oversight

Trident Mortgage Company, Devon, Pennsylvania, Issued and Submitted for Endorsement Loans wth an Increased Risk of Defaults and Claims

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-19.

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

                                                                         Issue Date
                                                                                July 19, 2006
                                                                         Audit Report Number
                                                                               2006-PH-1012




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



FROM:


SUBJECT:            Trident Mortgage Company, Devon, Pennsylvania, Issued and Submitted for
                     Endorsement Loans with an Increased Risk of Defaults and Claims


                                               HIGHLIGHTS

    What We Audited and Why

                    We audited the Devon, Pennsylvania, branch of Trident Mortgage Company
                    (Trident), a nonsupervised direct endorsement lender approved to originate
                    Federal Housing Administration single-family mortgage loans, because its default
                    rate was above the state’s default rate. Our objective was to determine whether
                    Trident complied with the U.S. Department of Housing and Urban Development’s
                    (HUD) regulations, procedures, and instructions in the origination of Federal
                    Housing Administration loans.

    What We Found

                    Trident’s Devon office did not originate all Federal Housing Administration loans in
                    accordance with HUD’s loan origination requirements. Of the 26 loans selected for
                    review,1 the Devon office did not fully comply with Federal Housing
                    Administration requirements for 15 of the loans valued at just under $2 million.
1
    Originally valued at more than $3.5 million.
                 Trident did not exercise due diligence in the review of assets and liabilities, did not
                 properly verify income, did not ensure that all borrowers met the minimum required
                 3 percent investment in the property, did not properly document the qualifying
                 ratios, and did not verify rental history. These deficiencies were caused by a lack of
                 due professional care and contributed to an increased risk to the Federal Housing
                 Administration insurance fund.

                 In addition, Trident overcharged for credit reports contrary to HUD regulations. For
                 five of the cases reviewed, fees totaling $146 were charged to the borrowers. As a
                 result, the borrowers incurred unnecessary costs.

                 Further, Trident’s quality control plan did not follow HUD requirements. Trident
                 did not perform the required number of quality control reviews of its Federal
                 Housing Administration loans and did not ensure that all Federal Housing
                 Administration loans that went into early default were flagged for review. As a
                 result, HUD-required elements were not addressed when the quality control reviews
                 were performed.

    What We Recommend

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

                      •   Request from Trident an indemnification of $487,075 2 on 13 loans, which
                          it issued contrary to HUD’s loan origination procedures.

                      •   Request from Trident an indemnification of $79,525 3 on two loans that
                          went into default, causing HUD to pay a claim.

                      •   Require Trident to develop internal procedures to more closely monitor its
                          underwriting procedures.

                      •   Require Trident to reimburse borrowers $146 in overcharges.

                      •   Require Trident to revise and implement its quality control plan to comply
                          with HUD requirements.

                 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.

2
  This amount was calculated by taking 29 percent of the total unpaid principal balance for the loans. On average,
HUD loses 29 percent of the claim amount paid.
3
  This amount was calculated by taking 29 percent of the total claim paid for the loans. On average, HUD loses 29
percent of the claim amount paid.


                                                         2
Auditee’s Response


           We provided a draft report to Trident on June 5, 2006. We discussed the report
           with Trident during the audit and at an exit conference on June 16, 2006. We
           requested a written response by June 30, 2006. Trident requested and was granted
           an extension to submit its comments. Trident provided written comments to our
           draft report on July 13, 2006. Trident generally agreed with our findings and
           recommendations. The complete text of Trident’s response, along with our
           evaluation of that response, can be found in appendix B of this report.




                                           3
                              TABLE OF CONTENTS


Background and Objectives                                                              5

Results of Audit
        Finding 1: Trident Did Not Fully Comply with HUD Requirements When             6
        Originating Loans

        Finding 2: Trident’s Quality Control Plan as Written and Implemented Did Not   10
        Follow HUD Regulations

Scope and Methodology                                                                  12

Internal Controls                                                                      13

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use                 14
   B.   Auditee Comments and OIG’s Evaluation                                          15
   C.   Schedule of Case File Discrepancies                                            18
   D.   Schedule of Overcharged Fees                                                   19
   E.   Narrative Case Presentations                                                   20




                                              4
                      BACKGROUND AND OBJECTIVES


The U.S. Department of Housing and Urban Development’s (HUD) strategic plan states that part
of its mission is to increase homeownership, support community development, and increase
access to affordable housing free from discrimination.

The National Housing Act as amended established the Federal Housing Administration, an
organizational unit within HUD. The Federal Housing Administration provides insurance for
lenders against loss on single-family home mortgages.

Beginning in 1983, HUD implemented the direct endorsement program, which authorized
approved lenders to underwrite loans without HUD’s prior review and approval. HUD can place
them on credit watch status or terminate their approval if their rate of defaults and claims
exceeds the normal rate for the area. Many sanctions are available for taking actions against
lenders or others who abuse the program.

The Devon, Pennsylvania, branch of Trident Mortgage Company (Trident) is the main office and
includes one additional active branch, located in Cherry Hill, New Jersey, with direct endorsement
approval. Although the Devon office is responsible for the origination of the Federal Housing
Administration loans, the Cherry Hill branch completes all Federal Housing Administration loan
originations. Trident issued 705 Federal Housing Administration loans worth more than $99
million between September 1, 2003, and August 31, 2005. Of the 705 loans issued, 33 loans worth
nearly $4.5 million went into default within the first two years. Of these, we reviewed 26 loans
worth more than $3.5 million that were in default status with 12 payments or fewer after closing.

The objectives of our review were to determine whether Trident originated Federal Housing
Administration-insured loans in accordance with prudent lending practices and HUD
requirements and whether the lender implemented a quality control plan that meets HUD’s
requirements. We reviewed case files from both HUD’s Homeownership Center and the lender
and reviewed Trident’s oversight of its branches.




                                                 5
                                RESULTS OF AUDIT


Finding 1: Trident Did Not Fully Comply with HUD Requirements
When Originating Loans
Trident did not always originate Federal Housing Administration-insured loans in accordance
with HUD requirements. For 15 of the 26 loans reviewed, originally valued at more than $3.5
million, Trident did not exercise due diligence in the review of assets and liabilities, did not
properly verify income, did not ensure that all borrowers met the minimum required 3 percent
investment in the property, did not properly document the qualifying ratios, and did not verify
rental history. These deficiencies were caused by a lack of due professional care and contributed
to an increased risk to the Federal Housing Administration insurance fund. Therefore, Trident
should indemnify $487,075 for 13 defaulted loans and $79,525 for claims paid on two loans.



 Trident Did Not Properly
 Verify the Borrower’s Funds to
 Close


              HUD requirements state that if the amount of the earnest money deposit exceeds 2
              percent of the sales price or appears excessive based on the borrower’s history of
              accumulating savings, the lender must verify with documentation the deposit
              amount and the source of funds.

              HUD requires the lender to verify savings and checking accounts. A verification
              of deposit, along with the most recent bank statement, may be used to accomplish
              this. If there is a large increase in an account or the account was opened recently,
              the lender must obtain a credible explanation of the source of those funds. In
              addition, if gift funds are in the homebuyer’s bank account, the lender must
              document the transfer of the funds from the donor to the homebuyer by obtaining
              a copy of the canceled check or other withdrawal document showing that the
              withdrawal is from the donor’s account. The homebuyer’s deposit slip and bank
              statement that shows the deposit are also required.

              In nine of the cases reviewed, Trident did not adequately verify the borrower’s funds
              to close. For five of those cases, the earnest money deposit exceeded 2 percent of
              the sales price, and Trident could not verify the source of the funds. Further, case
              071-0970940 had an unexplained large deposit and a gift that could not be
              supported. There were no bank statements or cancelled checks showing that the gift
              came from the donor or that it was deposited into the borrower’s bank account.




                                                6
Trident Did Not Properly
Verify the Borrower’s Income
or Employment


           HUD requirements state that the lender must develop an average of overtime and
           commission income for the past two years and that the employment verification
           must not state that such income is unlikely to continue. In addition, the lender
           must verify the borrower’s employment for the most recent two full years and
           explain any gaps in employment spanning one month or more.

           For nine of the cases reviewed, Trident did not properly verify the borrower’s
           income or employment. In four of the cases, overtime and commission were used
           to determine the borrower’s income. Trident did not determine whether the
           overtime or commission would continue. In addition, for cases 351-4685023 and
           441-7431423, Trident did not obtain an explanation for the large gap in
           employment.

Trident Did Not Obtain
Required Documentation for
Derogatory Credit


           HUD regulations state that court-ordered judgments must be paid off before the
           mortgage loan is eligible for Federal Housing Administration insurance
           endorsement. The borrower must explain in writing all collections and judgments
           and all inquiries shown on the credit report in the last 90 days. In addition, the
           lender must develop a credit history from utility payment records, rental payments,
           automobile insurance payments, or other means of direct access from the credit
           provider for those borrowers who do not use traditional credit.

           For six of the cases reviewed, Trident did not obtain the required documentation for
           the derogatory credit. For five of the cases, Trident did not obtain an explanation for
           either the collections, judgments, or credit inquiries found on the credit report.
           Further, for case 351-4627644, Trident did not obtain the required documents to
           show the payment history of the borrower for nontraditional credit.


Trident Did Not Ensure That
the Borrower Met the
Minimum Required Investment


           According to HUD guidance, the property’s sales price is multiplied by a loan-to-
           value ratio, and the resulting amount is the maximum mortgage that the Federal



                                              7
            Housing Administration will insure. The borrower must make a cash investment at
            least equal to the difference between the sales price and the resulting maximum
            mortgage amount. The investment must be at least 3 percent of the contract sales
            price. For four of the cases reviewed, Trident did not ensure that the borrower met
            the 3 percent minimum required investment.

Trident Did Not Properly
Document the Qualifying Ratios


            HUD requirements state that the ratio of total fixed payments to effective income
            may not exceed the benchmark guideline of 51 percent, unless significant
            compensating factors are provided in the “remarks” section of the mortgage credit
            analysis worksheet. In two of the cases reviewed, Trident included the
            unsupported commission and overtime income of the borrowers when calculating
            the qualifying ratios. When using the supportable income only (no commission or
            overtime), the total fixed payment-to-income ratios were above HUD guidelines
            with no compensating factors identified.


Trident Did Not Verify the
Rental History of All Borrowers


            HUD requires the lender to determine the borrower’s payment history of housing
            obligations through either the credit report, verification of rent directly from the
            landlord or mortgage servicer, or canceled checks covering the most recent 12-
            month period. For case 071-0968687, there was a printout from the borrower’s
            online bill payment history showing 11 months of rent payments. This was not an
            acceptable rental verification.

Miscellaneous

            Although the following issues do not require an indemnification, in three of the
            case files reviewed, Trident did not follow the loan origination requirements of
            HUD. The issues include

                •   Not verifying the information entered into the Automated Underwriting
                    System, and

                •   Not resubmitting the loan through the Automated Underwriting System
                    when material changes were discovered.




                                             8
Trident Overcharged
Borrowers for Credit Report
Fees


             HUD regulations state that customary and reasonable fees and charges may be
             collected from the borrower by the lender. The cost for any item charged to the
             borrower must not exceed the cost paid by the lender. Trident overcharged
             borrowers for credit report fees in 5 of the 26 cases reviewed. The overcharges
             totaled $146. After we brought the matter to Trident’s attention, it agreed that the
             overcharges would be paid back.

Conclusion


             The above cases illustrate that HUD assumed unnecessarily high risk when
             insuring the loans originated by Trident. The deficiencies associated with
             Trident’s loan origination activities stem from the lack of due care in applying
             HUD loan requirements. Therefore, Trident should indemnify $487,075 for 13
             defaulted loans and $79,525 for claims paid on two loans. See appendix C for the
             schedule of case file discrepancies and appendix E for the narrative case
             presentations, which contain the specific HUD regulations cited. In addition,
             Trident overcharged for credit reports contrary to HUD regulations. As a result,
             the borrowers incurred unnecessary costs. A listing of the fees is presented in
             appendix D.

Recommendations



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

             1A.    Request that Trident indemnify $487,075 on 13 defaulted loans in which
                    its loan origination procedures did not comply with HUD requirements.

             1B.    Request from Trident an indemnification of $79,525 on two loans that
                    went into default, causing HUD to pay a claim.

             1C.    Require Trident to develop internal procedures to more closely monitor its
                    underwriting procedures.

             1D.    Request that Trident reimburse the borrowers a total of $146 that was
                    erroneously charged to them for the credit report fees.




                                              9
Finding 2: Trident’s Quality Control Plan as Written and Implemented
Did Not Follow HUD Regulations
Trident did not establish and implement a quality control plan in accordance with HUD
requirements. Trident’s quality control plan did not follow the requirements found in HUD
Handbook 4060.1, “Mortgagee Approval Handbook.” In addition, Trident did not perform the
required number of quality control reviews of its Federal Housing Administration loans and did not
ensure that all Federal Housing Administration loans that went into early default were flagged for
review. As a result, HUD-required elements were not addressed when the quality control reviews
were performed.



 Trident’s Quality Control Plan
 Did Not Follow HUD
 Requirements


               HUD Handbook 4060.1, chapter 6, states that approved lenders 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
               requirements and its own policies and procedures.

               Trident’s quality control plan did not follow HUD Handbook 4060.1. Instead, it
               followed the Federal Home Loan Mortgage Corporation Handbook. The
               requirements listed in the HUD handbook were not clearly defined in Trident’s
               quality control plan.

 Trident Did Not Implement Its
 Quality Control Reviews in
 Accordance with HUD
 Requirements


               HUD Handbook 4060.1 states that a lender originating 7,000 or fewer Federal
               Housing Administration loans per year must review 10 percent of the loans it
               originates. In addition to the loans selected for routine quality control reviews,
               lenders must review all loans going into default within the first six payments.

               Trident closed 240 Federal Housing Administration loans in 2005. Therefore, it
               was required to perform 24 (10 percent) quality control reviews of the loans.
               According to the listing of the quality control reviews that were performed,
               Trident only performed 10 quality control reviews of the Federal Housing
               Administration loans that closed in 2005. Before 2005, Trident outsourced its
               quality control reviews.


                                                10
             Trident’s quality control manager stated that Trident uses a system to select and
             document its quality control reviews. It uses the system’s automatic selection
             instead of the manual selection to select cases for review. The automatic selection
             does not take into account that Trident is required to review 10 percent of its
             Federal Housing Administration loans annually. The quality control manager
             stated that she was aware of the requirement but was unsure as to why the 10
             percent were not reviewed. She stated that Trident will start reviewing the
             required number of Federal Housing Administration loans.

             Further, it could not be determined whether Federal Housing Administration loans
             that went into early payment default were included in Trident’s quality control
             reviews. The vice president of Trident stated that as of January 2006, Trident
             started to flag all early payment defaults. In March of 2006, an e-mail was sent to
             Trident staff informing them of retroactive policy changes, but there was no
             mention in the e-mail about the early payment defaults. The vice president of
             Trident stated that further discussion directed that Federal Housing
             Administration loans that went into early payment default would be reviewed, but
             no documentation was provided to support this statement.

Conclusion


             Because Trident’s quality control plan did not comply with HUD requirements,
             the quality control reviews were not performed in accordance with HUD’s
             regulations.

Recommendations

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

             2A.    Require Trident to revise and implement its quality control plan to comply
                    with HUD requirements.




                                             11
                        SCOPE AND METHODOLOGY


To accomplish our objectives, we

   •   Reviewed Federal Housing Administration-insured loans (26 cases) originated by
       Trident’s Devon office between September 1, 2003, and August 31, 2005, that had gone
       into default at least once. The 26 loans were part of a universe of 705 loans originated by
       the Devon branch during that time. Although the Devon office is responsible for the
       origination of the loans, the Cherry Hill branch completes all Federal Housing
       Administration loan originations. The results of the detailed testing apply to the 26 loans
       reviewed only and cannot be projected to the universe of Federal Housing
       Administration-insured loans.

   •   Examined records and related documents of Trident.

   •   Reviewed applicable HUD handbooks and mortgagee letters.

   •   Conducted interviews with officials and employees of Trident and the HUD Quality
       Assurance Division.

In addition, we relied in part on data maintained by HUD in the Single Family Data Warehouse
and Neighborhood Watch systems. We did not perform a detailed analysis of the reliability of
these programs.

The audit generally covered the period from September 1, 2003, to August 31, 2005. When
applicable, the audit period was expanded to include current data through March 31, 2006. We
conducted our fieldwork from January through April 2006.

We performed our review in accordance with generally accepted government auditing standards.




                                               12
                             INTERNAL CONTROLS


Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit objectives:

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

                  •   Quality control plan – Policies and procedures that management has in place
                      to reasonably ensure implementation of HUD quality control requirements.

              We assessed the relevant controls identified above.

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

 Significant Weaknesses


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

                  •   Trident did not operate in accordance with HUD requirements as they
                      relate to loan issuance and quality control.

              The deficiencies are discussed in detail in the Results of Audit section of this
              report.


                                               13
                                    APPENDIXES


Appendix A

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

        Recommendation            Ineligible 1/       Unsupported       Funds to be put
               number                                     costs 2/       to better use 3/
                       1A                                                     $487,075
                       1B                                  $79,525
                       1D                 $146

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

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

3/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes 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


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                         15
Comment 4




Comment 5

            Comment 5




               16
                         OIG Evaluation of Auditee Comments


Comment 1   We are pleased that Trident agreed with our finding and is adjusting its quality
            control plan.

Comment 2   Although Trident had in fact implemented needed controls to correct future
            overcharges, it still needed to ensure it repaid the overcharges the audit identified.

Comment 3   Since this was a manual underwrite and there was insufficient credit, the borrower
            used non-traditional credit to develop a payment history. However, documents
            showing payment histories were not provided. HUD Handbook 4155.1,
            paragraph 2-3 states that the lender must document that providers of non-
            traditional credit exist and they must verify the credit information. Trident did not
            do so.

Comment 4   We are pleased that Trident agreed with the finding and is adjusting its
            underwriting practice.

Comment 5   HUD Handbook 4155.1 states that the borrower is required to meet a 3 percent
            minimum investment. Since the $928.62 payment to lock in the rate was returned
            to the borrower at closing, that amount should not be included when calculating
            the minimum investment. Hence, the borrower did not meet the required 3
            percent minimum investment.




                                              17
   Appendix C

                    SCHEDULE OF CASE FILE DISCREPANCIES
                              Unpaid             Inadequate                                         Minimum
   Case       Mortgage                                      Unsupported Unsupported Credit High
                             principal   Claim     rental                                          investment Other
  number      amount                                          income       assets  problems ratios
                              balance              history                                           not met
351-4627644   $   111,650   $ 110,931                                                 X
351-4685023   $   162,943   $ 162,453                            X                    X
351-4618114   $   106,650   $         0 $115,205                 X           X        X       X
441-7375866   $   121,800   $ 118,852                                        X                          X
071-0970940   $   193,471   $ 191,039                            X           X        X
441-7491708   $    74,411   $ 72,541                             X                                             X
351-4444605   $   127,991   $ 125,793                            X           X                X
441-7336278   $    94,254   $ 93,647                                         X                          X      X
351-4496972   $   100,207   $ 97,413                                         X                          X
351-4489177   $    93,989   $ 91,969                             X           X
441-7431423   $   163,242   $ 159,356                            X                                      X
071-0968687   $   152,802   $         0 $159,018      X          X           X        X
441-7340707   $   132,914   $ 129,706                                                 X
441-7335164   $   187,435   $ 183,199                                        X                                 X
441-7382430   $   145,398   $ 142,670                            X
  Totals      $1,969,157 $1,679,569 $274,223         1          9           9          6       2      4        3




                                                         18
Appendix D

               SCHEDULE OF OVERCHARGED FEES

                 Mortgage   Amount of credit Amount charged
 Case number                                                  Overcharge
                 amount        report         the borrower
 351-4444605     $127,991      $ 9.54            $50.00        $ 40.46
 441-7336278     $ 94,254      $ 9.54            $50.00        $ 40.46
 351-4496972     $100,207      $19.08            $50.00        $ 30.92
 351-4489177     $ 93,989      $37.00            $50.00        $ 13.00
 441-7340707     $132,914      $28.61            $50.00        $ 21.39
    Total                                                      $146.23




                                  19
Appendix E

                     NARRATIVE CASE PRESENTATIONS

Case number: 351-4627644

Mortgage amount: $111,650

Date of loan closing: July 16, 2004

Status: First legal action to commence foreclosure

Payments before first default reported: Two

Unpaid principal balance: $110,931

Summary:

       Trident did not verify nontraditional credit provided by the buyer.

Pertinent Details:

       Trident Did Not Verify Nontraditional Credit

       The lender must develop a credit history from utility payment records, rental payments,
       automobile insurance payments, or other means of direct access from the credit provider
       for those borrowers who do not use traditional credit. To verify the credit information,
       lenders must use a published address or telephone number for that creditor (HUD
       Handbook 4155.1, paragraph 2-3). The nontraditional credit the borrower provided was
       payment coupons from utility companies and a status page from an automobile insurance
       policy. The documents did not include payment histories.




                                               20
Case number: 351-4685023

Mortgage amount: $162,943

Date of loan closing: January 28, 2005

Status: Delinquent

Payments before first default reported: Three

Unpaid principal balance: $162,453

Summary:

       Trident did not (1) properly verify the borrower’s employment, and (2) obtain an
       explanation of the credit inquiries listed on the borrower’s credit report.

Pertinent Details:

       Trident Did Not Properly Verify the Borrower’s Employment

       The lender must verify the borrower’s employment for the most recent two full years.
       The borrower also must explain any gaps in employment spanning one month or more
       (HUD Handbook 4155.1, paragraph 2-6). Trident did not obtain an explanation for the
       four-month gap in employment.

       Credit Inquiries Were Not Explained

       The borrower must explain in writing all inquiries shown on the credit report in the last
       90 days (HUD Handbook 4155.1, paragraph 2-3B). Trident did not obtain an explanation
       from the borrower of numerous credit inquiries.




                                                21
Case number: 351-4618114

Mortgage amount: $106,650

Date of loan closing: May 26, 2004

Status: Accelerated claim disposition

Payments before first default reported: Three

Claim Paid: $115,205

Summary:

       Trident did not (1) properly verify the borrower’s funds to close, (2) properly verify the
       borrower’s income, (3) obtain required documentation for derogatory credit, and (4)
       properly document the qualifying ratios.

Pertinent Details:

       Funds to Close Were Not Properly Verified or Supported

       A verification of deposit, along with the most recent bank statement, may be used to
       verify savings and checking accounts. If there is a large increase in an account or the
       account was opened recently, the lender must verify the source of funds (HUD Handbook
       4155.1, paragraph 2-10B). Trident did not verify the source of funds for the recently
       opened bank account. A note on the statement said that the deposit was from a tax return,
       but there were no documents in the file to verify it.

       Trident Did Not Properly Verify the Borrower’s Income

       Commission income must be averaged over the previous two years. The borrower must
       provide copies of signed tax returns for the last two years, along with the most recent pay
       stub. Unreimbursed business expenses must be subtracted from gross income.
       Individuals whose commission income shows a decrease from one year to the next
       require significant compensating factors for loan approval. Borrowers with commission
       income received for more than one but less than two years may be considered favorably,
       provided the underwriter is able to make a sound rationalization for acceptance and can
       document the likelihood of continuance (HUD Handbook 4155.1, paragraph 2-7D). In
       this case, the commission earned was not guaranteed by the employer to continue. In
       addition, there were weeks in which commission was not earned.

       Trident Did Not Obtain Required Documentation for Derogatory Credit

       Collections and judgments indicate a borrower’s regard for credit obligations and must be
       considered in the analysis of creditworthiness, with the lender documenting its reasons



                                                22
for approving a mortgage when the borrower has collection accounts or judgments. The
borrower must explain in writing all collections and judgments (HUD Handbook 4155.1,
paragraph 2-3C). In this case, there was no explanation given for the collection accounts.
Trident had asked for the explanation, but it was not received.

Qualifying Ratios Were Not Properly Documented

For ratios exceeding the benchmark guideline of 51 percent (total fixed payment-to-
income), underwriters must record the compensating factors in the “remarks” section of
the mortgage credit analysis worksheet, and they must be supported by documentation
(HUD Handbook 4155.1, paragraph 2-12B). Trident included the commission income
when calculating the qualifying ratios. When using the supportable income only (no
commission), the total fixed payment-to-income ratio is 60 percent with no compensating
factors identified. The new ratio is above HUD guidelines.




                                        23
Case number: 441-7375866

Mortgage amount: $121,800

Date of loan closing: November 25, 2003

Status: Delinquent

Payments before first default reported: Five

Unpaid principal balance: $118,852

Summary:

       Trident did not (1) determine the source of the earnest money deposit and (2) ensure that
       the borrower met the minimum required investment.

Pertinent Details:

       Source of Funds for the Earnest Money Deposit Was Not Obtained

       If the amount of the earnest money deposit exceeds 2 percent of the sales price, the lender
       must verify with documentation the deposit amount and the source of funds. Satisfactory
       documentation includes a copy of the borrower’s cancelled check. A certification from
       the deposit holder acknowledging receipt of funds and separate evidence of the source of
       funds are also acceptable. Evidence of source of funds includes a verification of deposit
       or bank statement showing that at the time the deposit was made, the average balance was
       sufficient to cover the amount of the earnest money deposit (HUD Handbook 4155.1,
       paragraph 2-10A). The earnest money deposit exceeded 2 percent of the sales price;
       however, Trident did not determine the source of the funds. It believed it did not have to
       determine the source of funds since the earnest money was not included when
       determining whether the borrower had sufficient funds to close.

       Trident Did Not Ensure That the Borrower Met the Minimum Required Investment

       Trident did not ensure that the borrower met the 3 percent minimum required investment
       in the property as required by HUD (HUD Handbook 4155.1, paragraph 1-7). Based on
       the property’s value, the minimum required investment should have been $3,684;
       however, the borrower invested less than $3,100 in the property. Review of the HUD-1
       settlement statement shows that the borrower received more than $1,100 back at the end
       of closing.




                                               24
Case number: 071-0970940

Mortgage amount: $193,471

Date of loan closing: December 30, 2003

Status: Partial reinstatement

Payments before first default reported: Nine

Unpaid principal balance: $191,039

Summary:

       Trident did not (1) properly verify the borrower’s funds to close, (2) properly verify the
       borrower’s income, (3) obtain required documentation for derogatory credit, and (4) obtain
       an explanation for the credit inquiries.

Pertinent Details:

       Funds to Close Were Not Properly Verified or Supported

       A verification of deposit, along with the most recent bank statement, may be used to
       verify savings and checking accounts. If there is a large increase in an account, the
       lender must obtain a credible explanation of the source of those funds (HUD Handbook
       4155.1, paragraph 2-10B). In addition, if gift funds are in the homebuyer’s bank account,
       the lender must document the transfer of the funds from the donor to the homebuyer by
       obtaining a copy of the canceled check or other withdrawal document showing that the
       withdrawal is from the donor’s account. The homebuyer’s deposit slip and bank
       statement that shows the deposit are also required (HUD Handbook 4155.1, paragraph 2-
       10C.1). Trident did not obtain an explanation for a deposit of $1,203 made into the
       borrower’s bank account. In addition, no documentation was provided to support the
       $4,100 gift that was given to the borrower. There were no bank statements or cancelled
       checks showing that the gift came from the donor or that it was deposited into the
       borrower’s bank account. The funds to close could not be supported.

       Trident Did Not Properly Verify the Borrower’s Income

       Overtime income may be used to qualify if the borrower has received such income for the
       past two years and it is likely to continue. The lender must develop an average of
       overtime income for the past two years, and the employment verification must not state
       that such income is unlikely to continue (HUD Handbook 4155.1, paragraph 2-7A). In
       this case, regular time and overtime were used to determine the average income of the
       borrower, but there was no guarantee that overtime would continue, and it was not
       verified that overtime was earned for the past two years.




                                               25
Trident Did Not Obtain Required Documentation for Derogatory Credit

Collections and judgments indicate a borrower’s regard for credit obligations and must be
considered in the analysis of creditworthiness, with the lender documenting its reasons
for approving a mortgage when the borrower has collection accounts or judgments. The
borrower must explain in writing all collections and judgments (HUD Handbook 4155.1,
paragraph 2-3C). Trident did not obtain an explanation for two of the collection
accounts. In addition, the borrower did not sign the explanation for three other collection
accounts.

Credit Inquiries Were Not Explained

The borrower must explain in writing all inquiries shown on the credit report in the last
90 days (HUD Handbook 4155.1, paragraph 2-3B). Trident did not obtain an explanation
from the borrower of numerous credit inquiries.




                                        26
Case number: 441-7491708

Mortgage amount: $74,411

Date of loan closing: April 2, 2004

Status: Repayment

Payments before first default reported: 12

Unpaid principal balance: $72,541

Summary:

       Trident did not (1) properly verify the borrower’s income, and (2) verify the information
       entered into the Automated Underwriting System.

Pertinent Details:

       Trident Did Not Properly Verify the Borrower’s Income

       Overtime income may be used to qualify if the borrower has received such income for the
       past two years and it is likely to continue. The lender must develop an average of
       overtime income for the past two years, and the employment verification must not state
       that such income is unlikely to continue (HUD Handbook 4155.1, paragraph 2-7A). In
       this case, regular time and overtime were used to determine the average income of the
       borrower, but there was no guarantee that overtime would continue. It could not be
       verified that overtime was earned for the past two years.

       Trident Did Not Verify the Information Entered into the Automated Underwriting System

       Asset documentation must comply with Federal Housing Administration requirements. All
       asset information entered into the Automated Underwriting System must be verifiable and
       meet Federal Housing Administration requirements for eligibility (HUD Housing Notice 03-
       25, chapter 1). Trident entered $6,801 in to the Automated Underwriting System as the
       depository money the borrower had in his account. According to documents in the file, the
       correct amount in the borrower’s account was $547. The correct amount was not rerun
       through the Automated Underwriting System; therefore, the loan may not have been
       approved by the system.




                                               27
Case number: 351-4444605

Mortgage amount: $127,991

Date of loan closing: August 18, 2003

Status: Reinstated by borrower who retains ownership

Payments before first default reported: n/a

Unpaid principal balance: $125,793

Summary:

       Trident (1) did not verify the source of the earnest money deposit, (2) did not properly
       verify the borrower’s income, (3) did not properly document the qualifying ratios, and (4)
       overcharged the borrower for the credit report.

Pertinent Details:

       Source of Funds for the Earnest Money Deposit Was Not Obtained

       If the amount of the earnest money deposit exceeds 2 percent of the sales price, the lender
       must verify with documentation the deposit amount and the source of funds. Satisfactory
       documentation includes a copy of the borrower’s cancelled check. A certification from
       the deposit holder acknowledging receipt of funds and separate evidence of the source of
       funds are also acceptable. Evidence of source of funds includes a verification of deposit
       or bank statement showing that at the time the deposit was made, the average balance was
       sufficient to cover the amount of the earnest money deposit (HUD Handbook 4155.1,
       paragraph 2-10A). The earnest money deposit exceeded 2 percent of the sales price;
       however, Trident did not determine the source of the funds. Trident agreed that the
       source of earnest money was not established.

       Trident Did Not Properly Verify the Borrower’s Income

       Overtime income may be used to qualify if the borrower has received such income for the
       past two years and it is likely to continue. The lender must develop an average of
       overtime income for the past two years, and the employment verification must not state
       that such income is unlikely to continue (HUD Handbook 4155.1, paragraph 2-7A). In
       this case, regular time and overtime were used to determine the average income of the
       borrower, but there was no guarantee that overtime would continue, and it could not be
       verified that overtime was earned for the past two years because the Internal Revenue
       Service W-2 forms that were provided were questionable.




                                               28
Qualifying Ratios Were Not Properly Documented

For ratios exceeding the benchmark guideline of 51 percent (total fixed payment-to-
income), underwriters must record the compensating factors in the “remarks” section of
the mortgage credit analysis worksheet, and they must be supported by documentation
(HUD Handbook 4155.1, paragraph 2-12B). Trident included the overtime income when
calculating the qualifying ratios. When using the supportable income only (no
overtime), the total fixed payment-to-income ratio is 60 percent with no compensating
factors identified. The new ratio is above HUD guidelines.

Trident Overcharged the Borrower for the Credit Report

Customary and reasonable fees and charges may be collected from the borrower by the
lender. The cost for any item charged to the borrower must not exceed the cost paid by
the lender or charged to the lender by the service provider (HUD Handbook 4000.2,
paragraph 5-2). Trident overcharged the borrower for the credit report.




                                       29
Case number: 441-7336278

Mortgage amount: $94,254

Date of loan closing: August 27, 2003

Status: Partial reinstatement

Payments before first default reported: Seven

Unpaid principal balance: $93,647

Summary:

       Trident (1) did not verify the source of the earnest money deposit, (2) did not properly
       verify the funds to close, (3) did not ensure that the borrower met the minimum required
       investment, (4) did not verify the information entered into the Automated Underwriting
       System, and (5) overcharged the borrower for the credit report.

Pertinent Details:

       Source of Funds for the Earnest Money Deposit Was Not Obtained

       If the amount of the earnest money deposit exceeds 2 percent of the sales price, the lender
       must verify with documentation the deposit amount and the source of funds. Satisfactory
       documentation includes a copy of the borrower’s cancelled check. A certification from
       the deposit holder acknowledging receipt of funds and separate evidence of the source of
       funds are also acceptable. Evidence of source of funds includes a verification of deposit
       or bank statement showing that at the time the deposit was made, the average balance was
       sufficient to cover the amount of the earnest money deposit (HUD Handbook 4155.1,
       paragraph 2-10A). The earnest money deposit exceeded 2 percent of the sales price;
       however, Trident did not determine the source of the funds for the entire amount. It
       believed it did not have to determine the source of funds since the earnest money was not
       included when determining whether the borrower had sufficient funds to close.

       Funds to Close Were Not Properly Verified or Supported

       If gift funds are in the homebuyer’s bank account, the lender must document the transfer
       of the funds from the donor to the homebuyer by obtaining a copy of the canceled check
       or other withdrawal document showing that the withdrawal is from the donor’s account.
       The homebuyer’s deposit slip and bank statement that shows the deposit are also required
       (HUD Handbook 4155.1, paragraph 2-10C.1). No documentation was provided to
       support the $3,000 gift that was given to the borrower. There is a cancelled check in the
       file for $3,000, but there is no copy of the borrower’s bank statement showing the
       deposit. In addition, there are no statements to show that the donor had the ability to give
       the gift or that it came from his accounts.



                                                30
Trident Did Not Ensure That the Borrower Met the Minimum Required Investment

Trident did not ensure that the borrower met the 3 percent minimum required investment
in the property as required by HUD (HUD Handbook 4155.1, paragraph 1-7). Based on
the property’s value, the minimum required investment should have been $2,850;
however, the borrower invested less than $2,800 in the property.

Trident Did Not Verify the Information Entered into the Automated Underwriting System

Asset documentation must comply with Federal Housing Administration requirements. All
asset information entered into the Automated Underwriting System must be verifiable and
meet Federal Housing Administration requirements for eligibility (HUD Housing Notice 03-
25, chapter 1). Trident entered $5,783 into the Automated Underwriting System as the
depository money the borrower had in his account. According to documents in the file, the
correct amount in the borrower’s account was $2,456. The correct amount was not rerun
through the Automated Underwriting System; therefore, the loan may not have been
approved by the system.

Trident Overcharged the Borrower for the Credit Report

Customary and reasonable fees and charges may be collected from the borrower by the
lender. The cost for any item charged to the borrower must not exceed the cost paid by
the lender or charged to the lender by the service provider (HUD Handbook 4000.2,
paragraph 5-2). Trident overcharged the borrower for the credit report.




                                       31
Case number: 351-4496972

Mortgage amount: $100,207

Date of loan closing: September 22, 2003

Status: Reinstated by borrower who retains ownership

Payments before first default reported: n/a

Unpaid principal balance: $97,413

Summary:

       Trident (1) did not determine the source of the earnest money deposit, (2) did not ensure
       that the borrower met the minimum required investment, and (3) overcharged the
       borrower for the credit report.

Pertinent Details:

       Source of Funds for the Earnest Money Deposit Was Not Obtained

       If the amount of the earnest money deposit exceeds 2 percent of the sales price, the lender
       must verify with documentation the deposit amount and the source of funds. Satisfactory
       documentation includes a copy of the borrower’s cancelled check. A certification from
       the deposit holder acknowledging receipt of funds and separate evidence of the source of
       funds are also acceptable. Evidence of source of funds includes a verification of deposit
       or bank statement showing that at the time the deposit was made, the average balance was
       sufficient to cover the amount of the earnest money deposit (HUD Handbook 4155.1,
       paragraph 2-10A). The earnest money deposit exceeded 2 percent of the sales price;
       however, Trident did not determine the source of the funds. The money in the bank
       accounts is not enough to cover the $3,000 claimed to be earnest money.

       Trident Did Not Ensure That the Borrower Met the Minimum Required Investment

       Trident did not ensure that the borrower met the 3 percent minimum required investment
       in the property as required by HUD (HUD Handbook 4155.1, paragraph 1-7). Based on
       the property’s value, the minimum required investment should have been $3,030;
       however, the borrower invested $2,419 in the property.

       Trident Overcharged the Borrower for the Credit Report

       Customary and reasonable fees and charges may be collected from the borrower by the
       lender. The cost for any item charged to the borrower must not exceed the cost paid by
       the lender or charged to the lender by the service provider (HUD Handbook 4000.2,
       paragraph 5-2). Trident overcharged the borrower for the credit report.



                                               32
Case number: 351-4489177

Mortgage amount: $93,989

Date of loan closing: August 13, 2003

Status: Delinquent

Payments before first default reported: 11

Unpaid principal balance: $91,969

Summary:

       Trident (1) did not properly verify the funds to close, (2) did not properly verify the
       borrower’s employment, and (3) overcharged the borrower for the credit report.

Pertinent Details:

       Funds to Close Were Not Properly Verified or Supported

       If gift funds are in the homebuyer’s bank account, the lender must document the transfer
       of the funds from the donor to the homebuyer by obtaining a copy of the canceled check
       or other withdrawal document showing that the withdrawal is from the donor’s account.
       The homebuyer’s deposit slip and bank statement that shows the deposit are also required
       (HUD Handbook 4155.1, paragraph 2-10C.1). No documentation was provided to
       support the $2,500 gift that was given to the borrower. There were no bank statements or
       cancelled checks showing that the gift came from the donor. In addition, there was no
       bank statement or cancelled check to show that the second gift of $3,904 was deposited
       into the borrower’s account or was given directly at closing. The funds to close could not
       be supported.

       Trident Did Not Properly Verify the Borrower’s Employment

       Verification of employment and the borrower’s most recent pay stub are to be provided
       (HUD Handbook 4155.1, paragraph 3-1E). Trident did not provide a verification of
       employment as required.

       Trident Overcharged the Borrower for the Credit Report

       Customary and reasonable fees and charges may be collected from the borrower by the
       lender. The cost for any item charged to the borrower must not exceed the cost paid by
       the lender or charged to the lender by the service provider (HUD Handbook 4000.2,
       paragraph 5-2). Trident overcharged the borrower for the credit report.




                                                33
Case number: 441-7431423

Mortgage amount: $163,242

Date of loan closing: January 20, 2004

Status: Reinstated by borrower who retains ownership

Payments before first default reported: n/a

Unpaid principal balance: $159,356

Summary:

       Trident did not (1) obtain an explanation for a gap in employment and (2) ensure that the
       borrower met the minimum required investment.

Pertinent Details:

       Trident Did Not Properly Verify the Borrower’s Employment

       The lender must verify the borrower’s employment for the most recent two full years.
       The borrower also must explain any gaps in employment spanning one month or more
       (HUD Handbook 4155.1, paragraph 2-6). Trident did not obtain an explanation for the
       10-month gap in employment.

       Trident Did Not Ensure That the Borrower Met the Minimum Required Investment

       Trident did not ensure that the borrower met the 3 percent minimum required investment
       in the property as required by HUD (HUD Handbook 4155.1, paragraph 1-7). Based on
       the property’s value, the minimum required investment should have been $5,010;
       however, the borrower invested $4,627 in the property. Review of the HUD-1 settlement
       statement shows that the borrower received more than $370 back at the end of closing.




                                               34
Case number: 071-0968687

Mortgage amount: $152,802

Date of loan closing: November 26, 2003

Status: Accelerated claim disposition

Payments before first default reported: n/a

Claim Paid: $159,018

Summary:

       Trident did not (1) properly verify the funds to close, (2) properly verify the borrower’s
       income, (3) obtain an explanation of the credit inquiries listed on the borrower’s credit
       report, and (4) determine the borrower’s payment history of housing obligations.

Pertinent Details:

       Funds to Close Were Not Properly Verified or Supported

       All funds for the borrower’s investment in the property must be verified and documented
       (HUD Handbook 4155.1, paragraph 2-10). The borrower paid $7,581 at closing. The
       borrower’s bank account had an ending balance of $5,879, which included the $3,400
       gift. After adding the remaining $1,000 in gift money, the total cash available to the
       borrower was $6,879. The source of the difference ($702) is not supported.

       Trident Did Not Properly Verify the Borrower’s Income

       Overtime income may be used to qualify if the borrower has received such income for the
       past two years and it is likely to continue. The lender must develop an average of
       overtime income for the past two years, and the employment verification must not state
       that such income is unlikely to continue (HUD Handbook 4155.1, paragraph 2-7A). In
       this case, regular time and overtime were used to determine the average income of the
       borrower, but there was no guarantee that overtime would continue, and it could not be
       verified that overtime was earned for the past two years.

       Credit Inquiries Were Not Explained

       The borrower must explain in writing all inquiries shown on the credit report in the last
       90 days (HUD Handbook 4155.1, paragraph 2-3B). Trident did not obtain an explanation
       from the borrower of numerous credit inquiries.




                                                35
Payment History of Housing Obligations Was Not Determined

A determination must be made of the borrower’s payment history of housing obligations
through either the credit report, directly from the landlord or mortgage servicer, or
cancelled checks covering the most recent 12-month period (HUD Handbook 4155.1,
paragraph 2-3A). Trident did not determine the borrower’s payment history of housing
obligations. There was a printout from the borrower’s online bill pay history showing 11
months of rent payment. This is not an acceptable rental verification.




                                       36
Case number: 441-7340707

Mortgage amount: $132,914

Date of loan closing: September 25, 2003

Status: Delinquent

Payments before first default reported: 10

Unpaid principal balance: $129,706

Summary:

       Trident (1) did not ensure that all judgments were paid off and (2) overcharged the
       borrower for the credit report.

Pertinent Details:

       Trident Did Not Ensure That All Judgments Were Paid Off

       Court-ordered judgments must be paid off before the mortgage loan is eligible for Federal
       Housing Administration insurance endorsement (HUD Handbook 4155.1, paragraph 2-
       3C). The judgment listed on the credit report had not been paid off. No explanations
       were provided.

       Trident Overcharged the Borrower for the Credit Report

       Customary and reasonable fees and charges may be collected from the borrower by the
       lender. The cost for any item charged to the borrower must not exceed the cost paid by
       the lender or charged to the lender by the service provider (HUD Handbook 4000.2,
       paragraph 5-2). Trident overcharged the borrower for the credit report.




                                               37
Case number: 441-7335164

Mortgage amount: $187,435

Date of loan closing: September 30, 2003

Status: Delinquent

Payments before first default reported: 23*

Unpaid principal balance: $183,199

* NOTE: When selected for review, the number of payments appeared as n/a. The 23 payments
refer to when the loan first went delinquent, not when it was first in default.

Summary:

       Trident did not (1) verify the source of the earnest money deposit and (2) resubmit the
       loan into the Automated Underwriting System when material changes were made.

Pertinent Details:

       Source of Funds for the Earnest Money Deposit Was Not Obtained

       If the amount of the earnest money deposit exceeds 2 percent of the sales price, the lender
       must verify with documentation the deposit amount and the source of funds. Satisfactory
       documentation includes a copy of the borrower’s cancelled check. A certification from
       the deposit holder acknowledging receipt of funds and separate evidence of the source of
       funds are also acceptable. Evidence of source of funds includes a verification of deposit
       or bank statement showing that at the time the deposit was made, the average balance was
       sufficient to cover the amount of the earnest money deposit (HUD Handbook 4155.1,
       paragraph 2-10A). The earnest money deposit exceeded 2 percent of the sales price;
       however, Trident did not determine the source of the funds. It believed it did not have to
       determine the source of funds since the earnest money was not included when
       determining whether the borrower had sufficient funds to close.

       Trident Did Not Resubmit the Loan into the Automated Underwriting System When
       Material Changes Were Made

       The lender is responsible for the integrity of the data used to obtain the risk assessment
       and for resubmitting the loan when material changes are discovered or otherwise occur
       during loan processing. The lender is required to resubmit the loan through the
       Automated Underwriting System for an updated evaluation if there were changes to the
       sales price or terms and conditions of the mortgage (HUD Housing Notice 03-25, chapter
       1). Trident stated that the loan was raised by $4,666 and was never rerun through the




                                               38
Automated Underwriting System. Trident agreed that the loan should have been rerun
through the system since the loan amount was increased.




                                     39
Case number: 441-7382430

Mortgage amount: $145,398

Date of loan closing: October 30, 2003

Status: Partial reinstatement

Payments before first default reported: Six

Unpaid principal balance: $142,670

Summary:

       Trident did not properly verify the borrower’s employment.

Pertinent Details:

       Trident Did Not Properly Verify the Borrower’s Employment

       Verification of employment and the borrower’s most recent pay stub are to be provided
       (HUD Handbook 4155.1, paragraph 3-1E). There was no verification of employment in
       the file to verify the borrower’s employment for the most recent two full years. Trident
       agreed that a verification of employment should have been obtained as required by the
       Automated Underwriting System.




                                              40