oversight

Matrix Financial Services Corporation�s St. Louis, Missouri, Branch Did Not Properly Underwrite and/or Close 40 Federal Housing Administration Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-01-31.

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

                                                                   Issue Date:
                                                                            January 31, 2006
                                                                   Audit Report Number:
                                                                             2006-KC-1005




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

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

SUBJECT: Matrix Financial Services Corporation’s St. Louis, Missouri, Branch Did Not
           Properly Underwrite and/or Close 40 Federal Housing Administration Loans


                                    HIGHLIGHTS

 What We Audited and Why

             We reviewed 65 Federal Housing Administration loans sponsored by the St.
             Louis, Missouri, branch of Matrix Financial Services Corporation (Matrix). Our
             audit objective was to determine whether Matrix properly underwrote, closed, and
             submitted the loans for endorsement.

             We initiated this audit due to the high default rate of Matrix’s St. Louis branch.
             As of March 8, 2005, 18.37 percent of the loans sponsored and closed by this
             branch in 2003 had defaulted within two years of closing.


 What We Found

             Matrix did not properly underwrite 32 loans. These loans contained material
             deficiencies related to assets, income, liabilities, credit history, and property
             condition. The deficiencies affected the credit quality of the loans and placed the
             Federal Housing Administration insurance fund at an increased risk of borrower
             default on the 32 loans with original mortgage amounts totaling $3,279,345.
           Matrix did not properly close 13 loans. The borrowers of each of these loans
           incurred excessive, unsupported, and/or unallowable closing fees totaling $7,703.
           While these deficiencies did not affect the Federal Housing Administration
           insurance fund, the borrowers should not have been required to pay these charges.

           Matrix properly submitted for endorsement all the loans in our sample.

           Because the branch office is no longer in business, we could not determine the
           cause of the underwriting or closing deficiencies.


What We Recommend

           We recommend that the assistant secretary for housing take appropriate
           administrative action based on the information contained in these findings. At a
           minimum, the U.S. Department of Housing and Urban Development (HUD)
           should require the lenders to
              • Indemnify the insurance fund $2,630,627 for the 26 actively insured loans
                  not properly underwritten,
              • Reimburse the insurance fund $226,419 for actual and future losses on the
                  five properties acquired by HUD for loans not properly underwritten, and
              • Buy down the principal balance of the 13 loans not properly closed by
                  $7,703.

           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 Response

           During our audit period, Matrix sold its wholesale operations to Ampro Mortgage
           Corporation (Ampro). We provided the draft report to both Matrix and Ampro on
           December 5, 2005, and requested a response within 15 days.

           Matrix provided written comments dated December 8, 2005. Matrix generally
           agreed with our findings. After requesting an extension, Ampro provided written
           comments dated January 24, 2006. While Ampro management agrees the loans in
           this report contain underwriting deficiencies, they do not feel all deficiencies
           adversely affected the loan quality.

           The complete text of the auditees’ response, along with our evaluation of that
           response, is located in appendix B of this report.




                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                4

Results of Audit
        Finding 1: Matrix Did Not Properly Underwrite 32 Loans           5
        Finding 2: Matrix Did Not Properly Close 13 Loans                9

Scope and Methodology                                                    11

Internal Controls                                                        12

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use   13
   B.   Auditee Comments and OIG’s Evaluation                            14
   C.   Schedule of Underwriting Deficiencies                            40
   D.   Schedule of Recommendations and Loan Status                      41
   E.   Schedule of Closing Deficiencies                                 42
   F.   Underwriting Deficiency Narratives                               43
   G.   Criteria                                                         65




                                              3
                     BACKGROUND AND OBJECTIVES

Matrix Financial Services Corporation (Matrix) is a non supervised direct endorsement lender
based in Phoenix, Arizona. Matrix received approval from the Federal Housing Administration
in June of 1983 and has operated branch offices in 12 states.

During our audit period, Matrix functioned primarily as a wholesale lender, sponsoring loans
originated by approved loan correspondents. The principal activity of loan correspondents is to
originate mortgages for the sale or transfer to a sponsor. Loan correspondents may take the
initial application, assign an appraiser, obtain credit reports, order verifications, and close the
loan after it has been underwritten. Sponsors perform the underwriting function and must ensure
loan packages contain sufficient documentation and explanation to support their approval
decisions. Sponsors are responsible for the actions of their loan correspondents and are required
to supervise and perform quality control reviews of their loan correspondents to ensure they
comply with U.S. Department of Housing and Urban Development (HUD) requirements and
prudent lending practices.

The St. Louis branch experienced a large increase in production in March 2003. While the
branch generally closed less than 50 insured loans per month, it closed more than 400 insured
loans between March and June 2003. As of October 11, 2005, more than 25 percent of these
loans had defaulted within two years of closing.

On August 31, 2003, Matrix sold its wholesale operations to Ampro Mortgage Corporation
(Ampro). While Matrix is still an approved direct endorsement lender, it has not originated or
sponsored a Federal Housing Administration-insured loan since 2003.

Our audit objective was to determine whether the St. Louis branch properly underwrote, closed,
and submitted loans for endorsement.




                                                 4
                                 RESULTS OF AUDIT

Finding 1: Matrix Did Not Properly Underwrite 32 Loans
Matrix’s St. Louis branch did not properly underwrite 32 of the 65 loans reviewed. These loans
contained material deficiencies related to assets, income, liabilities, credit history, and property
condition. Because the branch office is no longer in business, we could not determine the cause
of the underwriting deficiencies. These deficiencies affected the credit quality of the loans and
placed the Federal Housing Administration insurance fund at an increased risk of borrower
default on the 32 loans with original mortgage amounts totaling $3,279,345.



 Matrix Did Not Follow
 HUD Regulations


               Matrix’s St. Louis branch did not follow HUD requirements and prudent lending
               practices when underwriting 32 of the 65 loans reviewed. The following table
               summarizes the material underwriting deficiencies identified.

                                                                  # of      % of
                               Area of noncompliance
                                                                 loans      loans
                                  Assets                           14         22
                                  Income                           12         18
                                  Liabilities                      16         25
                                  Credit history                    7         11
                                  Property condition                1          2

               Appendix C contains a schedule of the deficiencies identified in each loan.
               Appendix F contains detailed narratives of each loan’s underwriting deficiencies.

               Assets
               Matrix did not adequately evaluate assets and document the ability of borrowers
               to meet their total cash investment. Matrix miscalculated retirement assets and
               failed to properly document gift funds, depository accounts, and earnest money
               deposits. Matrix also failed to verify the assets and reserves entered into an
               automated underwriting system.

               In case number 261-8429135, the borrower’s total cash investment in the property
               was $820. While the file contained a $500 money order, the borrower’s bank
               printouts did not document the source of funds used to purchase the money order
               and only showed a $.48 balance. Using the $.48 documented assets, the borrower
               was $820 short of meeting her total cash investment in the property.



                                                  5
Income
Matrix did not adequately evaluate the amount and stability of borrower income
used to compute qualifying ratios. In many cases, the underwriter included
income from child support, self-employment, overtime, and commissions without
obtaining sufficient documentation. In other cases, the employment documents in
the file contained inconsistencies or cast doubt on the stability of the borrower’s
income.

In case number 261-8421556, the underwriting worksheet cited $4,565 in base
monthly income. However, the employment documents revealed that the income
claimed consisted of base, differential, and overtime income. While the base and
differential income were stable, the borower’s overtime income had significantly
decreased from 2002 to 2003. Without overtime income, the borrower’s gross
monthly income was only $3,770.

Liabilities
Matrix did not adequately evaluate the liabilities used to compute qualifying
ratios. Matrix omitted debts without proper documentation, misstated monthly
escrow payments, and improperly reduced the borrower’s total mortgage payment
for mortgage credit certificates and temporary interest rate buydowns. Matrix
also failed to verify child support obligations, follow up on credit report inquiries,
document payment of outstanding judgments, and follow guidelines for adjustable
rate mortgages.

In case number 261-8353065, Matrix improperly reduced the borrower’s total
mortgage payment for a mortgage credit certificate and temporary interest rate
buydown. While the file contained a buydown agreement, the underwriter failed
to establish that the eventual increase in mortgage payments would not adversely
affect the borrower. Additionally, we determined that the borrower did not
generate sufficient tax liability to use the mortgage credit certificate. Using the
correct liabilities, the borrower’s qualifying ratios increased to 32.61 and 50.39
percent.

Credit History
Matrix did not adequately evaluate the credit history of seven borrowers. The
underwriter approved six of these loans using alternate credit documentation.
However, several verification letters lacked signatures or were addressed to the
borrower. In some cases, the verifications, credit reports, and employment
documents contained conflicting information about the borrower’s age or address
history. The underwriter failed to resolve these inconsistencies.

Property Condition
Matrix did not adequately document completion of required property repairs for one
loan. In case number 292-8383878, the conditional commitment required repair of
the subject property’s windows and brick. While the file contained a repair escrow



                                  6
           agreement and two repair estimates, it did not confirm that the required repairs were
           ever completed.


We Could Not Determine the
Cause of the Deficiencies


           Because of limitations in the scope of our review caused by the branch closure, we
           could not determine the cause of the underwriting deficiencies.


Effect of Noncompliance

           The material underwriting deficencies cited in this report affected the credit quality
           of the loans and placed the Federal Housing Administration insurance fund at an
           increased risk of borrower default on the 32 loans with original mortgage amounts
           totaling $3,279,345. Each of these loans defaulted within two years of closing. The
           following table summarizes the status of the loans as of October 11, 2005.

                                                              # of      % of
                          Loan status
                                                             loans      loans
                            Claim                               5         16
                            Foreclosure                        3           9
                            Currently in default               9          28
                            No longer in default               14         44
                            Terminated                          1          3
                          Total                                32        100

           HUD incurred losses totaling $168,272 after selling the properties of four of the five
           loans in claim status. HUD paid a $58,147 conveyance claim on the fifth loan in
           claim status. Additionally, HUD has paid $20,546 in loss mitigation retention
           claims on 15 of the 32 loans.


Matrix Detected and Addressed
Noncompliance

           Matrix stopped using a loan correspondent based on problems detected by its quality
           assurance department. The St. Louis branch sponsored 37 loan correspondents
           during our audit period; however, one correspondent originated 18 of the 32
           deficient loans. In June 2003, Matrix terminated its sponsorship agreement with this
           loan correspondent and terminated the underwriter who approved the loan packages
           submitted by the correspondent. At that time, the loan correspondent’s default rates
           were below average. However, its quarterly default rates increased significantly on
           June 30, 2003, and have remained above average for more than two years.



                                             7
          In November 2003, Ampro closed the St. Louis branch and terminated its
          remaining employees due to an unsatisfactory on-site review of the office.


Recommendations

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

          1A. Take appropriate administrative action against Matrix/Ampro for the four
              loans not properly underwritten whose subject properties were conveyed to
              HUD and later sold. This action, at a minimum, should include requiring
              Matrix/Ampro to reimburse HUD $168,272 for actual losses incurred.

          1B. Take appropriate administrative action against Matrix/Ampro for the loan not
              properly underwritten for which HUD has paid claims totaling $58,147,
              including requiring Matrix/Ampro to reimburse HUD for future losses on the
              property, which has not yet been sold.

          1C. Take appropriate administrative action against Matrix/Ampro for the actively
              insured loans that were not properly underwritten. This action, at a
              minimum, should include requiring Matrix/Ampro to indemnify HUD
              against future losses on the 26 loans with original mortgage amounts totaling
              $2,630,627.

          Appendix D contains a detailed schedule of our recommendations and lists the
          current status of the 32 loans with material underwriting deficiencies.




                                           8
Finding 2: Matrix Did Not Properly Close 13 Loans
Matrix did not properly close 13 of the 65 loans reviewed. The borrowers of each of these loans
incurred excessive, unsupported, and/or unallowable closing fees totaling $7,703. Because the
branch office is no longer in business, we could not determine the cause of the closing
deficiencies. While these deficiencies did not affect the Federal Housing Administration
insurance fund, the borrowers should not have been required to pay these charges.




 Matrix Did Not Follow
 HUD Regulations


              Matrix’s St. Louis branch did not follow HUD requirements when closing 13 of
              the 65 loans reviewed. The borrowers of these loans paid excessive, unsupported,
              and unallowable closing fees. The following table summarizes the improper
              charges identified.

                                                    # of      % of         Total
                        Type of fee charged
                                                   loans      loans       charges
                          Origination                4          6            $1,108
                          Appraisal                  1          2              $100
                          Credit report              1          2               $45
                          Loan discount /
                                                     7          11           $4,822
                          commitment
                          Administration             3          5            $1,500
                          Tax service                2          3             $128
                        Total                                                $7,703

              Appendix E contains a detailed schedule of the excessive, unsupported, and
              unallowable fees charged to each borrower.

              While HUD regulation permits lenders to charge origination, appraisal, and credit
              report fees, it sets restrictions on the maximum amount that can be charged. For
              example, origination fees may be charged up to 1 percent of the mortgage
              amount, excluding any up-front mortgage insurance premium. The portion of
              origination, appraisal, and credit report fees listed in the above chart exceeded
              HUD guidelines.

              HUD regulation also permits lenders to charge loan discount and commitment
              fees. However, it requires lenders to execute a written agreement with the


                                               9
           borrower guaranteeing the rate or discount points. In seven loans, borrowers were
           charged discount and commitment fees when the file did not contain the
           supporting agreement.

           Because the loan origination fee covers all administrative tasks performed by the
           lender, HUD regulation does not allow administration and tax service fees.

           While approximately $6,000 of the improper charges were paid to loan
           correspondents, Matrix sponsored the loans and was responsible for the actions of its
           loan correspondents.


We Could Not Determine the
Cause of the Deficiencies


           Because of limitations in the scope of our review due to the branch closure, we
           could not determine the cause of the closing deficiencies.


Improper Charges Did Not
Affect Insurance Fund


           While the closing deficiencies did not affect the Federal Housing Administration
           insurance fund, the borrowers should not have been required to pay the excessive,
           unsupported, and unallowable charges.


Recommendation

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

           2A. Require Matrix/Ampro to buy down the principal balance of the 13 loans by
               $7,703 to account for the excessive, unsupported, and unallowable fees
               charged to borrowers.




                                            10
                         SCOPE AND METHODOLOGY

The St. Louis branch of Matrix sponsored 588 Federal Housing Administration-insured loans
that closed from January 1 through December 31, 2003. As of June 9, 2005, 114 of the 588
loans had defaulted within two years of closing. We eliminated 49 nonconventional refinance
loans, loans with terminated insurance status, and loans with prior sales within a year of closing.
We selected the remaining 65 loans.

To accomplish our objective, we interviewed HUD staff and reviewed HUD’s rules and
regulations for direct endorsement lenders. We also interviewed senior auditee management and
reviewed Matrix’s written policies and procedures. Because Ampro closed the St. Louis branch
and terminated its employees, we were not able to perform an on-site review of the branch office
or interview the employees who approved the 65 loans included in our audit.

To determine whether Matrix properly underwrote loans, we reviewed HUD and auditee case
files for the 65 defaulted loans. We also examined previous reviews of the loans performed by
the auditee and HUD. To determine whether Matrix properly closed loans, we reviewed the
settlement statements and supporting documents for the 65 defaulted loans. To determine
whether Matrix properly submitted loans for endorsement, we reviewed late endorsement letters,
payment histories, mortgage notes, and loan submission records for all 21 of the 65 defaulted
loans which were endorsed more than 60 days after closing.

We conducted on-site audit work from April through August 2005 at Ampro’s office in Phoenix,
Arizona.

We conducted this audit in accordance with generally accepted government auditing standards.
However, due to limitations in the scope of our review, we could not assess the controls in
operation at the St. Louis branch office.




                                                11
                             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 the underwriting, closing, and submission 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


              Our review did not identify any significant weaknesses in internal controls.
              However, due to limitations in the scope of our review, we could not assess the
              controls in operation at the St. Louis branch office.




                                               12
                                         APPENDIXES

Appendix A

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

     Recommendation           Ineligible       Unsupported           Funds to be put to better use
         number                   1/               2/                             3/
           1A                 $168,272
           1B                                     $58,147
           1C                                                                 $2,630,627
           2A                   $7,703


1/      Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
        that the auditor believes are not allowable by law; contract; or federal, state, or local
        policies or regulations.

2/      Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
        or activity when we cannot determine eligibility at the time of 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 loans and
        guarantees not made.




                                                 13
Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         14
15
Comment 1




            16
Comment 2




            17
Comment 3




Comment 4




Comment 5




            18
Comment 6




            19
Comment 7




Comment 8




Comment 9




            20
Comment 10




Comment 11




             21
Comment 12




Comment 13




             22
Comment 14




Comment 15




             23
Comment 16




             24
Comment 17




             25
Comment 18




Comment 19




Comment 20




             26
Comment 21




Comment 22



Comment 23




             27
Comment 24




             28
Comment 25




Comment 26




             29
Comment 27




Comment 28




Comment 29




             30
Comment 30




             31
Comment 31




Comment 32




             32
Comment 33




             33
Comment 34




Comment 35



Comment 36




             34
                OIG Evaluation of Auditee Comments

Comment 1   While Ampro agrees the loans in this report contain underwriting
            deficiencies, they do not feel all deficiencies affected the loan quality.
            We disagree. The deficiencies identified affect the credit quality of the
            loans and placed the Federal Housing Administration insurance fund at
            an increased risk of borrower default. The following comments contain
            our evaluation of Ampro’s individual loan responses.

Comment 2   Ampro acknowledges they did not submit the proper asset figure. HUD
            Mortgagee Letter 96-34 requires lenders to follow automated
            underwriting system guidelines. Fannie Mae’s Desktop Underwriter
            User’s Guide for FHA Loans requires lenders to comply with all
            conditions listed on the findings report and to ensure data entered into the
            system was true, accurate, and complete. Matrix did not comply with
            Condition #28 and did not accurately enter data; therefore, the automated
            underwriting decision was invalid. Because Desktop Underwriter based
            its approval on a variety of factors, it is not possible to determine whether
            the approval decision would stand.

Comment 3   To simplify our case narrative, we removed the vehicle downpayment
            discussion from Appendix F.

Comment 4   Ampro acknowledges the unexplained deposits should have been
            addressed. Our unexplained portion of deposits calculation took into
            account the $2,110 income tax refund documented by the underwriter.
            The borrower could not have closed this loan without the unexplained
            portion of total deposits made during the month prior to closing.

Comment 5   The underwriter’s failure to investigate the inconsistency in dates
            between the verification of rent and utility letter compromised the
            integrity of this loan. Paragraph 2-3 of HUD Handbook 4155.1, REV-4,
            CHG-1 lists the manner of payments made on previous housing expense
            first in the basic hierarchy of credit. Our research indicates the borrower
            was evicted from the residence.

Comment 6   The pay increase was scheduled for June 29, 2003, 80 days after closing.

Comment 7   Ampro agrees the applicant was the primary borrower on the omitted
            liability account. HUD regulations do not allow exclusion of primary
            obligor debts.

Comment 8   The borrower’s qualifying ratios are 30.53 and 63.40 percent when
            including the $273 debt and using current base and average differential
            income. However, the borrower’s ratios still exceed HUD guidelines at
            25.61 and 53.17 percent when computed using the projected income.

Comment 9   The borrower did not generate sufficient tax liability to use the available


                                    35
             mortgage credit certificate. The borrower is married with three
             dependents and an annual household income of $22,134. Using the 2002
             Internal Revenue Service 1040 Instructions (the latest instructions
             available at the time of underwriting), the borrower would have zero tax
             liability after subtracting her standard deduction and five exemptions.

Comment 10   The underwriter failed to present significant compensating factors to
             justify approval of this loan. While the most recent pay stub documented
             overtime, the borrower’s year-to-date average was actually less than the
             amount used to qualify. In fact, ratios increase to 34.72 and 53.65
             percent when calculated using the year-to-date average.

Comment 11   Paragraph 2-6 of HUD Handbook 4155.1, REV-4, CHG-1, requires
             lenders to verify the borrower’s employment for the most recent two
             years. Ampro acknowledges the underwriter did not obtain the required
             tax returns; without these documents, the underwriter could not
             adequately analyze the borrower’s employment.

Comment 12   Ampro acknowledges the borrower was short at closing, based on the
             asset documentation. This acknowledgement confirms the borrower did
             not have the $10,636 reserves claimed on the Loan Prospector feedback
             certificate.

Comment 13   In order to exclude the student loans from the automated underwriting
             analysis, Matrix needed evidence the borrower was enrolled at least half-
             time. While Matrix obtained a transcript and a letter from the borrower’s
             employer, the documents did not evidence current enrollment.

Comment 14   Ampro agrees the underwriter did not address the inconsistencies.

Comment 15   We disagree with Ampro’s 2003 year-to-date income calculation. The
             pay stub ending March 2 was dated March 7, indicating the year-to-date
             income covered 10 weeks. Therefore, the 2003 average was only $4,309.

Comment 16   While the file documents the borrower’s March 2003 child support
             payment, it did document the required monthly payment amount or prove
             that the borrower is meeting his obligation. On the contrary, the
             verification indicated the borrower was $2,067 in arrears.

Comment 17   Ampro acknowledges they could have been more diligent in
             documenting the loan file, but believes the borrower did not represent a
             credit risk due to the strength of his income and savings. While the
             borrower had stable employment, his total fixed payment was 48.76% of
             his gross income. Furthermore, the borrower did not have sufficient
             savings to close the loan; he was $1,197 short at closing.
             Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans
             requires lenders to comply with all conditions listed on the findings
             report and to ensure data entered into the system was true, accurate, and
             complete. Matrix did not comply with Conditions #26 and #29 and did


                                    36
             not accurately enter information; therefore, the automated underwriting
             decision was invalid.

Comment 18   Paragraph 2-9N of HUD Handbook 4155.1, REV-4, CHG-1 requires
             underwriters to establish the amount of automobile allowances that may
             be added to gross income using Internal Revenue Service Form 2106,
             Employee Business Expenses, for the previous two years. Matrix failed
             to obtain the proper documentation to include the automobile allowance
             in gross income.

Comment 19   While the W-2s document increases in income, the verification of
             employment lists the probability of continued employment and
             date/amount of next pay increase as unknown.

Comment 20   The underwriter failed to present significant compensating factors to
             justify approval of this loan. Because the file did not contain a retirement
             statement dated within 120 days of closing, we could not determine the
             availability of assets to cushion the buydown’s effect. However, while
             the auditee comments voice disagreement, an Ampro representative
             initially agreed with our conclusion that the loan approval was not
             adequately supported.

Comment 21   We acknowledge the borrower paid earnest money; however, because the
             amount was over 2 percent of the sales price, Matrix was required to
             verify the source of funds.

Comment 22   According to a borrower letter dated April 8, 2003, the borrower
             attempted to cash his brother’s income tax refund check on February 13th.
             The letter indicates the bank rejected the check and, after his brother
             cashed the check, the borrower re-deposited $5,000 cash on March 25th.
             The underwriter did not obtain an updated bank statement to document
             this deposit.

Comment 23   The underwriter failed to resolve inconsistencies between the borrower
             letter and the brother’s income tax return. The letter indicates the brother
             received a $5,360.90 refund check. However, the income tax return
             indicates the brother will receive a $5,749 refund by direct deposit.

Comment 24   Before applying the $3,750 non-profit gift, the borrower needed $7,966
             to make her total cash investment in the property and meet all approval
             conditions. The file did not document any negotiated settlements for the
             collections. Based on the collection amounts listed on the credit report,
             the underwriter failed to verify the borrower could meet her total cash
             investment in the property and satisfy all approval conditions.

Comment 25   We disagree with Ampro’s assertion that the unexplained deposits are not
             excessive when considering the borrower’s income. It would take almost
             four weeks gross income to cover the $2,000 in unexplained deposits.



                                     37
Comment 26   The underwriter did not adequately document the transfer of gift funds
             from the donor to the borrower. The file did not contain evidence the
             $5,000 was withdrawn from the donor’s account. Furthermore, the
             deposit slip was undated and did not list the borrower’s name or account
             number.

Comment 27   Ampro indicates that, between March 2003 and May 2003, the borrower
             switched from a “local driver” to an “over-the-road driver.” The
             borrower’s letter of explanation confirms he became an “owner-
             operator.” HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9A-2
             states that income from borrowers self-employed for less than one year
             may not be considered as effective income. Because the borrower was
             self-employed for less than one year, the underwriter should not have
             used his income for qualifying purposes.

Comment 28   According to the initial application, signed by the borrower and co-
             borrower, the borrower is liable for $913 monthly child support, $520 of
             which is payable to the co-borrower. While the co-borrower may have
             received additional child support during the two month period referenced
             by Ampro, this does not change the amount of child support income
             available for qualifying purposes.

Comment 29   The borrowers' qualifying ratios increase to 49.74 and 115.35 percent
             after excluding the self-employment income. We adjusted the case
             narrative in Appendix F to reflect Ampro’s confirmation of the self-
             employment.

Comment 30   We disagree with Ampro’s calculation of year-to-date income. The
             borrower’s June 13th pay stub covers 24 weeks, for an average monthly
             income of $1,486. However, the pay stubs document varied hours each
             pay period and the borrower’s year-to-date income includes overtime.
             Therefore, we used a more appropriate 18.5 month average.

Comment 31   The borrower did not generate sufficient tax liability to use the available
             mortgage credit certificate. The borrower is an unmarried woman with
             four dependents and an annual household income of $19,240. Using the
             2002 Internal Revenue Service 1040 Instructions (the latest instructions
             available at the time of underwriting), the borrower would have zero tax
             liability after subtracting her standard deduction and five exemptions.

Comment 32   Contrary to Ampro’s claim, the employment documents did not indicate
             the borrower receives regular pay increases to offset the buydown’s
             effect. Ampro’s calculations of 2001 and 2002 hourly wages assume the
             borrower worked full-time. We believe averaging gross monthly income,
             including overtime, provides a more accurate portrayal of her income
             history. Based on 4.5 weeks in 2001, 12 months in 2002, and 24 weeks
             in 2003, the average gross monthly income was $1,759, $1,365, and
             $1,486 respectively.



                                     38
Comment 33   While Ampro recognizes alternate credit is not intended for borrowers
             with an unsatisfactory traditional credit history, it concludes the credit
             history is due to extenuating circumstances. We conclude the
             underwriter did not evaluate the borrower’s credit history per HUD
             guidelines. The borrower’s traditional credit history and prior eviction
             demonstrate a disregard for, or inability to manage, financial obligations.
             The underwriter failed to demonstrate significant compensating factors to
             justify approval of this loan.

Comment 34   Ampro acknowledges that appropriate documentation was not obtained to
             evidence the source of funds for the earnest money deposit.

Comment 35   We acknowledge that the underwriting worksheet was completed using a
             $1,161 total mortgage payment, $312 in monthly debts, and a $1,473
             total fixed payment. However, the underwriting worksheet indicates the
             loan was approved using Loan Prospector, an automated underwriting
             system. The information entered into the system only included a $1,004
             total mortgage payment, $266 in monthly debts, and a $1,270 total fixed
             payment.

Comment 36   Matrix did not accurately enter information into the automated
             underwriting system and did not satisfy all approval conditions listed on
             the Loan Prospector feedback certificate.




                                     39
Appendix C

          SCHEDULE OF UNDERWRITING DEFICIENCIES




                                                                                                          Property condition
                                                                                         Credit history
                              Original
                 Closing                   Underwriter                                                                          Recomputed
Case number                   mortgage




                                                                           Liabilities
                  date1                       type                                                                             qualifying ratios
                               amount




                                                                  Income
                                                         Assets
091-36376192    1/17/2003     $139,692      Automated  x x x
292-4295702     1/24/2003      $54,150       Manual           x                                                                34.02% / 53.15%
091-3643298     1/28/2003     $102,885      Automated     x x
261-8291418     2/21/2003      $81,357       Manual       x                                                                    74.27% / 74.27%
292-43194762    3/4/2003      $82,702        Manual       x                                                                    33.56% / 78.04%
292-43209442    3/10/2003     $76,500       Automated  x
261-8402578     3/21/2003      $80,364       Manual     x
261-8385623     3/28/2003      $67,467       Manual     x
261-8405705     3/28/2003      $95,247       Manual           x                                                                32.02% / 46.05%
261-8406746      4/4/2003     $84,829        Manual                                       x
261-8421556     4/10/2003     $150,212       Manual       x x                                                                  30.53% / 63.40%
261-8353065     4/16/2003      $69,351       Manual          x                                                                 32.61% / 50.39%
261-8383878     4/16/2003      $69,451       Manual    x                                  x                 x
261-8429135     4/16/2003      $95,742       Manual    x                                  x
261-8429493     4/18/2003      $94,254       Manual       x
292-4316802     4/22/2003     $166,881      Automated  x     x
292-43453512    4/22/2003     $49,129        Manual                                       x
261-8353223     4/25/2003      $54,568       Manual        x x                            x                                    48.03% / 48.03%
261-8448405     4/28/2003     $124,516       Manual       x x                                                                  23.09% / 44.93%
292-4341989     4/29/2003     $135,375      Automated  x
261-8445791      5/8/2003     $120,547       Manual       x x                                                                  32.72% / 46.53%
091-3704561      5/9/2003     $135,052      Automated  x
261-8407889      5/9/2003     $74,399        Manual    x
261-8452566     5/16/2003      $66,474       Manual    x
181-2000595     5/23/2003     $150,143       Manual    x
292-4359271     5/30/2003     $125,234      Automated        x
261-8500881      6/9/2003     $92,270        Manual       x x                                                                  31.16% / 51.58%
261-8437504     6/10/2003     $128,981       Manual       x x                                                                  49.74%/115.35%
261-8468553     6/12/2003      $77,388       Manual       x x                             x                                    45.07% / 45.07%
292-43558292    6/17/2003     $160,973      Automated  x     x
321-2284507     6/20/2003     $145,221      Automated         x
292-4416067     8/19/2003     $127,991       Manual     x                                 x
                                           23 Manual /
Total                        $3,279,345    9 Automated 14 12 16                           7                 1
1 - Dates are in month/day/year order.
2 - These loans are also included in finding 2.


                                                  40
Appendix D

               RECOMMENDATIONS AND LOAN STATUS

                                      Recommendations
                        1A                 1B                    1C




                                                            Mortgage amount
                                         property not yet
                    properties sold


                                          claim paid on
                     Actual losses




                                                             insured loans
                                           Conveyance
                      incurred on




                                                              of actively
                                                                                  Loss




                                                                Original
                                                                               mitigation    Loan status as of




                                               sold
 Case number
                                                                               retention     October 11, 2005
                                                                              claims paid


 091-36376191                                               $139,692                        No longer in default
 292-42957021                                               $54,150              $650       Currently in default
 091-36432981                                               $102,885                        No longer in default
  261-8291418       $60,260                                                                 Claim
  292-4319476                                               $82,702              $650       No longer in default
  292-4320944                                               $76,500                         Currently in default
  261-8402578                                                $80,364                        No longer in default
  261-8385623                                               $67,467              $500       No longer in default
  261-8405705                                               $95,247              $900       No longer in default
  261-8406746                                               $84,829             $4,471      Foreclosure
  261-8421556                                               $150,212             $650       No longer in default
  261-8353065                                               $69,351              $100       Currently in default
  261-8383878                                               $69,451              $100       Currently in default
  261-8429135                                               $95,742              $100       Currently in default
  261-8429493                                               $94,254              $100       Currently in default
  292-4316802                                               $166,881             $650       No longer in default
  292-4345351                                               $49,129                         Currently in default
  261-8353223                      $58,146                                                  Claim
  261-8448405       $45,689                                                                 Claim
  292-4341989                                               $135,375             $650       No longer in default
  261-8445791                                               $120,547                        Currently in default
  091-3704561                                                                               Terminated
  261-8407889                                                $74,399                        No longer in default
  261-8452566                                                $66,474                        No longer in default
  181-2000595                                               $150,143             $900       No longer in default
  292-4359271       $27,956                                                                 Claim
  261-8500881                                               $92,270                         Foreclosure
  261-8437504                                               $128,981            $5,359      No longer in default
  261-8468553                                               $77,388             $4,765      Foreclosure
  292-4355829                                               $160,973                        Currently in default
  321-2284507                                               $145,221                        No longer in default
  292-4416067       $34,367                                                                 Claim
 Total             $168,272        $58,146                  $2,630,627    $20,545
1 - Matrix is responsible for these three loans.            Ampro is responsible for the remaining loans.


                                                            41
Appendix E

                SCHEDULE OF CLOSING DEFICIENCIES




                                                                                        Administration fees
                                                                     commitment fees
                                                                      Loan discount /




                                                                                                              Tax service fee
                                               Credit report2
                    Origination



                                  Appraisal1
                       fees
  Case number                                                                                                                   Total




 091-36376193 / 4                          $45                                           $45
               3
 292-4319476                     $100                $1,520                            $1,620
 292-4314298         $258                                                               $258
               3
 292-4320944                                         $1,530     $500       $64         $2,094
 292-4314302                                          $385                              $385
 292-4326918         $250                                                               $249
               3
 292-4345351                                                    $500                    $500
 292-4365701         $350                             $320                              $670
 261-8390879                                          $350                              $350
 292-4370616         $250                                                               $250
               3
 292-4355829                                                    $500       $64          $564
 292-4369676                                          $260                              $260
 292-4412383                                          $457                              $456
Total               $1,108       $100      $45       $4,822 $1,500        $128         $7,703
1 - HUD requires appraisals to be charged at actual cost. The borrower in case number 292-
    4319476 was charged a $450 appraisal fee when the actual cost was only $350.
2 - HUD requires lenders to explain and justify credit report charges above $75. The borrower in
    case number 091-3637619 was charged a $120 credit report fee. The file did not contain the
    required explanation.
3 - These loans are also included in finding 1.
4 - Matrix is responsible for this loan. Ampro is responsible for the remaining loans.




                                                                42
Appendix F

             UNDERWRITING DEFICIENCY NARRATIVES

Case number: 091-3637619
Closing date: January 17, 2003
Original mortgage amount: $139,692
Underwriter type: Automated
Status: This loan is no longer in default.

Assets
Matrix overstated cash reserves when submitting the loan for automated underwriting by
improperly including gift funds. The automated underwriting analysis was performed using
$1,386 in cash reserves after closing. However, the accounts comprising these reserves included
$10,000 in gift fund deposits.

   Criteria
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 4
   Condition #29 of the Desktop Underwriter findings report indicated that cash reserves could
   not include funds received as a gift.

Income
Matrix overstated base income when submitting the loan for automated underwriting by
including insufficiently documented commission income. The automated underwriting analysis
was performed using $3,583 in monthly base employment income. However, pay stubs
indicated that almost 95 percent of the borrower’s year-to-date earnings were from commissions.
Matrix did not obtain borrower tax returns or determine the existence of unreimbursed business
expenses.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7D
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 2

Liabilities
Matrix understated the borrower’s total mortgage payment when submitting the loan for
automated underwriting. Additionally, Matrix failed to document the required payoff of a $234
collection at closing.

The automated underwriting analysis was performed using a $1,077 total mortgage payment,
which included $42 hazard insurance and $142 taxes. However, the appraisal, conditional
commitment, underwriting worksheet, settlement statement, and payment history indicated
higher amounts for the borrower’s hazard insurance and taxes. Using the highest payments as
listed on the settlement statement and payment history, the borrower’s total mortgage payment
increases to $1,195.

The Desktop Underwriter findings report required payoff of a $234 collection at closing.
However, the file did not contain evidence the debt was ever paid off.



                                               43
   Criteria
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 2
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 4
   Condition #23 of the Desktop Underwriter findings report required evidence that a $234
   collection was paid off before the loan closing.


Case number: 292-4295702
Closing date: January 24, 2003
Original mortgage amount: $54,150
Underwriter type: Manual
Status: This loan is currently in default.
Loss mitigation retention claims: $650

Liabilities
The underwriter understated liabilities by omitting a $251 monthly car payment from the
borrower’s total fixed payment. According to the credit report, the account had a $1,835 balance
and was paid in advance until June 2003. Based on the limited cash reserves reported on the
underwriting worksheet, the $251 payment would have affected the borrower’s ability to make
mortgage payments within a few months of closing. This conclusion is supported by the
borrower’s first default date, which occurred less than two months after the car payments
resumed.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-11A

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed liabilities, the
borrower’s qualifying ratios increase to 34.02 and 53.15 percent. While the underwriting
worksheet noted several potential compensating factors, these factors were inadequate and
unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 091-3643298
Closing date: January 28, 2003
Original mortgage amount: $102,885
Underwriter type: Automated
Status: This loan is no longer in default.

Income
Matrix overstated total income when submitting the loan for automated underwriting by
including insufficiently documented child support income. The automated underwriting analysis
was performed using $350 in monthly child support income. While bank statements covering six
months showed regular automatic deposits, the statements did not document the source of these



                                                44
deposits. Additionally, the file did not contain evidence the child support payments would
continue for at least three years.

   Criteria
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 2
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 4
   Condition #23 of the Desktop Underwriter findings report required evidence of three months’
   receipt of child support using deposits on bank statements or cancelled checks. Condition
   #23 also required evidence of at least three years worth of continuance using the front and
   individual pages showing details of the agreement.

Liabilities
Matrix understated the borrower’s total mortgage payment when submitting the loan for
automated underwriting. The automated underwriting analysis was performed using a $784 total
mortgage payment, which included $168 in monthly escrows. The total mortgage payment
submitted did not include the borrower’s mortgage insurance premium. Additionally, the
payment history indicated an even higher total escrow amount. Using the highest total escrow as
listed on the payment history, the borrower’s total mortgage payment increases to $864.

   Criteria
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 2


Case number: 261-8291418
Closing date: February 21, 2003
Original mortgage amount: $81,357
Underwriter type: Manual
Status: HUD acquired and sold the subject property.
Loss on sale of subject property: $60,260

Income
The underwriter overstated the borrower’s income by including commission income received for
less than one year. While the underwriter approved this loan using $2,854 in base monthly
income, the employment documents indicated the borrower had averaged $929 in base monthly
income over 37 weeks. The remainder of the borrower’s earnings was from commission income
received for less than one year.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7, 2-7D

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income, the
borrower’s qualifying ratios increase to 74.27 percent. While the underwriting worksheet noted
several potential compensating factors, these factors were unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13



                                               45
Case number: 292-4319476
Closing date: March 4, 2003
Original mortgage amount: $82,702
Underwriter type: Manual
Status: This loan is no longer in default.
Loss mitigation retention claims: $650

Income
The underwriter overstated the borrower’s income. According to the application and
underwriting worksheet, the borrower earned $4,000 gross monthly income from two jobs.
However, the underwriter did not obtain the required pay stub for one employer, and the
employment documents did not support the income claimed. Between the two employers, the
borrower averaged $1,352 gross monthly income in 2000, $2,174 in 2001, and $1,966 in 2002.
While the file indicated the borrower was involved in three worker’s compensation claims
totaling $23,000, the supporting paperwork did not cite the employer name, was not signed, and
did not cite the amount of work missed.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7, 2-7A, 3-1E

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income, the
borrower’s qualifying ratios increase to 33.56 and 78.04 percent. While the underwriting
worksheet noted several potential compensating factors, these factors were inadequate and
unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 292-4320944
Closing date: March 10, 2003
Original mortgage amount: $76,500
Underwriter type: Automated
Status: This loan is currently in default.

Assets
Matrix understated cash received at closing and overstated cash reserves when submitting the
loan for automated underwriting. The automated underwriting analysis was performed using
$475 cash received at closing. However, the settlement statement indicated the borrower
received $1,595. The automated underwriting analysis was performed using $7,951 in
retirement assets. While the file contained retirement account statements, the statements were
incomplete, and 60 percent of the balance was only $5,615 after subtracting a borrower loan.

   Criteria
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 2
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 4



                                                46
   Condition # 26 of the Desktop Underwriter findings report indicated that retirement assets
   could only be included in the underwriting analysis up to 60 percent of the account balance.
   Condition # 26 required the most recent statements for each retirement account. Condition
   #28 required verification of all cash reserves after closing submitted to the underwriting
   analysis.


Case number: 261-8402578
Closing date: March 21, 2003
Original mortgage amount: $80,364
Underwriter type: Manual
Status: This loan is no longer in default.

Assets
The underwriter failed to verify $1,504 of the borrower’s total cash investment in the property.
The borrower’s assets included $1,000 in earnest money, $464 in prepaid expenses, and $1,559
in a depository account. While bank printouts confirmed the balance and documented the
payment of earnest money and prepaid expenses, they showed a large increase in total deposits
during the month before closing. While the file contained some borrower explanations, the
underwriter did not adequately document the source of funds for the excess deposits. Without
the unexplained portion of the deposits, the borrower did not have any available assets. The
borrower’s total cash investment in the property was $2,968. The borrower was $1,504 short of
meeting her total cash investment in the property.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-10, 2-10B


Case number: 261-8385623
Closing date: March 28, 2003
Original mortgage Amount: $67,467
Underwriter type: Manual
Status: This loan is no longer in default.
Loss mitigation retention claims: $500

Assets
The underwriter failed to verify $904 of the borrower’s total cash investment in the property.
The borrower’s assets included $500 in earnest money. Because the underwriter did not
establish the borrower’s history of accumulated savings, she was required to verify the source of
funds for the earnest money. The borrower’s total cash investment in the property was $904,
including earnest money and prepaid expenses. The borrower was $904 short of meeting her
total cash investment in the property.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-10, 2-10A


Case number: 261-8405705
Closing date: March 28, 2003


                                               47
Original mortgage amount: $95,247
Underwriter type: Manual
Status: This loan is no longer in default.
Loss mitigation retention claims: $900

Liabilities
The underwriter understated liabilities by improperly reducing the total mortgage payment for a
mortgage credit certificate and temporary interest rate buydown.

While the state of Michigan issued a mortgage credit certificate, the underwriter failed to
confirm that the borrower generated sufficient tax liability to use the available credit. We were
unable to determine whether the borrower generated sufficient tax liability.

While the file included a buydown agreement, the underwriter failed to establish that the
eventual increase in mortgage payments would not adversely affect the borrower.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14A-4
   HUD Mortgagee Letter 95-7, section XVI

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed liabilities, the
borrower’s qualifying ratios increase to 32.02 and 46.05 percent. While the underwriting
worksheet noted several potential compensating factors, these factors were inadequate and
unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 261-8406746
Closing date: April 4, 2003
Original mortgage amount: $84,829
Underwriter type: Manual
Status: This loan is currently in the foreclosure process.
Loss mitigation retention claims: $4,471

Credit History
The underwriter did not adequately evaluate the borrower’s credit history. This loan was
approved using alternate credit including a verification of rent and letters from two utility
companies. While the March 2003 rental verification listed the borrower as a current tenant, the
DTE Energy letter indicated the borrower’s account was closed in October 2002. The
underwriter did not obtain an explanation for this inconsistency. Our research indicates the
borrower was evicted from this residence.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3
   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 2-4C


                                                48
Case number: 261-8421556
Closing date: April 10, 2003
Original mortgage amount: $150,212
Underwriter type: Manual
Status: This loan is no longer in default.
Loss mitigation retention claims: $650

Income
The underwriter overstated the borrower’s income by including overtime income not properly
documented. According to the underwriting worksheet, the borrower earned $4,565 in base
monthly income. However, the verification of employment indicated the borrower’s base
monthly income was only $3,383, and pay stubs indicated that the remaining income was from
differential payments and overtime. While it was reasonable to include the $387 monthly
average differential income, the overtime income decreased substantially from 2002 to 2003 and
should not have been counted as effective income.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7A, 3-1E

Liabilities
The underwriter understated liabilities by omitting a $273 monthly payment for one revolving
account from the borrower’s total fixed payment and understating a second revolving account
payment. While a note on the application said the borrower “co-signed for” the revolving
account with a $273 monthly payment, credit reports indicated the borrower is the primary
obligor. The most recent credit report also listed the balance of the second revolving account as
$72, almost twice the amount included by the underwriter.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-11A, 2-11B-2

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income and
liabilities, the borrower’s qualifying ratios increase to 30.53 and 63.40 percent. While the
underwriting worksheet noted several potential compensating factors, these factors were
inadequate and unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-19


Case number: 261-8353065
Closing date: April 16, 2003
Original mortgage amount: $69,351
Underwriter type: Manual
Status: This loan is currently in default.
Loss mitigation retention claims: $100



                                                49
Liabilities
The underwriter understated liabilities by improperly reducing the total mortgage payment for a
mortgage credit certificate and temporary interest rate buydown.

While the state of Michigan issued a mortgage credit certificate, the underwriter failed to
confirm that the borrower generated sufficient tax liability to use the available credit. Using the
income and household information cited on the mortgage credit certificate and borrower
application, we determined that the borrower did not generate sufficient tax liability.

While the file included a buydown agreement, the underwriter failed to establish that the
eventual increase in mortgage payments would not adversely affect the borrower.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14A-4
   HUD Mortgagee Letter 95-7, section XVI

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed liabilities, the
borrower’s qualifying ratios increase to 32.61 and 50.39 percent. Furthermore, the ratios
increase to 34.72 and 53.65 percent when calculated using the year-to-date average income.
While the underwriting worksheet noted several potential compensating factors, these factors
were inadequate.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 261-8383878
Closing date: April 16, 2003
Original mortgage amount: $69,451
Underwriter type: Manual
Status: This loan is currently in default.
Loss mitigation retention claims: $100

Assets
The underwriter failed to verify $865 of the borrower’s total cash investment in the property.
The borrower’s assets included $500 in earnest money and $5 in a depository account. Because
the underwriter did not establish the borrower’s history of accumulated savings, she was required
to verify the source of funds for the earnest money. While the file contained an official bank
check for the earnest money, the bank printout only documented a $100 withdrawal. While the
borrower did not pay any monies at closing, both the settlement statement and good faith
estimate indicate the borrower paid $500 in earnest money and $470 outside of closing. The
borrower’s total cash investment in the property was $970. Using the $105 documented assets,
the borrower was $865 short of meeting her total cash investment in the property.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-10, 2-10A, 2-10C



                                                50
Credit History
The underwriter did not adequately evaluate the borrower’s credit history. This loan was
approved using alternate credit including a verification of rent and letters from a utility company,
insurance company, and child care facility. However, the utility letter was not signed, the
insurance letter was not signed and was from the borrower’s employer, and the child care letter
did not list an address or contact number. None of the letters were addressed directly to the
lender.

   Criteria
   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 2-4C
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 3-1

Property Condition
The underwriter failed to confirm repair requirements were satisfied before submitting the loan
for endorsement. The February 6, 2003, conditional commitment required scraping/repair of
windows and repair/replacement of brick as needed. While the file contained an April 16, 2003,
repair escrow agreement for $1,350 and two repair estimates, dated before the escrow agreement,
it did not confirm that the required repairs were completed.

   Criteria
   HUD Handbook 4000.2, REV-2, paragraph 2-19


Case number: 261-8429135
Closing date: April 16, 2003
Original mortgage amount: $95,742
Underwriter type: Manual
Status: This loan is currently in default.
Loss mitigation retention claims: $100

Assets
The underwriter failed to verify $820 of the borrower’s total cash investment in the property.
The borrower’s assets included $500 in earnest money and $.48 in a depository account.
Because the underwriter did not establish the borrower’s history of accumulated savings, she was
required to verify the source of funds for the earnest money. While the file contained a money
order for the earnest money, the bank printout did not document the source of funds for the
money order. While the borrower did not pay any monies at closing, both the settlement
statement and good faith estimate indicated the borrower paid $500 in earnest money and $320
outside of closing. The borrower’s total cash investment in the property was $820. Using the
$.48 documented assets, the borrower was $820 short of meeting her total cash investment in the
property.

Additionally, the file ledger from the title company indicated that the borrower paid an additional
$500 to the title company the day after the loan closed. Matrix did not document the reason or
source of funds for this payment. Including the $500, the underwriter failed to document the
source of funds for $1,320 paid by the borrower.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-10, 2-10A


                                                51
Credit History
The underwriter did not adequately evaluate the borrower’s credit history. The underwriting
worksheet indicated this loan was approved using alternate credit. While the file contained
verifications of rent and automobile insurance, the verification of rent was addressed to the
borrower’s residence, and the letter from the insurance carrier was addressed to an unknown
party and mailed to the borrower’s residence. Additionally, alternate credit documentation is
intended for borrowers without traditional credit, not for those with poor traditional credit. The
borrower’s credit report indicated she had multiple late payments on a student loan account.
While the file contained a borrower explanation, it did not contain documentation to support her
explanation.

   Criteria
   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 2-4C
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 3-1


Case number: 261-8429493
Closing date: April 18, 2003
Original mortgage amount: $94,254
Underwriter type: Manual
Status: This loan is currently in default.
Loss mitigation retention claims: $100

Income
The underwriter did not adequately document the borrower’s two-year employment history.
According to a letter from the borrower’s current employer, he had been with the employer since
1996. However, a borrower letter of explanation indicated that he was self-employed from 2000
until June 2002, when he returned to his current employer. While the file contained the
borrower’s 2000 tax return, it did not document his 2001 or 2002 self-employment income.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6


Case number: 292-4316802
Closing date: April 22, 2003
Original mortgage amount: $166,881
Underwriter type: Automated
Status: This loan is no longer in default.
Loss mitigation retention claims: $650

Assets
Matrix overstated cash reserves when submitting the loan for automated underwriting by
including assets not properly documented. The automated underwriting analysis was performed
using $7,334 in depository assets, $6,104 in stocks and bonds, $195 required at closing, and
$10,636 in reserves. The documentation included to support the depository assets only verified
$3,910. The documentation included to support the stocks and bonds verified $520 in a Roth
IRA (individual retirement account) and $2,644 in stocks and bonds. Additionally, the
statements included to support the borrower’s stocks and bonds did not cover a two-month


                                                52
period. The borrower’s assets totaled only $7,074. The settlement statement indicated the
borrower paid $5,100 in earnest money deposits and owed $2,047 at closing. Therefore, the
borrower was short $73 at closing.

   Criteria
   Conditions B6 and A0 of the Loan Prospector feedback certificate required the most recent
   two months statements for each account to verify sufficient funds required to close.
   Condition 1P required verification of all reserves submitted to Loan Prospector.
   HUD Mortgagee Letter 00-28

Liabilities
Matrix understated the borrower’s total fixed payment by omitting student loan payments
without properly evidencing deferment of the debt. The automated underwriting analysis was
performed using a $2,140 total fixed payment. However, this amount did not include $961 in
monthly student loan payments. The file did not contain evidence that these debts could be
deferred for at least 12 months. Including the student loans, the borrower’s total fixed payment
increases to $3,101.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-11C
   Condition BG of the Loan Prospector feedback certificate required the lender to include all
   debts listed on the credit report when computing the borrower’s qualifying ratios.


Case number: 292-4345351
Closing date: April 22, 2003
Original mortgage amount: $49,129
Underwriter type: Manual
Status: This loan is currently in default.

Credit History
The underwriter did not adequately evaluate the borrower’s credit history. While the application
indicated the borrower had lived with family for the past three years, the credit report, nondriver
license, and employment documents show two additional addresses during the same timeframe.
Additionally, while the borrower application, credit report, and nondriver license indicated that
the borrower was 19 years old in 2003, the credit report showed an installment trade line from
open from 1991 to 1996. The borrower was 7-12 years old during this timeframe. The file did
not contain explanations for these inconsistencies.

   Criteria
   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 2-4C


Case number: 261-8353223
Closing date: April 25, 2003
Original mortgage amount: $54,568
Underwriter type: Manual
Status: HUD acquired the subject property.
Conveyance Claims: $58,147


                                                53
Income
The underwriter overstated the borrower’s income by failing to consider the stability of the
borrower’s income and employment. According to the underwriting worksheet, the borrower
earned $1,317 in base monthly income. While a handwritten employer letter indicated that the
borrower worked 40 hours per week, it was faxed from the seller, and a computerized
verification of employment only showed part-time employment status. While an 11-month
average supported the income claimed, recent pay stubs indicated that the borrower’s income
sharply declined during the four months before closing. Additionally, the borrower held three
positions in different lines of work in two years. Due to the instability of the borrower’s income
and employment, the underwriter should have used the 2003 average base monthly income.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6, 2-7, 3-1E

Liabilities
The underwriter understated liabilities by improperly reducing the total mortgage payment for a
mortgage credit certificate and temporary interest rate buydown.

While a mortgage credit certificate was issued by the state of Michigan, the underwriter failed to
confirm that the borrower generated sufficient tax liability to use the available credit. Using the
income and household information cited on the mortgage credit certificate and borrower
application, we determined that the borrower did not generate sufficient tax liability.

While the file included a buydown agreement, the underwriter failed to establish that the
eventual increase in mortgage payments would not adversely affect the borrower.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14A-4
   HUD Mortgagee Letter 95-7, section XVI

Credit History
The underwriter did not adequately evaluate the borrower’s credit history. This loan was oved
using alternate credit including a rental account and letters from two telecommunications
companies. One of the letters was faxed from the seller. While the borrower claimed to have
lived with family before renting her current residence for 10 months, the credit report and
employment documents showed two additional addresses during this period. The underwriter
did not obtain an explanation for this inconsistency. Our research indicates the borrower was
evicted from one of her previous residences.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3
   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 2-4C

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income and
liabilities, the borrower’s qualifying ratios increase to 48.03 percent. While the underwriting
worksheet noted several potential compensating factors, these factors were unsupported.



                                                54
   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 261-8448405
Closing date: April 28, 2003
Original mortgage amount: $124,516
Underwriter type: Manual
Status: HUD acquired and sold the subject property.
Loss on sale of subject property: $45,689

Income
The underwriter overstated the borrower’s income. While a two-year average including
overtime supported the $5,012 qualifying income, pay stubs covering five weeks documented
only $4,446 in base monthly income and did not document any overtime. Additionally, a
borrower letter and bank printouts cast doubt on the stability of the borrower’s income. The
letter indicated the borrower no longer relies on the overtime offered at any particular moment
while the bank printouts showed an absence of weekly payroll deposits from April 5 to 17, 2003.
The underwriter did not follow up on these inconsistencies. Our research confirmed a two-week
pay gap just before closing and indicates the borrower averaged only $3,959 gross monthly
income during the three months following closing.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6, 2-7A, 3-1E
   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 2-4C

Liabilities
The underwriter did not adequately verify the borrower’s monthly child support obligations and
follow up on recent inquiries shown on the borrower’s credit report.

According to the underwriting worksheet, the borrower paid $421 in monthly child support.
While the file contained a request for child support payment and balance information to the state
of Alabama, the letter was never signed by the state and did not list a monthly payment amount.
Furthermore, the letter indicated the borrower was $2,067 overdue in child support obligations.

The borrower’s credit report showed two inquiries in January 2003. While a borrower letter
explained that the inquiries were from applying for a store credit card and cell phone for his wife,
the underwriter did not follow up on the potential new accounts.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3B, 2-11A

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income and
liabilities, the borrower’s qualifying ratios increase to 23.09 and 44.93 percent. The
inconsistencies in the borrower’s income and liabilities could push these ratios even higher.
While the underwriting worksheet noted several potential compensating factors, these factors
were inadequate and unsupported.


                                                55
   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 292-4341989
Closing date: April 29, 2003
Original mortgage amount: $135,375
Underwriter type: Automated
Status: This loan is no longer in default.
Loss mitigation retention claims: $650

Assets
Matrix overstated funds available and cash reserves when submitting the loan for automated
underwriting by including a large deposit not properly documented.

The automated underwriting analysis was performed using $6,029 as funds available, including
$1,009 in retirement assets and $5,020 in depository assets. The retirement asset was adequately
verified. While bank documents supported the $5,020 depository asset balance, the balance
included a $5,744 deposit. Because the borrower’s earnest money deposit was greater than 2
percent of the sales price, the lender was required to verify the source of funds for the large
deposit. While a borrower letter and a retirement account statement evidenced $4,850 of the
large deposit, $894 was not documented. After subtracting the unsupported portion of the large
deposit, the borrower had $5,135 available.

The automated underwriting analysis was performed using $340 in reserves. The settlement
statement indicated the borrower paid $3,000 in earnest money and owed $3,332 at closing.
Based on the assets verified, the borrower was $1,197 short at closing.

   Criteria
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 2
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 4
   Condition #26 of the Desktop Underwriter findings report required the lender to verify the
   source of funds for earnest money deposits exceeding 2 percent of the sales price. Condition
   #29 of the Desktop Underwriter findings report required the lender to verify all cash reserves
   after closing and indicated that cash reserves could not include funds received as a gift.


Case number: 261-8445791
Closing date: May 8, 2003
Original mortgage amount: $120,547
Underwriter type: Manual
Status: This loan is currently in default.

Income
The underwriter overstated the borrower’s income by including a $250 “auto” allowance without
demonstrating that the payment exceeds actual expenses.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7, 2-7N, 3-1E


                                               56
Liabilities
The underwriter understated liabilities by improperly reducing the total mortgage payment for a
temporary interest rate buydown. While the file included a buydown agreement, the underwriter
failed to establish that the eventual increase in mortgage payments would not adversely affect the
borrower.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14A-4

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income and
liabilities, the borrower’s qualifying ratios increase to 32.72 and 46.53 percent. While the
underwriting worksheet noted several potential compensating factors, these factors were
inadequate and unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 091-3704561
Closing date: May 9, 2003
Original mortgage amount: $135,052
Underwriter type: Automated
Status: This loan has been terminated and paid-in-full.

Assets
Matrix overstated funds available and cash reserves when submitting the loan for automated
underwriting by including large deposits not properly documented.

The automated underwriting analysis was performed using $11,088 as funds available. While
bank documents supported the assets used to qualify, they showed two large deposits on
February 12, 2003. Because the borrower’s earnest money deposit was greater than 2 percent of
the sales price, the lender was required to verify the source of funds for the large deposit. While
a borrower letter explained that one of the large deposits was money withdrawn from another
account and saved at home, the file did not contain supporting documentation. While the letter
explained that the second deposit was repayment from the borrower’s brother for a loan, the
letter noted that the check was later rejected and redeposited; the file did not contain
documentation to support the redeposit. Without the two deposits, the borrower only had $2,427
available.

The automated underwriting analysis was based on $7,085 in reserves. The settlement statement
indicated the borrower needed $4,328 at closing. Based on the assets verified, the borrower was
$1,901 short at closing.

   Criteria
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 2
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 4



                                                57
   Condition #25 of the Desktop Underwriter findings report required verification of $11,088 in
   depository assets using a verification of deposit, the most recent bank statement showing the
   previous month’s balance, or the most recent two statements. Condition #28 required the
   lender to verify all cash reserves and indicated that the reserves could not include funds
   received as a gift.


Case number: 261-8407889
Closing date: May 9, 2003
Original mortgage amount: $74,399
Underwriter type: Manual
Status: This loan is no longer in default.

Assets
The underwriter failed to verify the borrower’s ability to meet her total cash investment in the
property and satisfy all approval conditions. The borrower’s total cash investment in the
property was $925. The underwriting worksheet indicated that the borrower was required to pay
off all collection accounts upon loan approval using funds on deposit with the realtor. Credit
reports confirmed the borrower paid off five collection accounts with previous account balances
totaling $3,291. The borrower needed $4,216 to make her total cash investment in the property
and meet all approval conditions. Using the $2,800 realtor deposit and $3 bank account balance,
the borrower was $1,413 short of meeting her total cash investment in the property and satisfying
the approval requirement.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10


Case number: 261-8452566
Closing date: May 16, 2005
Original mortgage amount: $66,474
Underwriter type: Manual
Status: This loan is no longer in default.

Assets
The underwriter failed to verify $753 of the borrower’s total cash investment in the property.
The borrower's assets included $2,159 in depository accounts. While bank printouts confirmed
the balance and documented payment of the earnest money and appraisal, they showed $2,000 in
large deposits made just two weeks before closing. Based on the borrower’s $2,326 gross
monthly income, these large deposits warranted an explanation and evidence of source of funds.
Without the deposits, the borrower only had $159 in available assets. The borrower’s total cash
investment in the property was $2,187, including the earnest money and appraisal. Using the
recomputed available assets, the borrower was $753 short of meeting her total cash investment in
the property.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-10, 2-10B




                                               58
Case number: 181-2000595
Closing date: May 23, 2003
Original mortgage amount: $150,143
Underwriter type: Manual
Status: This loan is no longer in default.
Loss mitigation retention claims: $900

Assets
The underwriter failed to verify $5,371 of the borrower’s total cash investment in the property.
The borrower’s assets included $500 in earnest money, $656 in depository accounts, $1,766 in
retirement assets, and a $5,000 gift. However, the depository account statement was missing
three pages, the retirement account statement only documented $1,513, and the gift documents
did not adequately document the transfer of gift funds. Using only the earnest money, depository
account balance, and recomputed retirement account balance, the borrower had $2,669 in
available assets. The borrower’s total cash investment in the property was $8,040. Using the
recomputed available assets, the borrower was $5,371 short of meeting his total cash investment
in the property.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-10, 2-10C
   HUD Mortgagee Letter 00-28


Case number: 292-4359271
Closing date: May 30, 2003
Original mortgage amount: $125,234
Underwriter type: Automated
Status: HUD acquired and sold the subject property.
Loss on sale of subject property: $27,956

Liabilities
Matrix understated the borrower’s total mortgage payment and total fixed payment when
submitting the loan for automated underwriting. The automated underwriting analysis was
performed using an $809 total mortgage payment and $1,639 total fixed payment. The note and
underwriting worksheet indicated these amounts included a temporary interest rate buydown
reduction. However, the file did not contain a buydown agreement, and the Loan Prospector
loan summary specifically stated that there was not a temporary buydown. Without the
reduction, the borrower’s total mortgage payment and total fixed payment increase to $964 and
$1,794.

   Criteria
   Loan Prospector feedback certificate and loan summary


Case number: 261-8500881
Closing date: June 9, 2003
Original mortgage amount: $92,270
Underwriter type: Manual
Status: This loan is currently in the foreclosure process.


                                                59
Income
The underwriter overstated the borrower’s income. The borrower’s current and previous
positions relied on weather conditions. During the last 15.5 months at his most recent position,
the borrower was laid off 327 days. While the $2,167 in base monthly income cited on the
underwriting worksheet was supported by a verification of employment and pay stub, the
borrower only averaged $1,143 gross monthly income over 27.4 months, including
unemployment compensation. The underwriter should have used the 27.4-month average to
account for the income’s instability.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7, 3-1E

Liabilities
The underwriter understated liabilities by incorrectly stating the borrower’s monthly taxes.
While the underwriting worksheet used a $117 monthly tax escrow, the appraisal, conditional
commitment, and settlement statement indicated the tax escrow is $174.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income and
liabilities, the borrower’s qualifying ratios increase to 31.16 and 51.58 percent. While the
underwriting worksheet noted several potential compensating factors, these factors were
inadequate and unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 261-8437504
Closing date: June 10, 2003
Original mortgage amount: $128,981
Underwriter type: Manual
Status: This loan is no longer in default.
Loss mitigation retention claims: $5,359

Income
The underwriter overstated the borrower’s income by improperly grossing up child support
income and improperly including self-employment income.

According to the underwriting worksheet, the borrower earned $3,602 in base monthly income.
However, the employment documents indicate the borrower became self-employed between
March 2003 and May 2003. Because the borrower was self-employed for less than one year, the
underwriter should not have included his income for qualifying purposes.

According to the underwriting worksheet, the co-borrower received $602 in other monthly
income. This amount was based on $523 in child support income grossed up 15 percent.


                                                60
However, the income should not have been grossed up as it was received from the borrower,
eliminating the tax savings.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7, 2-7P, 2-9A-2, 2-9B, 3-1E

Liabilities
The underwriter understated liabilities by improperly reducing the total mortgage payment for a
temporary interest rate buydown. While the file included a buydown agreement, the underwriter
failed to establish that the eventual increase in mortgage payments would not adversely affect the
borrower.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14A-4

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income and
liabilities, the borrower’s qualifying ratios increase to 49.74 and 115.35 percent. While the
underwriting worksheet noted several potential compensating factors, these factors were
inadequate and unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 261-8468553
Closing date: June 12, 2003
Original mortgage amount: $77,388
Underwriter type: Manual
Status: This loan is currently in the foreclosure process.
Loss mitigation retention claims: $4,765

Income
The underwriter overstated the borrower’s income. While the underwriting worksheet cited
$1,603 in base monthly income, the employment documents only supported an 18.5-month
average of $1,429. Further, the borrower’s most recent pay stub showed a significant decline in
the number of hours worked. The underwriter did not adequately document the amount or
stability of borrower income. This conclusion is supported by the borrower’s first default date,
which occurred within a year of closing.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6, 3-1E

Liabilities
The underwriter understated liabilities by incorrectly stating the borrower’s monthly taxes and by
improperly reducing the total mortgage payment for a mortgage credit certificate and temporary
interest rate buydown.



                                                61
While the underwriting worksheet used an $83 monthly tax escrow, the appraisal, conditional
commitment, and settlement statement indicated the tax escrow is $105.

While a mortgage credit certificate was issued by the state of Michigan, the underwriter failed to
confirm that the borrower generated sufficient tax liability to use the available credit. Using the
income and household information cited on the mortgage credit certificate and borrower
application, we determined that the borrower does not generate sufficient tax liability.

While the file included a buydown agreement, the underwriter failed to establish that the
eventual increase in mortgage payments would not adversely affect the borrower.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-14A-4, 3-1
   HUD Mortgagee Letter 95-7, section XVI

Credit History
The underwriter did not adequately evaluate the borrower’s credit history. This loan was
approved using alternate credit including a rental account and three verification letters. While all
three letters were signed originals, they were not addressed to the lender and did not have
creases. This indicates the letters may have been hand-carried. While the borrower claimed to
have lived at one address since 2001, the credit report and employment documents documented
three additional addresses during this period. The file contained an affidavit stating the borrower
had “used” a relative’s address in the past; however, this did not account for the other two
addresses. Our research indicates the borrower was evicted from one of these residences.
Additionally, alternate credit documentation is intended for borrowers without traditional credit,
not for those with poor traditional credit. The borrower’s credit report showed nine collection
accounts. While the borrower paid the collections off before closing, some of the accounts had
outstanding balances for several years before payoff. This indicated a disregard for, or inability
to manage, financial obligations.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3
   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 2-4C

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income and
liabilities, the borrower’s qualifying ratios increase to 45.07 percent. However, the ratios could
be higher, considering the significant decline in hours shown on the borrower’s most recent pay
stub. While the underwriting worksheet noted several potential compensating factors, these
factors were inadequate and unsupported.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13


Case number: 292-4355829
Closing date: June 17, 2003
Original mortgage amount: $160,973


                                                62
Underwriter type: Automated
Status: This loan is currently in default.

Assets
Matrix overstated funds available and understated funds required when submitting the loan for
automated underwriting. Additionally, Matrix failed to document the source of funds for the
borrower’s earnest money deposit.

The automated underwriting analysis was performed using $2,276 in retirement assets.
However, the retirement account statement only documented $1,951. While the underwriting
analysis was performed using $0 borrower-paid closing costs, the settlement statement indicated
the borrower needed $3,067 to close after $5,000 in earnest money deposits. Additionally, while
the file contained cancelled earnest money deposit checks totaling $5,000, the deposits exceeded
2 percent of the sales price, and the file did not evidence the source of funds.

Including earnest money, the borrower needed $8,067 to close. Based on the $1,951 in assets
verified, the borrower was $6,116 short.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10A
   HUD Mortgagee Letter 00-28
   Condition BT of the Loan Prospector feedback certificate indicated the automated
   underwriting analysis was performed using $0 in borrower closing costs. Condition G3
   indicated the automated underwriting analysis was performed using $2,276 in stocks and
   bonds.

Liabilities
Matrix understated the borrower’s total mortgage payment when submitting the loan for
automated underwriting by failing to follow the systems requirements for adjustable rate
mortgages. Additionally, Matrix understated the borrower’s total fixed payment when
submitting the loan for automated underwriting by failing to include all debts listed on the
borrower’s credit report.

The automated underwriting analysis was performed using a $1,004 total mortgage payment.
However, this amount was based on the note rate, and the correct total mortgage payment was
$1,161.

The automated underwriting analysis was performed using a $1,270 total fixed payment.
However, this amount did not include the updated total mortgage payment and all debts listed on
the borrower’s credit report. The correct total fixed payment was $1,473.

   Criteria
   Condition BU of the Loan Prospector feedback certificate required the lender to enter a total
   mortgage payment computed 1 percent greater than the note rate. Condition BG required the
   lender to include all debts listed on the borrower’s credit report.


Case number: 321-2284507
Closing date: June 20, 2003


                                                63
Original mortgage amount: $145,221
Underwriter type: Automated
Status: This loan is no longer in default.

Liabilities
Matrix failed to document the required payoff of an $880 outstanding judgment listed on the
borrower’s credit report.

   Criteria
   Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 4
   Condition #22 of the Desktop Underwriter findings report required evidence of payoff of any
   outstanding judgments shown on the credit report.


Case number: 292-4416067
Closing date: August 19, 2003
Original mortgage amount: $127,991
Underwriter type: Manual
Status: HUD acquired and sold the subject property.
Loss on sale of subject property: $34,367

Assets
The underwriter failed to verify $351 of the borrower’s total cash investment in the property.
While the settlement statement indicates the borrower received $222 at closing, the closing and
disbursement instructions and hazard insurance receipt indicated the borrower paid $1,088
outside of closing. The borrower’s total cash investment in the property was $866. Using the
$515 in available assets documented on the borrower’s bank statement balance, the borrower was
$351 short of meeting her total cash investment in the property.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10

Credit History
The underwriter did not adequately evaluate the borrower’s credit history. This loan was
approved using alternate credit including three utility payment verifications. However, the file
did not contain a verification of rent or an explanation regarding the absence of such verification.
Both the underwriting worksheet and the borrower application indicated she paid $700 per
month for rent.

   Criteria
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 2-3A, 3-1




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Appendix G

                                         CRITERIA

HUD Handbook 4000.2, REV-2, paragraph 2-19
Repair requirements outstanding on the conditional commitment must be satisfied before the
mortgage is submitted for endorsement. If adverse weather conditions prevent completion of the
repairs, the loan may be submitted for insurance if a repair escrow is established and the lender
provides a mortgagee’s assurance of completion.

HUD Handbook 4004.4, REV-1, CHG-2, paragraph 2-4C
Underwriters determine the overall acceptability of the loan for HUD insurance and are required
to perform underwriting decisions with due diligence in a prudent manner. Underwriters must
review all credit analyses performed by fee and staff personnel to ensure reasonable conclusions,
sound reports, and compliance with HUD requirements. Underwriters must have an awareness
of warning signs that may indicate irregularities and the ability to detect fraud.

HUD Handbook 4004.4, REV-1, CHG-2, paragraph 2-13
Loan correspondents may take the initial application, assign an appraiser, obtain credit reports,
order verifications, and close the loan after it has been underwritten. A direct endorsement-
approved sponsor must perform the underwriting function. Loan correspondents cannot perform
any underwriting function including mortgage credit examination.

HUD Handbook 4060.1, REV-1, paragraph 3-4
The principal activity of a loan correspondent is to originate mortgages for the sale or transfer to
a sponsor. The sponsor is required to perform the underwriting function and is responsible for
the actions of their loan correspondents. Sponsors are required to supervise and perform quality
control reviews of their loan correspondents to ensure they are in compliance with the HUD
requirements and prudent lending practices.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3
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 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 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. 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.

For borrowers who do not use traditional credit or have not yet established a credit history,
lenders must develop a credit history using alternate documentation. Alternate credit
documentation includes utility payment records, rental payments, automobile insurance
payments, and other means of direct access from the credit provider.




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The basic hierarchy of credit evaluation is the manner of payments made on previous housing
expense, including utilities, followed by the payment 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.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3A
Lenders must determine the borrower’s payment history of housing obligations either directly
from the landlord, through the credit report, or using canceled checks covering the most recent
12-month period.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3B
Lenders must obtain an explanation from the borrower for all recent inquiries shown on the
credit report.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6
Lenders must verify the borrower’s employment for the most recent two full years. To analyze
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. Income stability takes precedence over job stability.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7
Lenders must analyze the income of each borrower to determine whether it can reasonably be
expected to continue through at least the first three years of the mortgage loan.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7A
Overtime income may be included in the qualifying ratios if the borrower has received such
income for approximately two years and there are reasonable prospects of its continuance.
Lenders are required to develop an earnings trend and must provide a sound rationalization when
including overtime income that has continually declined.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7D
Commission income must be averaged over the previous two years. The borrower must provide
the last two years’ tax returns along with a recent pay stub. Unreimbursed business expenses
must be subtracted from gross income. Commissions earned for less than one year are not
considered effective income.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7N
Automobile allowances and expense account payments may only be included in gross monthly
income to the extent that they exceed actual expenditures. To establish the amount of income
that may be added to gross income, the borrower must provide Internal Revenue Service Form
2106, Employee Business Expenses, for the previous two years. Lenders must obtain
verification from the employer that the payments will continue.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7P
Nontaxable income may be “grossed-up” to account for the tax savings.




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HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9A-2
Income from borrowers self-employed for less than one year may not be considered as effective
income.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9B
Self-employment income must be documented using the year-to-date balance sheet and profit-
and-loss statement. The borrower must provide signed and dated individual tax returns for the
most recent two years, including all applicable schedules.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10
Lenders must verify all funds for the borrower’s investment in the property. The borrower’s
investment in the property is the difference between the amount of the insured mortgage,
excluding any up-front mortgage insurance premium, and the total cost to acquire the property,
including prepaid expenses.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10A
Lenders must verify the amount and source of funds for earnest money deposits which appear
excessive based on the borrower’s history of accumulated savings or exceed 2 percent of the
sales price. To document the amount of funds, lenders may use a copy of the borrower’s
canceled check or a certification from the deposit holder acknowledging receipt of funds. To
document the source of funds, lenders may use a verification of deposit or bank statement
showing that the average balance was sufficient to have included the earnest money deposit.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10B
Lenders must document depository accounts (savings and checking) using a verification of
deposit along with the most recent bank statement. If there is a large increase in an account, the
lender must obtain an explanation and evidence the source of funds for the deposits.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C
Lenders must document the transfer of gift funds from the donor to the borrower. Acceptable
documentation includes a donor’s withdrawal slip or cancelled 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 that the settlement agent
received the gift from the donor.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-11A
The borrower’s liabilities include all installment loans, revolving charge accounts, real estate
loans, alimony, child support, and all other continuing obligations. Unless a revolving account
shows a specific monthly payment, the lender must compute the monthly payment at the greater
of 5 percent of the balance or $10.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-11B-2
Contingent liability applies for cosigned obligations unless the underwriter obtains
documentation that the primary obligor has been making payments on a regular basis and does
not have a history of delinquent payments on the loan over the past 12 months.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-11C
When 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


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underwriting analysis unless the borrower can provide evidence that the debt may be deferred to
a period outside this timeframe.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12
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. HUD requires
underwriters to compute ratios of the borrower’s mortgage payment expense to effective income
and of the borrower’s total fixed payment to effective income. The borrower’s total mortgage
payment includes principal and interest and escrow deposits for real estate taxes, hazard
insurance premiums, homeowners’ association dues, and mortgage insurance premiums. The
borrower’s total fixed payment is comprised of the borrower’s total mortgage payment and all
recurring charges. The borrower’s ratios are considered acceptable if the total mortgage payment
and total fixed payment do not exceed 29 and 41 percent of gross monthly income, respectively.
Ratios exceeding these benchmarks may be considered acceptable if significant compensating
factors are presented.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-13
The following compensating factors may be used in justifying approval of mortgage loans with
ratios exceeding the 29 and 41 percent benchmarks. Underwriters must state the compensating
factors used to support loan approval on the “remarks” section of the underwriting worksheet.
    • 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.
    • The borrower makes a large downpayment toward the purchase of the property.
    • The borrower has demonstrated a conservative attitude toward the use of credit and an
        ability to accumulate savings.
    • Previous credit history shows that the borrower has the ability to devote a greater portion
        of income to housing expenses.
    • 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.
    • There is only a minimal increase in the borrower’s housing expense.
    • The borrower has substantial cash reserves after closing.
    • The borrower has substantial nontaxable income (if no adjustment made previously in the
        ratio computations).
    • The borrower has potential for increased earnings, as indicated by job training or
        education in the borrower’s profession.
    • 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 and is expected to
        return to work.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-19
If the borrower is purchasing an energy-efficient home, the qualifying ratios may exceed the 29
and 41 percent benchmarks by 2 percent. The borrower’s ratios are considered acceptable if the
total mortgage payment and total fixed payment do not exceed 31 and 43 percent of gross
monthly income, respectively. New construction begun after April 24, 1994, is automatically
considered energy efficient.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14A-4



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Underwriters are required to establish that the eventual increase in mortgage payments from a
temporary interest rate buydown will not adversely affect the borrower and likely lead to default.
The underwriter must document which of the following criteria the borrower meets:
   • Potential for increased income that would offset the scheduled payment increases, as
      indicated by job training, education, or a history of advancement.
   • A demonstrated ability to manage financial obligations in such a way that a greater
      portion of income may be devoted to housing expense. This may also include borrowers
      whose long-term debt, if any, will not extend beyond the term of the buydown agreement.
   • The borrowers have substantial assets available to cushion the effect of the increased
      payments.
   • The cash investment made by the borrower substantially exceeds the minimum required.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1
The loan package submitted for insurance endorsement is expected 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 approval 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. Verification
forms must pass directly between lender and provider without being handled by any third party.

HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1E
Lenders are required to obtain a verification of employment and the most recent pay stub to
document borrower income. If the lender does not obtain a verification, it must obtain pay stubs
covering the most recent 30-day period along with original copies of the previous two years’
Internal Revenue Service W-2 forms.

HUD Mortgagee Letter 95-7, section XVI
Lenders may consider the tax credit resulting from mortgage credit certificates as a direct
reduction in housing expense when computing the borrower’s qualifying ratios. Lenders using
the tax credit as a direct reduction in housing expense must develop and use a worksheet that
estimates the amount of the mortgage credit available, determines the adjusted total housing
payment, and confirms that borrowers generate sufficient tax liability to use the available credit.
Loan files must contain copies of the mortgage credit certificate and the worksheet.

HUD Mortgagee Letter 00-28
Assets such as 401(k)s, IRAs (individual retirement account), and thrift savings plans may be
included in the underwriting analysis up to 60 percent of value unless the borrower provides
credible evidence that a higher percentage may be withdrawn after subtracting taxes and
penalties.

Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 2
The lender is accountable for compliance with all Federal Housing Administration guidelines, as
well as for any eligibility requirements, credit capacity, and documentation requirements not
covered in the user’s guide. The data entered into the automated system must be true, accurate,
and complete.

Fannie Mae’s Desktop Underwriter User’s Guide for FHA Loans, chapter 4
The lender must comply with all messages and conditions listed on the automated underwriting
findings report. Additionally, the lender must review the credit report to confirm that the data
evaluated by the system were accurate.


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