oversight

Manufactured Home Lending by Wells Fargo Home Mortgage, West Des Moines, Iowa

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-10-25.

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

                                                              Issue Date
                                                                       October 25, 2006
                                                              Audit Report Number
                                                                           2007-KC-1002




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

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

SUBJECT: Manufactured Home Lending by Wells Fargo Home Mortgage,
           West Des Moines, Iowa


                                  HIGHLIGHTS

 What We Audited and Why

            We audited Wells Fargo Home Mortgage (Wells Fargo) because it is the largest
            Title II manufactured housing lender in the U.S. Department of Housing and
            Urban Development’s (HUD) Region VII and the second largest in the nation.
            We focused on Title II manufactured housing loans due to the high risk that the
            properties had mortgages insured by the Federal Housing Administration without
            meeting insurance requirements.

            Our objectives were to determine whether Wells Fargo originated, sponsored, or
            purchased manufactured housing loans that were underwritten in accordance with
            HUD requirements and whether insured loans met HUD permanent foundation
            requirements specific to Title II manufactured housing loans.

 What We Found
            Wells Fargo did not comply with HUD regulations, procedures, and instructions
            when underwriting 1 of 11 Federal Housing Administration-insured loans
            reviewed. The property for the loan was not eligible for insurance because its
            foundation did not meet HUD requirements, and Wells Fargo did not provide



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           HUD with all required certifications when submitting the loan for insurance. As a
           result, HUD insured one loan that unnecessarily placed the insurance fund at risk,
           causing HUD to incur a loss of $64,612.

What We Recommend
           We recommend that the assistant secretary for housing – federal housing
           commissioner require Wells Fargo to reimburse HUD for one loan on which HUD
           incurred a loss of $64,612 (see appendix C).

           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


           Wells Fargo agreed with our conclusions. We provided the draft report to Wells
           Fargo on October 19, 2006, and requested a response by October 23, 2006. Wells
           Fargo provided written comments on October 23, 2006.

           The complete text of the auditee’s response can be found in appendix B of this
           report.




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                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
      Finding 1: Wells Fargo Underwrote One Title II Manufactured Housing Loan    5
                  for a Property with an Ineligible Foundation

Scope and Methodology                                                             9

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use             12
   B. Auditee Comments                                                           13
   C. Case Studies of Improperly Underwritten Loans                              16




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                     BACKGROUND AND OBJECTIVES

Wells Fargo Home Mortgage (Wells Fargo) is a wholly owned subsidiary of Wells Fargo and
Company and maintains its headquarters in West Des Moines, Iowa. The U.S. Department of
Housing and Urban Development (HUD) approved Wells Fargo as a supervised direct
endorsement lender on December 16, 1985. The Federal Housing Administration provides
mortgage insurance on (endorses) loans made by approved lenders. The mortgage insurance
protects lenders such as Wells Fargo against losses when homeowners default on their mortgage
loan.

According to HUD’s Single Family Data Warehouse system, Wells Fargo originated or
sponsored 3,847 Title II manufactured housing loans that closed between July 1, 2004, and
December 31, 2005. HUD’s system also showed that Wells Fargo purchased 9,339 Title II
manufactured housing loans after endorsement that closed during the same period.

HUD has established requirements that lenders must follow when underwriting a loan for it to
qualify for Federal Housing Administration insurance. HUD also has specific requirements that
manufactured housing permanent foundations must meet for the property to be eligible for
insurance.

When submitting a manufactured housing loan for Federal Housing Administration insurance,
the lender is responsible for ensuring that it

    •   Obtains an engineer’s certification confirming that the permanent foundation complies
        with HUD requirements,
    •   Obtains a property appraisal from an appraiser that it must hire from HUD’s approved
        Federal Housing Administration appraiser roster,
    •   Provides the engineer’s certification to the appraiser before the property appraisal is
        conducted,
    •   Monitors the work of the appraiser as part of its quality control plan, and
    •   Obtains a compliance inspection for all new and proposed construction. The lender may
        use its own staff inspector or a fee inspector assigned by HUD.

Our objectives were to determine whether Wells Fargo originated, sponsored, or purchased
manufactured housing loans that were underwritten in accordance with HUD requirements and
whether insured loans met HUD permanent foundation requirements specific to Title II
manufactured housing loans.




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                                RESULTS OF AUDIT

Finding 1: Wells Fargo Underwrote One Title II Manufactured Housing
            Loan for a Property with an Ineligible Foundation
Wells Fargo insured one Title II manufactured housing loan on a property with a foundation that
did not meet HUD requirements. The property failed four of five structural areas inspected. As
a result, HUD insured a loan that did not meet HUD requirements, causing an unnecessary loss
of $64,612 to the Federal Housing Administration insurance fund.


 Wells Fargo Underwrote a
 Loan with an Ineligible
 Foundation

              Wells Fargo did not ensure that the foundation of one Title II manufactured
              housing unit met HUD requirements before submitting the $103,290 loan to HUD
              for endorsement. As a result, HUD insured the loan for a property with an
              ineligible foundation.

              HUD Handbook 4145.1, chapter 3, paragraph 4, states that manufactured homes
              for Title II mortgage insurance must have, with or without a basement, a site-built
              permanent foundation that complies with HUD Handbook 4930.3G, Permanent
              Foundations Guide for Manufactured Housing. The guide contains specific
              requirements for designing and constructing a permanent foundation so that a
              property qualifies for Federal Housing Administration insurance.

              We inspected the property for compliance with HUD requirements specific to five
              areas: skirting, perimeter, piers, footings, and anchor straps. The property failed
              four of the five structural areas inspected. The anchor straps were satisfactory.
              Appendix C provides a detailed explanation of inspection results and HUD
              requirements.

              Skirting
              HUD requires Title II manufactured homes to have skirting that is permanent or
              attached to a permanent foundation. The property did not have skirting that met
              HUD requirements. The following inspection photograph shows that the skirting
              was not permanent or attached to a permanent foundation.




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Perimeter
HUD requires Title II manufactured homes to have a permanent perimeter wall to
exclude entry of water and vermin. The property did not have an adequate
permanent perimeter wall. The wall was thin vinyl siding with holes throughout
that would allow entry of water and vermin. There were no reinforcement rods
permanently attaching the perimeter wall. The following inspection photographs
show the failed perimeter wall.




Piers
HUD requires Title II manufactured homes to have piers that have mortared bed
and head joints (i.e., dry-stacked piers are not permitted). The property piers did
not have mortared bed and head joints. The following inspection photograph
shows that the piers were dry stacked.




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             Footings
             HUD requires Title II manufactured homes to have reinforced concrete footings
             under the piers and perimeter wall. The property did not have reinforced concrete
             footings under the perimeter wall, as the following photograph shows.




             Required Certifications
             Wells Fargo did not provide HUD with all required certifications when submitting
             the loan for insurance. HUD requires a professional engineer’s certification of the
             foundation for all Title II manufactured homes. The certification is to show that
             the foundation plans and specifications met HUD foundation requirements. Wells
             Fargo was also unable to provide the engineer’s certification in response to our
             audit.


Conclusion

             Wells Fargo did not ensure that the foundation of one Title II manufactured
             housing unit met HUD requirements before endorsement. Therefore, HUD
             insured the $103,290 loan for a property with an ineligible foundation. HUD
             incurred a loss of $64,612 on the loan when the borrower defaulted and HUD sold
             the property.


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Recommendation

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

          1A. Require Wells Fargo to reimburse HUD for one loan on which HUD incurred
              a loss of $64,612 when it sold the property (see appendix C).




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                          SCOPE AND METHODOLOGY

In conducting our audit, we evaluated Title II manufactured housing loans originated, sponsored,
or purchased after endorsement by Wells Fargo. Wells Fargo is the largest Federal Housing
Administration manufactured housing lender in HUD’s Region VII and the second largest lender
of such loans in the nation. This report addresses our results specific to loans that Wells Fargo
originated or sponsored because Wells Fargo is directly responsible for ensuring that these loans
comply with HUD requirements. We will address our results specific to loans that Wells Fargo
purchased after endorsement in a separate report because lenders other than Wells Fargo are
responsible for these loans.

To address our objectives, we obtained and reviewed the HUD and Wells Fargo loan files. We
reviewed HUD’s underwriting requirements and its permanent foundation requirements for Title
II manufactured housing loans. We reviewed previous HUD Office of Inspector General (OIG)
reports related to Title II manufactured housing. We also reviewed Wells Fargo’s internal
reports on its manufactured housing portfolio.

We interviewed HUD headquarters and Denver Homeownership Center staff and Wells Fargo
staff that oversee its underwriting functions, including a group designated to manufactured
housing. We also performed on-site foundation inspections. To ensure that we conducted the
inspections properly, we provided the results of our seven initial inspections (i.e., field notes and
photographs), to a HUD Office of Manufactured Housing engineer. The engineer confirmed our
inspection approach and agreed with our conclusions that the seven foundations failed to meet
HUD requirements. We completed the remaining on-site inspections using the same approach
confirmed by the engineer.

Underwriting Review
According to HUD’s Single Family Data Warehouse system, Wells Fargo originated or
sponsored 3,832 Title II manufactured housing loans that closed between July 1, 2004, and
December 31, 2005. According to Wells Fargo’s data system, it had originated or sponsored
only 2,327 Title II manufactured housing loans during the same period. We compared the two
sets of loans and identified the following differences:
    • 1,233 loans were in the HUD and Wells Fargo systems as manufactured housing,
    • 2,599 loans were in the HUD system but not in the Wells Fargo data system, and
    • 1,094 loans were in the Wells Fargo data system but not in HUD’s system.

We initially reviewed 10 loans for compliance with HUD underwriting regulations, all of which
were originated or sponsored by Wells Fargo. Of the 1,233 loans appearing in both systems as
manufactured housing loans, two were in claims status. We selected these loans for our
underwriting review because they had caused a loss to the insurance fund. Of the 1,094 loans in
Wells Fargo’s system but not in HUD’s system, two were in claims status. We selected these
loans for review due to the losses incurred by HUD. We also selected six actively insured loans
from the group of 1,094 loans, using a representative, nonstatistical selection method. We did
not select any loans from the group of 2,599 loans.



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In addition, HUD’s data system showed that Wells Fargo had purchased 8,646 loans after
endorsement during the same 18-month period, but Wells Fargo’s data showed that it had
purchased 9,795 loans. We compared the two data systems and determined that there were 6,635
loans that both systems showed were purchased by Wells Fargo after endorsement.

We reviewed 18 additional loans for compliance with HUD underwriting regulations, all of
which Wells Fargo purchased after endorsement. Of the loans that Wells Fargo purchased after
endorsement, 44 were in claims status, and 428 were in default. We selected 10 loans from the
group of 44 loans in claims status, selecting the 10 loans with the highest original mortgage
amount because these loans represent the highest risk to HUD. From the group of 428 loans in
default, we selected another eight loans for review, selecting the loans with the highest original
mortgage amount.

Foundation Inspections
According to HUD’s Single Family Data Warehouse system, Wells Fargo originated, sponsored,
or purchased after endorsement 12,478 Title II manufactured housing loans that closed between
July 1, 2004, and December 31, 2005. According to Wells Fargo’s data system, it had
originated, sponsored, or purchased 12,122 such loans during the same period. We compared the
two sets of loans and identified the following differences:
    • 7,868 loans were in the HUD and Wells Fargo systems as manufactured housing,
    • 4,610 loans were in the HUD system as manufactured housing but not in the Wells Fargo
        data system, and
    • 4,252 loans were in the Wells Fargo data system as manufactured housing but not in
        HUD’s data system as manufactured housing loans.

This resulted in identifying 16,730 loans that at least one of the data systems identified as Federal
Housing Administration manufactured housing loans.

From the group of 16,730 loans, we identified 67 loans in claims status. Ten of these loans were
originated or sponsored by Wells Fargo, and 57 were purchased by Wells Fargo after endorsement.
Using the property locations from HUD’s system data, we identified geographical clusters of the 67
properties. Based on these clusters, we selected 43 loans in Texas for foundation inspections.

We conducted on-site inspections of the permanent foundations of 33 of the 43 properties
selected for review. Wells Fargo sponsored the loan for 1 of the 33 properties inspected. The
additional 32 loans were originated or sponsored by 11 other lenders. We inspected the properties
for compliance with HUD requirements specific to five areas: skirting, perimeter, piers,
footings, and anchor straps. We did not inspect 10 properties because we could not gain
adequate access to nine properties and one property was not a manufactured home.

We conducted tests of the Single Family Data Warehouse information and the Wells Fargo
system data to establish the level of reliance that we could place on the two sets of data,
including the identification of loans as manufactured housing loans. We found the Single Family
Data Warehouse data adequate to meet our audit objectives but found the Wells Fargo system
data unreliable. Therefore, we relied on HUD’s data to reach our conclusions.




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We did not assess Wells Fargo’s underwriting controls because we identified only one
improperly underwritten loan and one loan with an ineligible permanent foundation that were the
responsibility of Wells Fargo. In addition, the majority of the loans reviewed and permanent
foundations inspected were not the responsibility of Wells Fargo.

We conducted audit work at Wells Fargo’s offices, located in Des Moines, Iowa, and
Minneapolis, Minnesota, and conducted on-site foundation inspections in multiple locations in
Texas. We performed our audit work from January through July 2006. We conducted the audit
in accordance with generally accepted government auditing standards, except as noted.




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                                   APPENDIXES

Appendix A

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

                          Recommendation            Ineligible 1/
                                 number
                                        1A              $64,612


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




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Appendix B

             AUDITEE COMMENTS




                    13
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Appendix C

    CASE STUDY OF IMPROPERLY UNDERWRITTEN LOAN


Case number: 492-7299317                                Insured amount: $103,290
Section of Housing Act: 203(b)                          Date of inspection: May 11, 2006
Date of loan closing: October 19, 2004                  HUD costs incurred:
                                                            $64,612 loss on sale of property

Skirting - Failed
Skirting was not permanent or attached to a permanent foundation. Skirting was thin vinyl
siding with several bulges, tears, and holes throughout. Skirting was missing in several places.
Several holes beneath skirting showed no footing.

Perimeter - Failed
There was no permanent perimeter wall. The perimeter wall was made of thin vinyl siding. No
reinforcement rods were evident. The vinyl was sitting on top of the finished grade and had
several gaps and holes throughout that would allow water and vermin entry into the crawl space.
No footing under perimeter wall was evident.

Piers - Failed
Piers were constructed of concrete blocks that were dry stacked (not mortared) and installed
under the chassis beams. Some piers were sitting on poured concrete footings, and some were
sitting on top of the finished grade with no visible footing. Wood shims were used to level piers
under chassis.

Footings - Failed
There was no footing under the perimeter wall. The wall was thin vinyl skirting sitting on top of
finished grade. Some piers were sitting on poured concrete footings, but we could not determine
the depth.

HUD Requirements

HUD Permanent Foundations Guide for Manufactured Housing, section 100-1-C-d, requires
vertical stability, including that the foundation enclose a basement of crawl space with a
continuous wall (whether bearing or nonbearing) that separates the basement of crawl space from
the backfill and keeps out vermin and water.

HUD Handbook 4145.1, chapter 3-4, section 5, states that there must be a properly enclosed
crawl space with a continuous permanent foundation-type construction (similar to a
conventionally built foundation; i.e., concrete, masonry or treated wood). The perimeter
enclosure, if separate from supporting the foundations, must be adequately secured to the



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perimeter of the unit to exclude entry of vermin and water and allow proper ventilation of the
crawl space.

HUD Permanent Foundations Guide for Manufactured Housing, sections 503-2B and 503-4,
require that the minimum thickness for a pier be eight inches. All masonry piers and walls shall
have mortared bed and head joints. In addition, sections 503-1B, 503-2, and 503-2B require that
footings for pier foundations be reinforced concrete and placed below the frost penetration depth.
The minimum reinforced concrete footing thickness will be six inches or 1.5 times the length of
the footing projection from the foundation wall, whichever is greater. The minimum thickness
for a pier footing is eight inches or 1.5 times the length of the footing projection from the pier,
whichever is greater.

HUD Handbook 4145.1, chapter 3-4, section C, states that the foundation design information in
HUD’s Permanent Foundations Guide for Manufactured Housing may be used to verify the
design of the existing system. The lender must provide a structural engineer’s certification to
verify compliance with the handbook guidelines and with the requirements set forth in section B
of the handbook.

HUD Handbook 4150.2, chapter 8-1, states that the manufactured home must be erected on a
permanent foundation in compliance with the Permanent Foundations Guide for Manufactured
Housing. All proposed or newly constructed manufactured homes must meet the standards set
forth in the guide. A licensed professional engineer’s seal and signature (certification) is
required to indicate compliance with the guide. The lender should furnish the appraiser with a
design engineer’s inspection of the foundation before the appraisal.

HUD Handbook 4060.1, chapter 6-3-E and F, states that the lender’s quality control program
must provide for the review of a representative sample of a lender’s loans. This review must
evaluate the accuracy and adequacy of the information and documentation used in reaching
decisions in either the origination or servicing processes.

HUD Handbook 4060.1, chapter 6-7-B, states that the lender’s quality control program must
provide for a review of mortgage loan files to evaluate the loan origination and underwriting
functions.




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