oversight

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)

                                                                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.




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                           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




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                     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.


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                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.


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             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.




                                              7
                         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.




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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.




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