oversight

United Mortgage Corporation, Non-Supervised Mortgagee, Hauppauge, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-11-18.

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

    AUDIT REPORT




UNITED MORTGAGE CORPORATION
 NON-SUPERVISED MORTGAGEE
    HAUPPAUGE, NEW YORK

        2006-NY-1001

       November 18, 2005



        OFFICE OF AUDIT
      NEW YORK/NEW JERSEY
                                                              Issue Date
                                                                November 18, 2005
                                                              Audit Report Number
                                                                 2006-NY-1001




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


FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: United Mortgage Corporation, Hauppauge, NY Did Not Always Comply with
         HUD/Federal Housing Administration Loan Origination Requirements


                                   HIGHLIGHTS

 What We Audited and Why

            We audited United Mortgage Corporation (United Mortgage), a non-supervised
            direct endorsement lender located in Hauppauge, New York, because its default
            rate for loans originated and underwritten during the period November 1, 2002
            through October 31, 2004 was higher than the New York State average default
            rate.

            The audit objectives were to determine whether United Mortgage: (1) complied
            with the U.S. Department of Housing and Urban Development (HUD) regulations
            in the origination of Federal Housing Administration loans, and (2) developed and
            implemented a quality control plan that complied with HUD requirements.

 What We Found
            United Mortgage did not originate 13 of the 33 loans reviewed in accordance with
            HUD requirements. The 13 loans were approved with deficiencies that involved
            inadequate or incomplete compensating factors; failure to re-establish good credit
            following a bankruptcy; inadequate income verification; files containing
            questionable documents; inadequate debt verification; and inadequate review of
            appraisals. We attributed these deficiencies to United Mortgage’s failure to use due
            care when originating the loans. As a result, mortgages valued at $1,751,300 were
           approved for unqualified borrowers, causing HUD to assume an unnecessary
           insurance risk.

           Further, United Mortgage did not follow HUD requirements pertaining to supporting
           significant compensating factors as they relate to an additional 7 loans reviewed.
           As a result, mortgages amounting to $1,060,100 were approved for unqualified
           borrowers, causing HUD to assume an unnecessary insurance risk.

           United Mortgage implemented a quality control plan that for the items tested was in
           compliance with HUD requirements.


What We Recommend


           We recommend that the assistant secretary for housing- federal housing
           commissioner require United Mortgage to reimburse HUD for claims and fees paid
           on one loan amounting to $154,921. We are also requesting indemnification for
           potential losses on the 12 active loans with significant underwriting deficiencies.
           These 12 loans are valued at $1,605,950. We further recommend that HUD examine
           the 7 active loans valued at $1,060,100 that lacked support for compensating factors
           to determine if they should have been approved and if they should be indemnified.

           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


           United Mortgage officials did not agree with our conclusion that they did not
           follow HUD’s requirements in the origination of Federal Housing administration
           loans.

           We discussed the contents of the report with United Mortgage officials during the
           audit and at an exit conference held on October 19, 2005 and they provided their
           written comments on October 25, 2005. Appendix B of this report contains the
           complete text of United Mortgage’s comments, along with our evaluation of the
           comments.




                                            2
                              TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
        Finding 1: United Mortgage Did Not Follow HUD Requirements When           5
                   Originating Loans

Scope and Methodology                                                             11

Internal Controls                                                                 12

Appendixes
   A.    Schedule of Questioned Costs and Funds to Be Put to Better Use           14
   B.    Auditee Comments and OIG’s Evaluation                                    15
   C.    Summary of Loan Origination Deficiencies                                 61
   D.    Narrative Case File Presentations                                        62
   E.    Case File Presentations for Loans with Inadequate Compensating Factors   76




                                               3
                     BACKGROUND AND OBJECTIVES


United Mortgage Corporation (United Mortgage) is a non-supervised lender that became a HUD
approved lender on May 19, 1992. United Mortgage’s home office is located in Hauppauge,
NY, and it has 11 separate branch offices located throughout the country. United Mortgage has
five loan correspondents and is acting as principal for one authorized agent.

Between November 1, 2002 and October 31, 2004, United Mortgage originated 433 Federal
Housing Administration insured mortgages. We selected United Mortgage for audit because its
3.42 percent default rate for loans originated and underwritten during the period November 1,
2002 through October 31, 2004 was higher than the average default rate for the State of New
York, which was 2.18 percent.

The objectives of this audit were to determine whether United Mortgage (1) complied with HUD
regulations in the origination of Federal Housing Administration loans, and (2) developed and
implemented a quality control plan that complied with HUD requirements.




                                               4
                                 RESULTS OF AUDIT


Finding 1: United Mortgage Did Not Follow HUD Requirements When
Originating Loans

United Mortgage did not comply with HUD requirements in the origination of 13 of the 33 loans
included in our review. The 13 loans contained deficiencies that should have precluded their
approval. The deficiencies involved loans with inadequate or incomplete compensating factors;
files containing questionable documents; inadequate debt verification; and inadequate review of
appraisals. We attribute these deficiencies to United Mortgage’s failure to use due care when
originating the loans. As a result, the HUD/Federal Housing Administration Insurance Fund
incurred a loss of $154,921, and continues to be at risk for $2,811,400.


 HUD Requirements



               HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance,
               prescribes basic underwriting requirements for HUD-insured single-family
               mortgage loans. Lenders must ensure that borrowers have the ability and
               willingness to repay the mortgage debt. Lenders are to obtain and verify
               information with at least the same care that would be exercised if the lender was
               originating a mortgage entirely dependent on the property as security to protect its
               investment.

               HUD Handbook 4155.1 also requires lenders to determine a borrower’s ability
               and willingness to repay the mortgage debt and, thus, limit the probability of
               default or collection difficulties. Lenders should evaluate the stability of income,
               funds to close, credit history, qualifying ratios, and compensating factors. They
               must ensure the application package contains sufficient documentation to support
               their decision to approve the mortgage loan. United Mortgage did not always
               follow the above requirements in its loan originations.

 Origination and Underwriting
 Deficiencies

               We found origination deficiencies in 13 of 33 loans we reviewed with beginning
               amortization dates between November 1, 2002, and October 31, 2004. These
               deficiencies occurred because United Mortgage did not exercise due diligence in
               adequately supporting compensating factors, verifying debt, income, and gift
               documentation, and reviewing appraisal information.




                                                 5
            Specifically, we found that (a) ratios exceeded HUD standards without compensating
            factors or without adequate compensating factors (four loans), (b) borrower’s did not
            re-establish good credit following bankruptcy (three loans), (c) income verification
            were inadequate (three loans), (d) files contained questionable documents (two loans),
            (e) debt verification were inadequate (two loans), and (f) appraisal reviews were
            inadequate (two loans).

Inadequate or Incomplete
Compensating Factors

            HUD Handbook 4155.1, REV-4, paragraphs 2-12 and 2-13 provides that the
            borrowers total mortgage payment to effective income ratio and total fixed
            payment to effective income ratio cannot exceed 29 percent and 41 percent
            respectively without listing significant compensating factors.

            In one loan (Case Number 251-3042694), the borrower had a mortgage payment
            expense to effective income ratio of 37.04 and a total fixed payment to effective
            income ratio of 45.25 percent. Conservative use of credit, good earnings potential,
            and not using overtime or bonus income to qualify were listed as compensating
            factors. However, we determined that the credit report and the available assets did
            not support the compensating factor of conservative use of credit and an ability to
            accumulate savings. The bank account showed a balance of $1,919 at the time the
            mortgage credit analysis worksheet was prepared. Furthermore, the borrower had
            opened a credit line 3 months prior to closing and the balance was close to its
            maximum allowable limit. In addition, United Mortgage’s case files contained
            insufficient supporting documentation for the other two compensating factors.
            The case files did not contain evidence that there was a potential for increased
            earnings as indicated by job training or education in the borrower’s profession,
            and the verification of employment did not provide evidence that the overtime and
            bonus income was likely to continue.

            In two other loans we reviewed (Case Numbers 371-3362145 and 374-4236831),
            the borrowers total fixed payment to effective income or backend ratios were
            44.96 percent and 45.09 percent, respectively. However, the loans were approved
            without any compensating factors listed on the mortgage credit analysis
            worksheet.

            In another loan (Case Number 374-4347581), the loan had a front ratio of 36.13
            and a back ratio of 43.85 percent. Contractual pay increases, conservative use of
            credit, and good earnings potential were listed as compensating factors. However,
            the files did not support any of these compensating factors, as indicated by job
            training or education in the borrower’s profession.

            Because of the compensating factor concerns identified above, we selected an
            additional 16 loans to review only to determine whether United Mortgage
            obtained adequate compensating factors to support its decision to approve loans
            for borrowers with high total debt to income or backend ratios. We determined
            that 9 of the 16 additional loans selected did not contain adequate compensating


                                             6
            factors. Two of these loans were paid in full thus we are requesting HUD to
            examine the 7 active loans with deficient compensating factors to determine
            whether they should have been approved. The seven loans are Case Numbers 371-
            3355512, 351-4593484, 292-4475818, 371-3356599, 374-4415719, 371-3401203,
            052-3495166.

The Borrower Did Not Re-establish
Good Credit Following Bankruptcy

            HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3E states that a bankruptcy
            will not disqualify the borrower from Federal Housing Administration insurance
            if at least two years have passed since the bankruptcy was discharged and the
            borrower has re-established good credit, and has demonstrated an ability to
            manage financial affairs.

            In three of the loans we reviewed (Case Numbers 371-3330273, 371-3372063,
            and 371-3129664), the borrower did not re-establish good credit following a
            bankruptcy. In each of these cases, the borrowers’ credit reports indicated that the
            borrowers had chosen to incur new credit obligations since the discharge date of
            their bankruptcies. In fact, one borrower opened 11 new credit lines, had a
            $35,279 credit limit and incurred $30,838 in debt. In addition, the same
            borrower’s prior mortgage had five instances of late payments greater than 90
            days. Further, for each of the borrowers there was no indication from the files
            that they re-established good credit nor demonstrated an ability to manage their
            financial affairs.

Inadequate Income Verification


            HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6 provides that the
            anticipated amount of income, and the likelihood of its continuance, must be
            established to determine a borrower’s capacity to repay mortgage debt. In
            addition, the lender is required to verify the borrower’s employment for the most
            recent two full years.

            In three of the loans we reviewed (Case Numbers 374-4347581, 351-4605626,
            and 291-3251765), we determined that the loans contained inadequate income
            verification. In one of the loans (Case Number 374-4347581), United Mortgage
            indicated that the borrower's gross monthly income was $6,096.70. However,
            based on the documents in the files we calculated it to be $5,679.55. This change
            increased the total fixed payment to effective income or backend ratio to 47.07
            percent, which is in excess of HUD’s threshold. In the other two cases (Case
            Numbers 351-4605626 and 291-3251765), United Mortgage failed to verify the
            borrower's employment for the most recent two full years. In both cases, the
            borrowers indicated that they worked in their current positions for periods of less
            than two years, at the time of application; yet, the files did not adequately
            document the previous employment. The loan application for one of the


                                              7
            borrowers details eight months of employment and one year of self employment.
            However, the case files did not contain documents to support the timeframe or the
            amount of income generated by the borrower while self employed, such as tax
            returns and year-to-date profit and loss statements.

Questionable Documents


            HUD Handbook 4155.1, REV-4, CHG-1, Paragraph 2-3C requires that judgments
            must be paid off before the mortgage loan is eligible for endorsement. Also, HUD
            Handbook 4155.1, REV-4, paragraph 2-11C states that if a debt payment, such as
            a student loan, is scheduled to begin within twelve months of the mortgage loan
            closing, the lender must include the anticipated monthly obligation in the
            underwriting analysis unless the borrower can provide evidence that the debt may
            be deferred to a period outside this timeframe.

            United Mortgage failed to adequately verify questionable documents contained in
            the files. The documents included a questionable judgment verification and
            questionable debt verification. For example, the file for case number 374-4347581
            included two letters explaining that judgments totaling $4,876 had been satisfied.
            Each of these letters was provided to United Mortgage via facsimile and
            contained incomplete header information. However, the files did not contain
            evidence of reverification of the letters, nor the source of the payment that
            satisfied the judgment. In another example, the file for case number 061-2722023
            contained documents from a university attesting that the borrower had been a
            student through 2003. Thus, on the premise that the student loans were not due
            for repayment until the following year, the loans were not considered in the
            underwriting analysis. However, the loans became due shortly after closing.
            Therefore, this debt should have been included as part of the underwriting
            analysis of the borrower’s liabilities. Had these debts been properly analyzed, the
            borrowers may not have qualified for the loans.

Inadequate Debt Verification


            HUD Handbook 4155.1, REV-4, paragraph 2-11A states that the borrower's
            liabilities include all installment loans, revolving charge accounts, real estate
            loans, alimony, child support, and all other continuing obligations. In computing
            the debt-to-income ratios, the lender must include the monthly housing expense,
            and all other additional recurring charges including payments on installment
            accounts, child support or separate maintenance payments, revolving accounts
            and alimony, etc., extending ten months or more.

            In two of the loans we reviewed (Case Numbers 061-2722023 and 091-3646170),
            we determined that the files contained inadequate debt verification. In one of the
            loans (Case Number 061-2722023), the borrower had numerous inquiries on her
            credit report. However, United Mortgage did not require the borrower to explain


                                             8
              the inquires that were on the report. These credit items were significant because
              the quality control review performed on this loan found that a liability that was
              incurred between the application and the closing was not included in the approval
              of the loan. In the other loan file (Case Number 091-3646170), United Mortgage
              did not include a payment in the calculation of monthly debt on the mortgage
              credit analysis worksheet. According to the borrower's credit report, the payment
              was for an auto loan and should have been included in the total monthly debt.
              This payment would have increased the borrower's total fixed payment to
              effective income ratio to 61.19 percent.


Inadequate Appraisal Review


              Mortgagee Letter 03-07 states that if a home’s re-sale date is between 91 and 180
              days following acquisition by the seller, the lender is required to obtain a second
              appraisal made by another appraiser if the resale price is 100 percent or more over
              the price paid by the seller when the property was acquired. As an example, if a
              property is re-sold for $80,000 within six months of the seller's acquisition of that
              property for $40,000, the mortgage lender must obtain a second independent
              appraisal supporting the $80,000 sales price. The mortgage lender may provide
              documentation showing the costs and extent of rehabilitation that went into the
              property that resulted in the increased value; however, the lender must still obtain
              the second appraisal.

              In two of the loans we reviewed (Case Numbers 351-4605626 and 371-3386266),
              there was a significant increase in the sales price of the home over a short period
              of time. However, the Uniform Residential Appraisal Reports did not provide
              sufficient information to justify and substantiate a large increase in value and
              United Mortgage did not question the values. For example, the subject property
              pertaining to Case Number 371-3386266 was sold for $52,500 on October 24,
              2003. The appraised value was $147,500 on April 18, 2004. This was a 181
              percent increase in value over a 6-month period. The time period between prior
              sales date and the date of the sales contract was 4 months. However, the second
              appraisal was conducted prior to the accepted appraisal, and did not support the
              increase in the sales price.


Conclusions


              As of August 31, 2005, five of the loans we reviewed that contained deficiencies
              were in default, seven were current, and a claim had been paid on one. We are
              requesting reimbursement to HUD for the loan that had claims and fees paid on it
              amounting to $154,921. We are also requesting indemnification for the other 12
              loans with significant underwriting deficiencies that are active. The value of these
              loans amounts to $1,605,950 and would represent funds to be put to better use if
              indemnified. Indemnification of these loans would preclude a potential future


                                                9
          claim against the Federal Housing Administration insurance fund. Regarding the
          seven additional active loans that contained inadequate support for compensating
          factors, HUD should review the underwriting for these loans to determine if they
          should have been approved and if they should be indemnified. There were an
          additional two loans with significant underwriting deficiencies, however they
          were paid in full. Since there is no risk to the Federal Housing Administration
          insurance fund for the two loans that were paid in full, we are not requesting HUD
          to review them.

          The above deficiencies occurred because United Mortgage did not have adequate
          controls to ensure that loans were processed in accordance with all applicable HUD
          requirements. The deficiencies resulted in the approval of mortgages for borrowers
          whose qualifications are questionable thus causing HUD to assume an unnecessary
          insurance risk.

          Appendix C provides a chart summarizing the loan processing deficiencies; while
          Appendix D provides the details of the deficiencies identified on the 13 cited loans.
          Appendix E to this report provides a detailed narrative case presentation of the
          additional seven loans with inadequate compensating factors.


Recommendations


          We recommend that HUD, the Assistant Secretary for Housing-Federal Housing
          Commissioner, require United Mortgage to:

          1A. Reimburse HUD for the loss incurred resulting from claims and fees paid on
              case number 371-3386266 in the amount of $154,921.

          1B. Indemnify HUD against potential future losses on 12 loans totaling
              $1,605,950, which are considered as funds to be put to better use since
              indemnification prevents future claims against the Federal Housing
              Administration insurance fund.

          1C. Submit a corrective action plan to HUD that will assure compliance with all
              HUD guidelines regarding the origination and underwriting of Federal
              Housing Administration insured loans.

          We further recommend that HUD, the Assistant Secretary for Housing-Federal
          Housing Commissioner:

          1D. Examine the additional 7 active loans valued at $1,060,100 that lacked
              support for compensating factors and determine whether they were properly
              underwritten and approved, and whether they should be indemnfied.




                                           10
                         SCOPE AND METHODOLOGY


We sampled 33 of the 433 loans that were originated by United Mortgage during the timeframe
from November 1, 2002 through October 31, 2004. We focused our sample on loans that have
gone into default within the first two years. Twenty-seven loans were selected representing 100
percent of the active loans that had gone into default at least once. The remaining six loans were
selected based on other audit indicators. We performed detailed file reviews on these loans. In
addition to the detailed file reviews, we selected an additional sample of 16 loans to determine
whether United Mortgage obtained adequate compensating factors to support its decisions to
approve loans for borrowers with high debt to income or backend ratios. These loans had total
fixed payment to effective income ratios in excess of 45 percent and closed in calendar year
2004. The results of our testing apply only to the 49 loans selected, and cannot be projected over
the universe of the 433 loans.

To achieve our audit objectives, we reviewed the Homeownership Center’s endorsement files, as
well as case files provided by United Mortgage. We also reviewed United Mortgage’s quality
control procedures in order to assess whether they were adequate and properly implemented as
per HUD requirements.

We interviewed United Mortgage’s staff in order to obtain an understanding of the policies and
procedures related to United Mortgage’s management controls. We also analyzed Post
Endorsement Technical Reviews.

We performed our audit fieldwork from December 2004 through August 2005. Our audit work
was performed at United Mortgage’s home office in Hauppauge, New York. The audit was
conducted in accordance with generally accepted government auditing standards.




                                                11
                             INTERNAL CONTROLS

Internal controls are 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 that the following internal controls were relevant to our audit
              objectives:

              •       Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Compliance with laws and regulations - Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources - Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              •       Validity and reliability of data - Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              We assessed the relevant controls identified above.

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




                                               12
Significant Weaknesses


           Based on our review, the following items are considered significant weaknesses:

               •   United Mortgage did not ensure that certain loans were processed in
                   accordance with all applicable HUD/Federal Housing Administration
                   requirements.
                   (See finding one).




                                           13
                                       Appendices

Appendix A

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


                               Types of Questioned Costs

Recommendation                    Ineligible                 Funds to be put
   number                         costs 1/                   to better use 2/

     1-A                          $154,921

     1-B                                                     $1,605,950

     1-D                                                     $1,060,100

            Total                 $154,921                   $2,666,050


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.




                                               14
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION




                      15
Comment 1




Comment 2




Comment 3




Comment 4




            16
Comment 2




            17
Comment 2




            18
Comment 5




            19
  Comment 5




 Comment 6




Comment 6




              20
 Comment 6




Comment 7




             21
 Comment 8




Comment 9




             22
Comment 10




             23
Comment 11




Comment 12



Comment 13



Comment 14




Comment 15




             24
Comment 15




Comment 16




Comment 17




             25
Comment 18




Comment 19




             26
Comment 20




             27
 Comment 21




Comment 22




              28
Comment 23




             29
Comment 24




             30
Comment 25




             31
Comment 26




             32
Comment 27




Comment 5




             33
34
Comment 23




Comment 20




             35
36
Comment 24




             37
Comment 28




             38
Comment 25




             39
40
Comment 29




             41
Comment 9




            42
Comment 8




            43
Comment 17




Comment 30




             44
Comment 21




Comment 27




             45
46
Comment 7




            47
Comment 18




             48
49
Comment 19




             50
Comment 26




             51
Comment 22




             52
Comment 5




            53
54
Comment 31




             55
56
Appendix B

            AUDITEE COMMENTS AND OIG’S EVALUATION

Comment 1   The conclusions made in our report are based on the information contained in the loan case
            files at the time of our review. As such, our conclusions address deficiencies and
            weaknesses in United Mortgage’s underwriting practices as measured against HUD
            requirements.

Comment 2   Our report recommends reimbursement and indemnification for the cases we believe the
            significance of the underwriting deficiencies adversely affected the risk assumed by the
            FHA Insurance fund. As such, our decisions are reasonable considering the level of the
            underwriting and are based upon criteria in HUD regulations and additional guidance
            promulgated by HUD.

Comment 3   Our report cites the default rate for loans originated during our audit period, November 01,
            2002 through October 31, 2004, in order to provide one of the reasons United Mortgage was
            selected for audit. Any inaccuracies in the Neighborhood Watch system would not have
            precluded us from conducting a review, as we know this rate will fluctuate over time based
            on the number of loans originated and the default history.

Comment 4   The scope of the review is based on a number of factors. In this audit, 33 loans were selected
            for full origination review and 16 loans were selected for a limited review of compensating
            factors used to support cases with high back ratios.

Comment 5   The appraisals did not justify the value of the property at the time of the appraisal. Thus, the
            underwriter did not have adequate information to determine whether the appraisers’
            conclusions were acceptable. Yes the appraisal had pictures, but there was no narrative to
            explain what repairs were actually performed.

Comment 6   These loans were only reviewed for adequate compensating factors and not examined for
            other origination deficiencies, further OIG acknowledges that there may be more substantial
            compensating factors than those listed in HUD Handbook 4155. 1 Paragraph 2-13.
            However, OIG’s findings are based on the compensating factors that were listed on the
            Mortgage Credit Analysis Worksheet and any additional compensating factors provided by
            United Mortgage for those cases where compensating factors were not listed.

Comment 7   We were not provided evidence that United Mortgage demonstrated that the borrower had a
            conservative attitude toward credit and an ability to accumulate savings. Also, United
            Mortgage did not provide evidence that there was potential for increased earnings as
            indicated by job training or education in the borrower’s profession. Further, the
            documentation provided in the files did not indicate the continuance of overtime and bonus
            income.

Comment 8   At the time of the audit, United Mortgage did not mention that a compensating factor was
            that the borrower had substantial cash reserves after the closing in excess of six months


                                                   57
              principal, interest, taxes and insurance. Furthermore, based on the information on the
              Mortgage Credit Analysis Worksheet, the HUD-1, and based on the grant that the borrower
              received, OIG does not agree that there was six months of cash reserves.

Comment 9     During the audit, United Mortgage provided two compensating factors. They were
              substantial cash reserves in excess of three months and potential increased earnings as
              evidenced by contractual pay increases. There were no excess reserves as stated because the
              nature of the assets was gift funds, which cannot be considered as reserves. United
              Mortgage also did not take into account a collection account that was supposed to be paid
              prior to closing. Furthermore, although there were pay increases in the past, the verification
              of employment did not indicate whether there would be any pay increases in the future.

Comment 10 The compensating factors of contractual pay increases and good earnings potential were not
           supported. Further, the credit report did not support the compensating factor of conservative
           use of credit.

Comment 11 Mortgagee Letter 00-28 provides that funds from gifts from any source are not to be
           included as cash reserves. United Mortgage did not demonstrate that the borrower had the
           ability to accumulate savings nor that the borrower had a conservative attitude toward credit.

Comment 12 HUD Handbook 4155.1 REV-5, Paragraph 2-13 G provides that funds borrowed from
           retirement funds may be used for loan closings, but are not to be considered as cash
           reserves. The borrower’s employment is a condition of approving the loan.

Comment 13 United Mortgage did not address the compensating factors provided on the Mortgage Credit
           Analysis Worksheet. United Mortgage explained that during the audit a compensating factor
           was the decrease in housing expense. However, the monthly payment was inaccurate.
           Actually, the mortgage payment increased from $731 per month to $868 per month. United
           Mortgage included $321 per month on a trailer as being refinanced and did not include it
           after the refinance. Further, there was no evidence on the HUD-1 that this loan was paid off.

Comment 14 Conservative use of credit is not in itself an adequate compensating factor. The borrower
           would have had to demonstrate an ability to accumulate savings and have a conservative
           attitude toward the use of credit as requirement by HUD Handbook 4155.1, Paragraph 2-13.

Comment 15 The six open lines of credit and sixteen other accounts that are either closed or have no
           current balances did not represent a conservative attitude toward the use of credit. In
           addition, the borrower's bank accounts demonstrated that the borrower did not have the
           ability to accumulate savings as the borrower relied on four large deposits to meet the asset
           requirements. Further, the cash reserves verified on the Mortgage Credit Analysis
           Worksheet amounted to $582.34. We also did not consider the minimal increase in the
           borrower’s housing expense and the lack of late payments on the previous mortgage
           payment history as an adequate compensating factor. These items were not identified on the
           Mortgage Credit Analysis Worksheet and they were discussed with United Mortgage during
           the audit.

Comment 16 There were discrepancies in the amount of overtime, and bonus income that was included in
           the effective income. We determined that the overtime that was not included would have had


                                                    58
              a minimal impact on the ratios. Although we did not examine the borrowers’ job history
              extensively, there appeared to be questions about the borrowers’ meeting the job stability
              requirements. We believe this should be examined because United Mortgage is claiming
              additional income that was not used to qualify the loan.

Comment 17 The borrower’s credit explanation seemed to justify their need to file bankruptcy and did not
           address the delinquencies to a utility account and a revolving account subsequent to the
           bankruptcy discharge.

Comment 18 The borrower did not re-establish good credit or demonstrate an ability to manage his
           financial affairs as evidenced by the late payments on his prior mortgage, utility account and
           a revolving loan. Following the bankruptcy, the borrower opened 11 new accounts. One of
           these new accounts was a car loan. Including or excluding the car loan, the borrower’s credit
           balance was near the allowable limit. This does not demonstrate an ability to manage his
           affairs and re-establish good credit.

Comment 19 United Mortgage required as one of its conditions to the commitment that prior to closing
           the borrower must submit a satisfactory explanation regarding the derogatory credit listed on
           the credit report. The explanation didn't address the mortgage account and the utility
           account.

Comment 20 United Mortgage continues to include amounts in their calculation of regular pay that has
           been included in overtime. United Mortgage makes the assumption that regular pay is based
           on 40 hours a week. There is no indication of that in the verification of employment and the
           payment stubs. We concur that United Mortgage could use the increase pay of $24.10 to
           indicate the borrower’s earning potential for 2004. Again, United Mortgage would have
           needed to determine how many hours per week are regular hours versus overtime. Also,
           there wasn’t any evidence provided for the $25.84 amount for the underwriter to make an
           income determination.

Comment 21 The fact remains that at the time of underwriter approval, United Mortgage did not have
           adequate documentation to support income stability. We have not reviewed any of the
           additional documents United Mortgage obtained subsequent to our audit, which were not
           included in the case files.

Comment 22 United Mortgage has not provided adequate documentation to support income and job
           stability of the borrower for the most recent two years. We were only able to verify 8
           months of the borrowers employment. Further, although self-employment income was not
           used per United’s comments, the borrower did not prove self-employment. The fact that the
           borrower had a sales license is not sufficient; United Mortgage should have requested the
           borrowers tax return to verify self-employment.

Comment 23 United Mortgage did not obtain the necessary documentation to ensure that the judgments
           had been paid in full contrary to its own policies. Further, evidence that the title insurance
           cleared these judgments was not presented to us during the audit. Moreover, the OIG
           auditor did not instruct United Mortgage officials not to contact the borrowers.




                                                    59
Comment 24 United Mortgage failed to properly verify facsimile documentation related to the student
           loan. The files contain a letter stating that the loan was due six months after graduation,
           which was supposed to be two months after the closing. As such, United Mortgage officials
           should have done more by requesting the student transcript and including this loan in the
           ratio computations. In addition, the OIG auditors did not request that documents be
           backdated.

Comment 25 United Mortgage concurred that a credit explanation could not be located in the files. A
           credit explanation letter may have identified that the borrower was obtaining additional debt.
           Further, the number of inquiries on the borrower’s credit report and no explanation letter is
           evidence that United Mortgage should have taken some action; as such, our concerns are not
           without merit.

Comment 26 United Mortgage concurred that the debt should have been included in the borrower’s ratios.

Comment 27 The appraisal reports did not justify the value of the property at the time of the appraisal.
           Thus, there is no assurance that the underwriter had adequate information to determine
           whether the appraisers’ conclusions were acceptable. There was neither pictures of the
           renovation work nor a supplemental listing of the repairs in the files at the time of our
           review.

Comment 28 United Mortgage used the co-borrowers income in the calculation of the borrowers ratios,
           however, they did not use the co-borrower’s debt or revolving credit. Without considering
           the co-borrower’s entire expenses in the calculation of the borrower’s ratios, we have no
           assurance that the ratios met HUD requirements. HUD requires lenders to carefully ascertain
           and report all assets and liabilities of prospective borrowers and co-borrowers.

Comment 29 United Mortgage’s argument that the borrower has long term debt, a student loan, that will
           not extend beyond the term of the buy-down agreement appears to have some merit.
           However, United Mortgage did not discuss this interpretation of the criteria during the
           course of the audit nor in specific discussions regarding this loan. Additionally, United
           Mortgage did not document their interpretation or explain their position in the file.

Comment 30 United failed to comply with all conditions of the commitment. The rental verification letter
           from the landlord indicated that the rent is paid up to date. However, the letter did not
           provide the borrower's payment history. The basic hierarchy of credit evaluation is the
           manner of payments made on previous housing expenses, including utilities, followed by the
           payment history of installment debts then revolving accounts. The payment history of the
           borrower's housing obligations is of significant importance in evaluating credit. The lender
           must determine the borrower's payment history of the housing obligations through the credit
           report, directly from the landlord or mortgage servicer, or through canceled checks covering
           the most recent 12-month period.

Comment 31 Mortgagee letter (ML) 94-30 that relates to all refinancing of delinquent mortgages is clear.
           Although arrears and closing costs may be paid through funds generated from refinancing a
           delinquent loan, there can be no cash back to borrowers in these transactions.




                                                    60
  Appendix C

                                 Summary of Loan Origination Deficiencies

                                                         Borrower
                                                         Did Not Re-
                                           Inadequate or establish
                           Amount          Incomplete    Good Credit Inadequate Questionable Inadequate Inadequate    Other
            Mortgage       Requested for   Compensating Following    Income      Documents Debt           Appraisal   Origination    Appendix
Case Number Amount         Indemnification Factors       Bankruptcy Verification Provided    Verification Review      Deficiencies   Reference

374-4347581     $275,650          $275,650      X                        X            X                                                 D-01

061-2722023     $164,900          $164,900                                            X           X                          X          D-02

371-3362145     $118,300          $118,300      X                                                                            X          D-03

374-4236831     $142,000          $142,000      X                                                                                       D-04

371-3330273      $85,600           $85,600                   X                                                               X          D-05

351-4605626     $105,300          $105,300                               X                                    X                         D-06

251-3042694     $125,000          $125,000      X                                                                                       D-07

371-3372063      $86,250           $86,250                   X                                                                          D-08

371-3129664     $142,200          $142,200                   X                                                                          D-09

091-3646170      $91,200           $91,200                                                        X                                     D-10

291-3251765      $82,350           $82,350                               X                                                              D-11

371-3386266     $145,350                                                                                      X                         D-12

374-4343748     $187,200          $187,200                                                                                  X           D-13
Subtotal      $1,751,300        $1,605,950       4            3           3           2           2           2              4

371-3355512     $114,900          $114,900      X                                                                                       E-01

351-4593484     $137,700          $137,700      X                                                                                       E-02

292-4475818      $81,700           $81,700      X                                                                                       E-03

371-3356599      $85,950           $85,950      X                                                                                       E-04

374-4415719     $399,700          $399,700      X                                                                                       E-05

371-3401203      $82,650           $82,650      X                                                                                       E-06

052-3495166     $157,500          $157,500      X                                                                                       E-07
Subtotal      $1,060,100        $1,060,100       7

Total         $2,811,400        $2,666,050      11




                                                                       61
Appendix D

                           Narrative Case File Presentation
                                                                                    Appendix D-01
Case Number:           374-4347581
Loan Amount:           $275,650
Settlement Date:       January 30, 2004
Status:                Current

A.     Questionable Documentation

The file contained questionable judgment verifications. HUD Handbook 4155.1 REV-4, CHG-1,
Paragraph 2-3 C requires that judgments must be paid off before the mortgage loan is eligible for
endorsement. As such, United Mortgage required the borrower to provide adequate
documentation to evidence that judgments totaling $4,876 had been paid in full. The file
included two letters explaining that judgments had been satisfied. Each of these letters was
provided to United Mortgage via facsimile with incomplete header information. There is no
indication that anyone re-verified the information as we were told United Mortgage's processors
do when documents are provided by facsimile. United Mortgage's president felt that based on the
responses on the letters, the judgments of $4,876 were not significant to require additional
follow-up. We spoke to the parties who supposedly signed the documents. They claimed that
they were not party to the judgments and did not know the borrower or anything regarding the
judgment. In addition, the borrower was to provide the source of the payment. The file did not
contain any source of the payment.

B.     Inadequate Income Verification and the Borrower's Debt-to-Income Ratios Exceeded the
       Acceptable Threshold Permitted by HUD

United Mortgage indicated that the borrower's gross monthly income was $6,096.70. We
calculated it to be $5,679.55. The change increased the total fixed payment to effective income
ratio to 47.07 percent. HUD Handbook 4155.1 REV-4, CHG-1, Paragraph 2-12 states that this
ratio cannot exceed 41 percent without listing significant compensating factors. United Mortgage
determined the base pay to be $4,056.00 from the income verification. We calculated the income
to be $3,604.83. The compensating factors listed on the mortgage credit analysis worksheet
included contractual pay increases, good earnings potential and conservative use of credit. The
compensating factors of contractual pay increases and good earnings potential were not
supported. The verification of employment did not indicate that there were contractual pay
increases or that the borrower had the potential for increased earnings as indicated by job
training or education in the borrower's profession. HUD Handbook 4155.1 REV-4, CHG-1,
Paragraph 2-13 states that the potential for increased earnings can be used as a significant
compensating factor if it is indicated by job training or education in the borrower’s profession. In
regards to conservative use of credit, the credit reports did not support this compensating factor.




                                                62
                                                                                     Appendix D-02
                                                                                        Page 1 of 2

Case Number:           061-2722023
Loan Amount:           $164,900
Settlement Date:       January 9, 2004
Status:                Default, Modification

A.     Questionable Documentation

The file contained questionable debt verification. The documents provided indicated that student
loans were due for repayment in over a year. Thus, it was not considered in the underwriting
analysis. HUD Handbook 4155.1 REV-4, CHG-1, Paragraph 2-11 C requires that if a debt
payment, such as a student loan, is scheduled to begin within twelve months of the mortgage
loan closing, the lender must include the anticipated monthly obligation in the underwriting
analysis. The student loan provider indicated that the loans became due shortly after closing.
Thus, the debt should have been included as part of the analysis of the borrowers liabilities.
United Mortgage failed to properly verify documentation that would have led to questioning the
reliability of the debt verification documentation. For example, United Mortgage required as part
of the conditions of the commitment that the borrower provide her college transcripts. There
were no college transcripts in the file. United Mortgage explained that the underwriter waived
this condition due to the fact that there was a letter from the university attesting that she had been
a student through 2003. In regards to this letter, United Mortgage failed to question and verify it.
We inquired with the Registrar's office and learned that the borrower last attended the college in
2002. Also, United Mortgage failed to follow it's procedures regarding facsimile documents.
Both the loan provider and the Registrar's office letters were faxed to United Mortgage.
According to United Mortgage, they verify all facsimile documentation supporting the
processing or conditions of the loan. The impact of this debt to the borrower's ratios would have
required significant compensating factors to approve the loan.

B.     United Mortgage Processed Loan As If the Co-borrower Was Going To Be an Owner-
       occupant

It was disclosed by the borrower that the co-borrower had no intention of occupying the property
as their primary residence and was only assisting her in buying the home. The borrower stated
that United Mortgage's loan officer was made aware of this fact. By failing to consider the co-
borrower to be a non-occupant co-borrower, consideration was not given to ascertaining and
verifying the co-borrowers liabilities arising from not living at the purchased property (i.e., rent,
mortgage payments, utilities, etc.). Absent such knowledge, we could not calculate the correct
qualifying ratios. HUD requires lenders to carefully ascertain and report all assets and liabilities
of prospective borrowers and co-borrowers.




                                                 63
                                                                                  Appendix D-02
                                                                                     Page 2 of 2

C.     Failure to Adequately Analyze the Borrower's Credit

The borrower had over 85 inquiries on her credit report. In fact, 20 of those inquires were in the
month prior to when the credit report was examined. However, United Mortgage did not require
the borrower to explain the inquires that were on the report. These credit items are significant
due to the fact that the quality control review performed on this loan found that significant
liabilities were incurred between the application date and the closing, which were not included in
the ratios. Specifically, a $22,936 Credit Acceptance account dated December 2003 was not
shown on the initial credit report. The additional $478 monthly liability would have increased the
debt ratio from 38.01 percent to 47.96 percent. The ratio increase does not include the affects of
the student loan above.

Furthermore, the co-borrower had derogatory debt items on his credit report. The co-borrower’s
explanation did not adequately explain his derogatory credit. Also, the co-borrower's credit
report indicated eight student loans that were all open a couple of months prior to the credit
report being examined. United Mortgage should have requested proof that the student loans were
deferred for twelve months.




                                               64
                                                                                  Appendix D-03
Case Number:          371-3362145
Loan Amount:          $118,300
Settlement Date:      May 28, 2004
Status:               Default

A.     United Mortgage Did Not Establish That the Eventual Increase in Mortgage Payments
       Would Not Affect the Borrower Adversely

The borrower paid for a temporary interest rate buydown, and United Mortgage underwrote the
loan at two percent below the actual note rate. However, United Mortgage did not provide
evidence on whether the eventual increase in mortgage payments (when the loan reverts to the
actual note rate) would affect the borrower’s ability to make the mortgage payments. As such,
according to HUD Handbook 4155.1 REV-5, Paragraph 2-14, United Mortgage had to document
that the borrower met one of the following criteria. The borrower must have had a potential
income increase that would offset the scheduled payment increases. Further, the borrower must
demonstrate the ability to manage financial obligations in such a way that a greater portion of
income may be devoted to housing expenses. Likewise, United Mortgage should have shown
that the borrower had substantial assets available to cushion the effect of the increased payments
or that the cash investment made by the borrower substantially exceeded the minimum required.
United Mortgage did not provide any support that the borrower met this criteria. In addition, the
borrower's income and debt history does not support any of the criteria.

B.     The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's total fixed payment to effective income ratio was 44.96 percent. HUD Handbook
4155.1 REV-5, Paragraph 2-12 states that the ratio cannot exceed 41 percent without listing
significant compensating factors. The mortgage credit analysis worksheet did not list any
compensating factors. United Mortgage claimed that the compensating factors were not on the
mortgage credit analysis worksheet due to a system error because the loan was originated in
another branch office. United Mortgage stated that the compensating factors were substantial
cash reserves in excess of three months and potential increased earnings as evidenced by
contractual pay increases. The gift funds provided gave the borrower their cash reserves.
However, HUD Handbook 4155.1 REV-5, Paragraph 2-13 G provides that funds from gifts from
any source are not to be included in cash reserves. Likewise, the reserves are questionable
because United Mortgage should have reduced the available assets by the amount of a collection
account that was supposed to be paid shortly before closing. In regards to contractual pay
increases, the verification of employment did not indicate whether there would be any pay
increase in the future.




                                               65
                                                                                  Appendix D-04
Case Number:          374-4236831
Loan Amount:          $142,000
Settlement Date:      June 18, 2003
Status:               Current

A.     The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's mortgage payment expense to effective income ratio was 38.39 percent and the
borrower's total fixed payment to effective income ratio was 45.09 percent. HUD Handbook
4155.1 REV-4, CHG-1, Paragraph 2-12 states that these ratios cannot exceed 29 and 41 percent
respectively without listing significant compensating factors. There were no compensating
factors on the mortgage credit analysis worksheet. United Mortgage also believes the borrower
had excellent earnings potential, as the borrower was a recent college graduate. The use of this
compensating factor was not adequately supported in the file. The borrower being a recent
college graduate by itself does not constitute an adequate compensating factor. Also the files did
not support the excess earning potential.




                                               66
                                                                                  Appendix D-05
Case Number:          371-3330273
Loan Amount:          $85,600
Settlement Date:      December 12, 2003
Status:               Default

A.     The Borrower Did Not Re-Established Good Credit After Bankruptcy

The borrower had collection accounts and had been delinquent on a utility account and a
revolving account subsequent to a bankruptcy discharge. HUD Handbook 4155.1, REV-4, CHG-
1, Paragraph 2-3 states that a bankruptcy will not disqualify the borrower if at least two years
have passed since the bankruptcy was discharged and the borrower has re-established good
credit, and has demonstrated an ability to manage financial affairs. United Mortgage did not
provide an adequate explanation regarding the derogatory credit issues that occurred subsequent
to the bankruptcy.


B.     All Conditions of the Commitment Were Not Met

United Mortgage failed to comply with all conditions of the commitment. HUD Handbook
4155.1, REV-4, CHG-1, Paragraph 3-12 states that the lender is required to resolve all problems
regarding title to the real estate and comply with all conditions of the commitment within 60
days of loan closing. United Mortgage required, on its conditions to the commitment, that prior
to closing the borrower provide copies of twelve months of cancelled checks evidencing
satisfactory rental payment history. There was insufficient evidence in the file to conclude that
the items were obtained.




                                               67
                                                                                    Appendix D-06
Case Number:           351-4605626
Loan Amount:           $105,300
Settlement Date:       May 13, 2004
Status:                Current

A.     Failure to Establish Income and Job Stability

United Mortgage failed to verify the borrower's employment for the most recent two full years.
The borrower indicated that he worked in his current position for a year and a half at the time of
application. HUD Handbook 4155.1, REV-5, Paragraph 2-6 states that the lender must verify the
borrower’s employment for the most recent two full years. There was no indication of previous
employment in the file. Further, the co-borrower had only a month experience in her current
position and previous employment of one year at the time of application. However, United
Mortgage did not verify two years of employment as required.

B.     Appraisal Report was Not Adequately Reviewed

There was no evidence provided to show that United Mortgage questioned the appraised value of
the subject property to determine whether the appraiser's conclusions were acceptable as required
by HUD Handbook 4000.4 REV-1, Paragraph 3-3 G. The borrowers' parents purchased the home
in August 2003 for $84,000. The sale over eight months later resulted in a 27 percent increase.
However, the Uniform Residential Appraisal Report did not provide sufficient information to
justify and substantiate a large increase in value. The large increase in value provided the gift of
equity funds of $6,705 that was used by the borrower to meet their minimum required
investment.




                                                68
                                                                                 Appendix D-07
Case Number:          251-3042694
Loan Amount:          $125,000
Settlement Date:      January 27, 2004
Status:               Current, Partial claim paid, Loss mitigation retention, $10,827 paid on
                      May 17, 2005

A.     The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's mortgage payment expense to effective income ratio was 37.04 percent and the
borrower's total fixed payment to effective income ratio was 45.25 percent. HUD Handbook
4155.1 REV-4, CHG-1, Paragraph 2-12 states that these ratios cannot exceed 29 percent and 41
percent respectively without listing significant compensating factors. There were three
compensating factors listed on the mortgage credit analysis worksheet (conservative use of
credit, good earnings potential, and overtime and bonus income not used to qualify for the loan).
Regarding the conservative use of credit and the ability to accumulate savings, the borrower only
had $1,919 available at the time the mortgage credit analysis worksheet was prepared. While the
borrower only had two credit lines open, one was opened 3 months prior to closing and close to
its maximum allowable limit. The credit limit was $2,500 and the borrower was carrying a
$2,043 balance.

In regards to good earnings potential, United Mortgage did not provide evidence that there was a
potential for increased earnings as indicated by job training or education in the borrower's
profession.

Regarding the overtime and bonus income not used to qualify, the verification of employment
did not state whether the income was likely to continue. Also, there was no overtime or bonus
income earnings trend established on the verification of employment or elsewhere in the file. The
borrower earned $673 in bonus income in 2003, but none in 2002. The borrower earned $230 in
overtime income in 2002, but none in 2003. These combined earnings had a minimal effect on
the borrower's ratios.




                                               69
                                                                                 Appendix D-08
Case Number:          371-3372063
Loan Amount:          $86,250
Settlement Date:      March 18, 2004
Status:               Default

A.     The Borrower Did Not Re-Establish Good Credit After Bankruptcy.

The borrower filed for Chapter 7 bankruptcy on April 17, 2000 and it was discharged on August
23, 2000. The loan closed on March 18, 2004. According to HUD Handbook 4155.1, REV-4,
CHG-1, Paragraph 2-3E, a bankruptcy will not disqualify the borrower if at least two years have
passed since the bankruptcy was discharged and the borrower has re-established good credit (or
has chosen not to incur new credit obligations), and has demonstrated an ability to manage
financial affairs. The borrower's credit report indicated that the borrower had chosen to incur
new credit obligations since the discharge date of the bankruptcy. Further, the borrower did not
re-establish good credit nor demonstrate an ability to manage his financial affairs. Since the
bankruptcy discharge date, the borrower opened 11 new lines of credit. These 11 new credit lines
had a limit of $35,279 and a balance of $30,838. Additionally, one of these new lines of credit
had a late payment in excess of 30 days. The borrower's prior mortgage had four instances of late
payments greater than 30 days, one instance of late payments greater than 60 days, and five
instances of late payments greater than 90 days. There were missed payments in April, May and
June 2001. Also, the borrower had late payments on a utility account. The borrower had missed
payments on this utility account in March, July, August, and October 2003.




                                               70
                                                                                  Appendix D-09
Case Number:          371-3129664
Loan Amount:          $142,200
Settlement Date:      February 28, 2003
Status:               Current

A.     The Borrower Did Not Re-Established Good Credit After Bankruptcy

The borrower failed to establish good credit subsequent to a bankruptcy. According to HUD
Handbook 4155.1, REV-4, CHG-1, Paragraph 2-3E, a bankruptcy will not disqualify the
borrower if at least two years have passed since the bankruptcy was discharged and the borrower
has re-established good credit, and has demonstrated an ability to manage financial affairs.
However, the borrower had been delinquent on a previous mortgage, a utility account and a
revolving account subsequent to the bankruptcy discharge. United Mortgage failed to adequately
scrutinize the borrower's recent past credit history as provided in the commitment. United
Mortgage required on its conditions to the commitment that prior to closing the borrower must
submit a satisfactory explanation regarding the derogatory credit listed on the credit report. The
explanation didn't address the mortgage account and the utility account.




                                                71
                                                                                   Appendix D-10
Case Number:          091-3646170
Loan Amount:          $91,200
Settlement Date:      October 29, 2002
Status:               Current

A.     United Mortgage Did Not Use all Debt when Calculating the Borrower's Total Monthly
       Debt Payments

United Mortgage did not include a $300 monthly payment in the calculation of monthly debt on
the mortgage credit analysis worksheet. According to the borrower's credit report, this $300
monthly payment was for an auto loan and should have been included in total monthly debt. This
payment would have increased the borrower's total fixed payment to effective income ratio to
61.19 percent. HUD Handbook 4155.1 REV-4, CHG-1, Paragraph. 2-12 states that the
borrower's liabilities include all installment loans, revolving charge accounts, real estate loans,
alimony, child support, and all other continuing obligations. In computing the debt-to-income
ratios, the lender must include the monthly housing expense, and all other additional recurring
charges including payments on installment accounts, child support or separate maintenance
payments, revolving accounts and alimony, etc., extending ten months or more. United Mortgage
explained that they thought this debt had less than ten payments remaining; and therefore, should
not be included in the calculation of monthly debt. However, they did not provide evidence that
there were less than 10 payments remaining.




                                                72
                                                                                     Appendix D-11
Case Number:           291-3251765
Loan Amount:           $82,350
Settlement Date:       April 1, 2004
Status:                Default

A.     Failure to Establish Income and Job Stability

United Mortgage failed to verify the borrower's employment for the most recent two full years.
The borrower had only eight months of employment verified. HUD Handbook 4155.1, REV-5,
Paragraph 2-6 states that the lender must verify the borrower’s employment for the most recent
two full years. Prior to that, he was listed as self employed in construction for a year on the loan
application. However, there wasn't any documentation to support the time frame or the amount
of income generated. HUD Handbook 4155.1, REV-5, Paragraph 2-9 states that income from
self-employment is considered stable and effective if the borrower has been self-employed for
two or more years.




                                                 73
                                                                                   Appendix D-12
Case Number:           371-3386266
Loan Amount:           $145,350
Settlement Date:       May 28, 2004
Status:                Claim, $154,921.31 was paid on May 12, 2005

A.     Appraisal Report Was Not Adequately Reviewed

There was no evidence provided that United Mortgage questioned the appraised value of the
subject property to determine whether or not the appraiser's conclusions were acceptable as
required by HUD Handbook 4000.4 REV-1, Paragraph 3-3 G. The subject property sold for
$52,500 on October 24, 2003. The appraised value was $147,500 on April 18, 2004. This was a
181 percent increase in value over a 6 month period. However, the Uniform Residential
Appraisal Report did not provide sufficient information to justify and substantiate a large
increase in value. The time period between prior sales date and the date of the sales contract was
4 months. Mortgagee Letter 03-07 states that, "If the re-sale date is between 91 and 180 days
following acquisition by the seller, the lender is required to obtain a second appraisal made by
another appraiser if the resale price is 100 percent or more over the price paid by the seller when
the property was acquired. The mortgage lender may also provide documentation showing the
costs and extent of rehabilitation that went into the property resulting in the increased value but
must still obtain the second appraisal." Although there was a second appraisal in the file, this
appraisal was done prior to the accepted appraisal and did not support the increase in sales price.
The prior appraisal was rejected because United Mortgage thought it was inaccurate.

Also, there was no evidence that United Mortgage questioned the appraised value of comparable
one on the Uniform Residential Appraisal Report to determine whether or not the appraiser's
conclusions were acceptable. Comparable one sold for $60,000 on January 17, 2003. The
appraised value was $150,000 on April 18, 2004. This was a 150 percent increase in value over a
15 month period. However, the Uniform Residential Appraisal Report did not provide sufficient
information to justify and substantiate a large increase in value.




                                                74
                                                                                  Appendix D-13
Case Number:          374-4343748
Loan Amount:          $187,200
Settlement Date:      February 18, 2004
Status:               Current

A.     The Lender Permitted a Cash-Out Refinance while the Borrower's Mortgage was
       Delinquent

The loan that the borrower was refinancing (374-3982148) was delinquent at the time of loan
application. The payoff statement indicated past mortgage interest payments totaling $5,201.60.
These were from unpaid mortgage payments from October, November, and December 2003. The
payoff statement further showed late charges due totaling $319.30. These charges were for five
delinquent or unpaid mortgage payments in the amount of $63.86 per delinquency.

According to Neighborhood Watch Early Warning System, the loan that the borrower was
refinancing was delinquent on January 1, 2004. The system indicated that the borrower's
November 1, 2003 installment was their oldest unpaid installment. The borrower's credit report
indicated five instances of delinquencies of 30 days on the borrower's real estate debt. There was
no evidence in the file indicating that United Mortgage considered the delinquency when
originating the new loan. The mortgage credit analysis worksheet was dated December 10, 2003.
The borrower was delinquent on his mortgage at the time the mortgage credit analysis worksheet
was prepared. Although HUD permits streamline refinancing of mortgages that are no more than
two months delinquent at the time of refinance, we also recognize there are situations where
borrowers more than two months behind in their payments could cure their delinquency if they
could refinance the mortgage and also retire any arrearage on the mortgage. However, according
to Mortgagee Letter 94-30, there can be no cash back to the borrower in these transactions. The
borrower received cash back of $12,667.




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Appendix E

Case File Presentation for Loans with Inadequate Compensating Factors

                                                                                    Appendix E-01
Case Number:           371-3355512
Loan Amount:           $114,900
Settlement Date:       February 13, 2004
Status:                Current

       The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's mortgage payment expense to effective income ratio was 33.13 percent and the
borrower's total fixed payment to effective income ratio was 48.19 percent. HUD Handbook
4155.1 REV-4, CHG-1, Paragraph 2-12 states that these ratios cannot exceed 29 and 41 percent
respectively without listing significant compensating factors. There were three compensating
factors listed on the mortgage credit analysis worksheet (good earnings potential, conservative
use of credit, and good cash reserves). Regarding good earnings potential, we found no evidence
in the file that indicated that the borrower had the potential for increased earnings as evidenced
by job training or education in the borrower's profession.

Regarding the conservative use of credit, the borrower had eight open lines of credit. The
borrower's credit report indicated an outstanding debt balance of $17,328 with a limit of $26,740
on all open accounts. HUD Handbook 4155.1 REV-4, CHG-1, Paragraph 2-13 prescribes that the
borrower must demonstrate an ability to accumulate savings and a conservative attitude toward
the use of credit. United Mortgage did not provide evidence that the borrower had the ability to
accumulate savings. In addition, the borrower had not demonstrated a conservative attitude
toward credit.

Regarding good cash reserves, United Mortgage stated that the borrower had over three months
in reserves. The borrower received a gift of $9,000 prior to closing. Without receiving this gift,
the borrower had no cash reserves. Mortgagee Letter 00-28 provides that funds from gifts from
any source are not to be included as cash reserves.




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                                                                                 Appendix E-02
Case Number:          351-4593484
Loan Amount:          $137,700
Settlement Date:      June 28, 2004
Status:               Current

       The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's total fixed payment to effective income ratio was 46.84 percent. HUD Handbook
4155.1 REV-5, Paragraph 2-12 states that this ratio cannot exceed 41 percent without listing
significant compensating factors. There were three compensating factors listed on the mortgage
credit analysis worksheet. Regarding good cash reserves, the mortgage credit analysis worksheet
indicated cash reserves of $0. United Mortgage stated that the borrower had a 401k plan that was
not counted as reserves. However, HUD Handbook 4155.1 REV-5, Paragraph 2-13 G provides
that funds borrowed from retirement funds may be used for loan closings, but are not to be
considered as cash reserves.

The compensating factor, "Not using overtime income to qualify", was not a valid compensating
factor because United Mortgage used the borrower's overtime income in the base pay amount on
the mortgage credit analysis worksheet. The borrower's overtime income was included in the
gross monthly income used to calculate the ratios.

Contractual pay increases was not supported as a valid compensating factor. The borrower's
verification of employment indicated the date of the borrower's next pay increase to be in
January 2005. However, there was no exact date or amount of the pay increase listed on the
form.




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                                                                                Appendix E-03
Case Number:          292-4475818
Loan Amount:          $81,700
Settlement Date:      March 02, 2004
Status:               Current

       The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's mortgage payment expense to effective income ratio was 31.87 percent and the
borrower's total fixed payment to effective income ratio was 46.26 percent. HUD Handbook
4155.1 REV-5, Paragraph 2-12 states that these ratios cannot exceed 29 and 41 percent
respectively without listing significant compensating factors.There were three compensating
factors listed on the mortgage credit analysis worksheet. United Mortgage explained that the
borrower had three months of cash reserves. However, the borrower had $830.81 of cash
reserves documented and a monthly principal, interest, taxes and insurance payment of $718.03.
Next, United Mortgage provided as a compensating factor conservative use of credit.
Conservative use of credit is not in itself an adequate compensating factor. The borrower would
have had to demonstrate an ability to accumulate saving and have a conservative attitude toward
the use of credit as required by HUD Handbook 4155.1 REV-5, Paragraph 2-13. United
Mortgage did not show that the borrower demonstrated an ability to accumulate savings. In
regards to good earnings potential, United Mortgage did not provide evidence that there was a
potential for increased earnings as indicated by job training or education in the borrower's
profession. This is also required by HUD Handbook 4155.1 REV-5, Paragraph 2-12.




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                                                                                Appendix E-04
Case Number:          371-3356599
Loan Amount:          $85,950
Settlement Date:      March 19, 2004
Status:               Current

       The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's total fixed payment to effective income ratio was 48.62 percent. HUD Handbook
4155.1 REV-5, Paragraph 2-12 states that this ratio cannot exceed 41 percent without listing
significant compensating factors. There were three compensating factors listed on the mortgage
credit analysis worksheet. United Mortgage explained that the borrower had good cash reserves.
The mortgage credit analysis worksheet indicated that the borrower had $3,364 in assets
available. However, the borrower brought $1,878 to closing leaving only a balance of $1,487.
Thus, the assets that were adequately verified did not indicate that the borrower had good cash
reserves as required by HUD Handbook 4155.1 REV-5, Paragraph 2-13.

United Mortgage's second compensating factor was good earnings potential. However, United
Mortgage did not provide any documentation to show a potential for increased earnings as
indicated by job training or education as required by HUD Handbook 4155.1 REV-5, Paragraph
2-13.

The third compensating factor was that the borrower earned bonus/overtime that was not used to
qualify. However, there was no way to calculate the bonus/overtime accurately based on the
verification of employment provided by United Mortgage.




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                                                                                   Appendix E-05
Case Number:          374-4415719
Loan Amount:          $399,700
Settlement Date:      August 26, 2004
Status:               Default

       The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's mortgage payment expense to effective income ratio was 36.26 percent and the
borrower's total fixed payment to effective income ratio was 49.08 percent. HUD Handbook
4155.1 REV-5, Paragraph 2-12 states that these ratios cannot exceed 29 and 41 percent
respectively without listing significant compensating factors. There were three compensating
factors listed on the mortgage credit analysis worksheet. Contractual pay increase was the first
compensating factor. We took into account that the borrower was to receive a pay increase in
2004. However, the increase did not have a material affect on the ratios.

Conservative use of credit was listed as the next compensating factor. HUD Handbook 4155.1
REV-5, Paragraph 2-13 prescribes that the borrower must demonstrate an ability to accumulate
savings and a conservative attitude toward the use of credit. United Mortgage did not provide
evidence that the borrower had the ability to accumulate savings. Also, there were derogatory
credit items on two of the three revolving accounts.

The third compensating factor was good earnings potential. United Mortgage did not provide any
evidence that the borrower had a potential for increased earnings, as indicated by job training or
education in the borrower's profession as required by HUD Handbook 4155.1 REV-5, Paragraph
2-13.




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                                                                                  Appendix E-06
Case Number:          371-3401203
Loan Amount:          $82,650
Settlement Date:      July 1, 2004
Status:               Current

       The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's total fixed payment to effective income ratio was 49.53 percent. HUD Handbook
4155.1 REV-5, Paragraph 2-12 states that this ratio cannot exceed 41 percent without listing
significant compensating factors. There were three compensating factors listed on the mortgage
credit analysis worksheet. Conservative use of credit and good savings ability were two of the
compensating factors. HUD Handbook 4155.1 REV-5, Paragraph 2-13 prescribes that the
borrower must demonstrate an ability to accumulate savings and a conservative attitude toward
the use of credit. Six open lines of credit and sixteen other accounts that were either closed or
had no current balance did not represent a conservative attitude toward the use of credit. In
addition, the borrower's bank accounts demonstrated that the borrower did not have the ability to
accumulate savings and that the borrower relied on four large deposits to meet his asset
requirements.

The third compensating factor listed was contractual pay increases. United Mortgage explained
that the borrower had been on the same job for five years. Also, the borrower received a raise in
2003. In addition, bonus and overtime income were likely to continue along with the probability
of continued employment. Continued employment is a requirement for approving the loan. Also,
bonus and overtime income were included in the borrower's effective income. Lastly, there
wasn't any indication on the verification of employment of a proposed pay increase.




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                                                                                 Appendix E-07
Case Number:          052-3495166
Loan Amount:          $157,500
Settlement Date:      August 13, 2004
Status:               Current

       The Borrower's Debt-to-Income Ratios Exceeded the Acceptable Threshold Permitted by
       HUD

The borrower's total fixed payment to effective income ratio was 49.19 percent. HUD Handbook
4155.1 REV-5, Paragraph 2-12 states that this ratio cannot exceed 41 percent without listing
significant compensating factors. There were two compensating factors listed on the mortgage
credit analysis worksheet. Good earnings potential and contractual pay increases were not
supported in the file. Additionally, United Mortgage did not provide any evidence that the
borrower had a potential for increased earnings, as indicated by job training or education in the
borrower's profession as required by HUD Handbook 4155.1 REV-5, Paragraph 2-13. United
Mortgage explained that the borrower was to receive pay increases. In addition, they explained
that the continuance of bonus income and overtime earnings were likely to continue and were not
used in qualifying the borrower for the loan. The amounts of future pay increases were either not
identified on the verification of employment or would have had a minimal effect on the ratios.
Moreover, the bonus income was utilized as income to qualify the borrower, and the overtime
income was minimal. The additional income did not have a significant impact on the ratios.




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