Issue Date
September 25, 2008
Audit Report Number
2008-FW-1013
TO: Brian D. Montgomery
Assistant Secretary for Housing–Federal Housing Commissioner, H
FROM:
Gerald R. Kirkland
Regional Inspector General for Audit, Fort Worth Region, 6AGA
SUBJECT: Wells Fargo Mortgage, San Antonio, Texas, Loans Generally Complied with
Reverse Mortgage Requirements
HIGHLIGHTS
What We Audited and Why
We audited Wells Fargo Mortgage (Wells Fargo) as part of our annual audit plan
objective of improving the integrity of single family insurance programs. Our
objective was to determine whether Wells Fargo complied with U. S. Department
of Housing and Urban Development (HUD) origination requirements for the
Home Equity Conversion Mortgage program, commonly known as a reverse
mortgage.
What We Found
Wells Fargo generally complied with HUD’s reverse mortgage requirements.
However, 3 (6.3 percent) of the 47 loans reviewed did not meet HUD’s
requirements. Wells Fargo originated
One ineligible loan totaling $86,250 for a home that was not the
borrower’s primary residence,
One loan for $148,500 for a home that the borrower no longer occupied,
and
One loan for which the list of required repairs was not detailed enough to
determine requirements.
In addition, for the loan to the borrower who no longer occupied the home, the
borrower did not complete repairs in an acceptable manner.
What We Recommend
We recommend that the Assistant Secretary for Housing–Federal Housing
Commissioner cancel the mortgage insurance on one loan, require Wells Fargo to
complete foreclosure proceedings for one loan, and ensure that inspectors list
repairs in sufficient detail to determine what repairs were required and ensure that
the repairs are satisfactorily completed.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
We provided a draft copy of the report to Wells Fargo on September 3, 2008, and
asked it to respond by September 19, 2008. We held an exit conference with
Wells Fargo on September 18, 2008. Wells Fargo provided its written response
electronically on September 19, 2008, which agreed with the report’s
recommendations. The complete text of Wells Fargo’s response along with our
evaluation of the response is included in appendix B.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding: Wells Fargo Generally Complied with the Reverse Mortgage 5
Requirements
Scope and Methodology 8
Internal Controls 9
Appendixes
A. Schedule of Questioned Costs 10
B. Auditee Comments and OIG’s Evaluation 11
3
BACKGROUND AND OBJECTIVES
Wells Fargo Mortgage (Wells Fargo) is a nonsupervised direct endorsement lender approved to
originate Federal Housing Administration (FHA) loans. It is located at 2650 Wells Fargo Way,
Minneapolis, Minnesota. Wells Fargo has 2,400 branch offices including five in San Antonio,
Texas. Between January 1, 2006, and December 31, 2007, the selected Wells Fargo branch
closed 106 reverse mortgages in the San Antonio area.
The Home Equity Conversion Mortgage program, commonly known as a reverse mortgage, is a
non-recourse loan and enables homeowners that are at least 62 years of age to convert the equity
in their principal residence to monthly streams of income and/or lines of credit. The homeowner
is required to receive reverse mortgage counseling before the loan application is processed.
Unlike traditional residential mortgages, which are repaid in periodic payments, a reverse
mortgage is repaid in one payment, after the death of the homeowner or when he or she no
longer occupies the property as a principal residence.
Our objective was to determine whether Wells Fargo complied with HUD origination
requirements for reverse mortgages.
4
RESULTS OF AUDIT
Finding: Wells Fargo Generally Complied With the Reverse Mortgage
Requirements
Although Wells Fargo generally complied with HUD’s reverse mortgage requirements, it
originated one ineligible loan, because it did not resolve conflicting information during
underwriting. Another loan was ineligible as the home was no longer occupied by the borrower.
Wells Fargo was not aware because the required annual home inspection was not due for several
months. Also for this loan, repairs of $3,500 were not completed in an acceptable manner. In
another instance repairs of $5,000 were not described in sufficient detail to determine what
repairs the borrower was required to complete. Wells Fargo was not aware because the inspector
did not report the conditions. HUD should require Wells Fargo to cancel or seek recovery on
two mortgages totaling $234,750. In addition, HUD should require Wells Fargo to ensure that
the repairs for one mortgage totaling $5,000 are completed in accordance with program
requirements.
Forty-Four Loans Generally
Complied with HUD’s
Requirements
Wells Fargo originated 44 of the 47 loans reviewed in compliance with reverse
mortgage requirements. It ensured that the borrowers were at least 62 years of age
and completed a reverse mortgage counseling program; and that the property was
the borrower’s primary residence. In addition, the settlement charges and fees
appeared reasonable. Further, five of seven site visits (71 percent) confirmed that
the repairs had been completed or the property was in foreclosure.
Wells Fargo Originated One
Loan on a Property That Was
Not a Principal Residence
Wells Fargo originated one loan totaling $86,2501 for a property that was not the
borrower’s primary residence. HUD requires that properties eligible for the
reverse mortgage program be the borrower’s primary residence. The address on
the borrower’s driver’s license along with other documents in the loan file
indicated that the property to be mortgaged was not the borrower’s primary
residence. A site visit confirmed that the mortgaged property was not currently
occupied by the borrower. If Wells Fargo had resolved the conflicting
1
FHA case # 495-7586044, Wells Fargo loan # 0072372774.
5
information in the loan file during the underwriting process, it would have
discovered that the property was ineligible. Since this loan was ineligible for the
program, the Assistant Secretary for Housing–Federal Housing Commissioner
should cancel the mortgage insurance.
The Mortgaged Property Was
No Longer Occupied as the
Principal Residence
One mortgaged property with a loan in the amount of $148,5002 was no longer
occupied by the borrower. When the mortgaged property is no longer the primary
residence, HUD’s requirement states that the mortgage becomes due and payable.
The borrower or his/her estate must sell the property. HUD also requires the
lender to annually verify that the property is the borrower`s principal residence.
Wells Fargo was not aware that the property was no longer occupied by the
borrower because the annual verification was not due until August 2008.
However, Wells Fargo should declare the mortgage due and payable and seek
repayment in keeping with HUD’s requirements.
Repairs Were Not Detailed
For another 3 property to which a site visit was made, the statement of work was
not detailed enough to determine what repairs were necessary. We could not
determine which of the $5,000 of repairs had or had not been completed. The
borrower's nephew stated that some of the repairs had not been completed.
According to HUD requirements, the lender is only responsible for having the
property inspected and ensuring that the compliance inspection report is
completed and that all mechanics' and material men's liens are released of record.
Wells Fargo should ensure the required repairs are completed.
Repairs Were Not Completed
Adequately
For one of the ineligible properties2, Wells Fargo did not ensure that the
borrowers completed $3,500 of repairs in an acceptable manner. The final
inspection was inadequate and did not report easily identifiable problems such as
repairs that had not been performed or were poorly performed. For example,
quick release locks had not been replaced on some of the windows, the soffit paint
2
FHA # 495-7677264, Wells Fargo # 0077156669.
3
FHA # 495-7586038, Wells Fargo # 72371859.
6
was dripped onto the siding, and the window frame was not painted. However,
according to HUD requirements, the lender is only responsible for having the
property inspected and ensuring that the compliance inspection report is
completed. Wells Fargo was not aware of the repair problems, because the
inspector did not report them. Since this loan is ineligible, Wells Fargo does not
need to take further action, if HUD implements our recommendation to cancel the
mortgage.
Conclusion
Although Wells Fargo generally complied with program requirements, it did not
resolve conflicting information during underwriting and originated an ineligible
loan in the amount of $86,250. For another loan in the amount of $148,500, the
site visit confirmed the mortgaged property was no longer occupied by the
borrower. For one other property, Wells Fargo did not ensure that the statement
of work was detailed enough to determine what repairs were necessary.
Recommendations
We recommend that the Assistant Secretary for Housing-Federal Housing
Commissioner
1A. Cancel the mortgage insurance totaling $86,250 on the ineligible loan.
1B. Require Wells Fargo to seek repayment of the ineligible mortgage totaling
$148,500 on the home that is no longer occupied by the borrower.
1C. Require Wells Fargo to ensure that the repairs are completed in an
acceptable manner for one unsupported loan totaling $5,000.
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SCOPE AND METHODOLOGY
Using a nonstatistical method, we selected this Wells Fargo branch for review as it originated the
most reverse mortgages in San Antonio, Texas. We selected a representative nonstatistical
sample of 47 of 106 reverse mortgage loans originated by the Wells Fargo branch for testing.
We also nonstatistically selected seven of the 47 loans reviewed for site visits.
To accomplish our objective, we
Reviewed reverse mortgage program requirements;
Interviewed HUD officials, Wells Fargo staff, and other individuals connected to the loan
files;
Assessed internal controls;
Reviewed settlement charges and fees for reasonableness;
Made site visits to seven properties to assess whether repairs had been completed; and
Examined loan files for documentation supporting program requirements that
o The borrowers were at least 62 years of age,
o The borrowers had completed a reverse mortgage counseling program, and
o The subject property was the borrower’s primary residence.
The review was conducted between March and June 2008 and included loans that were endorsed
from January 1, 2006, to December 31, 2007. We performed our fieldwork in San Antonio,
Texas, and not at Wells Fargo. We conducted this performance audit in accordance with
generally accepted government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that the evidence obtained
provides a reasonable basis for our findings and conclusions based on our audit objectives.
8
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:
Program eligibility,
Required repairs completed, and
Ongoing principal residence status.
We assessed the relevant controls identified above and did not find a significant
weakness.
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.
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APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation
number Ineligible 1/ Unsupported 2/
1A $86,250
1B 148,500
1C $5,000
Total $234,750 $5,000
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or federal, state, or local
policies or regulations.
2/ 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.
10
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
11
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
OIG Evaluation of Auditee Comments
Comment 1
12
OIG Evaluation of Auditee Comments
Comment 1 Wells Fargo agreed with the report and the recommendations. We acknowledge
its response and prompt action to correct the issues identified in this report.
13
Wells Fargo Mortgage, San Antonio, Texas, Loans Generally Complied with Reverse Mortgage Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)