed liability. The lender should have verified the purpose of the liability to ensure
that it did not affect the loan approval.

HUD Requirements – Appendix C
Handbook 4000.4, REV-1, CHG-2, chapter 2, section 2-5 (Criteria 3)
Handbook 4155.1, REV-5, chapter 2, section 2-11, paragraph A (Criteria 27)




                                            60
Case number: 291-3300350                Insured amount: $113,474

Section of Housing Act: 203(b)          Status upon selection: Defaulted on 4th payment

Date of loan closing:                   Underwriter type: Manual
   September 3, 2004


Underreported Liabilities
The lender did not adequately evaluate the borrower’s recurring liabilities. The loan application,
mortgage credit analysis worksheet, Loan Prospector findings report, and credit report showed
different amounts for total liabilities, as follows:
    • Loan application shows $74 per month.
    • Mortgage credit analysis worksheet shows $0 per month.
    • Loan Prospector findings report shows $1,067 per month.

The credit report shows:
   • Numerous student loans (at least 23 loans with monthly payments of $1,815), but
       duplicates are possible.
   • No monthly payments due.
   • No repayment start dates.
   • A total of $245,616 owed in installment debt + $7,173 in revolving debt.

The lender obtained a deferment letter from the Department of Education stating that the largest
student loan ($20,952) was in deferment until at least 2006, but no other evidence of loan
deferments for the remainder of the loans was provided.

According to the mortgage credit analysis worksheet, the borrower’s housing ratio and total debt
ratio were 31.2 percent because the lender included no recurring liabilities. If the $1,815 in
monthly loan repayments was to begin within one year of the loan closing, the borrower’s total
debt ratio would increase to 91 percent, requiring nearly all of the borrower’s current monthly
income.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-11, paragraph C (Criteria 28)

Unsupported Assets
The lender did not adequately verify borrower assets when giving loan approval. The mortgage
credit analysis worksheet showed that the borrower needed $12,423 to close the loan and lists
$13,777 in borrower assets. The HUD-1 settlement statement indicated the borrower paid
$12,122 in cash at closing. To support the availability of borrower assets, the lender obtained a
verification of deposit showing that the borrower had $13,777 in a checking account, but the
lender did not obtain bank statements. In addition, the verification of deposit was a bank report
obtained from an Internet Web site, which did not contain the borrower’s name, a beginning or
ending balance, or detailed transaction activity. Without detailed bank statements, the lender
could not have been assured that the borrower was the owner of the funds or that the funds were



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from an allowable source and could not review for large, unexplained deposits or recurring
liabilities not disclosed.

HUD Requirements – Appendix C
Handbook 4155.1, REV-5, chapter 2, section 2-10, paragraph B (Criteria 25)




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