oversight

Major Mortgage, Cheyenne, Wymoing, Improperly Submitted Late Requests for Endorsement of Federal Housing Administration Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-01-20.

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

                                                                Issue Date
                                                                         January 20, 2006
                                                                Audit Report Number
                                                                         2006-KC-1004




TO:        Brian D. Montgomery, Assistant Secretary for Housing - Federal Housing
              Commissioner and Chairman, Mortgagee Review Board, H


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

SUBJECT: Major Mortgage, Cheyenne, Wyoming, Improperly Submitted Late Requests for
           Endorsement of Federal Housing Administration Loans


                                    HIGHLIGHTS
 What We Audited and Why


             We audited Major Mortgage because of its high rate of late requests for
             endorsement. For loans closed between November 2002 and October 2004, the
             U.S. Department of Housing and Urban Development (HUD) endorsed 57 percent
             of these loans more than 66 days after closing, indicating the lender submitted
             many late requests. Our objective was to determine whether Major Mortgage met
             HUD requirements when submitting the late requests.

 What We Found


             Major Mortgage submitted 51 loans that did not comply with HUD requirements
             for late requests. As a result, these loans increased the risk to the Federal Housing
             Administration insurance fund $5.6 million.




                                               1
What We Recommend
           We recommend that the assistant secretary for housing - federal housing
           commissioner take appropriate administrative action against Major Mortgage for
           not following HUD requirements and placing the insurance fund at unnecessary
           risk. This action should at a minimum include requiring Major Mortgage to
           indemnify improperly submitted loans currently insured and reimburse HUD for
           losses already incurred and future losses on foreclosed properties HUD has not
           yet sold.

           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
           Major Mortgage agreed with our findings, with one exception. We reevaluated
           the exception and made appropriate changes to this report. We provided the draft
           report to Major Mortgage on January 13, 2006, and requested a response by
           January 19, 2006. Major Mortgage provided written comments on January 19,
           2006.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
              TABLE OF CONTENTS

Background and Objectives                                                             4

Results of Audit
        Finding: Major Mortgage Improperly Submitted Late Requests for Endorsement    5
                  of Federal Housing Administration Loans

Scope and Methodology                                                                7

Internal Controls                                                                     9

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use               10
   B.   Auditee Comments and OIG’s Evaluation                                        11
   C.   Federal Requirements                                                         14
   D.   Improperly Submitted Loans                                                   18




                                              3
                     BACKGROUND AND OBJECTIVES
Major Mortgage is primarily a residential home lender participating in a variety of loan
programs. It incorporated in March 1996 as a subsidiary of Wyoming Employee Resource
Capital and Services. Major Mortgage conducts operations from 53 offices in 11 states and
maintains its home office in Cheyenne, Wyoming. It produces first mortgage loans for sale to
investors and does not retain the servicing rights to most of these loans. CitiMortgage is the
largest loan servicer for Major Mortgage.

Major Mortgage became an approved nonsupervised lender for the Federal Housing
Administration on May 17, 1996. The Federal Housing Administration provides mortgage
insurance on loans made by approved lenders. The mortgage insurance protects lenders such as
Major Mortgage against losses when homeowners default on their mortgage loan.

Major Mortgage submitted 2,747 loans (from 4,791 loans it closed between November 2002 and
October 2004) that were endorsed more than 66 days after closing. The U.S. Department of
Housing and Urban Development (HUD) requires lenders to submit loans for endorsement
within 60 days of loan closing. For our audit purposes, we added six days to allow for HUD
processing and potential mail delays in HUD receiving the loan case binders to consider for
endorsement. Our objective was to determine whether Major Mortgage met HUD requirements
when submitting the late requests.




                                                4
                               RESULTS OF AUDIT

Finding: Major Mortgage Improperly Submitted Late Requests for
          Endorsement of Federal Housing Administration Loans
Major Mortgage improperly submitted late requests for insurance endorsement of 51 loans. This
occurred because it did not have an internal quality control function to identify and mitigate
improper late requests, nor did it adequately staff its operations when its loan volume
significantly increased. As a result, the 51 loans placed the insurance fund at risk for $5.6
million and caused HUD to incur related claims and losses.


 Loans Did Not Comply with
 HUD Requirements

              Major Mortgage submitted 51 loans that did not meet applicable HUD
              requirements. When lenders submit loans for insurance endorsement that HUD
              considers late requests, the lender must meet certain conditions for HUD to
              endorse the loans. For the 51 loans, HUD regulations required a payment history
              showing the borrower made all payments in or before the month due. If the
              borrower made any payments after the month due, the loan was not eligible for
              endorsement until the borrower made six consecutive payments before or within
              the calendar month due. The 51 loans did not meet these conditions.

              Major Mortgage did not have adequate controls to ensure its employees followed
              HUD requirements when submitting late requests. It did not have an internal
              quality control function to monitor late requests for compliance with HUD
              requirements. In addition, our audit period coincided with an unprecedented
              increase in refinance loans that tripled Major Mortgage’s workload. At the same
              time, Major Mortgage experienced significant employee turnover and did not hire
              additional staff quickly enough to handle the increased loan volume.

              Since October 2004, Major Mortgage has reduced late requests from 57 percent of
              loans closed in the previous two years to less than 6 percent since October 2004,
              significantly reducing the risk to the insurance fund. According to Major
              Mortgage management, it recently implemented a quality control plan that
              improved its controls over late requests. Management also indicated it now has
              adequate staffing levels to process Federal Housing Administration loans. Due to
              the reduced risk to the insurance fund, we did not assess Major Mortgage’s
              current controls over late requests.




                                              5
New HUD Requirements -
Mortgagee Letter 2005-23

           On May 17, 2005, HUD issued new requirements to reduce the administrative
           burden on lenders submitting late requests. Mortgagee Letter 2005-23 eliminated
           the requirement that the borrower make six consecutive payments when due
           before the loan was eligible for insurance. Under the new requirements, lenders
           need only ensure that all payments due were made before submitting the loan for
           endorsement.

           Of the 51 improperly submitted loans, 11 violated the newest requirement. As of
           November 3, 2005, nine loans hold active insurance and two defaulted and went
           into foreclosure. Our recommendations reflect HUD’s effort to reduce the
           administrative burden on lenders.

           Appendix C provides the federal requirements regarding late requests for
           insurance endorsement. Appendix D provides a list of the improperly submitted
           loans, excluding 17 loans that are no longer insured.

Recommendations

           We recommend that the assistant secretary for housing - federal housing
           commissioner

           1A. Take appropriate administrative action against Major Mortgage for not
               complying with HUD requirements, including requiring it to indemnify nine
               loans totaling $1,098,180 that it improperly submitted for endorsement.

           1B. Take appropriate administrative action against Major Mortgage, including
               requiring it to reimburse HUD for the $35,492 loss incurred for one loan for
               which HUD paid a claim and sold the property.

           1C. Take appropriate administrative action against Major Mortgage, including
                requiring it to reimburse HUD for any future loss from $132,562 in claims
                paid once the property is sold for one loan that went into foreclosure.

           1D. Take appropriate administrative action against Major Mortgage for violating
               HUD requirements in effect at the time it submitted 23 loans totaling
               $2,239,043 without showing the borrowers met the six consecutive monthly
               payment requirement.




                                           6
                        SCOPE AND METHODOLOGY

To achieve our objectives, we reviewed electronic and hard-copy payment histories obtained
from Major Mortgage and CitiMortgage. Multiple lenders service Major Mortgage’s loans, but
CitiMortgage services a majority of the loans. Therefore, we concentrated our efforts only on
loans serviced by Major Mortgage or CitiMortgage.

We also reviewed data from HUD’s Single Family Data Warehouse for loans originated or
sponsored by Major Mortgage and closed during our review period. We performed automated
testing on the HUD data and the electronic payment histories. We also reviewed HUD
regulations and sought guidance from HUD Quality Assurance Division staff regarding HUD’s
application of pertinent HUD requirements. We reviewed policies and procedures of Major
Mortgage and interviewed Major Mortgage and CitiMortgage staff at their offices in Cheyenne,
Wyoming, and O’Fallon, Missouri, respectively. We also reviewed financial audit reports and
other reviews associated with Major Mortgage and CitiMortgage operations.

We relied on computer-processed and hard-copy payment histories from Major Mortgage and
CitiMortgage. We relied on the loan payment histories in the loan files Major Mortgage
submitted to HUD. We also relied on the various dates in Major Mortgage and HUD data
systems. We assessed the reliability of these data, including relevant general and application
controls, and found them adequate. We performed tests of the data and based on the assessments
and testing, concluded that the data were sufficiently reliable to use in meeting our objectives.
We used the original mortgage amount and claim status from HUD’s systems for informational
purposes only.

Major Mortgage closed 4,791 Federal Housing Administration-insured loans between November
2002 and October 2004. Of the 4,791 loans, Major Mortgage submitted 2,747 that were
endorsed more than 66 days after closing. HUD requires lenders to submit loans for
endorsement within 60 days of loan closing. To identify the potential universe of late requests,
we used HUD data and allowed six additional days for processing by HUD’s mailroom and
endorsement contractor and for weekend mail delays.

Using the loan submission dates provided by Major Mortgage, we identified 2,675 loans that
were subject to the late request for endorsement rules. Of the 2,675 loans, Major Mortgage and
CitiMortgage serviced 1,819. The following table explains the adjustments made to the universe
of loans to identify the loans tested. Appendix C provides the federal requirements regarding
late requests for insurance endorsement.




                                                7
                                                                                               Original
                                                                                Number         mortgage
                            Description of loans                                of loans       amount
Originated or sponsored by Major Mortgage and closed between
November 2002 and October 2004                                                     4,791       $   512,498,244
Endorsed more than 66 days after closing                                           2,747       $   298,327,743
Total loans subject to the late request for endorsement rules (late requests)      2,675       $   223,149,902
Late requests serviced by Major Mortgage or CitiMortgage                           1,819       $   205,983,024
Electronic payment histories tested                                                1,810       $   204,804,550
Hardcopy payment histories tested - electronic histories were incomplete               4       $       499,038
Did not test - no longer hold Federal Housing Administration insurance                 5       $       679,436
                                 Loans tested                                      1,814   $       205,303,588

We performed audit work from April through November 2005. The audit was conducted in
accordance with generally accepted government auditing standards.




                                                           8
                             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 submitting late requests for insurance endorsement 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 Weaknesses


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

                      •   Major Mortgage did not have adequate controls to ensure that its
                          employees followed HUD requirements when submitting late requests
                          for insurance endorsement (see finding).




                                                9
                                    APPENDIXES

Appendix A

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

      Recommendation                                                   Funds to be put to
             number              Ineligible 1/        Unsupported 2/        better use 3/
             1A                                                               $1,098,180
             1B                       $35,492
             1C                                            $132,562


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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     supporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.

3/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                                 10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         11
12
                        OIG Evaluation of Auditee Comments

Comment 1   We reevaluated Federal Housing Administration case number 521-5217745. We
            agree that HUD’s most recent regulations (Mortgagee Letter 2005-23) did not
            apply to this loan. However, the loan was subject to late endorsement procedures
            under HUD Handbook 4161.1, REV-1, chapter 3.

            Under the HUD regulations in effect when Major Mortgage submitted the loan for
            insurance, it should have included a payment history showing the borrower made
            the January 2002 payment within the month due. The HUD case binder contained
            two payment histories, dated January 23, 2002, and February 25, 2002. Neither
            showed the borrower made the January payment. The February payment history
            showed the borrower made the February payment on time. Because Major
            Mortgage was unable to show that the borrower made the January payment on
            time, it should have monitored the loan until six consecutive, on time payments
            were made before submitting the loan for endorsement.

            We reassigned this loan from recommendation 1A to recommendation 1D and
            made the appropriate changes to this report.




                                           13
Appendix C

                          FEDERAL REQUIREMENTS


                                  Code of Federal Regulations

According to 24 CFR [Code of Federal Regulations] part 203.255(b), for applications for
insurance involving mortgages originated under the direct endorsement program, the lender shall
submit to the secretary of HUD, within 60 days after the date of closing of the loan or such
additional time as permitted by the secretary, properly completed documentation and
certifications.


                                        HUD Handbooks

HUD Handbook 4165.1, REV-1, “Endorsement for Insurance for Home Mortgage Programs
(Single Family),” chapter 3, section 3-1(A), states late requests for endorsement procedures
apply if
    • The loan is closed after the firm commitment,
    • Direct endorsement underwriter’s approval expires, and/or
    • The mortgage is submitted to HUD for endorsement more than 60 days after closing.

Section 3-1(B) states that a late request for endorsement from the lender must include

   (3) A payment ledger that reflects the payment received, including the payment due for the
       month in which the case is submitted if the case is submitted after the 15th of the month.
       For example, if the case closed February 3 and the case is submitted April 16, the
       payment ledger must reflect receipt of the April payment even though the payment is not
       considered delinquent until May 1. Payment under the mortgage must not be delinquent
       when submitted for endorsement.

           (a) The lender must submit a payment ledger for the entire period from the first
               payment due date to the date of the submission for endorsement. Each payment
               must be made in the calendar month due.

           (b) If a payment is made outside the calendar month due, the lender cannot submit the
               case for endorsement until six consecutive payments have been made within the
               calendar month due.

   (4) A certification that the lender did not provide the funds to bring the loan current or to
       affect the appearance of an acceptable payment history.




                                                14
                                   HUD Mortgagee Letters

Mortgagee Letter 2004-14, “Late Request for Endorsement Procedures,” clarifies procedures for
mortgage lenders when submitting mortgage insurance case binders to the Federal Housing
Administration for endorsement beyond the 60-day limit following closing. It replaces the
instructions found in the section, “Late Request for Endorsement,” in chapter 3 of HUD
Handbook 4165.1, REV-3.

A request for insurance is considered “late” and triggers additional documentation when the
binder is received by HUD more than 60 days after the mortgagee loan settlement or funds
disbursement, whichever is later.

If HUD returns the case binder to the lender by issuing a notice of rejection (or a subsequent
notice of rejection), HUD’s Homeownership Center must receive the reconsideration request for
insurance endorsement within the original 60-day window or 30 days from the date of issuance
of the original notice of rejection, whichever is greater.

When submitting a late request for endorsement, in addition to including a payment history or
ledger, the mortgage lender is required to include a certification that

   (1) All mortgage payments due have been made by the mortgagor before or within the
       month due. If any payments have been made after the month due, the loan is not eligible
       for endorsement until six consecutive payments have been made before and/or within the
       calendar month due.

   (3) The mortgage lender did not provide the funds to bring and/or keep the loan current or to
       bring about the appearance of an acceptable payment history.

Mortgagee Letter 2005-23, “Amended Late Request for Endorsement Procedures,” supersedes
Mortgagee Letter 2004-14 and amends procedures for late submission of mortgage insurance
case binders to the Federal Housing Administration for endorsement. The new instructions are
designed to reduce the administrative burden on lenders that are unable to submit applications for
mortgage insurance to the Federal Housing Administration within 60 days of closing. It also
replaces the instructions in the section, “Late Request for Endorsement,” in chapter 3 of HUD
Handbook 4165.1, REV-3.

These procedures will provide an assurance that the loan was current at the time it was submitted
by the lender for insurance endorsement. The lender will be required to certify that no payment
is more than 30 days overdue as of the date of the certification. In assessing whether any
payment is more than 30 days overdue, the lender is required to ensure that all payments up to
the payment due for the current month have been paid. Since mortgage servicers are required to
report defaults on mortgages, the Federal Housing Administration intends to use this information
to help confirm the accuracy of the lender’s certification.




                                               15
Highlights of Major Changes

   •   Certification requirements clarified: The lender needs to only certify that the most recent
       payment that came due was made within that month.
   •   Payment history or ledger eliminated: The Federal Housing Administration will no
       longer require a payment history or ledger to be submitted with the case binder. Rather,
       it will rely on the certification provided by the lender. As a quality control measure, the
       Federal Housing Administration will increase the selection of such mortgages for
       postendorsement technical reviews and may use mortgage servicer reports to make
       certain that the lender did not incorrectly certify that the loan submitted for insurance
       endorsement was not in default at the time of the certification.
   •   Six consecutive payment history eliminated: The requirement that if any payments have
       been made after the month due, the loan is not eligible for endorsement until six
       consecutive payments have been made before and/or within the calendar month due is
       eliminated. The Federal Housing Administration believes its risk at insurance
       endorsement is based on the status of the mortgage at the time of endorsement and is,
       therefore, eliminating this requirement in the late endorsement request.

Late Request for Endorsement Certification by the Lender

When submitting a late request for endorsement under the circumstances described below, the
lender is required to include a dated certification that states

   •   At the time of this certification, no mortgage payment is currently unpaid more than 30
       days, and

   •   The lender or its agents did not provide the funds to bring and/or keep the loan current or
       to bring about the appearance of an acceptable payment history.

If the payment due for the month before the lender submitted the loan for endorsement has not
been received, that mortgage is not eligible for endorsement.

Examples of Late Endorsement Processing and Requirements

The following examples illustrate the procedures for late request for mortgage insurance
endorsement: Mortgage closed June 4 with first payment due August 1.

   •   No certification is required if the mortgage insurance application is received for
       endorsement on or before August 31. However, if the mortgage case binder is sent back
       to the lender due to a notice of return and the lender is not able to respond correctly
       before the later of 30 days or when the certification period begins (September 1 in this
       example), the certification will be required.

   •   If the mortgage is received for endorsement in the Homeownership Center on or after
       September 1 (or first business day after that date), the lender must provide the
       endorsement certification.

The Federal Housing Administration determines whether a mortgage is received late based upon
the date the Homeownership Center receives the case binder. Lenders must consider mailing and


                                               16
processing times when submitting case binders to the Homeownership Center. They may
determine the date the case binder was received and logged in by the Homeownership Center by
reviewing the case status screen using the FHA Connection.




                                             17
  Appendix D
                                  IMPROPERLY SUBMITTED LOANS

   Federal
   Housing        Indemnify -                           Claims paid -                                               Late or missed
Administration   holding active    Claims paid -        property not        Administrative                             monthly
 case number       insurance       property sold          yet sold             action        Endorsement date         payments

                 Recommendation    Recommendation   Recommendation      Recommendation
                      1A                1B               1C                  1D
                                                                                                                   August 2003
                                                                                                                   September 2003
                                                                                                                   October 2003
                                                                                                                   November 2003
052-2745297      $     134,545                                                                December 3, 2003     December 2003
                                                                                                                   February 2004
052-2770244      $      139,795                                                                   April 12, 2004   March 2004
                                                                                                                   September 2003
                                                                                                                   October 2003
052-2973645      $      79,525                                                               November 17, 2003     November 2003
                                                                                                                   August 2003
332-4198574      $     111,244                                                                  October 2, 2003    September 2003
                                                                                                                   December 2003
                                                                                                                   January 2004
332-4281738      $     130,161                                                                    March 1, 2004    February 2004
                                                                                                                   July 2003
521-5512287      $     145,713                                                                September 8, 2003    August 2003
                                                                                                                   December 2003
562-1887341      $     127,351                                                                 February 9, 2004    January 2004
                                                                                                                   July 2003
591-0931940      $      116,725                                                              September 25, 2003    August 2003
591-0932526      $      113,121                                                              November 18, 2003     September 2003
                 $    1,098,180
495-6750016                        $      35,492                                                January 2, 2004    December 2003
                                   $      35,492
                                                                                                                   July 2003
052-2827288                                         $         132,562                         September 8, 2003    August 2003
                                                    $         132,562
                                                                                                                   September 2003
052-2930433                                                             $           93,532     January 20, 2004    October 2003
052-3044227                                                             $          177,914    November 7, 2003     October 2003
052-3199332                                                             $           84,606        April 6, 2004    February 2004
321-2328701                                                             $          121,950        April 1, 2004    February 2004
                                                                                                                   April 2003
                                                                                                                   May 2003
                                                                                                                   September 2003
421-3909830                                                             $           56,434   November 24, 2003     October 2003
491-7989239                                                             $           69,426     January 20, 2004    November 2003
495-6492672                                                             $           86,356         July 11, 2003   June 2003
495-6506503                                                             $           51,562       August 6, 2003    June 2003
495-6544973                                                             $          121,439   September 11, 2003    August 2003
521-5217745                                                             $          112,922    February 28, 2003    January 2003
521-5494624                                                             $          114,686    September 8, 2003    July 2003




                                                             18
   Federal
   Housing        Indemnify -                       Claims paid -                                               Late or missed
Administration   holding active   Claims paid -     property not        Administrative                             monthly
 case number       insurance      property sold       yet sold             action         Endorsement date        payments

                 Recommendation   Recommendation   Recommendation   Recommendation
                      1A               1B               1C               1D

                                                                                                               May 2003
                                                                                                               June 2003
                                                                                                               July 2003
                                                                                                               August 2003
                                                                                                               September 2003
521-5512337                                                         $          125,352    November 17, 2003    October 2003
                                                                                                               August 2003
                                                                                                               October 2003
521-5538305                                                         $           63,723     November 4, 2003    November 2003
                                                                                                               October 2003
521-5775503                                                         $           74,054    December 15, 2003    November 2003
561-7777258                                                         $          148,174    November 26, 2003    November 2003
561-7909158                                                         $          118,146        April 16, 2004   January 2004

562-1905468                                                         $           91,045      October 30, 2003   September 2003

562-1911854                                                         $           71,379    December 11, 2003    November 2003
                                                                                                               June 2003
                                                                                                               August 2003
562-1877712                                                         $            64,424       March 2, 2004    October 2003
562-1912084                                                         $            97,884       March 3, 2004    December 2003
562-1918137                                                         $           110,169        May 5, 2004     April 2004
591-0928001                                                         $           116,572   December 10, 2003    October 2003
591-0943183                                                         $            67,294      March 10, 2004    February 2004
                                                                    $       2,239,043




                                                         19