oversight

Ryland Mortgage Company, Tempe, Arizona, Did Not Follow HUD Requirements in the Origination of Insured Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-10-31.

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

                                                                Issue Date
                                                                       October 31, 2005
                                                                Audit Report Number
                                                                       2006-LA-1001




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



FROM:      Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: Ryland Mortgage Company, Tempe Arizona, Did Not Follow HUD
           Requirements in the Origination of Insured Loans

                                  HIGHLIGHTS

 What We Audited and Why

            In response to a recommendation from the Department of Housing and Urban
            Development’s (HUD) Santa Ana Homeownership Center Quality Assurance
            Division and Ryland Mortgage Company’s (Ryland) high default rate for its
            branch office, we audited Ryland’s loan origination activities for its Tempe,
            Arizona, branch office. The audit objectives were to determine whether Ryland
            acted in a prudent manner and complied with HUD regulations, procedures, and
            instructions in its approval of Federal Housing Administration-insured mortgages
            and whether it adequately implemented its quality control plan.

 What We Found
            Although most of Ryland’s loans are performing, Ryland failed to originate 23 of
            the 24 loans in our sample in compliance with HUD requirements and regulations.
            All 23 loans involved multiple origination deficiencies that should have precluded
            their approval. The deficiencies included false employment data; questionable/
            false Social Security numbers; improper treatment of downpayment gifts, service
            fees, and/or buydowns, resulting in inflated sales prices; unsupported/overstated
            income; insufficient income and employment documentation; an understated
           liability; an unacceptable credit history; inaccurate or excessive qualifying ratios
           without adequate compensating factors; an unallowable fee; and unsupported
           sources of deposits. In addition, Ryland did not adequately implement its quality
           control plan. We attribute these problems to Ryland’s failure to fully implement
           its quality control plan and its aggressive position on approving loans over more
           prudent lending practices. As a result, Ryland placed HUD’s single-family
           insurance fund at risk for 23 unacceptable loans with original mortgages totaling
           $3,085,094. HUD remains at risk of losses totaling $2,730,099 related to 20 of
           the 24 loans.

What We Recommend
           We recommend that HUD take appropriate administrative action against Ryland
           by seeking recovery for 14 of the loans totaling $85,741 in partial claims, loan
           modification, special forbearance, and inflated sales prices; indemnification of
           $2,730,099 against future losses on 20 of the loans; and requiring Ryland to
           reimburse the borrowers for $4,000 in unallowable fees on one of the loans.

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

Auditee’s Response


           We provided Ryland the draft report on September 20, 2005, and held an exit
           conference with Ryland officials on September 27, 2005. Ryland provided
           written comments on October 14, 2005. Ryland generally disagreed with our
           report findings.

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




                                             2
                             TABLE OF CONTENTS

Background and Objectives                                                            4

Results of Audit
        Finding 1: Ryland Did Not Originate Insured Loans in Accordance with HUD     5
        Requirements and Prudent Lending Practices
        Finding 2: Ryland Did Not Adequately Implement Its Quality Control Plan as   15
        Required

Scope and Methodology                                                                19

Internal Controls                                                                    21

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use               22
   B.   Auditee Comments and OIG’s Evaluation                                        23
   C.   Schedule of Loan Deficiencies                                                106
   D.   Narrative Case Summaries                                                     107
   E.   Criteria                                                                     138




                                              3
                      BACKGROUND AND OBJECTIVES

The National Housing Act, as amended, established the Federal Housing Administration, an
organizational unit within the Department of Housing and Urban Development (HUD). The
Federal Housing Administration provides insurance to private borrowers against loss on
mortgages financing homes. The basic home borrower insurance program is authorized under
title II, section 203(b) of the National Housing Act and governed by regulations in 24 CFR
[Code of Federal Regulations] Part 203.

Before 1983, HUD performed most underwriting of Federal Housing Administration-insured
loans. In 1983, HUD implemented the direct endorsement program, which authorized approved
lenders to underwrite loans without HUD’s prior review and approval. Regulations governing
this program are contained in 24 CFR [Code of Federal Regulations] Parts 202 and 203. The
vast majority of Federal Housing Administration-insured single-family loans are processed
through the direct endorsement program.

Ryland was approved in 1979 as a nonsupervised lender, with its home office headquartered in
Woodland Hills, California. According to HUD’s Neighborhood Watch system, Ryland has 24
active branches throughout the country, including the Tempe, Arizona, branch office. Ryland is
an authorized agent for two principal lenders: Coastal Mortgage Services Inc., and Virginia
Housing Development. Ryland’s primary business is to originate loans for new homes built by
its parent company, Ryland Group, Inc. All loan applications are initially received at the branch
offices or online through Ryland’s Web site and then routed to the Ryland Operations Center in
Scottsdale, Arizona, for underwriting and closing. The loans are initially underwritten by Loan
Prospector, a software program which evaluates the borrowers’ creditworthiness and indicates
the level of underwriting and documentation that is necessary to determine the loan’s eligibility
for insurance by Federal Housing Administration. If Loan Prospector gives an accept status on
the loan, then the loan officer underwrites the loan. However, if the loan is given a refer status,
then it is routed to the Ryland Operations Center for a more thorough review and underwriting.
Pursuant to a written agreement, Ryland sells Federal Housing Administration loans to
Countrywide Funding Corporation shortly after closing, if the loans meet Countrywide’s contract
requirements.

The audit objectives were to determine whether Ryland acted in a prudent manner and complied
with HUD regulations, procedures, and instructions in its approval of the Federal Housing
Administration-insured mortgages and whether it adequately implemented its quality control
plan.




                                                4
                                  RESULTS OF AUDIT

Finding 1: Ryland Did Not Originate Insured Loans in Accordance with
           HUD Requirements and Prudent Lending Practices
Ryland did not comply with HUD’s requirements for prudent lending practices in the origination
and underwriting of the 23 loans we reviewed in our sample totaling $3,085,094. It did not
exercise due diligence in (1) detecting false employment data and invalid Social Security numbers,
(2) identifying inflated sales prices and inappropriate use of gift funds and buydowns, (3) verifying
borrowers’ income and employment, (4) assessing borrowers’ ability to pay through meticulous
evaluation of liabilities and credit deficiencies, (5) precluding charging unearned or unallowable
fees, and (6) verifying borrowers’ source of funds for deposits. We attribute this problem to
Ryland’s disregard for HUD requirements and in the failure to adequately implement its quality
control plan. As a result, HUD remains at a risk of loss on 20 of the loans, valued at $2,730,099,
and incurred other actual losses of $85,741. In addition, one borrower was charged an unallowable
fee of $4,000.


 HUD Handbook and
 Requirements

               Lenders must follow the statutory and regulatory requirements of the National
               Housing Act and HUD requirements, instructions, guidelines, and regulations when
               originating insured loans. HUD Handbook 4060.1, REV-1, “Mortgagee Approval
               Handbook,” requires that lenders conform to generally accepted practices of prudent
               lenders and demonstrate responsibility to maintain approval for participation in
               Federal Housing Administration insurance programs.

               HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, “Mortgagee Credit Analysis
               for Mortgagee Insurance,” describes the basic mortgage credit underwriting
               requirements for single-family mortgage loans insured under the National Housing
               Act. The lender must establish the ability and willingness of the borrower to repay
               the mortgage debt. This decision must be predicated on sound underwriting
               principles consistent with the guidelines, rules, and regulations described throughout
               the handbook and must be supported by sufficient documentation.

 Summary of Findings


               We reviewed 24 Federal Housing Administration-insured loans originated
               between November 30, 2001, and November 30, 2004, and found that Ryland did
               not comply with HUD requirements and prudent lending practices in 23 of 24
               loans totaling $3.1 million. All 23 loans contained multiple loan origination



                                                  5
           deficiencies that should have precluded their approval. During the audit, 3 of the
           24 loans were sold without a loss to HUD, while 21 of the 24 loans equaling $2.8
           million are still active and 20 of those loans continue to be a risk to HUD. We
           identified the following loan deficiencies during our review (see appendix C):

              Questionable Documentation Deficiencies
              • False or altered Internal Revenue Service W-2 forms, pay stubs, and
                 verification of employment forms and false loan officer cerification (3 of
                 24 loans) and
              • Questionable/false borrowers’ Social Security numbers (3 of 24 loans).

              Loan Origination Deficiencies
              • Inflated sales prices without justification (13 of 24 loans); and
              • Improper use of buydown rate (8 of 24 loans).

              Income Deficiencies
              • Unsupported/overstated income (7 of 24 loans); and
              • Insufficient employment documentation (14 of 24 loans).

              Debt or Credit Deficiencies
              • Understated liabilities (1 of 24 loans);
              • Unacceptable credit history (1 of 24 loans); and
              • Inaccurate or excessive qualifying ratios without adequate compensating
                 factors (5 of 24 loans).

              Unallowable Fees
              • Unallowable fees (1 of 24 loans).

              Inadequate Documentation
              • Unsupported sources of deposits (8 of 24 loans).

           Details of deficiencies are discussed separately below. In addition, narrative case
           summaries for each of the cases are in appendix D.


False Employment Data and False
Loan Officer Certifications
(3 of 24 Cases)


           We determined that 3 of the 24 cases contained false employment documents that
           should have been detected by Ryland. These documents included fabricated or
           altered Internal Revenue Service W-2 forms, borrower pay stubs, and verification
           of employment forms. We confirmed the false employment data by reviewing the
           documents in the file, interviewing the borrower and employer, and obtaining
           supplemental verification documentation from the borrower’s employer.


                                            6
In one case (023-0990733), the borrower’s employer, G-Unlimited, did not exist.
We visited the address listed on the loan application to conduct an interview with
the employer. The lot the employer purportedly occupied belonged to another
business, Grand Canyon Pump and Supply Company, which has operated at that
location for more than 15 years without affiliation with G-Unlimited. We
contacted the property owner of the area, who confirmed that G-Unlimited has
never operated at the address, nor has it ever occupied any of its properties. It
appears that the business is fictitious, and income earned by the borrower while
supposedly working there is false.

The borrower’s pay stubs and W-2 form appear to have been fabricated. We
noticed that the Social Security insurance tax and healthcare tax amounts were
incorrectly presented on both pay stubs and the W-2 form. Contrary to HUD
Handbook 4000.4, REV-1, CHG-2, paragraph 3-16, the loan officer certified the
faxed copies of the borrower’s W-2 form and pay stubs as true and correct copies
of the originals without noticing the discrepancy of the tax withholding
calculations. The W-2 form calculated a 9 percent Social Security tax (a variance
of 2.8 percent from the standard 6.2 percent), and a 2 percent Medicare tax (a
variance of 0.65 percent from the standard 1.45 percent). All four pay stubs
calculated a 4.84 percent Social Security tax (a variance of 1.36 percent), and a
1.60 percent Medicare tax (a variance of 0.15 percent). When we questioned the
borrower about these inconsistencies, she could not verify her employment at G-
Unlimited, yet Ryland’s telephone verification of employment showed that the
borrower’s employment was verified for two years.

In another case (023-1451488), false employment documents included faxed
copies of the W-2 form and pay stubs, contrary to HUD Handbook 4155.1, REV-
4, CHG-1, paragraph 3-1 F. The W-2 form, shown in figure 1 below, shows the
type set was printed outside of the text box margins. Additionally, a handwritten
number was superimposed on the first number of the Social Security prefix on the
pay stub (see figure 2 below). The borrower was able to verify the employer’s
name; however, she could not explain the altered state of her pay stubs, furnish
supportive documentation to corroborate the pay stubs’ authenticity, or contact
her former employer since it had gone out of business. The Department of
Economic Security wage reports did not show the borrower ever worked for
Muebleria Imperial, which signifies that either the employment was false or the
borrower’s income was unreported, yet the telephone verification of employment
confirmed borrower’s two years of service at Muebleria.




                                 7
                               Figure 1: W-2 form, case 023-1451488




                               Figure 2: Pay stub, case 023-1451488




          In the third case (023-1932092), three of the most recent pay stubs in the loan file
          were manufactured and altered to increase the borrower’s monthly income. We
          were able to contact the borrower’s employer, Pioneer Ford, which provided the
          borrower’s payment history for the period of April through September 2003. The
          two pay stubs coinciding with the payment history showed a deviation of $2,000
          and $1,300 from the amount reported on Pioneer Ford’s records. In addition, one
          of the pay stubs was missing a check number, and the font sizes on all three pay
          stubs were different. Ryland failed to detect this violation and approved the loan.

Questionable/False Social
Security Numbers
(3 of 24 Cases)

          We tested the validity of all borrowers’ and coborrowers’ Social Security
          numbers by querying Lexis Nexis and performing a Social Security number
          validity test from an in-house database. We determined that 3 of the 24 cases
          contained invalid Social Security numbers that went unnoticed by Ryland. These
          borrowers’ Social Security numbers were issued within two years of the
          application-received date.




                                            8
               •   Our Lexis Nexis query showed one borrower had more than one Social
                   Security number (see appendix D, case 023-1073648). Ryland’s only
                   documentation of verification of the borrower’s Social Security number
                   was the individual’s tax returns (1999-2001), which appeared questionable
                   since they lacked the borrower’s signature, and his name was misspelled.
                   The credit report for the borrower showed no activity. However, the
                   accounts that were used to analyze his liabilities were listed under his
                   spouse’s Social Security number.
               •   Lexis Nexis reported that the second borrower’s Social Security number
                   belonged to another individual (see appendix D, case 023-1932092).
                   Moreover, Ryland required that the borrower provide a clearer copy of his
                   Social Security card; however, the loan was underwritten without either
                   the card or a documented explanation in the Ryland case file.
               •   The third borrower’s Social Security number was altered on the pay stubs
                   to show “765” rather than the printed “665” (see appendix D, case 023-
                   1451488).


Inflated Sales Prices and
Improper Treatment of
Downpayment Gifts and
Buydowns (13 of 24 Cases)


           Ryland generally offers an incentive to new home buyers if they use Ryland as
           their lender to finance the purchase of a home. Through the Nehemiah or OWN
           program, the buyer is offered gift funds, which go toward financing the
           downpayment and closing costs. In exchange for supplying the homebuyers with
           this gift, Ryland agrees to make a contribution in the amount of the gift, along
           with a $300, $385, $500, or $800 service fee to the gift provider (Nehemiah or
           OWN). We found that 13 of the 21 cases we reviewed included this type of
           situation. While this is an accepted practice, Ryland inappropriately made price
           adjustments to the original base sales price to recover part or all of the amount it
           provided to the Nehemiah or OWN program, service fees, and buydown.

           Contrary to HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-10
           C, the borrowers were essentially unaware that they were repaying the gift funds
           through their monthly mortgage payments. The increase in sales price caused the
           payments to be inflated for 13 of the 24 cases by part or all of the amount of the
           gift, service fee, and/or buydown.

           A former Ryland loan officer claimed that Ryland management’s aggressive
           position on approving loans led its employees to circumvent more prudent loan
           approval practices. For instance, if the borrower’s income was insufficient to
           qualify for a loan, the two-to-one buydown would be offered to the borrower to


                                             9
           bypass the qualification cap. The Nehemiah program was offered in the event
           that the borrower had no funds saved for closing. In the scenario in which the
           borrower receives the gift fund, the operations manager would instruct the loan
           processor to increase the sales price of the home to cover the expense of funding
           the gift. The manager would also request this transaction’s anonymity by making
           sure that the contract addendums did not state “sales price increase.” A Ryland
           underwriter confirmed these practices.

           Figure 3 below shows two examples of documents which a Ryland employee had
           written, illustrating the increase in sales price due to the Nehemiah gift fund,
           service fee, and buydown.

                Figure 3: Sales price increase, cases 023-1293230 and 023-1449064

               Sales price increased by $8,000 in the first case and $5,500 in the second.




Inappropriate Use of Buydown
Rate (8 of 24 Cases)

           Contrary to HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14, and REV-
           5, paragraph 3-1 C, Ryland qualified 8 of the 24 loans with a buydown rate but
           failed to document that the eventual increase in mortgage payments would not
           adversely affect the borrower or increase the chance of default. On seven of the
           eight loans, the borrowers defaulted after making from 3 to 15 payments.

           Two Ryland homebuyers attested that Ryland offered them the two-to-one
           buydown without adequately explaining the process or warning them of the
           eventual monthly mortgage payment increase. One of the borrowers believed she
           was offered the buydown because her income would not qualify her for the loan.


                                           10
            A former Ryland loan officer indicated that this was common practice when the
            borrower did not have sufficient income to qualify. As a result, both borrowers
            struggled in meeting their payments, which could have resulted in the loss of their
            homes.

Overstated Income
(7 of 24 Cases)

            Contrary to HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraphs 2-7
            and 2-7 A, Ryland overstated the borrowers’ income in 7 of the 24 cases. This
            problem is attributable to the inclusion of false or discrepant employment income
            and unsupported/incorrect calculations of income.

Third-Party Verifications Not
Conducted (14 of 24 Cases)


            Ryland failed to obtain adequate employment documentation as required by HUD
            Handbook 4155.1, REV-4, paragraph 4-4, and REV-5, paragraphs 2-6 and 3-1 E,
            in 14 of 24 cases. Ryland failed to verify borrower’s employment for two years,
            obtain a copy of the borrowers’ pay stubs covering the most recent 30-day period,
            and/or obtain a copy of the previous two years’ Internal Revenue Service W-2
            forms. Details are contained in the individual narrative case summaries (appendix
            D) and in finding 2.

Understated Liabilities
(1 of 24 Cases)

            Ryland did not include all outstanding liabilities as required by HUD Handbook
            4155.1, REV-4, CHG-1, paragraphs 2-3 and 2-4, and REV-5, paragraph 2-11 in 1
            of the 24 loans. In case 023-1073648, Ryland understated the borrower’s liabilities
            by not including a personal line of credit account that held a balance of $184

Unacceptable Credit History
(1 of 24 Cases)


            In 1 of 24 cases (023-1493862) , the borrower’s credit history was unsatisfactory
            and did not meet the provisions stated in HUD Handbook 4155.1, REV-4, CHG-




                                             11
            1, paragraph 2-3. The credit report indicated collection and charge-off accounts
            older than two years. Ryland obtained explanation letters from the borrower
            regarding the charge-offs but not the collection accounts.


Inaccurate/Excessive Qualifying
Ratios without Adequate
Compensating Factors
(5 of 24 Cases)

            Ryland’s calculated borrower debt-to-income ratios as required by HUD Handbook
            4155.1, REV-4, CHG-1, and REV-5, paragraph 2-12 exceeded guidelines in 4 of
            the 24 case files. Yet, Ryland approved the loans and submitted them for insurance
            endorsement without acceptable compensating factors.

            After we adjusted the calculations for unsupported/overstated income and
            understated liabilities that Ryland should have included, the ratios exceeded HUD
            guidelines for 5 of the 24 cases. The ratios calculated for the 5 loans are shown
            below in figure 4.

                                  Figure 4: Qualifying ratios

                                                    Ryland calculated           OIG calculated

                                                 Mortgage     Total fixed   Mortgage    Total fixed
                                                payment-to- payment-to- payment-to- payment-to-
                                                income ratio income ratio income ratio income ratio

                           HUD case number          29%          41%          29%          41%



                          1     023-1057152       26.75%        46.25%       26.94%       46.43%

                          2     023-1129379       28.77%        43.26%       30.96%       46.56%

                          3     023-1592011       18.59%        46.53%       18.82%       47.11%

                          4     023-1653270       35.79%        40.17%       37.38%       41.76%

                          5     023-1932092       22.65%        35.42%       48.99%       76.60%



                               Cases with
                           excessive debt-to-        2            4            4             5
                              income ratios




                                                    12
        Unallowable Fee (1 of 24 Cases)



                    In 1 of the 24 loans (023-1493852), we determined that the borrower was charged an
                    unallowable fee. The borrower’s accrued rent equity with her stay at an Equity
                    Residential apartment was used to offset an unjustified adjustment in the sales price
                    of her home. Ryland allowed a total of $4,000 in unallowable fees to be charged to
                    the borrower.


    Inadequate Documentation for
    Verification of Deposit
    (8 of 24 Cases)


                    Ryland failed to obtain a standard verification of deposit or original bank statements
                    for the most recent three-month period for 8 of the 24 cases as required by HUD
                    Handbook 4155.1, REV-4, CHG-1 and REV-5, paragraph 3-1 F. If the document
                    itself is not more than 180 days old when the loan closes, there is no need to acquire
                    an updated application or original bank statements.


    Prudent Underwriting and
    Required Quality Control
    Practices Circumvented


                    According to a former Ryland national underwriting manager, Ryland’s upper
                    management circumvented underwriting policies and procedures to increase loan
                    approval turnovers. This included allowing branch managers to underwrite refer1
                    loans and then instructing direct endorsement underwriters to sign off on the
                    mortgage credit analysis worksheets and certifications. She also claimed many of
                    the loan processors were not properly trained and were heavily dependent on the
                    instruction of the senior managers, whose primary goal was to increase loan
                    approvals as quickly as possible.

                    A former loan officer confirmed those facts. She stated that “she had no formal
                    Federal Housing Administration training and received assistance with completing
                    her duties from an operations manager, who stressed quantity rather than quality.
                    The same operations manager allegedly pressured other loan officers to falsify
                    borrower income in order to meet requirements. If the loan officers did not comply,
                    their continued employment at Ryland was doubtful.”


1
    Refer loans are those that were not initially qualified to be approved in Loan Prospector.


                                                            13
             Another former underwriter stated that the managers did everything possible to
             ensure a loan was not rejected. This notion, she stated, was what Ryland
             headquarters dictated to the Ryland Operations Center.

Conclusion



             Based on our review and discussions with borrowers, their employers, and former
             Ryland employees, we believe that Ryland upper management’s failure to fully
             implement its quality control plan (see finding 2 below) and its aggressive
             philosophy on approving loans over adhering to more prudent lending practices
             caused the improper loan approvals. Consequently, Ryland unnecessarily increased
             the risk to the Federal Housing Administration insurance fund by approving loans
             that did not comply with HUD requirements and remains at risk of losses on 20 of
             the loans totaling $2,730,099.

Recommendations


             We recommend that HUD’s assistant secretary for housing-federal housing
             commissioner require Ryland to

             1A. Indemnify HUD’s Federal Housing Administration against future losses on
             the 20 active loans totaling $2,730,099 and reimburse HUD for losses already
             incurred of $85,741 (see appendix A).

             1B. Reimburse the borrower $4,000 for an unallowable fee.

             1C. Contact the servicing lenders regarding the inflated sales prices and pay the
             increased amounts to reduce the corresponding loan amounts.




                                              14
                                RESULTS OF AUDIT

Finding 2: Ryland Did Not Adequately Implement Its Quality Control
           Plan as Required
Contrary to HUD requirements, Ryland did not fully implement its quality control plan as
required. Our review disclosed that while Ryland had established a written quality control plan
that met HUD requirements, it failed to conduct the required quality control and early payment
default reviews. Ryland also neglected to follow established quality control plan procedures
relating to third-party verifications of income and employment. We attribute these deficiencies
to Ryland’s disregard of its responsibilities to assure the reviews were conducted in a timely
manner and that deficiencies were promptly addressed. This unnecessarily increased the risk to
the Federal Housing Administration insurance fund.



 HUD Requirements


              HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” chapter 6,
              provides that as a condition of HUD-Federal Housing Administration approval,
              lenders, including loan correspondents, must have and maintain a quality control
              plan for the origination and servicing of insured mortgages. The quality control
              plan must be a prescribed function of the lender’s operations and assure that the
              lender maintains compliance with HUD-Federal Housing Administration
              requirements and its own policies and procedures. It must be sufficient in scope
              to enable the lender to evaluate the accuracy, validity, and completeness of its
              loan origination and servicing operations. It must provide for independent
              evaluation of the significant information gathered for use in the mortgage credit
              decision making and loan servicing process for all loans originated or serviced by
              the lender. The quality control plan must enable the lender to initiate immediate
              corrective action where discrepancies are found.

 Quality Control Plan Reviews
 Not Conducted

              Ryland’s quality control plan states that quality control reviews will be conducted
              on 10 percent of its loans within 90 days of closing. However, we found that did
              not occur.




                                               15
As of January 2005,

•   Ryland’s November 2003 to July 2004 monthly audit reviews were
    complete but were done late. According to Ryland’s vice president of the
    Quality Assurance Division, these were late because of the extended leave
    of one of its auditors beginning in June 2004 and the retirement of another
    senior auditor on December 31, 2003.

•   Although the November 2003 to July 2004 reviews were performed and
    completed, they were conducted over 90 days after closing and occurred
    before Ryland’s auditor took leave, indicating that the work was not
    completed in a timely manner with a full staff on board.

•   Our review of the November 2003 report showed about 70 percent of the
    reviews (or 71 of the 103 loans) were completed after the 90-day period.
    This delayed Ryland from notifying senior and middle management
    personnel to promptly initiate remedial action and from directing
    corrective measures to all loan origination, underwriting, and service
    personnel.

As of May 2005,

•   Ryland’s August 2004 to November 2004 monthly audit reviews were
    complete but late.

•   Ryland anticipated it would catch up with its reviews by the end of July
    2005.

•   Our review of Ryland’s November 2004 report showed 100 percent of its
    110 reviews were conducted and completed after the required timeframe,
    which contributed in the delay of management’s actions and notification
    of remedial action to loan origination, underwriting, and service personnel.

•   A few of the deficiencies identified in Ryland’s November 2004 review
    reflected what we found during ours and mirrored findings in HUD’s
    August 2003 monitoring. Those deficiencies included the following:

    1. The qualifying ratios were not calculated correctly;
    2. Some of the income used to qualify was unstable and/or not properly
       identified;
    3. All underwriting requirements were not met;
    4. The qualifying ratios were not always acceptable, and the underwriter
       did not always state the compensating factors on the mortgage credit
       analysis worksheet;



                             16
                   5. A pay stub covering the most recent 30-day period was not found in
                      the file and/or did not meet all of the requirements for this type of
                      loan; and


Early Payment Default Reviews
Not Conducted

            Our evaluation of Ryland’s early payment default reviews was inconsistent with
            the work completed by one of Ryland’s internal auditors. When we discussed the
            reviews with her, she assured us that all defaults with six payments or fewer were
            conducted monthly. We recreated her selection procedures by obtaining a hard
            copy of her Neighborhood Watch default list for the periods between December 1,
            2002, and March 31, 2005. We determined that 122 loans went into default, with
            66 (more than 50 percent) defaulting in six payments or fewer. Only 32 (48
            percent) of the 66 loans were properly reviewed, while the remaining 34 were not.
            We also noted that several reviews were conducted for loans that went into
            default with more than six payments. The time expended for these reviews should
            have been allocated to those loans that defaulted in fewer than six payments.

Third-Party Verifications Not
Conducted (14 of 24 Cases)

            In our review of 24 loans, we found 14 instances in which Ryland did not follow
            the established quality control plan procedures and HUD Handbook 4155.1, REV-
            4, CHG-1, and REV-5, paragraphs 2-6 and 3-1 E, relating to third-party
            verifications of income and employment used as a basis for approving the loans.
            Ryland’s quality control plan provides that employment documents, such as
            verification of employment, pay stubs, Internal Revenue Service W-2 forms, tax
            returns, and bank statements, will be reviewed for accuracy and completeness.
            HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraphs 2-6 and 3-1 E,
            provides more stringent requirements for verifying employment; as an alternative
            to obtaining a written verification of employment, the lender may choose to
            obtain from the borrower original pay stubs covering the most recent 30-day
            period, along with original copies of the previous two years’ Internal Revenue
            Service W-2 forms. The lender must also verify by telephone all employment for
            the past two years.

            One case (023-1188456) did not contain a written or telephone verification of
            employment, indicating that no verification of the borrower’s employment was
            performed for the past two years. Another case (023-1592011) did not contain the
            borrower’s and coborrower’s original pay stubs covering the most recent 30-day




                                            17
             period, while the telephone verification of employment verified only one year and
             five months of the borrower’s employment and one year and six months of the
             coborrower’s employment.

Conclusion



             We attribute these deficiencies to Ryland management’s disregard of its
             responsibilities to assure the reviews were conducted and in a timely manner.
             Ryland’s vice president of quality assurance explained that there was insufficient
             staff to perform the work. We believe Ryland’s disregard stems from management’s
             aggressive position on approving loans as quickly as possible over more prudent
             lending practices. As a result, as discussed in finding 1, Ryland unnecessarily
             increased the risk to the Federal Housing Administration insurance fund by
             approving loans that did not comply with HUD requirements.

Recommendations

             We recommend that HUD’s assistant secretary for housing-federal housing
             commissioner

             2A. Require Ryland to take the necessary actions to ensure that the required quality
             control plan and early payment default reviews are conducted in a timely manner
             and that corrective action is taken and documented for all reported deficiencies.

             2B. Require Ryland to take the necessary actions to ensure that it complies with
             HUD’s Federal Housing Administration requirements relating to third-party
             verifications of income and employment.




                                              18
                         SCOPE AND METHODOLOGY

Our review generally covered the period from November 30, 2001, through November 30, 2004.

We made a nonrepresentative selection of 24 loan files originated by Ryland’s Tempe, Arizona,
branch office from a population of 390 loans. We made our selection based on the number of
payments before first default; loans in claim; and several risk factors, including miscellaneous
“price adjustments” found in the agreement of sale, questionable Social Security numbers,
inadequate qualifying ratios, unsupported income, unsupported assets, understated liabilities,
inadequate documentation, and questionable/unearned fees.

To accomplish our objectives, we

   •    Reviewed relevant HUD rules, regulations, and guidance regarding mortgage underwriting
       and quality assurance.

   •   Reviewed Ryland and HUD case files for the 24 sample loans, 12 LandAmerica
       Transnation escrow files, and 7 Ryland title escrow files.

   •   Obtained Arizona Department of Economic Security wage reports on borrowers and
       coborrowers for all 24 loans.

   •   Distributed postal tracers to verify borrowers’ home/mailing addresses.

   •   Reviewed Ryland’s fiscal year end 2003 quality control plan to determine whether the plan
       complied with HUD requirements and whether Ryland fully implemented the plan.

   •   Queried the Social Security numbers for the 390 borrowers and 214 coborrowers in our
       audit universe to determine their validity.

   •   Queried electronic/Internet database systems, including Lexis Nexis, Real Quest,
       Neighborhood Watch, and Single Family Data Warehouse to determine the validity of loan
       information.

   •   Interviewed 10 borrowers and 10 current or former borrowers’ employers.

   •   Interviewed former Ryland employees: national underwriting manager, underwriter, and
       loan officer.

   •   Interviewed current Ryland employees, including the vice president of the Quality
       Assurance Division and vice president of production.




                                                 19
The audit fieldwork was performed during the period January through July 2005. We performed
our review in accordance with generally accepted government auditing standards.




                                            20
                             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 control was relevant to our audit objectives:

              •       Policies and procedures that management has in place to reasonably ensure
                      that the loan underwriting process complies with HUD program
                      requirements.

              We assessed the relevant control identified above.

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


 Significant Weaknesses


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

              •       Ryland did not have adequate internal controls to reasonably ensure that
                      originations complied with all applicable HUD requirements (see findings 1
                      and 2).




                                               21
                                                        APPENDIXES

Appendix A

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

               Recommendation                          Ineligible 1/            Funds to be put to better use 2/
                      number
                    1A (see below)                            $85,741                                         $2,730,099
                     1B (finding 1)                            $4,000


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

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

                                                                                                                                   Indemnification
                                                                                                         Recovered
                          Mortgage       Claim     Partial      Loan           Special  Inflated sales                  Net loss amount (funds
     HUD case no.                                                                                          amount
                           amount       amount     claim      modification forebearance      price                    (ineligible)      put to
                                                                                                          (resale)
                                                                                                                                     better use)
  1 023-0990733       $      100,261    $     -    $     -     $       -    $        -    $     2,264     $        - $ 2,264 $           100,261
  2 023-1057152               95,460     95,460           -             -             -         2,363        95,460 $ 2,363                      -
  3 023-1073648              137,857           -          -             -             -              -              - $         -        137,857
  4 023-1113543              134,995           -          -             -             -         3,352               - $ 3,352            134,995
  5 023-1129379              123,068           -          -             -             -         4,696               - $ 4,696            123,068
  6 023-1188456              143,470           -          -          650              -           985               - $ 1,635            143,470
  7 023-1293230              132,457    132,457     26,216           650              -         7,876       132,457 $ 34,742                     -
  8 023-1318434              107,488           -          -             -          100          3,136               - $ 3,236            107,488
  9 023-1449064              131,239           -          -          650              -         5,413               - $ 6,063            131,239
 10 023-1451488              150,575           -          -             -             -              -              - $         -        150,575
 11 023-1453913              151,265           -          -             -             -              -              - $         -        151,265
 12 023-1487584              127,078    127,078           -          650              -         5,270       127,078 $ 5,920                      -
 13 023-1493862              118,805           -     6,170              -             -         2,985               - $ 2,985            118,805
 14 023-1576678              128,905           -     9,145              -             -         5,907               - $ 5,907            128,905
 15 023-1592011              153,772           -                   1,300           100               -              - $ 1,400            153,772
 16 023-1646394              130,833           -         -              -             -              -              - $         -        130,833
 17 023-1646660              148,291           -         -              -             -              -              - $         -        148,291
 18 023-1653270              136,010           -          -             -             -         3,150               - $ 3,150            136,010
 19 023-1736086              140,628           -     5,094              -             -         2,934               - $ 8,028            140,628
 20 023-1811657              155,173           -         -              -             -              -              - $         -        155,173
 21 023-1932092              119,516           -         -              -             -              -              - $         -        119,516
 22 023-1965223              157,172           -         -              -             -              -              - $         -        157,172
 23 023-2133833              137,025           -         -              -             -              -              - $         -
 24 023-2177719              160,776           -         -              -             -              -              - $         -        160,776
 Subtotal (without    $    3,085,094   $354,995    $46,625     $   3,900    $      200    $    50,331    $ 354,995 $ 85,741 $ 2,730,099
      Total           $    3,222,119
                                       Recommendation 1A sanction total                                               $               2,815,840

                     Loans are still active. We are requesting indemnification for amount not partial claims amount




                                                                      22
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         23
24
Comment 1




            25
26
Comment 2




            27
28
29
30
31
Comment 3




            32
33
34
35
36
Comment 4




Comment 5




            37
Comment 6




            38
Comment 7




Comment 8




Comment 9




            39
Comment 10




Comment 11




             40
Comment 12




Comment 13




             41
Comment 14




Comment 15




             42
Comment 16




             43
44
45
Comment 17




Comment 18




             46
Comment 19




             47
Names redacted for privacy




           48
Comment 20




             49
50
Comment 21




             51
52
Comment 22




             53
Comment 23




             54
Comment 24




             55
56
Comment 25




             57
58
Comment 26




             59
60
Comment 27




             61
62
Comment 28




             63
Comment 29




             64
65
Comment 30




             66
Comment 31




             67
68
Comment 32




             69
Comment 33




             70
71
Comment 34




             72
73
Comment 35




             74
Comment 36




             75
Comment 37




             76
77
Comment 38




             78
79
Comment 39




             80
81
Comment 40




             82
83
                         OIG Evaluation of Auditee Comments

Comment 1   OIG has the authority to audit any HUD-funded program activities and does not
            need a specific justification for its selection. Nevertheless, as previously
            discussed with Ryland at the exit conference, OIG initiated the audit of Ryland
            based on the fact that the Tempe branch office’s three year default rate of 9.2
            percent for loans closed during the audit period (November 1, 2001 and
            November 30, 2004) was significantly high. The confusion in Ryland’s
            comments lies in the time period, loans that were in default for the two year
            performance period ending November 30, 2004, used when querying
            Neighborhood Watch. Further, we felt an audit of Ryland was warranted based
            on a HUD recommendation stemming from concerns outlined in a November
            2003 monitoring report.

Comment 2   We interviewed the former Ryland employees to obtain a better understanding of
            the loan process and origination practices that occurred at the time the sampled
            loan transactions took place. Subsequent to the interviews, we discussed the
            results with Ryland’s vice president of production in order to ensure accuracy and
            fairness in our audit report conclusions. The vice president was unable to provide
            us with any evidence to dispute the statements and claims by the former Ryland
            employees. Our interpretations of former Ryland employee allegations are
            addressed below:

            •   The former Ryland national underwriting manager’s contention does not
                question the branch manager’s authority to underwrite loans, but questions
                whether the branch manager acted in accordance with underwriting policies
                and procedures. Ryland’s response stated “a phone survey of these seven
                management employees reveals that only one branch manager has used such
                authority on approximately four loans and only after discussion, and with the
                approval and concurrence of the national underwriting manager, who
                ultimately approved the loans.” The former national underwriting manager’s
                claim implies she did not concur with the approval of the loans, yet the loans
                were approved based on the sole authority of the branch manager. As a result,
                we feel that Ryland did not successfully invalidate the former employee’s
                allegation.

            •   The former loan officer was not speaking about loan processors; she was
                speaking about other loan officers. Further, she did not state that loan
                processors were pressured to approve loans. She stated that loan officers were
                pressured to falsify borrower income in order to meet requirements. There is a
                great distinction between falsifying borrower income and approving loans. As
                a result, we feel that Ryland did not successfully invalidate the former
                employee’s allegation.




                                            84
            •   The former Ryland employees did not assert that all of its employees lacked
                training. The underwriting manager stated that many of the loan processors
                were not properly trained, not that they were not trained at all. And, because
                they were not properly trained, they relied heavily on the assistance of higher
                managers. Similarly, the former loan officer stated that she had no formal
                Federal Housing Administration training and as a result, relied heavily on the
                assistance of someone above her. As a result, we feel that Ryland did not
                successfully invalidate the former employees’ allegation.

Comment 3   We agree with Ryland’s assertion found two paragraphs down after the section
            “Ryland Also Objects to the Misrepresentation Regarding Changes in Sales
            Pricing and Treatment of Downpayment Gift.” and understand how the message
            was misconstrued. We revised the section to clarify the statement.

            We also agree with the contention that Ryland employees do not have the ability
            to “increase” the sales price. We are fully aware that Ryland is a separate entity
            from any of The Ryland Group’s home selling subsidiaries and Ryland receives
            its mortgage loans from the home sales division. It is, however, apparent that both
            entities have business associations with each other. We believe that the decisions
            to “increase” the sales price of homes are made at Ryland Mortgage and
            communicated and directed to The Ryland Group’s home selling subsidiary. This
            assertion is evidenced by an email we obtained from a Ryland Mortgage file
            between a Ryland Mortgage loan processor and a Ryland Home employee, who
            we presume to be the seller since her name appears on the Rider to Agreement of
            Sale as the document’s preparer. The email requests a price adjustment be made
            to cover the cost of a buydown and to adjust what is reported on the finance
            addendum by a proportionate amount. The email continues to say “put in the
            comments in clear ‘price adjustment’ cause we’ve had people put in other things
            like – to cover buy down or for Nehemiah – and we don’t want the appraiser to
            know that.” The message alludes that this procedure of increasing the sales price
            to conceal the recovery of Nehemiah fund, service fee, and buydown is not an
            isolated occurrence, but is common and accepted at Ryland Mortgage.
            Furthermore, we recently received a memo directing Ryland managers and their
            respective departments to cease increasing sales prices when offering
            downpayment assistance. The memo went on to state that if there was any
            resistance, contact the Regional President or the writer of the memo. This
            suggests that prior to its dissemination in December of 2002, increasing the sales
            price to regain the downpayment assistance funds was commonly exercised.

            We reviewed the 24 borrower contracts, included in that number are the three
            cases that were omitted from the narrative case summary, and determined that 13
            cases contained unjustified price adjustments. Of the 13 cases, nine were in effect
            and dated before Ryland sent out the directive (see chart below). It is safe to say
            that these nine cases had inflated sales prices. We believe the four remaining
            cases, signed by buyer between January 11, 2003 and April 17, 2003, were



                                             85
            handled the same way and no changes to cease this practice were ever
            implemented.

                                                         Price    Price adjustment
                               Case        Settlement
                                                      adjustment date based on
                              number          date
                                                        amount    buyer's signature
                         1   023-0990733    12/14/01  $     2,300     12/5/2001
                         2   023-1113543    04/30/02        3,400      3/2/2002
                         3   023-1057152    05/16/02        2,400      4/2/2002
                         4   023-1188456    06/14/02        1,000      6/5/2002
                         5   023-1129379    07/30/02        4,770     7/14/2002
                         6   023-1293230    09/27/02        8,000     8/23/2002
                                                                      8/31/02 &
                         7 023-1449064      12/27/02        5,500
                                                                       10/10/02
                         8   023-1318434    09/25/02        3,200      9/8/2002
                         9   023-1576678    03/26/03        6,000     11/11/2002
                        10   023-1487584    02/12/03        5,277     1/11/2003
                        11   023-1493862    01/28/03        3,032     1/11/2003
                        12   023-1736086    06/24/03        2,980      2/6/2003
                        13   023-1653270    04/30/03        3,200     4/17/2003

                                           Not signed by borrower, date of fax
                                           3 loans not included in draft report

            Mortgagee Letter 96-18 states “the source of funds for a gift to the borrower must
            be totally unrelated to the loan transaction.” HUD Handbook 4155.1, REV-4,
            CHG-1, and REV-5, paragraph 2-10 C, states that “no repayment of the gift may
            be expected or implied.” Therefore, if the sales price of the homes were increased
            to recoup the gift, there is a violation of both Mortgagee Letter 96-18 and HUD
            Handbook, regardless of whether this increase in sales price is below the market
            value of the house.

            Other than briefly mentioning that the terminated loan officer wrote the two notes
            appearing on page 10 of the report, Ryland did not provide any documentation or
            support to negate these notes. Nor did Ryland sufficiently explain the option
            identification numbers attached to these sales price increases during our audit.
            Therefore, we did not make any changes to the report relating to the inflated sales
            prices.

Comment 4   We reviewed the loan file documentation again, but stand by our conclusion that
            all three cases contained false employment data that should have been detected by
            Ryland and/or false loan officer certification. It appears that Ryland may have
            confused the facts between two cases. The first two paragraphs on page 15 of
            their comments seem to refer to case number 023-0990733, while the third
            paragraph seems to refer to case number 023-1451488. However, we never
            mentioned that a loan officer certified the pay stubs and W-2 from a fax source
            for case number 023-1451488, but rather directed that deficiency to case number
            023-0990733. In light of Ryland’s observation, we noticed that we overlooked


                                               86
            the fact that the pay stubs and W-2s were also falsely certified for case number
            023-1451488. As a result, we have included that deficiency in the narrative case
            summary and will appear on the final version of the report. In order to reduce
            redundancy, we chose to direct Ryland to the comments of the narrative case
            summaries, unless Ryland agrees with a deficiency but chose to comment on it.
            Please see comment 20 for our response.

            •   Case No. 023-1451488 HUD Handbook 4000.4, REV-1, CHG-2, paragraph 3-
                16 states when a duly designated official of a mortgage certifies a document,
                they are endorsing that the document is accurate and complete to the best of
                their knowledge. The text typewritten on the year 2001 W-2 form overlaps the
                surrounding textbox and text descriptions, while the Social Security numbers
                on two pay stubs were altered; before the change, the Social Security prefix
                showed “665,” and after the change, it showed “765.” The loan officer
                certified W-2 statements for the years 2000 and 2001, as well as the two
                altered pay stubs for the periods August 24 to September 6, 2002 and
                September 7 to 20, 2002. Clearly, this loan officer acted in violation of the
                HUD Handbook. Also, these items contained the fax header from “PM Home
                Buyer Connection In,” with the fax number 623-846-6660. HUD Handbook
                4155.1 REV-4, CHG-1, paragraph 3-1 E requires that the original pay stubs be
                obtained. Further, there were also pay stubs for the borrower’s husband
                included in the file, which were faxed by Ryland; however, because the
                husband is not a borrower those items are irrelevant. The bank statement
                certification bears no consequence to false employment.

            •   Case No. 023-1932092 OIG agrees that Ryland verified employment using an
                acceptable alternative method. However, employment verification is not in
                question for this borrower. Moreover, we do not believe substituting signed
                tax returns for the missing W-2 form added significant risk to the loan. The
                issue at hand concerns false pay stubs. The most recent pay stubs in the loan
                file were fabricated and altered to increase the borrower's monthly income.
                One of the pay stubs was missing a check number and the font size on all
                three pay stubs was different. This was very apparent at first inspection of the
                documents. Ryland failed to detect this discrepancy. We noted that Ryland
                agreed with the OIG to indemnify this loan; their statement can be found on
                page 20 and 55 of their comments.

Comment 5   We reviewed the loan file documentation again but stand by our position that all
            three cases contained false Social Security numbers that should have been
            detected by Ryland. Ryland found one case in which they believe the underwriter
            should have detected the false Social Security numbers (case number 023-
            1451488) and they chose to indemnify another case (023-1932092), but disagreed
            with OIG’s evaluation. Our response is shown below. Please see comment 21 for
            our response on the third case (023-1073648).




                                             87
            •   Case No. 023-1932092 Even though borrower’s Social Security number was
                the same on pay stubs, W-2 forms, tax returns, application, and credit report,
                there was still an issue with the number. As noted on the file, a Ryland
                employee wanted a clearer copy of the Social Security card. This is not
                necessary; however, due diligence should have dictated. We feel that the
                employee who noted the request was unsure of the validity of the Social
                Security number. As discussed in the exit conference, Ryland has access to
                Lexis Nexis, a research database where the OIG found other names associated
                with the Social Security number in question. We noted that Ryland agreed
                with the OIG to indemnify this loan; their statement can be found on page 20
                and 55 of their comments.

Comment 6   Our contention in the ‘inappropriate use of buydown’ section was twofold; one, to
            satisfy the documentation requirement mandated by HUD Handbook 4155.1,
            REV-4, CHG-1, paragraph 2-14 and two, to show the improper use of the
            buydown. This is illustrated by the statement concerning borrowers who
            defaulted in 3 to 15 payments. We are suggesting that these borrowers should not
            have received a loan because their incomes were insufficient to handle the
            monthly mortgage payments, yet Ryland qualified them by offering the two to
            one buydown. We stand by our position that all six cases contained inappropriate
            use of a buydown. Also, we included in the total count the three other cases we
            did not include in the narrative case summaries; note that we cite two of those
            cases contained inappropriate use of buydown. Please see comments 23, 26, 29,
            30, and 33 for our response.

Comment 7   We agree to remove two deficiencies with regard to overstated income for case
            numbers 023-1188456 and 023-2133833 from the report, but maintain that the
            other five cases are valid and remain deficient. Please see comments 20, 21, 31,
            32, and 40 for our response.

Comment 8   We agree to remove one deficiency concerning case number 023-1965223 from
            the report, but maintain that the remaining twelve are valid and remain deficient.
            Included in our total count are the three cases we did not include in the narrative
            case summaries; note that we cite two of those cases contained a third party
            verification deficiency. In addition, we added in the criteria HUD Handbook
            4155.1, REV-4, CHG-1, and REV-5, paragraph 2-6, which requires that the
            borrower must explain any gaps in employment spanning one month or more.
            Additionally, the lender must verify the borrower’s employment for the most
            recent two years. Please see comments 24, 25, 29, 31, 33, 35, 36, & 40 for our
            response.

Comment 9   We agree to remove two deficiencies with regard to understated liabilities for case
            numbers 023-1965223 and 023-2133833 from the report, but maintain that the
            other one case is valid and remains deficient. Please see comment 21 for our
            response.



                                             88
Comment 10 We stand by our position that this one case has an unacceptable credit history.
           Please see comment 29 for our response.

Comment 11 We agree to remove eight deficiencies with regard to inaccurate/excessive
           qualifying ratios without adequate compensating factors for case numbers 023-
           0990733, 023-1188456, 023-1449064, 023-1493862, 023-1646394, 023-1811657,
           023-1965223, and 023-2133833 from the report, but maintain that the remaining
           four were valid and remain deficient. Included in our total count are the three
           other cases we did not include in the narrative case summaries; note that we cite
           one other case that contained inaccurate/excessive qualifying ratios without
           adequate compensating factors. Please see comments 23 and 31 for our response.

Comment 12 We agreed not to pursue the home ownership association fees as improper
           charges. However, we stand by our position that the $4,000 in rent equity be
           refunded as an overcharge to the borrower in case number 023-1493862.

Comment 13 We agree to remove five deficiencies with regard to inadequate documentation
           for verification of deposit for case numbers 023-118456, 023-1451488, 023-
           1646660, 023-2133833, and 023-2177719 from the report, but maintain that the
           remaining five were valid and remain deficient. Please see comments 20, 29, 34,
           36, and 38 for our responses.

Comment 14 The missing three loans are also included in the narrative case summaries of
           appendix D. In addition, we readjusted our case totals to include the three loans,
           bringing us up to 24 instead of the original 21 we had reported in the draft.

Comment 15 Ryland agrees to indemnify loans relating to case numbers 023-1932092 and
           023-1451488. We agree not to pursue indemnification for case number 023-
           2133833; however, we believe that Ryland did not originate insured loans in
           accordance with HUD requirements and prudent lending practices in the other 23
           cases. We believe that Ryland should reimburse HUD for losses, partial claims,
           or forbearance relating to 23 cases. In addition, we believe that Ryland should
           reimburse the servicing lender to pay down the loan amounts and refund any
           overcharges to the borrowers.

Comment 16 Contrary to Ryland’s claim, failing to perform timely audit reviews for a period
           of about a year and a half clearly shows that Ryland disregarded its
           responsibilities. Considering the importance of these monthly audit reviews to
           internal controls, this relatively long instance was not rectified immediately
           thereby delaying corrective action by middle and upper management.

Comment 17 According to HUD Handbook 4060.1 REV-1 & REV-1 CHG-1, Chapter 6, an
           analysis of all loans which go into default within the first six months are required
           to be conducted as part of the lender’s quality control. We took a conservative
           approach to testing early payment defaults. Rather than relying on data that we



                                              89
              directly pulled from Neighborhood Watch, we opted on reproducing a Ryland
              auditor’s work to understand the series of actions or events leading to her results.
              As stated in the report, 66 or over 50% of the 122 defaulted loans between
              December 1, 2002 and March 31, 2005 were not properly reviewed; i.e., no
              documentation was in the binders to substantiate that a review was done. While
              we acknowledge that the department is current with its early payment default
              files; at the time of our review in May of 2005, we found several instances when
              the files were still not reviewed. Between September 2004 and March 2005, 28
              loans defaulted within six payments or less. While 21 of the required reviews
              were conducted, seven or 25 percent were not; disproving Ryland’s statement that
              ‘all files since August 2004 have been completed monthly.’

Comment 18 The purpose of third-party verifications is to evaluate the stability of the
           borrower’s income. According to HUD Handbook 4155.l, REV-4, CHG-1, and
           REV-5, paragraph 2-6, the lender must verify the borrower’s employment for the
           most recent two full years. If the borrower indicates he or she was in school or in
           military during any of this time, the borrower must provide evidence supporting
           this. The borrower must also explain any gaps in employment of a month or
           more. This criterion indicates that two years of employment must be verified and
           not just current employment. We will include this Handbook citation in the main
           body, criteria, and narrative case summaries of the report for clarification.

Comment 19 While Ryland may have intended to comply with agency, state, and federal
           regulations, our review shows otherwise. For the reasons stated above, we
           maintain our position that Ryland did not adequately implement its quality control
           plan as required and unnecessarily increased the risk to the Federal Housing
           Administration insurance fund.

Comment 20 Based on the underwriting deficiencies found in the file we recommend that
           Ryland indemnify this loan. We agree to remove one deficiency relating to case
           number 023-0990733.

              •   False Employment We are unsure whether Ryland agrees or disagrees with
                  this deficiency. On page 15 of the report, Ryland found one case in which
                  they believe that the underwriter should have detected fraud; however, in the
                  narrative case summary on page 27, Ryland stated that it was not reasonable
                  to detect this fraud. Nonetheless we wanted to make clear that the address
                  listed on the loan application for borrower’s employer actually belonged to
                  Grand Canyon Pump and Supply Company, which has operated at that
                  location for over 15 years without any affiliations with G-Limited. Further, no
                  wages from the employer in question appeared for the borrower’s Social
                  Security number with the Arizona Department of Economic Security.

              •   Inflated Sales Price The original purchase price was listed as $99,540 on the
                  Sales Agreement signed on October 19, 2001 by the borrower. This amount
                  included options with a total of $6,500, a lot premium of $1,500, and a base


                                               90
                 price of $91,490. On a December 5, 2001 faxed copy of a rider to Agreement
                 of Sale, $2,300 was added to the final sales price as a 'Price Adjustment.' The
                 final sales price as a result of this adjustment was $101,840. There was no
                 description or explanation of the $2,300. Moreover, the original agreement
                 states that the appraised value of the property will not be less than $99,540.
                 There was an additional rider included in the file that states the appraised
                 value of the property will not be less than $101, 840. However, after the price
                 adjustment of $2,300 was added to the sales price.

             •   Overstated Income The borrower’s monthly income of $2,600 earned at G-
                 Unlimited on the mortgage credit analysis worksheet was overstated. Since
                 the borrower’s place of employment was false, the purported income from this
                 employment must be deducted. We do not know whether the borrower had
                 any income at all. Aside from her bank statement, covering a two-week
                 period, there was no evidence in the file that leads us to believe that borrower
                 has a stable income and can afford to pay her monthly premiums.

             •   Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this
                 deficiency from the report.

             •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                 report.

             •   Unverified Sources of Deposit While we agree that borrower is not required to
                 have a bank account, HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-10
                 B states that if the account was recently opened an explanation and evidence
                 of source of funds must be obtained by the lender. Other than the letter
                 explaining her lack of a bank account, no evidence of source of funds was
                 ever provided.

             •   Recommendations
                 ‰  Indemnify HUD the mortgage amount of $100,261.
                 ‰ Pay the servicing lender $2,264 to reduce the loan amount.


Comment 21 Based on the underwriting deficiencies found in the file we recommend that
           Ryland indemnify this loan. We do not agree on removing any deficiencies
           relating to case number 023-1073648.

             •   Questionable/False Social Security number We reviewed Ryland’s objections
                 and do not concur with Ryland’s assessment. The tax records may have had
                 the Social Security number listed, but with all the discrepancies on the forms;
                 i.e., forms not signed, misspelled name, multiple year filings, and the tax
                 preparer did not submit the tax return to the Internal Revenue Service, (he
                 turned them over to the filer for him to submit to the Internal Revenue
                 Service) we have considerable doubt whether the records were actually used
                 to declare the individual’s income and tax liability, in-turn have not been


                                              91
    validated by the IRS. We reviewed the borrower’s Arizona Federal Credit
    Union bank statements and found no reference to the borrower’s Social
    Security number other than the words “on file.” The document Ryland speaks
    of which indicates the borrower’s Social Security number and “N” under
    “Foreign Status” does not appear authentic and does not contain the Arizona
    Federal Credit Union’s header. The borrower’s file did not have a verification
    of deposit for the Arizona Federal Credit Union so it is assumed the statement
    was used as an alternative to the standard verification of deposit sheet. No
    documentation was in the file to show that a contact was ever made with the
    bank concerning the borrower. Therefore, we cannot see how the statement
    can validate the borrower’s Social Security number. We agree that the
    Landsafe Credit report does show the same Social Security number; however,
    the credit report also generated more than one variation of the borrower’s
    name attached to that same Social Security number. Trans Union credit
    bureau indicated the one variation to the borrower’s name was 0 years old,
    while Experian credit bureau indicated the other name variation to be 21 years
    of age, yet both hold the same Social Security number. This should have
    raised a red flag towards the borrower’s identity/Social Security number.
    When we interviewed the borrower, he stated that the last name listed on the
    loan application was not his surname, but was the variant that was reported on
    the credit report. Further, the Landsafe credit report does not show any
    activity for the borrower. All activity is for the borrower’s wife, who is not a
    borrower/co-borrower. As stated at the exit conference by both the Vice
    President of Quality Assurance and Ryland’s Assistant General Counsel, this
    is a red flag and further verification is required.

•   Overstated Income The borrower’s monthly income of $4,518 on the
    mortgage credit analysis worksheet was overstated by $293 per month.
    Assuming that the borrower’s self-employed income was appropriate, Ryland
    improperly calculated the income by using business income rather than
    adjusted gross income as required by HUD Handbook 4155.1 REV-4, CHG-1,
    paragraph 2-9 C. 1.

•   Understated Liability We agree that this liability would not have increased the
    debt to income ratios; however, it was not appropriate to omit it from the loan
    application. Also as a debt management tool for an individual, who has
    approximately 16 overdrafts in one month, this paints a poor picture of the
    borrower’s ability to live within his income.

•   Unallowable Fees As discussed, we agreed to remove this deficiency from the
    report.

•   Recommendations
    ‰  Indemnify HUD for the mortgage amount of $137,857.




                                 92
Comment 22 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We do not agree on removing any
           deficiencies relating to case number 023-1113543.

             •   Inflated Sales Price The original purchase price was listed as $131,640 on the
                 Sales Agreement signed on October 27, 2001 by the borrower. This amount
                 included options with totaling negative $10, a lot premium of $750, and a base
                 price of $130,900. On a Rider to Agreement of Sale, signed by the borrower
                 on October 27, 2001, $1,796 worth of options was added to the final sales
                 price, increasing it to $133,436. Additionally, a second Rider to Agreement of
                 sale, signed by the borrower on October 27, 2001, shows an option of $95.00
                 added to the final sales price, increasing it to $133,531. On a Rider to
                 Agreement of Sale, signed by the borrower on March 2, 2002, $3,400 was
                 added to the final sales price as a 'Price Adjustment.' The final sales price as a
                 result of this adjustment was $136,931. There was no description or
                 explanation of the $3,400.

             •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                 report.

             •   Recommendations
                 ‰  Indemnify HUD the mortgage amount of $134,995.
                 ‰ Pay the servicing lender $3,352 to reduce the loan amount.


Comment 23 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We do not agree on removing any
           deficiencies relating to case number 023-1129379.

             •   Inflated Sales Price The original purchase price was listed as $120,230 on the
                 Sales Agreement signed on May 25, 2002 by the borrower. This amount
                 included options with a total of $1,740, a lot premium of $1,000, and a base
                 price of $117,490. On July 14, 2002, the borrower signed an amendment to
                 agreement of sale, which added $4,770 to the final sales price. The description
                 of this transaction was listed as a "Price Adjustment." The final sales price as
                 a result of this adjustment was $125,000. There was no description or
                 explanation of the $4,770.

             •   Inappropriate Use of Buydown Rate HUD Handbook 4155.1 REV-4, CHG-1,
                 paragraph 2-14 requires that the underwriter specifically state which four
                 criteria the borrower meets and documentation of job training or education in
                 the borrower’s profession or a history of the borrower’s career advancement
                 along with increases in earnings, all of which Ryland failed to do. Also, note
                 that one pay stub included in the file for the period ended May 19, 2002, the


                                              93
                  year to date overtime hours were 44. These hours are a significant difference
                  from the prior year’s, which was stated on the verification of employment as
                  191.50 hours. HUD Handbook 4155.1, REV-4, CHG-1, chapter 2, section, 2-7
                  requires that “an earnings trend must be also established” for overtime
                  income. In addition, if this type of income shows a continual decline, the
                  lender must provide rationalization for inclusion of such income, where none
                  was provided. Therefore, we disagree with Ryland’s evaluation of the
                  borrower’s potential for increased earnings and feel that this borrower was
                  inappropriately given a buydown to qualify for the loan. Interestingly enough,
                  Ryland did not notice that the verifier of the employment verification form
                  was signed by someone holding a position as ‘foreman.’ When we spoke to
                  the employer, they notified us that this person was not authorized to verify
                  employment.

              •   Inaccurate/Excessive Debt-to-Income Ratios The recalculated overtime
                  income is incorrect and therefore cannot be included as income in the
                  calculation of qualifying ratios. Further, the Debt-to-Income ratio remains at
                  46.6 percent, which is considerably higher than the 43 percent benchmark for
                  Energy Efficient Mortgage Standards.

              •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                  report.

              •   Recommendations
                  ‰ Indemnify HUD the mortgage amount of $123,068.
                  ‰ Pay the servicing lender $4,696 to reduce the loan amount.




Comment 24 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We agree to remove three
           deficiencies relating to case number 023-1188456.

              •   Inflated Sales Price The $1,000 price adjustment was listed on the Rider to the
                  Agreement contract with an unidentifiable code beside it, not indicating what
                  the legitimate purpose was for the adjustment. When we asked Ryland what it
                  was for (i.e. additional options), we did not get a straight answer. Further,
                  when we interviewed the borrower, they could not verify what it was for, yet
                  they were able to name the option upgrades they requested and an
                  approximate price they were charged.

              •   Unsupported Source of Income We agree to remove this deficiency from the
                  report.

              •   Insufficient Employment Documentation HUD Handbook 4155.1, REV-4,
                  CHG-1, paragraph 2-6 states that the borrower must explain any gaps in


                                              94
                  employment spanning one month or more. Additionally, the lender must
                  verify the borrower’s employment for the most recent two years. The
                  telephone verification of employment was scarcely complete when verifying
                  borrower’s employment at On Semiconductor. The years of employment of
                  January 1, 1992 thru December 30, 2001were written on the sheet; however,
                  no name, phone number, or date of verification was filled out. "W-2's" was
                  handwritten on the verification of employment, possibly indicating that the
                  loan processor did not contact anyone to verify this income and merely relied
                  on the paper document for verification.

              •   Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this
                  deficiency from the report.

              •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                  report.

              •   Unverified Source of Deposit We agree to remove this deficiency from the
                  report.

              •   Recommendations
                  ‰  Indemnify HUD the mortgage amount of $143,470.
                  ‰ Reimburse HUD for the loan modification amount of $650.
                  ‰ Pay the servicing lender $985 to reduce the loan amount.


Comment 25 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We disagree with removing any
           deficiencies relating to case number 023-1318434.

              •   Inflated Sales Price The original purchase price was listed as $105,990 on the
                  Sales Agreement signed on August 9, 2002 by the borrowers. This amount
                  included no options, no lot premium, and a base price of $105,990. On
                  September 8, 2002, the borrowers signed an amendment to agreement of sale,
                  which added $3,200 to the final sales price. The description of this transaction
                  was listed as a "Price Adjustment." The final sales price as a result of this
                  adjustment was $109,190. There was no description or explanation of the
                  $3,200.

              •   Insufficient Employment Documentation We understand that one pay stub is
                  sufficient to satisfy this requirement, so long as it covers the most recent 30-
                  day period, i.e., one month’s worth of income prior to the signing of the
                  initial/final application. Ryland did not obtain the original pay stubs
                  covering the most recent 30-day period from both borrowers. The last pay
                  stub included in the file for borrower and coborrower were for the periods
                  ended August 3, 2002 and August 10, 2002, respectively. We presumed that
                  the application signed by both borrowers on September 10, 2002 is the initial


                                               95
                  application since no other applications preceded it on file. Therefore, the
                  necessary most recent 30-day pay stubs must cover the date August 10 thru
                  September 10, 2002 because Ryland chose to verify the borrowers’
                  employment via telephone. HUD Handbook 4155.1, REV-4, CHG-1,
                  paragraph 3-1 E states “verification of employment (VOE) and most recent
                  pay stub” are required for each borrower. Additionally, the lender may
                  choose an alternate form of verification where they must “obtain from the
                  borrower original pay stub(s) covering the most recent thirty-day period,
                  along with original copies of the previous two years’ IRS W-2 forms.”

              •   Recommendations
                  ‰  Indemnify HUD the mortgage amount of $107,488.
                  ‰ Reimburse HUD for the special forbearance of $100.
                  ‰ Pay the servicing lender $3,136 to reduce the loan amount.


Comment 26 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We agree on removing one
           deficiency relating to case number 023-1449064.

              •   Inflated Sales Price On October 10, 2002, the borrower signed an amendment
                  to agreement of sale included in the file that adds $7,856 in options and
                  $5,500 to the final sales price. The description of this transaction was listed as
                  an ‘incentive.’ The final sales price as a result of this adjustment was
                  $133,346. There was no description or explanation for the $5,500.

              •   Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1,
                  paragraph 2-14 requires the lender must establish and document that the
                  eventual increase in mortgage payments will not adversely affect the borrower
                  and likely lead to default. This requirement was not met. We disagree with
                  Ryland’s evaluation of the borrower’s potential for increased earnings.

                  When we interviewed the borrower, she claimed that she was unaware of how
                  the buydown worked and that Ryland failed to explain the eventual increase in
                  her mortgage payment. The last we heard, this borrower not only defaulted on
                  her payments again, but she’s had to sell her home. Clearly, the borrower
                  defaulted after three payments, yet Ryland provided her with a buydown to
                  meet the qualification requirement, Ryland improperly assessed the
                  borrower’s ability to pay and improperly used the buydown.

              •   Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this
                  deficiency from the report.

              •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                  report.



                                                96
                   •    Recommendations
                        ‰ Indemnify HUD the mortgage amount of $131,239.
                        ‰ Reimburse HUD for the loan modification amount of $650.
                        ‰ Pay the servicing lender $5,413 to reduce the loan amount.


Comment 27 Ryland agreed to indemnify HUD for any and all actual costs incurred due to any
           default, forbearance or modification of this loan. We agree on removing one
           deficiency relating to case number 023-1451488.

                   •    Unallowable Fees As discussed, we agreed to remove this deficiency from the
                        report.

                   •    Unverified Source of Deposit We agree to remove this deficiency from the
                        report.

                   •    Recommendations
                        ‰ Indemnify HUD the mortgage amount of $150,575.


Comment 28 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify case number 023-1453913.

                   •    Recommendations
                        ‰ Indemnify HUD the mortgage amount of $151,265.


Comment 29 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We agree on removing one
           deficiency relating to case number 023-1493862.

                   •    Inflated Sales Price On January 11, 2003, the borrower signed an amendment
                        to agreement of sale, which reduced the sales price by $3,968. The description
                        of this transaction was listed as a "Price Adjustment Rent w/ equity per
                        xxxx."2 There was an additional amendment to agreement of sale not signed
                        by the borrower, which added $7,000 to the sales price with the description
                        "Correcting Price Adjustment and Adding Additional Financing." There was
                        no other description or explanation of the $7,000 increase.

                   •    Inappropriate Use of Buydown HUD Handbook 4155.1, REV-4, CHG-1,
                        paragraph 2-14 requires the lender must establish and document that the
                        eventual increase in mortgage payments will not adversely affect the borrower
                        and likely lead to default. This requirement was not met. We disagree with
                        Ryland’s evaluation of the borrower’s potential for increased earnings.

2
    Name redacted for privacy.


                                                    97
                 While the borrower’s W-2 earnings show a $3,000 increase from 2000 to
                 2001 and an increase in annualized pay in 2002, the borrower’s January 2003
                 credit report shows several deferments of educational loans amounting to
                 approximately over $60,000. Payments are to begin between June and
                 December of 2004, which is one year into the buydown. In addition, borrower
                 has several pending liabilities that were deferred to June of 2004, amounting
                 to approximately $18,000. Clearly, her income would not be sufficient to pay
                 the monthly payments of a home and pay for student loans as well as other
                 liabilities. Therefore, we believe Ryland inappropriately used the buydown.

             •   Insufficient Employment Verification HUD Handbook 4155.1, REV-4, CHG-
                 1, paragraph 2-6 states that the borrower must explain any gaps in
                 employment spanning one month or more. Additionally, the lender must
                 verify the borrower’s employment for the most recent two years. The VOE
                 was done by telephone and employment was only verified for four months.
                 Therefore, the lender failed to verify the most recent two full years of
                 employment.

             •   Unacceptable Credit History HUD Handbook 4155.1, REV-4, CHG-1,
                 paragraph 2-3 & 2-5 states the lender is required to examine the overall
                 pattern of credit behavior, which it failed to do. Moreover, they also failed to
                 explain numerous returned checks on the bank statement, which leads us to
                 believe the borrower to be a high credit risk.

             •   Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this
                 deficiency from the report.

             •   Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1,
                 paragraph 3-1 F requires original bank statements covering the most recent
                 three-month period where two must be consecutive statements if no
                 verification of deposit is done by the lender. Only one applicable bank
                 statement was found in the file.

             •   Recommendations
                 ‰  Indemnify HUD for the mortgage amount of $118,805.
                 ‰ Reimburse HUD for partial claims paid of $6,170.
                 ‰ Refund $4,000 in overcharges to the borrower.
                 ‰ Pay the servicing lender $2,985 to reduce the loan amount.


Comment 30 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We do not agree on removing any
           deficiencies relating to case number 023-1576678.




                                              98
             •   Inflated Sales Price The original purchase price was listed as $120,555 on the
                 Sales Agreement signed on September 29, 2002 by the borrower. This amount
                 included options with a total of $5,565, no lot premium, and a base price of
                 $114,990. On an amendment to agreement of sale, signed by the borrower on
                 October 12, 2002, added additional options of $505, which increased the sales
                 price to $121,060. On an amendment to agreement of sale dated November 1,
                 2002, signed by the borrower on November 02, 2002, options of $3,870 were
                 added and increased the sales price to $124,930. On November 11, 2002, the
                 borrower signed an amendment to agreement of sale, which added $6,000 to
                 the final sales price. The description of this transaction was listed as a
                 "Financing." The final sales price as a result of this adjustment was $130,930.
                 There was no description or explanation of the $6,000.

             •   Inappropriate Use of Buydown To use the buydown interest rate to qualify,
                 the underwriter must document the borrower’s ability to handle the scheduled
                 mortgage payment increase as required by HUD Handbook 4155.1, REV-4,
                 CHG-1, paragraph 2-14, which Ryland failed to do. In addition, we noted that
                 the borrower defaulted after making seven payments. Therefore, a buydown
                 was used to initially qualify the borrower. Further, Ryland claims borrower’s
                 income could go up $145 per month; however, the mortgage payment will
                 increase $157.

             •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                 report.

             •   Recommendations
                 ‰  Indemnify HUD the mortgage amount of $128,905.
                 ‰ Reimburse HUD for partial claims paid of $9,145.
                 ‰ Pay the servicing lender $5,907 to reduce the loan amount.


Comment 31 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We do not agree on removing any
           deficiencies relating to case number 023-1592011.

             •   Overstated Income The coborrower’s monthly income of $2,462 on the loan
                 application and mortgage credit analysis worksheet is overstated by $70 per
                 month. We were unable to determine the basis of $70 listed as other income.
                 There was no evidence in the file to support the continuance of this income as
                 required in HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7 & 2-7 A.
                 Further, no faxed paycheck from the borrower was found in the file
                 documenting the additional $70 in monthly income.

             •   Insufficient Employment Documentation HUD Handbook 4155.1, REV-4,
                 CHG-1, paragraph 2-6 states that the borrower must explain any gaps in


                                             99
    employment spanning one month or more. Additionally, the lender must
    verify the borrower’s employment for the most recent two years. The VOE
    was done by telephone and borrower’s employment was only verified for one
    year and five months. Coborrower’s employment was verified for one year
    and six months, also done by telephone. Therefore, the lender failed to verify
    the most recent two full years of employment for both borrowers. HUD
    Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E states “verification of
    employment (VOE) and most recent pay stub” are required for each borrower.
    Additionally, the lender may choose an alternate form of verification where
    they must “obtain from the borrower original pay stub(s) covering the most
    recent thirty-day period, along with original copies of the previous two years’
    IRS W-2 forms.” Ryland did not obtain an original pay stub covering the most
    recent 30-day period from both borrower and coborrower. The last pay stub
    included in the file for the borrower was for the period ended March 7, 2003.
    However, the pay stub was faxed from the coborrower's place of employment.
    Additionally, there is a stamp bearing “certified to be a true and correct copy
    of the original” signed by a Ryland employee. The only original copies of pay
    stubs found in the file for the borrower were for the periods ended August 9,
    2002, August 2, 2002, July 26, 2002, and July 19, 2002. The last pay stub
    included in the file for the coborrower was for the period ended March 14,
    2003. This pay stub was also faxed from the coborrower's place of
    employment and bears the stamp “certified to be a true and correct copy of the
    original” signed by a Ryland employee. Without actually examining the
    original the Ryland employee is unable to certify that the document at hand is
    true and correct.

•   Inaccurate/Excessive Debt-to-Income Ratios HUD Handbook 4155.1, REV-4,
    CHG-1, paragraph 2-12 requires lenders to list compensating factors that
    justify qualifying ratios that exceed guidelines. The only compensating factors
    listed on the Mortgage Credit Analysis Worksheet were “minimal increase in
    housing.” Where the borrower’s verification of rent shows a monthly rent
    payment of $659, whereas the estimated mortgage payment is $1,062. This
    increased monthly home payment expenditures by $403. Additional
    compensating factors assured that “both borrowers have been in the same line
    of work for 5 and 2 yrs, borrower's have paid off some credit,” yet borrowers
    defaulted their loans after three payments. We agree that borrower’s had
    approx. 4.70 months reserves during loan process; nonetheless, was not listed
    as a compensating factor.

•   Unallowable Fees As discussed, we agreed to remove this deficiency from the
    report.

•   Recommendations
    ‰  Indemnify HUD the mortgage amount of $153,772.
    ‰ Reimburse HUD for the special forbearance ($100) and loan modification
       ($1,300) paid of $1,400.


                                100
Comment 32 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We agree on removing one
           deficiency relating to case number 023-1646394.

              •   Overstated Income The borrower’s monthly income of $2,523 on the
                  mortgage credit analysis worksheet was overstated by $178 per month.
                  Assuming that the borrower’s self-employed income was appropriate, Ryland
                  improperly calculated the income by using business income rather than
                  adjusted gross income as required by HUD Handbook 4155.1 REV-4, CHG-1,
                  paragraph 2-9 C,1. We disagree with your analysis on the grounds that first,
                  the mortgage was executed April 2003 and required the use of 4155.1 REV-4,
                  CHG-1. Second, Ryland’s interpretation of REV-5 appears flawed; the
                  paragraph quoted intended the analyzer not to deduct these taxes from gross
                  income, and third, this is in the liability section of the HUD Handbook
                  regulation allowing these debts not to be used as a liability against the
                  borrower, not gross income analysis.

              •   Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this
                  deficiency from the report.

              •   Recommendations
                  ‰  Indemnify HUD the mortgage amount of $130,833.

Comment 33 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We agree on removing one
           deficiency relating to case number 023-1646660.

              •   Inappropriate Use of Buydown HUD Handbook 4155.1, REV-4, CHG-1,
                  paragraph 2-14 requires the lender must establish and document that the
                  eventual increase in mortgage payments will not adversely affect the borrower
                  and likely lead to default. This requirement was not met.

              •   Unsupported Source of Income Income from any source that cannot be
                  verified, is not stable, or will not continue may not be used in calculating the
                  borrower’s income ratios as stated in HUD Handbook 4155.1, REV-4, CHG-
                  1, paragraph 3-1 E. Borrower’s verification of employment reported gross
                  income earned through April 24, 2003 of $5,374. Borrower’s hourly pay prior
                  to his May 9, 2003 pay raise of $10.11 per hour was $9.82. The combined
                  income of $5,374 and calculated hourly income of $10.11 per hour, equaled a
                  monthly income of $1,526, resulting in an overstatement and deviance from
                  the $1,684 income reported on the MCAW of $158.




                                              101
              •   Insufficient Employment Documentation HUD Handbook 4155.1, REV-4,
                  CHG-1, paragraph 3-1 E states “verification of employment (VOE) and most
                  recent pay stub” are required for each borrower. Additionally, the lender may
                  choose an alternate form of verification where they must “obtain from the
                  borrower original pay stub(s) covering the most recent thirty-day period,
                  along with original copies of the previous two years’ IRS W-2 forms.” Ryland
                  did not obtain the original pay stubs covering the most recent 30-day period
                  from coborrower, yet coborrower’s income was incorporated in the
                  calculation of income. Only one pay stub was included in file for the pay
                  period ending March 21, 2003, showing a gross amount of $964. The most
                  recent 30-day period pay stub is required because Ryland chose to verify the
                  coborrower’s employment via telephone.

              •   Unverified Source of Deposit We agree to remove this deficiency from the
                  report.

              •   Recommendation
                  ‰  Indemnify HUD the mortgage amount of $148,291.

Comment 34 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We do not agree to remove any
           deficiencies relating to case number 023-1653270.

              •   Inflated Sales Price There is only one amendment to Agreement of Sale
                  included in the file that adds $3,200 to the final sales price. The description of
                  this transaction was listed as an "Incentive to be used towards closing". Yet an
                  incentive to be used towards closing would not increase the sales price. There
                  was no other explanation or description in the file to support the increase.

              •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                  report.

              •   Unverified Sources of Deposit HUD Handbook 4155.1 REV-4, CHG-1,
                  paragraph 2-10 B states a verification of deposit or copies of the most recent
                  bank statements must be included in the file. If the account was recently
                  opened, an explanation and evidence of source of funds must be obtained by
                  the lender. There was no such explanation found in the file.

              •   Recommendations
                  ‰  Indemnify HUD the mortgage amount of $136,010.
                  ‰ Pay the servicing lender $3,150 to reduce the loan amount.


Comment 35 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we


                                               102
              recommend that Ryland indemnify this loan. We do not agree to remove any
              deficiencies relating to case number 023-1736086.

              •   Inflated Sales Price We agree that there were two riders and contract
                  amendments that document changes in the original sales price due to added
                  options. However, there is a third amendment to agreement of sale signed by
                  the borrower on February 6, 2003, which added $2,980 to the sales price. The
                  description of this transaction was listed as an "off base price off
                  house/options." This increase was not substantiated by any documentation or
                  explanation.

              •   Insufficient Employment Documentation HUD Handbook 4155.1, REV-4,
                  CHG-1, paragraph 2-6 states that the borrower must explain any gaps in
                  employment spanning one month or more. Additionally, the lender must
                  verify the borrower’s employment for the most recent two years. The VOE
                  was done by telephone and borrower’s employment was only verified for one
                  year.

              •   Recommendations
                  ‰  Indemnify HUD the mortgage amount of $140,628.
                  ‰ Reimburse HUD for a claim paid of $5,094.
                  ‰ Pay the servicing lender $2,934 to reduce the loan amount.


Comment 36 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We agree on removing one
           deficiency relating to case number 023-1811657.

              •   Insufficient Employment Documentation HUD Handbook 4155.1, REV-4,
                  CHG-1, paragraph 2-6 states that the borrower must explain any gaps in
                  employment spanning one month or more. Additionally, the lender must
                  verify the borrower’s employment for the most recent two years. The VOE
                  only verified borrower’s employment for one year and seven months.

              •   Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this
                  deficiency from the report.

              •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                  report.

              •   Unverified Source of Deposit We do not contest the dates of the bank
                  statements provided in the file. The issue we found is there are several copies
                  of online bank account statements - each corresponding to the account
                  numbers provided on the URLA. However, we cannot be sure that these
                  accounts belong to the borrower and co-borrower since the statements do not
                  have names of the account holders. Therefore, HUD Handbook 4155.1, REV-


                                              103
                  4, CHG-1, paragraph 3-1 F requirement that original bank statements covering
                  the most recent three-month period are required where two must be
                  consecutive statements if no verification of deposit is done by the lender was
                  not met.

              •   Recommendations
                  ‰ Indemnify HUD the mortgage amount of $155,173.


Comment 37 Ryland agreed to indemnify HUD for any and all actual costs incurred due to any
           default, forbearance or modification of this loan. We do not agree on removing
           any deficiencies relating to case number 023-1932092.

              •   Recommendation
                  ‰ Indemnify HUD the mortgage amount of $119,516.


Comment 38 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We agree on removing three
           deficiencies relating to case number 023-1965223.

              •   Insufficient Employment Documentation We agree to remove this deficiency
                  from the report.

              •   Understated Liabilities We agree to remove this deficiency from the report.

              •   Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this
                  deficiency from the report.

              •   Unverified Source of Deposit Ryland contends that the statement meets the
                  180-day requirement for new construction. OIG agrees with this part, but the
                  bank statements failed to meet the rule concerning three consecutive bank
                  statements, two if beginning and ending balance are listed. Our file showed
                  two different bank accounts for the period June 6 through July 8 and
                  September 24 through October 24; these documents have a gap between July
                  9 and September 23.

              •   Recommendation
                  ‰  Indemnify HUD the mortgage amount of $157,172.

Comment 39 There was no finding of fraud found in this case and therefore, no such claim is
           made on the report. In addition, we agree with Ryland this loan did not create any
           greater risk to HUD. For that reason, we will not recommend that case number
           023-2133833 to be indemnified.

              •   Overstated Income We agree to remove this deficiency from the report.



                                              104
              •   Understated Liabilities We agree to remove this deficiency from the report.

              •   Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this
                  deficiency from the report.

              •   Unverified Source of Deposit We agree to remove this deficiency from the
                  report.

Comment 40 There was no finding of fraud found in this case and no such claim is made on
           the report. Based on the underwriting deficiencies found in the file we
           recommend that Ryland indemnify this loan. We agree on removing one
           deficiency relating to case number 023-2177719.

              •   Unsupported Source of Income A copy of the borrower’s 2004 W-2 was not
                  in file; therefore, we cannot verify the YTD earnings of $13,128. Our position
                  still remains that Ryland failed to authenticate the borrower’s source of $813
                  overtime income as required in HUD Handbook 4155.1, REV-5, paragraph 2-
                  7. We could not determine the basis for borrower’s income through
                  recalculation. Additional documentation to support the $813 on MCAW was
                  not available in file.

              •   Insufficient Employment Verification HUD Handbook 4155.1, REV-5,
                  paragraph 2-6 states that the borrower must explain any gaps in employment
                  spanning one month or more. Additionally, the lender must verify the
                  borrower’s employment for the most recent two years. The VOE was done by
                  telephone and borrower’s employment was only verified for one year and ten
                  months.

              •   Unallowable Fees As discussed, we agreed to remove this deficiency from the
                  report.

              •   Unverified Source of Deposit We agree to remove this deficiency from the
                  report.

              •   Recommendations
                  ‰ Indemnify HUD the mortgage amount of $160,766.




                                   105
                                              Appendix C
                                                                                SCHEDULE OF LOAN DEFICIENCIES




                                   To


                                   Pe loan ncie
                                      ta
                                      02




                                      02




                                      02




                                      02




                                      02

                                      02

                                      02

                                      02
                                       02

                                       02 0 73

                                       02

                                       02

                                       02




                                       02




                                       02

                                       02

                                       02

                                       02

                                       02

                                       02




                                       02




                                       02

                                       02

                                       02




                                       rc s s
                                         ld


                                          en
                                          3-




                                          3-




                                          3-




                                          3-




                                          3-

                                          3-

                                          3-

                                          3-
                                          3-

                                          3-

                                          3-

                                          3-

                                          3-




                                          3-




                                          3-

                                          3-

                                          3-

                                          3-

                                          3-

                                          3-




                                          3-




                                          3-

                                          3-

                                          3-




                                            ef
                                            11 9




                                            13 0




                                            15 8




                                            16 4




                                            19 7

                                            19

                                            21

                                            21
                                             09

                                             10

                                             10

                                             11

                                             11




                                             12




                                             14

                                             14

                                             14

                                             14

                                             14

                                             15




                                             16




                                             16

                                             17

                                             18




                                             ta
                                              ici
                                               88




                                               18




                                               92




                                               46




                                               32

                                               65

                                               33

                                               77




                                                ge
                                                9

                                                57

                                                73

                                                13

                                                29




                                                93




                                                49

                                                51

                                                53

                                                87

                                                93

                                                76




                                                46




                                                53

                                                36

                                                11




                                                  e
                                                   45




                                                   43




                                                   01




                                                   66




                                                   09

                                                   2

                                                   83

                                                   71
                                                   15

                                                   64

                                                   54

                                                   37




                                                   23




                                                   06

                                                   48

                                                   91

                                                   58

                                                   86

                                                   67




                                                   39




                                                   27

                                                   08

                                                   65




                                                    of
                                                    23
                                                      6




                                                      4




                                                      1




                                                      0




                                                      2




                                                      3

                                                      9
                                                      3

                                                      2

                                                      8

                                                      3




                                                      4

                                                      8

                                                      3

                                                      4

                                                      2




                                                      0

                                                      6




                                                       24
Questionable documentation indicators
False loan officer certification              X                                                                     X                                                                       2    8%
False employment                              X                                                                     X                                                       X               3    13%
Questionable/false Social Security number                   X                                                       X                                                       X               3    13%
Loan origination
Inflated sales prices                         X     X               X       X       X       X       X       X                       X       X   X               X   X                       13   54%
Inappropriate use of buydown rate                   X                       X               X               X                               X   X           X   X                           8    33%
Income
Unsupported/overstated income                 X             X                                                                                       X   X   X               X           X   7    29%
Missing verification of employment, written
or telephonic; employment of 2 years not                                            X                                       X       X       X       X               X   X               X   8    33%
verified
Missing W2 forms                              X     X                                                       X               X       X                                                       5    21%
Missing paystubs covering most recent 30-
                                                    X                                               X               X                               X       X                               5    21%
day period
Debt/credit
Understated liabilities                                     X                                                                                                                               1    4%
Unacceptable credit history                                                                                                                 X                                               1    4%
Inaccurate/excessive qualifying ratios
                                                    X                       X                                                                       X           X           X               5    21%
without inadequate compensating factors
Unearned/unallowable fees
Rent equity                                                                                                                                 X                                               1    4%
Inadequate documentation
Missing verification of deposit/
                                              X             X                                       X                                       X           X       X       X       X           8    33%
3 months of bank statements

Total deficiencies per loan                   6     5       4       1       3       2       2       3       3       4       2       3       6   2   4   2   3   4   2   2   4   1   0   2   70


                                                  Loan files that were paid in full and sold by borrower as of end of fieldwork, July of 2005




                                                                                                                                   106
Appendix D

                       NARRATIVE CASE SUMMARIES


HUD case number: 023-0990733
Loan amount:          $100,261
Settlement date:      December 14, 2001
Status:               Mortgage payments current
Indemnification:      $100,261
Ryland underwrote and approved the loan based on false employment, overstated income,
insufficient employment documentation, excessive debt-to-income ratio without adequate
compensating factors, and an unverified source of deposit. Therefore, HUD insured the loan
based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines.
Moreover, Ryland inflated the sales price by $2,264.

A. False Employment
       HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3; HUD Handbook 4155.1,
       REV-4, CHG-1, paragraph 3-1 E; HUD Handbook 4000.4, REV-1, CHG-2,
       paragraph 3-16. Ryland used falsified employment documents to qualify the borrower
       for the loan. The false documents include a verification of employment, a W-2 form, and
       four pay stubs. During the audit, we established that the borrower’s place of
       employment, G-Unlimited, does not exist, yet the telephone verification of employment,
       dated December 14, 2001, falsely confirmed two years with the fictitious employer.
       Also, the recalculated Social Security and Medicare taxes on both the W-2 form and pay
       stubs do not compute to the appropriate 6.2 and 1.45 percent, respectively. The W-2
       form calculated a 9 percent Social Security tax (a variance of 2.8 percent) and a 2 percent
       Medicare tax (a variance of about .55 percent). All four pay stubs calculated a 4.84
       percent Social Security tax (variance of 1.36 percent) and a 1.60 percent Medicare tax
       (variance of .15 percent). Ryland’s loan officer falsely certified that all supporting
       documents were accurate and complete to the best of the signer’s knowledge. In light of
       the miscalculations, the W-2 form and four pay stubs were not adequately reviewed for
       their authenticity, yet the loan officer certified the documents to be a true and correct
       copy of the originals. We noted that the W-2 form and pay stubs were faxed in, but we
       could not determine the source since the header was unreadable. This loan was
       underwritten, approved, and insured without the underwriter’s due diligence.

B. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6 and 1-7; HUD Handbook
       4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $2,264.
       Ryland increased the sales price from $99,540 to $101,840, a difference of $2,300,
       without documentation or justification to substantiate the increase. When we asked the




                                               107
       borrower about the increase, she stated that she was unsure what the price adjustment
       represented and that Ryland told her no downpayment was necessary if it increased the
       price of the property. We believe the adjustment was made to cover part or all of the
       Nehemiah gift of $3,055 and/or a service fee of $800.

C. Overstated Income
      HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7 and 2-7 A; HUD
      Handbook 4000.4, REV-1, CHG-2, paragraph 5-3. The borrower’s monthly income of
      $2,600 earned at G-Unlimited on the mortgage credit analysis worksheet was overstated.
      Since the borrower’s place of employment was false, the purported income from this
      employment must be deducted. We do not know whether the borrower had any income.
      Aside from her bank statement, covering a two-week period, there was no evidence in the
      file that leads us to believe the borrower has a stable income and can afford to pay her
      monthly premiums.

D. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland failed to
       obtain original copies of the previous year’s W-2 forms. Only the W-2 form for 2000
       was in the file. The last two years’ W-2 forms are required because Ryland chose to
       verify the borrower’s employment via telephone.

G. Unverified Source of Deposit
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. The borrower provided a
      one-month bank statement, covering the two-week period of November 30, 2001, through
      December 12, 2001. Original bank statements covering the most recent three-month
      period are required, two of which must be consecutive statements, if the lender does not
      obtain a verification of deposit.

Recommendations
     ‰ Indemnify HUD the mortgage amount of $100,261.
     ‰ Pay the servicing lender $2,264 to reduce the loan amount.




                                             108
HUD case number:      023-1057152
Loan amount:          $95,460
Settlement date:      May 16, 2002
Status:               Paid in full on March 01, 2005; property sold by borrower
Indemnification:      None

Ryland underwrote and approved the loan based on inappropriate use of buydown rate,
insufficient employment documentation, and excessive debt-to-income ratio without adequate
compensating factors. Therefore, HUD insured the loan based on Ryland’s inaccurate
representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the
sales price by $2,363.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C. Ryland
       inflated the sales price by $2,363. Ryland increased the sales price from $94,562 to
       $96,962, a difference of $2,400, without any documentation or justification to
       substantiate the increase. According to a note found in the Ryland file, this amount was
       used to cover the buydown agreement of $2,322.

B. Inappropriate Use of Buydown Rate
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a
      buydown agreement for $2,322. Ryland qualified the borrower using the buydown
      interest rate; however, they failed to show that the scheduled mortgage payment increase
      would not adversely affect the borrower and likely lead to default. To use the buydown
      interest rate to qualify, the underwriter must document the borrower’s ability to handle
      the scheduled mortgage payment increase. We noted that the borrower defaulted after
      making seven payments.

C. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
       obtain the original pay stubs covering the most recent 30-day period from borrower. We
       found a loan application signed by borrower on May 2, 2001, which we presume to be the
       initial application, and the final application signed on May 16, 2002, coinciding with the
       loan settlement date. According to the Handbook, if the initial application lapsed 180
       days before the loan closes, it and its supporting documentation must be updated. Since
       no other applications were found in the file, we relied on the date of the final application
       and expected to find the April 16 through May 16, 2002 pay stubs. However, the last pay
       stub included in file was for March 24, 2002. Additionally, Ryland failed to obtain
       original copies of the previous two years’ W-2 forms. There was only a W-2 form for the
       year 2001 in the file. Both a most recent 30-day period pay stub and the last two years’
       W-2 forms are required because Ryland chose to verify the borrower’s employment via
       telephone.




                                               109
D. Inaccurate/Excessive Debt-to-Income Ratios
       HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12. We recalculated the
       qualifying ratios using the correct monthly hazard insurance premium. Our ratios were
       very close to those calculated by Ryland. The recalculated mortgage payment-to-income
       ratio of 26.94 percent does not exceed the HUD requirement; however, the total fixed
       payments-to-income ratio of 46.43 percent exceeds the HUD requirement by 5.43
       percentage points. The compensating factor listed by Ryland was "buydown offers
       payments less than rent." However, there was no verification of rent included in the loan
       file. The loan application lists $0 for present monthly housing expense. The total increase
       in the monthly housing payment was $687. Therefore, the compensating factor did not
       make sense and was unacceptable in explaining the high ratio.

Recommendations
   ‰ Pay the servicing lender $2,363 to reduce the loan amount.




                                               110
HUD case number:      023-1073648
Loan amount:          $137,857
Settlement date:      June 28, 2002
Status:               Mortgage payments current
Indemnification:      $137,857

Ryland underwrote and approved the mortgage based on a questionable/false Social Security
number, an unsupported source of income, overstated income, understated liability, and an
unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate
representation that the borrower met HUD qualifying guidelines.

A. Questionable/False Social Security Number
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-2 C. We performed a Social
     Security number query of our in-house database and determined that the borrower was
     using a Social Security number issued within two years of the application-received date.
     In addition, Lexis Nexis reported that the borrower’s name was associated with a second
     Social Security number. Based on our interview with the borrower, we determined there
     was an immigration issue with the borrower. Ryland’s only documentation of
     verification of borrower’s Social Security number was the individual’s tax returns (1999-
     2000), which appear questionable since they were without the borrower’s signature and
     his name was misspelled. The credit report for the borrower showed no activity.
     However, the accounts that were used to analyze his liabilities were listed under his
     spouse’s Social Security number.

B. Unsupported Source of Income
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9 C. Ryland failed to
     authenticate the borrower’s self-employed source of income. During our interview with
     the borrower’s tax preparer, we determined that the borrower filed his 1999 and 2000 tax
     returns in January of 2002, while his 2001 tax return was filed later in the year (March
     2002) and used to substantiate his income. No additional documents or information was
     obtained to explain why all three individual tax returns were filed or received in 2002.
     Additionally, these income tax documents showed the borrower’s name was misspelled.

C. Overstated Income
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9 C. The borrower’s monthly
     income of $4,518 on the mortgage credit analysis worksheet was overstated by $293 per
     month. Assuming that the borrower’s self-employed income was appropriate, Ryland
     improperly calculated the income by using business income rather than adjusted gross
     income.

D. Understated Liability
      HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3 and 2-4. Ryland failed to list
      an overdraft protection (loan) account for $184 that was established by the bank for the
      borrower to cover the excessive nonsufficient funds checks the borrower wrote.




                                              111
E. Unverified Source of Deposit
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. The borrower provided one
      bank statement covering only the month of May. Since the lender did not obtain a
      verification of deposit, original bank statements covering the most recent three-month period
      are required, two of which must be consecutive statements.

Recommendations
   ‰ Indemnify HUD for the mortgage amount of $137,857.




                                               112
HUD case number:     023-1113543
Loan amount:         $134,995
Settlement date:     April 30, 2002
Status:              Borrower retains ownership; not currently in default (partial reinstatement)
Indemnification:     $134,995

HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD
qualifying guidelines. Moreover, Ryland inflated the sales price by $3,352.

A. Inflated Sales Price
      HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6 and 1-7; HUD Handbook
      4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $3,352.
      It increased the sales price from $133,531 to $136,931, a difference of $3,400, without
      documentation or justification to substantiate the increase. This adjustment was made to
      cover part of the Nehemiah gift of $4,108 and a service fee of $500.

Recommendations
     ‰ Indemnify HUD the mortgage amount of $134,995.
     ‰ Pay the servicing lender $3,352 to reduce the loan amount.




                                             113
HUD case number:      023-1129379
Loan amount:          $123,068
Settlement date:      July 30, 2002
Status:               Borrower retains ownership; not currently in default
Indemnification:      $123,068

Ryland underwrote and approved the loan based on inappropriate use of a buydown rate and an
excessive debt-to-income ratio without adequate compensating factors. Therefore, HUD insured
the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying
guidelines. Moreover, Ryland inflated the sales by $4,696.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD
       Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price
       by $4,696. It increased the sales price from $120,230 to $125,000, a difference of
       $4,770, without documentation or justification to substantiate the increase. By increasing
       the sales price, Ryland recouped part or all of the $3,750 Nehemiah gift, a $500 service
       fee, and/or a $2,852 buydown at the expense of the borrower.

B. Inappropriate Use of Buydown Rate
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a
      buydown of $2,852. Ryland qualified the borrower using the buydown interest rate but
      failed to show that the scheduled mortgage payment increase would not adversely affect
      the borrower and likely lead to default. To use the buydown interest rate to qualify, the
      underwriter must document the borrower’s ability to handle the scheduled mortgage
      payment increase. The borrower defaulted after making five payments.

C. Inaccurate/Excessive Debt-to-Income Ratios
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12. We recalculated the
      qualifying ratios using the correct monthly income. The recalculated mortgage payment-
      to-income ratio of 30.96 percent exceeds the HUD requirement by 1.96 percentage
      points; the total fixed payments-to-income ratio of 46.56 percent exceeds the HUD
      requirement by 5.56 percentage points. Compensating factors listed by Ryland were
      “minimal increase in housing/borrower in the same line of work for 5 years/the collection
      accounts are old.” The difference between the rental payment of $639 listed on loan
      application and estimated mortgage payment with buydown interest of $778 on the
      mortgage credit analysis worksheet was $139. Without the buydown agreement, the
      increase would have been from $639 to $935, constituting a significant $296 difference.
      Therefore, the compensating factor was insufficient to explain the high ratios.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $123,068.
   ‰ Pay the servicing lender $4,696 to reduce the loan amount.




                                              114
HUD case number:      023-1188456
Loan amount:          $143,470
Settlement date:      June 14, 2002
Status:               Mortgage payments current
Indemnification:      $144,400 ($143,470 + $650 loan modification)

Ryland underwrote and approved the loan based on an unsupported source of income,
insufficient employment documentation, and an unverified source of deposit. Therefore, HUD
insured the loan based on Ryland’s inaccurate representation that the borrower met HUD
qualifying guidelines. Moreover, Ryland inflated the sales price by $985.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6 and 1-7. Ryland inflated the
       sales price by $985. It increased the sales price from $144,765 to $145,765, a difference
       of $1,000, without documentation or justification to substantiate the increase. When we
       questioned the borrowers about the price adjustment, they stated that they were unaware
       of the increase and what it could possibly have gone toward.

B. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland failed to
       verify the borrower’s employment for the past two years. The telephone verification of
       employment was not complete when verifying borrower’s employment at On
       Semiconductor. The years of employment of January 1, 1992, through December 30,
       2001, were written on the sheet; however, no name, telephone number, or date of
       verification was filled out. “W-2’s” was handwritten on the verification of employment,
       possibly indicating that the loan processor did not contact anyone to verify this income
       and merely relied on the paper document for verification.

Recommendations
     ‰ Indemnify HUD the mortgage amount of $143,470.
     ‰ Reimburse HUD for the loan modification amount of $650.
     ‰ Pay the servicing lender $985 to reduce the loan amount.




                                              115
HUD case number:      023-1293230
Loan amount:          $132,457
Settlement date:      September 27, 2002
Status:               Preforeclosure sale completed, January 21, 2005
Indemnification:      $26,866 ($26,216 partial claims + $650 loan modification)

Ryland underwrote and approved the mortgage based on inappropriate use of buydown rate and
excessive debt-to-income ratio without adequate compensating factors. Additionally, Ryland
failed to verify the borrower’s verification of deposit. Therefore, HUD insured the loan based on
Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover,
Ryland inflated the sales price by $7,876.

A. Inflated Sales Price
        HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7 and 1-7 C; HUD
        Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price
        by $7,876. Ryland increased the sales price from $126,542 to $134,542, a difference of
        $8,000, without any documentation or justification to substantiate the increase. This
        adjustment was made to cover the $4,036 Nehemiah gift, a $500 service fee, and a $3,033
        buydown agreement.

B. Inappropriate Use of Buydown Rate
       HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a
       buydown agreement in the amount of $3,033. Ryland qualified the borrower using the
       buydown interest rate; however, failed to show that the scheduled mortgage payment
       increase would not adversely affect the borrower and likely lead to default. To use the
       buydown interest rate to qualify, the underwriter must document the borrower’s ability to
       handle the scheduled mortgage payment increase. We noted that the borrower defaulted
       after making six payments.

Recommendations
   ‰ Reimburse HUD for partial claims paid of $26,216.
   ‰ Reimburse HUD for loan modification amount of $650.
   ‰ Pay the servicing lender $7,876 to reduce the loan amount.




                                               116
HUD case number:      023-1318434
Loan amount:          $107,488
Settlement date:      September 25, 2002
Status:               In default as of June 30, 2005
Indemnification:      $107,588 ($107,488 + $100 special forbearance)

Ryland underwrote and approved the mortgage based on insufficient employment
documentation. In addition, it failed to verify the borrowers’ deposit came from a legitimate
source. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the
borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $3,136.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD
       Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price
       by $3,136. It increased the sales price from $105,990 to $109,190, a difference of
       $3,200, without documentation or justification to substantiate the increase. This
       adjustment was made to cover part or all of the Nehemiah gift of $3,276 and/or a $500
       service fee.

B. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
       obtain the original pay stubs covering the most recent 30-day period from both
       borrowers. The last pay stub included in the file for the borrower and coborrower were
       for the periods ending August 3, 2002, and August 10, 2002, respectively. We presumed
       that the application signed by the borrower on September 10, 2002, was the initial
       application since no other applications preceded it on file and, therefore, was based on the
       most recent 30-day pay stub on that date. The necessary pay stubs should cover the dates
       August 10 through September 10, 2002, because Ryland chose to verify the borrowers’
       employment via telephone.

C. Unverified Source of Deposit
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. Original bank statements
      covering the most recent three-month period are required, two of which must be
      consecutive statements, if no verification of deposit is done by the lender. The borrowers
      signed the presumed initial loan application on September 10, 2002; therefore, the bank
      statements should generally cover the period June 10 through September 10, 2002. The
      bank statement provided was a printout from the borrower’s financial institution’s Web
      site only covering the period between August 2 through August 23, 2002. Therefore, the
      handbook requirement was not met.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $107,488.
   ‰ Reimburse HUD for the special forbearance of $100.
   ‰ Pay the servicing lender $3,136 to reduce the loan amount.




                                               117
HUD case number:       023-1449064
Loan amount:           $131,239
Settlement date:       December 27, 2002
Status:                Borrower retains ownership; not currently in default
Indemnification:       $131,889 ($131,239 + $650 loan modification)

Ryland underwrote and approved the mortgage based on an inappropriate use of a buydown rate,
insufficient employment documentation, and excessive qualifying ratios. Therefore, HUD
insured the loan based on Ryland’s inaccurate representation that the borrower met HUD
qualifying guidelines. Moreover, Ryland inflated the sales price by $5,413.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD
       Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price
       by $5,413. It increased the sales price from $127,846 to $133,346, a difference of
       $5,500, without documentation or justification to substantiate the increase. When we
       questioned the borrower concerning this price adjustment, she stated that she was not
       aware of the increase and did not know what costs it went toward. This adjustment was
       made to cover part or all of the Nehemiah gift of $4,000, a service fee of $500, and/or a
       buydown of $3,023.

B. Inappropriate Use of Buydown Rate
       HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a
       buydown agreement in the amount of $3,023. Ryland qualified the borrower using the
       buydown interest rate but failed to show that the scheduled mortgage payment increase
       would not adversely affect the borrower and likely lead to default. To use the buydown
       interest rate to qualify, the underwriter must document the borrower’s ability to handle the
       scheduled mortgage payment increase. We noted that the borrower defaulted after making
       three payments.

C. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland failed to
       obtain original copies of the previous two years’ W-2 forms for the borrower. Only a W-
       2 form for year 2000 was included in the file. The last two years’ W-2 forms are required
       because Ryland chose to verify the borrower’s employment via telephone.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $131,239.
   ‰ Reimburse HUD for the loan modification amount of $650.
   ‰ Pay the servicing lender $5,413 to reduce the loan amount.




                                                118
HUD case number:      023-1451488
Loan amount:          $150,575
Settlement date:      December 19, 2002
Status:               Mortgage payments current
Indemnification:      $150,575

Ryland underwrote and approved the loan based on false employment, a questionable/false
Social Security number, insufficient employment documentation, and an unverified source of
deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the
borrower met HUD qualifying guidelines.

A. False Employment
       HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3; HUD Handbook 4155.1,
       REV-4, CHG-1, paragraph 3-1 E; HUD Handbook 4000.4, REV-1, CHG-2,
       paragraph 3-16. Ryland used falsified employment documents to qualify the borrower
       for the loan. The false documents include a faxed copy of the W-2 form and two pay
       stubs from employer Muebleria Imperial Furniture. The text typewritten on the year
       2001 W-2 form overlaps the surrounding textbox and text descriptions, while the Social
       Security numbers on two pay stubs were altered; before the change, the Social Security
       prefix showed “665,” and after the change, it showed “765.” The discrepancies should
       have alerted Ryland that there was a problem with the purported employment. Also, the
       loan officer certified W-2 statements for the years 2000 and 2001, as well as the two
       altered pay stubs for the periods August 24 to September 6, 2002 and September 7 to 20,
       2002. Clearly, this loan officer acted in violation of the HUD Handbook.

B. Questionable/False Social Security Number
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-2 C; 24 Code of Federal
      Regulations 202.5(j)(4). We performed a Social Security number query of our in-house
      database and determined that Ryland qualified the borrower using a Social Security
      number that was issued within two years of the application-received date. Also, as shown
      in section A, the Social Security number on two of borrower pay stubs were altered to
      show “765,” rather than the printed “665.” The discrepancies should have alerted Ryland
      that there was a problem with the Social Security number.

C. Insufficient Employment Documentation
      HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
      obtain the original pay stubs covering the most recent 30-day period from borrower. The
      last pay stub was sent to Ryland via fax and covered the period ending September 20,
      2002. Since the only loan application in the file is dated December 19, 2002, pay stubs
      covering November 19 through December 19, 2002, must be in the file. The original pay
      stub covering the most recent 30-day period was required because Ryland chose to verify
      the borrower’s employment via telephone.

Recommendations
     ‰ Indemnify HUD the mortgage amount of $150,575.




                                             119
HUD case number:      023-1453913
Loan amount:          $151,265
Settlement date:      December 27, 2002
Status:               Mortgage payments current
Indemnification:      $151,265

Ryland underwrote and approved the loan based on insufficient employment documentation.
Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower
met HUD qualifying guidelines.

A. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
       obtain a standard or telephone verification of employment for both the borrower and
       coborrower. Additionally, a year of the borrower’s and coborrower’s W-2 forms were
       missing from the file. Because the borrower provided sufficient pay stubs, it appeared
       that Ryland was verifying employment through the alternative method; i.e., telephone
       verification of employment.

Recommendation
     ‰ Indemnify HUD the mortgage amount of $151,265.




                                              120
HUD case number:     023-1487584
Loan amount:         $127,078
Settlement date:     February 12, 2003
Status:              Paid in full on March 31, 2005; property sold by borrowers
Indemnification:     $650 loan modification

Ryland underwrote and approved the mortgage based on insufficient employment
documentation. Therefore, HUD insured the loan based on Ryland’s inaccurate representation
that the borrowers met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by
$5,270.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7 and 1-7 C; HUD
       Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price
       by $5,270. Ryland increased the sales price from $123,723 to $129,000, a difference of
       $5,277, without any documentation or justification to substantiate the increase. This
       adjustment was made to cover the Nehemiah gift of $3,870 and a service fee of $500

B. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland failed to
       obtain original copies of the previous two years’ W-2 forms for borrower and
       coborrower. Included in the file were the year 2001 W-2 forms for borrower and
       coborrower. Furthermore, Ryland failed to verify employment for the coborrower. A
       most recent 30-day period pay stub, last two years’ W-2 forms, and verification of
       employment are required. Without the required documentation, Ryland would not have
       been able to determine the income stability and/or likelihood of income continuance.

Recommendations
   ‰ Reimburse HUD for loan modification paid of $650.
   ‰ Pay the servicing lender $5,270 to reduce the loan amount.




                                             121
HUD case number:       023-1493862
Loan amount:           $118,805
Settlement date:       January 28, 2003
Status:                Borrower retains ownership; not currently in default; partial claim
Indemnification:       $124,975 ($118,805 + $6,170 partial claim)

Ryland underwrote and approved the mortgage based on inappropriate use of a buydown rate and
insufficient employment documentation, unacceptable credit history, and excessive debt-to-
income ratio. In addition, Ryland failed to verify that the borrower’s deposit came from a
legitimate source. Therefore, HUD insured the loan based on Ryland’s inaccurate representation
that the borrower met HUD qualifying guidelines. Moreover, Ryland overcharged the borrower
$4,000 in equity credits and inflated the sales price by $2,985.

A. Inflated Sales Price
   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD
   Handbook 4155.1, REV-4, CHG-1, paragraphs 2-10 C. Ryland inflated the sales price by
   $2,985. It increased the sales price from $117,643 to $120,675, a difference of $3,032,
   without documentation or justification to substantiate the increase. The borrower also
   accrued $4,000 from her participation in a program enabling renters to earn credits toward
   the purchase of a new home. Initially, Ryland adjusted the property sales price by $7,000,
   but the $4,000 in equity credits had offset that amount and reduced it to $3,032. When we
   questioned the borrower concerning this price adjustment, she stated that she was not aware
   of the increase and did not know what cost it went toward. We believe the after-equity
   difference was made to cover part or all of the Nehemiah gift of $3,620, a service fee of
   $500, and/or a buydown of $2,704.

B. Inappropriate Use of Buydown Rate
       HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a
       buydown in the amount of $2,704. Ryland qualified the borrower using the buydown
       interest rate but failed to show that the scheduled mortgage payment increase would not
       adversely affect the borrower and likely lead to default. To use the buydown interest rate to
       qualify, the underwriter must document the borrower’s ability to handle the scheduled
       mortgage payment increase. The borrower defaulted after making 15 payments.

C. Insufficient Employment Documentation
      HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
      verify all of the borrower’s employment for the past two years. Ryland verified, via
      telephone, employment for only four months.

D. Unacceptable Credit History
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3. The borrower’s credit
     history was unsatisfactory. The credit report indicated six collection accounts and two
     charge-offs, which are older than two years, for a balance of $902. However, the lender




                                                122
       was required to examine the overall pattern of credit behavior. The lender failed to
       document in the file whether these items were “based on a disregard for financial
       obligations, an inability to manage debt, or factors beyond the control of the borrower,”
       as stated in the HUD handbook. There was only an explanation included in the file by
       the borrower regarding one charge-off account and a judgment. The remaining six items
       are unaccounted for by both the borrower and the lender.

F. Unverified Source of Deposit
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. Original bank statements
      covering the most recent three-month period are required, two of which must be
      consecutive statements, if no verification of deposit is done by the lender. The borrower
      signed the initial loan application on September 3, 2002, and handbook requires that the
      application be updated so it was not more than 180 days old when the loan closes. The
      loan should have been updated in February 3, 2002; however, no document found in file
      was signed by borrower around that date. Instead, a January 21, 2003, application was on
      file, on which we relied; therefore, the bank statements should cover the period October
      21, 2002, through January 21, 2003. The loan file contained more than one bank
      statement from three different banks; five of the seven provided were not submitted
      within the acceptable three-month period. The two statements fell within the required
      timeframe but covered generally the same period. Two more statements were necessary
      so the handbook requirement was not met.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $118,805.
   ‰ Reimburse HUD for partial claims paid of $6,170.
   ‰ Refund $4,000 in overcharges to the borrower.
   ‰ Pay the servicing lender $2,985 to reduce the loan amount.




                                              123
HUD case number:       023-1576678
Loan amount:           $128,905
Settlement date:       March 26, 2003
Status:                In default as of June 30, 2005; partial claim
Indemnification:       $138,050 ($128,905 + $9,145 partial claim)

Ryland underwrote and approved the mortgage based on inappropriate use of a buydown rate.
Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower
met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $5,907.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD
       Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price
       by $5,907. It increased the sales price from $124,930 to $130,930, a difference of
       $6,000, without documentation or justification to substantiate the increase. This
       adjustment was made to cover part or all of the Nehemiah gift of $3,928, a service fee of
       $385, and/or a buydown of $2,860.

B. Inappropriate Use of Buydown Rate
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a
      buydown in the amount of $2,860. Ryland qualified the borrower using the buydown
      interest rate but failed to show that the scheduled mortgage payment increase would not
      adversely affect the borrower and likely lead to default. To use the buydown interest rate to
      qualify, the underwriter must document the borrower’s ability to handle the scheduled
      mortgage payment increase. The borrower defaulted after making seven payments.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $128,905.
   ‰ Reimburse HUD for partial claims paid of $9,145.
   ‰ Pay the servicing lender $5,907 to reduce the loan amount.




                                                124
HUD case number:      023-1592011
Loan amount:          $153,772
Settlement date:      March 31, 2003
Status:               Borrower retains ownership; not currently in default
Indemnification:      $155,172 ($153,772 + $100 special forbearance + $1,300 loan
                      modification)

Ryland underwrote and approved the mortgage based on overstated income, insufficient
employment documentation, and excessive debt-to-income ratio without adequate compensating
factors. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the
borrower met HUD qualifying guidelines.

A. Overstated Income
      HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7 and 2-7 A. The
      coborrower’s monthly income of $2,462 on the loan application and mortgage credit
      analysis worksheet was overstated by $70 per month. Ryland failed to verify and provide
      documentation to substantiate this amount.

B. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
       obtain an original pay stub covering the most recent 30-day period from either the
       borrower or coborrower. The last pay stub included in the file for the borrower was for
       the period ending March 7, 2003. However, the pay stub was faxed from the
       coborrower’s place of employment. Additionally, there was a stamp bearing “certified to
       be a true and correct copy of the original” signed by a Ryland employee. The only
       original copies of pay stubs found in the file for the borrower were for the periods ending
       August 9, August 2, July 26, and July 19, 2002. The last pay stub included in the file for
       the coborrower was for the period ending March 14, 2003. This pay stub was also faxed
       from the coborrower’s place of employment and bears the stamp “certified to be a true
       and correct copy of the original” signed by a Ryland employee. The only original copies
       of pay stubs found in the file for the coborrower were for periods ending August 15, July
       31, and July 15, 2002, and were not the most updated documents in the file.
       Additionally, Ryland failed to verify employment for two full years for either the
       borrower or coborrower. Ryland verified the borrower’s employment for one year and
       five months and verified the coborrower’s employment for one year and six months. A
       most recent 30-day period pay stub and verification of employment for two full years are
       required. Without the required documentation, Ryland would not have been able to
       determine the income stability and/or likelihood of income continuance.

C. Inaccurate/Excessive Debt-to-Income Ratios
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12. The calculated total fixed
      payments-to-income ratio of 47.11 percent exceeds the HUD requirement by 6.11
      percentage points. The compensating factor listed by Ryland stated “minimal increase in
      housing.” This was not adequate justification for approving the loan with excessive




                                               125
      ratios. The borrower’s verification of rent shows a monthly rent payment of $659,
      whereas the estimated mortgage payment was $1,062. This increased monthly home
      payment expenditures by $403. Additional compensating factors assured that “both
      borrowers have been in the same line of work for 5 and 2 years, borrowers have paid off
      some credit,” yet the borrowers defaulted on their loans after three payments.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $153,772.
   ‰ Reimburse HUD for the special forbearance ($100) and loan modification ($1,300) paid
     of $1,400.




                                            126
HUD case number:       023-1646394
Loan amount:           $130,833
Settlement date:       April 30, 2003
Status:                Mortgage payments current
Indemnification:       $130,833

Ryland underwrote and approved the loan based on overstated income, an excessive debt-to-
income ratio without adequate compensating factors, and an unverified source of deposit.
Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower
met HUD qualifying guidelines.

A. Overstated Income
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9 C; HUD Handbook 4000.4,
      REV-1, CHG-2, paragraph 5-3. The borrower’s monthly income of $2,523 on the
      mortgage credit analysis worksheet was overstated by $178 per month. Based on the
      borrower’s self-employed income on the 2001 and 2002 tax returns, Ryland improperly
      calculated the income by using business income rather than adjusted gross income.

B. Unverified Source of Deposit
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. The borrower provided a
      one-month bank statement, covering the period December 20, 2002, through January 22,
      2003. Original bank statements covering the most recent three-month period are required,
      two of which must be consecutive statements, if the lender does not obtain a verification of
      deposit.

Recommendation
     ‰ Indemnify HUD the mortgage amount of $130,833.




                                               127
HUD case number:      023-1646660
Loan amount:          $148,291
Settlement date:      May 13, 2003
Status:               Mortgage payments current
Indemnification:      $148,291

Ryland underwrote and approved the loan based on unsupported income, insufficient
employment documentation, and an unverified source of deposit. Therefore, HUD insured the
loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying
guidelines.

A. Inappropriate Use of Buydown Rate
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a
      buydown agreement in the amount of $3,290. Ryland qualified the borrower using the
      buydown interest rate but failed to show that the scheduled mortgage payment increase
      would not adversely affect the borrower and likely lead to default. To use the buydown
      interest rate to qualify, the underwriter must document the borrower’s ability to handle
      the scheduled mortgage payment increase.

B. Unsupported Source of Income
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E. Income from any source
      that cannot be verified, is not stable, or will not continue may not be used in calculating
      the borrower’s income ratios. The borrower’s verification of employment reported gross
      income earned through April 24, 2003, of $5,374. The borrower’s hourly pay before his
      May 9, 2003, pay raise of $10.11 per hour was $9.82. The combined income of $5,374
      and calculated hourly income of $10.11 per hour equaled a monthly income of $1,526,
      resulting in an overstatement and deviation from the $1,684 income reported on the
      mortgage credit analysis worksheet of $158.

C. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
       obtain the original pay stubs covering the most recent 30-day period from the
       coborrower, yet the coborrower’s income was incorporated in the calculation of income.
       Only one pay stub was included in the file for the pay period ending March 21, 2003,
       showing a gross amount of $964. The most recent 30-day period pay stub was required
       because Ryland chose to verify the borrower’s employment via telephone.

Recommendation
     ‰ Indemnify HUD the mortgage amount of $148,291.




                                               128
HUD case number:      023-1653270
Loan amount:          $136,010
Settlement date:      April 30, 2003
Status:               In default as of June 30, 2005
Indemnification:      $136,010

Ryland underwrote and approved the mortgage based on inappropriate use of a buydown rate and
excessive qualifying ratios. In addition, Ryland failed to verify that the borrower’s deposit came
from a legitimate source. Therefore, HUD insured the loan based on Ryland’s inaccurate
representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the
sales price by $3,150.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD
       Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price
       by $3,150. It increased the sales price from $134,953 to $138,153, a difference of
       $3,200, without documentation or justification to substantiate the increase. When we
       questioned the borrower, he stated that he was shocked to see the price increase at closing
       because he did not know what it went toward. He further stated that he was
       overwhelmed with the paper work, and the closer assured him that he would be receiving
       an incentive; therefore, he did not question the increase. We believe this adjustment was
       made to cover part or all of the OWN gift of $4,145, a service fee of $300, and/or a
       buydown agreement of $3,017.

B. Inappropriate Use of Buydown Rate
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a
      buydown of $3,017. Ryland qualified the borrower using the buydown interest rate but
      failed to show that the scheduled mortgage payment increase would not adversely affect
      the borrower and likely lead to default. To use the buydown interest rate to qualify, the
      underwriter must document the borrower’s ability to handle the scheduled mortgage
      payment increase. The borrower defaulted after making seven payments.

C. Inaccurate/Excessive Debt-to-Income Ratios
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12. The mortgage payment-to-
      income ratio of 37.38 percent exceeds HUD guidelines by 8.38 percentage points; the
      total fixed payments-to-income ratio of 41.76 percent exceeds the HUD requirement by
      0.76 percentage points. The compensating factor on the mortgage credit analysis
      worksheet stated “borrower paying the same in housing as rent.” However, the
      borrower’s rent, according to the verification of rent, was $646, and the new mortgage
      payment was $778, including the buydown of $166. The total increase in the monthly
      housing payment was $131, which was not the same amount as rent payment. Therefore,
      the compensating factor does not justify excessive ratio.




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D. Unverified Source of Deposit
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. Original bank statements
      covering the most recent three-month period are required, two of which must be
      consecutive statements, if no verification of deposit is done by the lender. The borrower
      signed the initial loan application on April 10, 2003, and the final application on April 29,
      2003; since no more than 180 days had lapsed since the settlement date of April 30, 2003,
      bank statements should generally cover the period January 10 through April 10, 2003.
      The two bank statements provided covered February 17 through March 25, 2003. As a
      result, the HUD handbook requirement was not met.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $136,010.
   ‰ Pay the servicing lender $3,150 to reduce the loan amount.




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HUD case number:      023-1736086
Loan amount:          $140,628
Settlement date:      June 24, 2003
Status:               Borrower retains ownership; not currently in default; partial claim
Indemnification:      $145,722 ($140,628 + $5,094 partial claim)

Ryland underwrote and approved the mortgage based on insufficient verification of employment.
Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower
met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $2,934.

A. Inflated Sales Price
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD
       Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price
       by $2,934. It increased the sales price from $139,861 to $142,841, a difference of
       $2,980, without documentation or justification to substantiate the increase. This
       adjustment was made to cover part or all of the OWN gift of $4,285 and/or a service fee
       of $300.

B. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
       verify all of the borrower’s employment for the past two years. It verified employment
       for only one year.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $140,628.
   ‰ Reimburse HUD for a claim paid of $5,094.
   ‰ Pay the servicing lender $2,934 to reduce the loan amount.




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HUD case number:      023-1811657
Loan amount:          $155,173
Settlement date:      August 13, 2003
Status:               Borrower retains ownership; not currently in default
Indemnification:      $155,173

Ryland underwrote and approved the mortgage based on insufficient verification of employment,
excessive debt-to-income ratio without adequate compensating factors, and insufficient
verification of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate
representation that the borrowers met HUD qualifying guidelines.

A. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not
       verify all of borrowers’ employment for the past two years. It verified employment for
       only one year and seven months.

B. Unverified Source of Deposit
      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. Original bank statements
      covering the most recent three-month period are required, two of which must be
      consecutive statements, if no verification of deposit is done by the lender. The borrowers
      signed the initial loan application on March 30, 2003, and the handbook requires that the
      application be updated so as not to be more than 180 days old when the loan closes. The
      loan should have been updated September 30, 2003; however, no document on file was
      signed by the borrowers around that date. We relied on the final application, dated
      August 12, 2003; therefore, the bank statements should cover the period May 12 through
      August 12, 2003. There were four deposit accounts, as well as an investment account,
      listed on the loan application. The account statements included in the file were copies of
      statements downloaded from the borrowers’ financial institution’s Web site. There were
      eight statements included in the file:

           •   Account 5318, February 5 through March 28, 2003, and May 27 through July 18,
               2003.
           •   Account 0372, January 22 through March 20, 2003, and April 21 through July 17,
               2003.
           •   Account 9984, January 16 through March 28, 2003, and May 15 through July 18,
               2003.
           •   Account 3967, the two statements provided do not contain date coverage.




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      None of these statements contained account holder names. There was no statement found
      for the investment account listed on the loan application. Ryland would not have been
      able to verify that these accounts belonged to the borrowers. As a result, the HUD
      handbook requirement was not met.

Recommendations
   ‰ Indemnify HUD the mortgage amount of $155,173.




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HUD case number:      023-1932092
Loan amount:          $119,516
Settlement date:      November 4, 2003
Status:               Mortgage payments current
Indemnification:      $119,516

Ryland underwrote and approved the loan based on false employment, a questionable/false
Social Security number, an unsupported source of income, and an excessive debt-to-income ratio
without adequate compensating factors. Therefore, HUD insured the loan based on Ryland’s
inaccurate representation that the borrower met HUD qualifying guidelines.

A. False Employment
       HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3; HUD Handbook 4155.1,
       REV-4, CHG-1, paragraph 3-1 E. Ryland used falsified employment documents to
       qualify the borrower for the loan. The false documents include two pay stubs (April through
       May 2003) from employer Pioneer Ford. The following deficiencies were found:
       • Social Security and Medicare taxes did not calculate to 6.2 percent and 1.45 percent,
          respectively; rather, Social Security calculated to 5.45 percent and Medicare to 0.58
          percent on April 2003 pay stub and Social Security calculated to 5.87 percent and
          Medicare to .92 percent on May 2003 pay stub.
       • The April 2003 pay stubs did not have a check number printed on the top right hand
          corner, as did the May 2003 pay stub.
       • We requested a wage history for borrower from Pioneer Ford and found inconsistent
          wage information. The April 2003 wages were inflated by $2,000, and the May 2003
          wages were inflated by $1,300.
       The borrower was unaware of the inflation or other inconsistencies found on the pay stubs.

B. Questionable/False Social Security Number
      HUD Handbook 4155.1, REV-5, paragraph 3-1 C; 24 Code of Federal Regulations
      202.5(j)(4). We performed a Social Security number query of our in-house database and
      determined that Ryland qualified the borrower using a Social Security number that was
      issued before the borrower’s birthdate. Lexis Nexis reported that the Social Security
      number belonged to another individual. Moreover, Ryland required that the borrower
      provide a clearer copy of his Social Security card; however, the loan was underwritten
      without the card or a documented explanation in the Ryland case file.

C. Unsupported Source of Income
      HUD Handbook 4155.1, REV-5, paragraph 2-7 C. Ryland failed to authenticate the
      borrower’s source of income. We could not determine the basis for borrower’s income of
      $3,876 through recalculation. Instead, we recalculated the borrower’s income based on
      the amount reported on the Department of Economic Security wage reports. Monthly
      income based on our calculation was $1,792, an overstatement of $2,084 from the income
      reported on the mortgage credit analysis worksheet.




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D. Inaccurate/Excessive Debt-to-Income Ratios
      HUD Handbook 4155.1, REV-5, paragraph 2-12. We recalculated the qualifying ratios
      using the income based on the figure reported on the Department of Economic Security
      wage statements. The recalculated mortgage payment-to-income ratio was 48.99 percent
      and exceeds HUD requirements by 19.99 percentage points, while the total fixed payments-
      to-income ratio of 76.60 percent exceeds the HUD requirements by 35.60 percentage points.
      Compensating factors stated the borrower had worked in the same line for three years, ratios
      were in line, and maximum loan to value was 90 percent. Due to the large variance of these
      ratios, the compensating factors were not adequate to justify approving the loan.

Recommendation
     ‰ Indemnify HUD the mortgage amount of $119,516.




                                               135
HUD case number:      023-1965223
Loan amount:          $157,172
Settlement date:      December 22, 2003
Status:               In default; first legal action to commence
                      foreclosure on January 1, 2005
Indemnification:      $157,172

Ryland underwrote and approved the mortgage based on insufficient employment
documentation, understated liabilities, excessive debt-to-income ratios without adequate
compensating factors, and an unverified source of deposit. Therefore, HUD insured the loan
based on Ryland’s inaccurate representation that the borrowers met HUD qualifying guidelines.

A. Unverified Source of Deposit
      HUD Handbook 4155.1, REV-5, paragraph 3-1 F. Original bank statements covering
      the most recent three-month period are required, two of which must be consecutive
      statements, if no verification of deposit is done by the lender. The borrowers signed the
      initial loan application on June 10, 2003, and the handbook requires that the application
      be updated so as not to be more than 180 days old when the loan closes. The loan should
      have been updated December 10, 2003. We relied on the final application, dated
      December 15, 2003; therefore, the bank statements should cover the period September 15
      through December 15, 2003. The two bank statements provided covered June 6 through
      July 8, 2003, and September 24 through October 24, 2003. As a result, the HUD
      handbook requirement was not met.

Recommendation
   ‰ Indemnify HUD the mortgage amount of $157,172.




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HUD case number:     023-2177719
Loan amount:         $160,766
Settlement date:     October 19, 2004
Status:              Mortgage payments current
Indemnification:     $160,766

Ryland underwrote and approved the loan based on an unsupported source of income,
insufficient employment documentation, and an unverified source of deposit. Therefore, HUD
insured the loan based on Ryland’s inaccurate representation that the borrower met HUD
qualifying guidelines.

A. Unsupported Source of Income
      HUD Handbook 4155.1, REV-5, paragraph 2-7. Ryland failed to authenticate the
      borrower’s source of $813 in overtime income. We could not determine the basis for
      borrower’s income through recalculation. Additional documentation to support the $813
      on the mortgage credit analysis worksheet was not available in file.

B. Insufficient Employment Documentation
       HUD Handbook 4155.1, REV-5, paragraphs 2-6 and 3-1 E. Ryland failed to verify
       the borrower’s employment for two years. A telephone verification of employment was
       on file, which verified employment for one year and ten months.

Recommendations
     ‰ Indemnify HUD the mortgage amount of $160,766.




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Appendix E

                                         Criteria


A.   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3, defines a level three
     deficiency as one, which involves an action by the lender to misrepresent the financial
     capacity either of the applicant-borrower or the condition of the property offered as
     security for the mortgage.

B.   HUD Handbook 4000.4, REV-1, CHG-2, paragraph 3-16, states the underwriter
     should certify the legitimacy of the insurance application and all supporting documents
     are accurate and complete to the best of the signer’s knowledge.

C.   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F, requires the lender to
     obtain original and not faxed pay stubs from the borrower covering the most recent 30-
     day period. In addition, lenders should obtain original copies of the previous two years’
     Internal Revenue Service W-2 forms in the event that a telephone verification of
     employment is used, which is concurrent with this situation.

D.   HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-10 C, state that no
     repayment of the gift may be expected or implied.

E.   HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-14, state that the
     lender must establish that the eventual increase in mortgage payments after the buydown
     term ends will not adversely affect the borrower and likely lead to default. The
     underwriter must document which of the following criteria the borrower meets:

     (a) Potential for increased income that would offset the scheduled payment increases, as
     indicated by job training or education in the borrower's profession or by a history of
     advancement in the borrower's career with attendant increases in earnings.

     (b) 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.

     (c) The borrowers have substantial assets available to cushion the effect of the increased
     payments.

     (d) The cash investment made by the borrower substantially exceeds the minimum
     required.




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F.   HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraphs 2-7 and 2-7 A,
     provide that the income of each borrower to be obligated for the mortgage debt must be
     analyzed to determine whether it can reasonably be expected to continue through at least
     the first three years of the mortgage loan. In most cases, borrower income will be limited
     to salaries or wages. Income from most other sources, provided it is properly verified by
     the lender, can be included as effective income.

G.   HUD Handbook 4155.1, REV-4, CHG-1 and REV-5, paragraphs 2-6 and 3-1 E,
     require that in lieu of obtaining a standard verification of employment, the lender may
     obtain the borrower’s original pay stubs covering the most recent 30-day period, along
     with the original copies of the previous two years’ Internal Revenue Service W-2 forms.
     The lender must also verify employment by telephone for the past two years. Ryland
     failed to verify borrower’s employment for two years, obtain a copy of the borrowers’
     pay stubs covering the most recent 30-day period, and/or obtain a copy of the previous
     two years’ Internal Revenue Service W-2 forms. Moreover, the borrower must explain
     any gaps in employment spanning one month or more. The lender must verify the
     borrower’s employment for the most recent two years.

H.   HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3 and 2-4, and REV-5,
     paragraph 2-11, require lenders to consider all installment loans, contingent liabilities,
     and projected obligations when assessing the loan application. In computing the debt-to-
     income ratios, the lender must include the monthly housing expense and all other recurring
     charges, including payments on installment accounts, child support or separate maintenance
     payments, revolving accounts and alimony, etc., extending 10 months or more. Debts
     lasting less than 10 months must be counted if the amount of the debt affects the borrower’s
     ability to make the mortgage payment during the months immediately after loan closing; this
     is especially true if the borrower will have limited or no cash assets after loan closing.

I.   HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3, serves as a guide in
     determining the attitude toward credit obligations that will govern the borrower’s future
     actions. A borrower who has made payments on previous or current obligations in a
     timely manner represents reduced risk. Conversely, if the credit history, despite adequate
     income to support obligations, reflects continuous slow payments, judgments, and
     delinquent accounts, strong offsetting factors will be necessary to approve the loan.

J.   HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-12, state that
     ratios are used to determine whether the borrower can reasonably be expected to meet the
     expenses involved in homeownership and otherwise provide for the family. The
     mortgage payment expense to effective income (front ratio) may not exceed 29 percent of
     gross effective income, and the total fixed payment to effective income (back ratio) may
     not exceed 41 percent of gross effective income, unless significant compensating factors
     are presented.




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K.      Chapter 2, page 2-15, of the HUD Homeownership Guide lists a group of closing costs
        and fees that can be collected by the lender from the borrower, subject to a maximum
        limitation. Whenever “actual costs” are permitted, it is expected that they do not exceed
        what is reasonable and customary for the area.

        An unallowable fee is one that has been identified by the local HUD office as not being a
        necessary/normal part of the loan origination process. An unearned fee is a closing cost that
        does not have an actual service or thing of value attached to it. An excessive fee is a closing
        cost charged to the borrower beyond the amount allowed by HUD.

     L. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 3-1 F, requires the
        lender to obtain the borrower’s verification of deposit. As an alternate to obtaining a
        verification of deposit, the lender may choose to obtain from the borrower original bank
        statements for the most recent three-month period, two of which must be consecutive
        statements. Provided the bank statement shows the previous month's balance, this
        requirement is met by obtaining the two most recent consecutive statements.

     M. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9 C & C, 1, requires the lender
        must establish the borrower's earnings trend over the previous two years, but may
        average the income over three years if all three years' tax returns are provided. If the
        borrower provides quarterly tax returns, then the analysis can include income through the
        period covered by the tax filings. If the borrower is not subject to quarterly tax filings or
        does not file quarterly returns (form IRS 1040 ES), the income shown on the P&L may
        be included in the analysis provided the income stream based on the P&L is consistent
        with the previous years' earnings. If the P&L statements submitted for the current year
        show an income stream considerably greater than what is supported by the previous
        years' tax returns, the analysis of income must be predicated solely on the income verified
        through the tax returns. Lenders must carefully analyze the individual business's financial
        strength, the source of its income, and the general economic outlook for similar
        businesses in that area to determine if the business can be expected to continue to
        generate sufficient income for the borrower's needs. Annual earnings that are stable or
        increasing are acceptable. Conversely, a borrower whose business shows a significant
        decline in income over the period analyzed may not be acceptable even if current income
        and debt ratios meet our guidelines. Business income or loss (from Schedule C). The
        sole proprietorship income calculated on Schedule C is business income. Depreciation or
        depletion may be added back to adjusted gross income.

     N. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-10 B states that a
        verification of deposit (VOD) may be used to verify these accounts, along with the most
        recent bank statement. If there is a large increase in an account, or the account was
        opened recently, an explanation and evidence of source of funds must be obtained by the
        lender.




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