oversight

Mortgage Access Corporation, Morris Plains, New Jersey, Did Not Always Comply with HUD/FHA Loan Origination Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-05-12.

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

                                                             Issue Date
                                                             May 12, 2008

                                                             Audit Report Number
                                                             2008-NY-1005




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


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

SUBJECT:   Mortgage Access Corporation, Morris Plains, New Jersey, Did Not Always
           Comply with HUD/FHA Loan Origination Requirements

                                   HIGHLIGHTS

 What We Audited and Why

            We audited Mortgage Access Corporation, doing business as Weichert Financial
            Services, a nonsupervised lender located in Morris Plains, New Jersey. Mortgage
            Access Corporation was selected for review because its default rate of 10.74
            percent for loans with beginning amortization dates between May 1, 2005, and
            April 30, 2007, was higher than the state of New Jersey’s default rate of 5.49
            percent.

            The audit objectives were to determine whether Mortgage Access Corporation (1)
            approved insured loans in accordance with U.S. Department of Housing and
            Urban Development (HUD)/Federal Housing Administration (FHA)
            requirements, which include following prudent lending practices, and (2)
            developed and implemented a quality control plan that complied with HUD/FHA
            requirements.

 What We Found
            Mortgage Access Corporation did not always comply with HUD regulations in
            underwriting FHA-insured loans. Seven loans exhibited significant underwriting
            deficiencies such as inadequate credit analysis, inadequate verification of funds to
            close, minimum cash investment not met, and inadequate verification of
           income/employment. As a result, loans were approved for potentially ineligible
           borrowers, which caused HUD/FHA to incur an unnecessary insurance risk. In
           addition, one of these seven loans was approved for a property that was not
           eligible for FHA insurance. These deficiencies occurred because Mortgage
           Access Corporation lacked adequate controls to ensure that loans were processed
           in accordance with HUD requirements.

           Mortgage Access Corporation failed to ensure that its quality control plan was
           implemented in accordance with HUD’s requirements. Specifically for early
           defaulted loans, Mortgage Access Corporation did not ensure that (1) quality
           control reviews were conducted for all loans that defaulted within six months of
           closing, (2) reviews of early defaulted loans were performed in a timely manner,
           (3) adequate reverifications of loan documents were performed, and (4)
           management addressed the material deficiencies identified in quality control
           findings. Consequently, the effectiveness of its quality control plan, which was
           designed to ensure accuracy, validity, and completeness in its loan underwriting
           process, was lessened.

What We Recommend
           We recommend that the Assistant Secretary for Housing – Federal Housing
           Commissioner require Mortgage Access Corporation to (1) reimburse HUD for
           one ineligible loan, (2) indemnify HUD against future losses on the remaining six
           loans with significant underwriting deficiencies, (3) establish procedures to ensure
           that HUD underwriting requirements are properly implemented and documented,
           and (4) implement procedures to ensure compliance with HUD’s and its own
           quality control requirements. We also recommend that HUD’s Homeownership
           Center’s Quality Assurance Division follow up with Mortgage Access
           Corporation within one year to ensure that quality control reviews have been
           properly implemented.

           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 report to Mortgage Access Corporation officials on March
           26, 2008 and requested their responses by April 11, 2008. We discussed the
           results of our review during the audit and at an exit conference on April 11, 2008.
           Mortgage Access Corporation officials provided written comments at the exit
           conference, and generally agreed with the draft report findings. The complete text
           of Mortgage Access Corporation’s response, along with our evaluation of that
           response, can be found in appendix B of this report. The auditee’s response also
           contained attachments, which are available upon request.



                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
        Finding 1: Mortgage Access Corporation Did Not Always Comply with HUD’s   5
                   Underwriting Requirements

        Finding 2: Mortgage Access Corporation Had Weaknesses in the              9
                   Implementation of Its Quality Control Plan

Scope and Methodology                                                             12

Internal Controls                                                                 13

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use            15
   B.   Auditee Comments and OIG’s Evaluation                                     16
   C.   Summary of Underwriting Deficiencies                                      30
   D.   Case Summary Narratives                                                   31




                                              3
                      BACKGROUND AND OBJECTIVES


Mortgage Access Corporation became an approved U.S. Department of Housing and Urban
Development (HUD) non-supervised lender in 1983. The company originates loans, which it then
sells to investors, banks, and other mortgage bankers.

The main office of Mortgage Access Corporation is located in Morris Plains, New Jersey, and it has
branches in Shrewsbury, New Jersey; Bethesda, Maryland; Norwell, Massachusetts; Spring Hill,
Florida; and Johnson City, Tennessee.

Between May 1, 2005, and April 30, 2007, Mortgage Access Corporation underwrote 698 Federal
Housing Administration (FHA)-insured mortgages in New Jersey and experienced a default rate of
10.74 percent, which was significantly higher than the New Jersey state average default rate of 5.49
percent.

On March 13, 2007, HUD notified Mortgage Access Corporation of its intent to terminate the
lender’s origination approval agreement based upon its default and claim rate of 9.44 percent during
the 24-month period ending December 31, 2006. The Morris Plains branch’s default and claim rate
of 9.44 percent for all loans in the Camden, New Jersey, HUD office jurisdiction exceeded the HUD
Camden office’s default and claim rate of 2.96 percent and the national rate of 3.30 percent On
June 15, 2007, HUD notified Mortgage Access Corporation that the explanation provided in its
written responses and during the informal conference held with HUD officials did not mitigate the
proposed termination action, and, therefore, HUD terminated Mortgage Access Corporation’s
authority to originate HUD/FHA-insured single-family mortgage loans in HUD’s Camden
jurisdiction.

The objectives of this audit were to determine whether Mortgage Access Corporation (1) approved
insured loans in accordance with HUD/FHA requirements, which include following prudent lending
practices, and (2) developed and implemented a quality control plan that complied with HUD/FHA
requirements.




                                                 4
                                RESULTS OF AUDIT


Finding 1: Mortgage Access Corporation Did Not Always Comply with
           HUD’s Underwriting Requirements
Mortgage Access Corporation did not follow prudent lending practices and HUD regulations in
the origination and underwriting of the seven loans we reviewed. As a result, loans were
approved for potentially ineligible borrowers, and these deficiencies contributed to an
unnecessary insurance risk to HUD/FHA. The seven loans contained significant underwriting
deficiencies such as inadequate credit analysis, inadequate verification of funds to close,
minimum cash investment not met, and inadequate verification of income/employment. In
addition to significant underwriting deficiencies, one loan was approved for a property that was
not eligible for FHA insurance. These deficiencies occurred because Mortgage Access
Corporation did not have adequate controls to ensure that loans were processed in accordance
with HUD/FHA requirements.



Significant Underwriting
Deficiencies

              Our review of seven loans with amortization dates between May 1, 2005, and
              April 30, 2007, disclosed significant underwriting deficiencies in all seven loans,
              and one of the loans was approved for a property that was not eligible for FHA
              insurance. These deficiencies occurred because Mortgage Access Corporation did
              not follow prudent lending practices and regulations prescribed by HUD in its
              origination and underwriting of the seven loans.

              HUD Handbook 4155.1, REV-5, entitled “Mortgage Credit Analysis for Mortgage
              Insurance,” prescribes basic underwriting requirements for FHA-insured single-
              family mortgage loans. The lender must ensure that the borrower has the ability
              and willingness to repay the mortgage debt. This assessment must be based on
              sound underwriting principles in accordance with the guidelines, rules, and
              regulations described in this handbook and be supported by sufficient
              documentation. In addition, chapter 3-1 of the handbook requires that the
              application package contain sufficient documentation to support a lender’s
              decision to approve a mortgage. While this decision involves some subjectivity,
              our examination of seven loans approved by Mortgage Access Corporation
              disclosed significant underwriting deficiencies in the approval of these seven
              loans. Mortgage Access Corporation did not always (1) sufficiently analyze
              borrowers’ credit, (2) adequately verify the source of funds to close, (3) ensure
              that the minimum cash investment requirement was met, and (4) properly verify
              the borrowers’ employment and/or income. In addition to significant
              underwriting deficiencies, one loan was approved for an individual unit in a non-


                                                5
       FHA-approved condominium. If the unit is located in a non-FHA-approved
       condominium project, it can qualify for spot-loan financing. However, the
       condominium project did not meet the 51 percent owner occupancy requirements
       for the unit to qualify for spot-loan financing.

       Significant deficiencies are noted in the chart below and in appendix C. The
       deficiencies noted are not independent of one another, as one loan may have
       contained more than one deficiency.

            Areas of deficiencies                    Number of loans
        Inadequate credit analysis                   6 of 7 loans
        Inadequate verification of funds to close    7 loans
        Minimum cash investment not met              7 loans
        Inadequate verification of employment        4 of 7 loans
        and/or income

Specific examples of these significant underwriting deficiencies follow:

   •   For FHA case #351-4737353, the lender did not conduct an adequate analysis of
       the borrower’s credit history. The borrower’s credit report reflected various
       major derogatory accounts including judgments and collection actions and late
       payment instances on a prior FHA mortgage loan and other accounts. However,
       the lender did not obtain a written explanation from the borrower about major
       derogatory accounts and failed to analyze the borrower’s payment history of
       housing obligations and document its analysis as to whether the late payments
       were based on a disregard for financial obligations, an inability to manage debt, or
       factors beyond borrower’s control. The lender also did not verify the borrower’s
       funds for the investment in the property. The mortgage credit analysis worksheet
       indicated that the borrower’s only source of funds was proceeds from a pending
       real estate sale; however, the lender did not document the actual sale. In addition,
       the borrower’s employment income was overstated, which resulted in the lender’s
       calculating incorrect debt-to-income ratios of 38.78 and 48.16 percent. After
       adjusting the borrower’s income, these ratios would increase to 41.85 and 51.97
       percent. Further, the lender did not describe compensating factors to justify the
       mortgage approval.

   •   For FHA case #352-5447285, the lender did not obtain a credible explanation for
       the borrower’s source of funds to close. The HUD-1 settlement statement showed
       an earnest money deposit of $25,000, which exceeded 2 percent of the $312,000
       sale price. However, the file did not contain certification from the deposit holder
       acknowledging the receipt of the funds or a copy of the cancelled check. It
       appeared that the source of the earnest money was the borrower’s funds in an
       investment account, but the lender did not verify the actual receipt of funds as
       required by HUD regulations. HUD Handbook 4155.1, REV-5, section 2-10 A,
       states 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


                                        6
                   savings, the lender must verify with documentation the deposit amount and the
                   source of funds. Section 2-10 L of the handbook also states that the actual receipt
                   of funds must be verified and documented. The file contained a statement from
                   the financial institution covering the period August 1 through September 30,
                   2005. In addition, the debt-to-income ratios were calculated incorrectly because
                   liabilities were understated and employment income was overstated. After
                   adjusting the borrower’s income and liabilities, the ratios would increase to 54.17
                   and 65.11 percent.

               •   For FHA case #352-5499451, the lender approved a loan for an individual unit in
                   a non-FHA-approved condominium. If a condominium is not FHA approved, it is
                   possible that the individual unit may qualify for spot-loan financing if the building
                   meets the 51 percent owner occupancy requirement. Based on detailed
                   information obtained from HUD’s Web site on condominiums, the building did
                   not meet the 51 percent owner occupancy requirement. Also, there was a
                   discrepancy between the number of units reported on the appraiser’s report and by
                   the condominium’s management company. The lender did not ensure the
                   accuracy of the information it relied upon and failed to perform a sufficient
                   investigation and analysis to certify that the condominium project satisfied the
                   eligibility criteria. In addition, the lender failed to conduct an adequate analysis
                   of the borrower’s credit history. The borrower’s credit report reflected collection
                   accounts and late payment instances within two years of the FHA loan closing;
                   however, the lender did not obtain an explanations from the borrower. The lender
                   did not obtain (1) original pay stubs showing the year-to-date earnings of at least
                   one month, (2) adequate bank documents, and (3) gift fund transfer documents.

    Conclusions

                   Mortgage Access Corporation did not always follow HUD regulations in the
                   approval of loans. As a result, HUD remains at risk for more than $1.3 million,
                   the value of the seven loans we reviewed, which had significant underwriting
                   deficiencies. 1 The final loss that HUD incurs will depend upon what HUD
                   realizes when it disposes of the property. HUD’s most recent data disclosed that
                   its loss rate is 39 percent. Net sales proceeds after considering carrying and sales
                   expenses may mitigate the amount of the claim paid. Loans for which HUD
                   remains at risk can be mitigated by requesting that the lender indemnify HUD. In
                   this case, the lender reimburses HUD for any insurance claim, taxes, interest, and
                   other expenses connected with the disposition of the property, reduced by any
                   amount recouped by HUD via sale or other disposition.



1
    A reimbursement of $93,500 is recommended for the loan that was approved for a property not eligible for FHA
    insurance. The amount of cost savings or funds to be put to better use on the loans for which indemnification is
    recommended is estimated at $480,897 based on HUD’s 39 percent default loss experience for the remaining six
    loans ($1,326,569 - $93,500 x 39 percent).


                                                           7
          Appendix C of this report provides a summary of the underwriting deficiencies
          noted in the seven cases. Appendix D of this report provides a more detailed
          description of the deficiencies by case number.

Recommendations

          We recommend that the Assistant Secretary for Housing – Federal Housing
          Commissioner require Mortgage Access Corporation to

          1A.     Reimburse HUD for the $93,500 loan that was approved for a property
                  that was not eligible for FHA insurance.

          1B.     Indemnify HUD against future losses estimated to be $480,897 on six
                  loans with significant underwriting deficiencies.

          1C.     Establish procedures to ensure that all HUD underwriting requirements are
                  properly implemented and documented.




                                           8
Finding 2: Mortgage Access Corporation Had Weaknesses in the
           Implementation of Its Quality Control Plan

Mortgage Access Corporation had weaknesses in the implementation of its quality control plan.
It did not always comply with both HUD’s and its own quality control requirements to ensure
that (1) all HUD-insured loans that defaulted within the first six payments were reviewed, (2)
reviews for early defaulted loans were conducted in a timely manner, (3) adequate reverification
of loan documents was performed, and (4) management addressed the material deficiencies
identified in quality control findings. These noncompliances occurred because Mortgage Access
Corporation did not establish procedures to ensure that its quality control plan was properly
implemented. Consequently, the effectiveness of Mortgage Access Corporation’s quality control
plan, which was designed to ensure accuracy, validity, and completeness in its loan underwriting
process, was lessened.


 Loans Defaulting within the
 First Six Payments Were Not
 Reviewed

              Loans that defaulted within the first six payments (early payment defaults) were
              not reviewed as required by HUD regulations and by the lender’s own quality
              control plan. HUD Handbook 4060.1, REV-2, section 7-6 D, requires the lender
              to review all loans going into default within the first six payments. Quality
              control reviews were not performed on 17 of the 41 early defaulted loans. Quality
              control reviews of the early defaulted loans can provide valuable information
              about the causes of default that may indicate inadequate underwriting. A
              Mortgage Access Corporation official stated that the focus for early defaulted
              reviews was to identify patterns and common factors among participants in the
              origination process; therefore, the lender could select for review loans in which
              six or more payments had been made. However, HUD regulations do not relieve
              the lender from its responsibility to review all early payment defaulted loans.
              Mortgage Access Corporation officials acknowledged that weaknesses existed in
              their early payment default quality control reviews, and they agreed to implement
              the HUD-required procedures.


   Quality Control Reviews of
   Early Defaulted Loans Were
   Not Conducted in a Timely
   Manner

              Quality control reviews for another 17 of 41 loans were significantly delayed.
              These loans were not reviewed within three to four months from the date that the



                                               9
        loans were first reported as in default. Generally, early payment defaulted loans
        have a high incidence of problems; therefore, it is important to conduct quality
        control reviews in a timely manner so that lenders can identify patterns of
        deficiencies or problems that can be used as a training aid to eliminate problems
        in underwriting HUD/FHA loans. Mortgage Access Corporation officials
        acknowledged weaknesses in the timeliness of conducting early payment
        defaulted quality control reviews, and they agreed to correct their controls.


Documentation of
Reverifications Was Inadequate

        Our review of two randomly selected early payment default quality control
        reports found that contrary to HUD regulations, loan documents were not
        reverified. HUD Handbook 4060.1, REV-2, paragraph 7-6 E, states that
        documents contained in the loan file should be checked for sufficiency and
        subjected to written reverification. Items that must be reverified include but are
        not limited to the borrower’s employment or other income, deposits, gift letters,
        and other sources of funds. If the written reverification is not returned, a
        documented attempt must be made to conduct a telephone reverification. If the
        original information was obtained electronically or involved alternative
        documents, a written reverification must still be attempted. Without detailed
        quality control reviews, problems in the loan origination and underwriting will not
        be identified and corrected. As a result, Mortgage Access Corporation’s quality
        control reviews did not serve as a tool for identifying and correcting problems in
        origination and underwriting procedures.

Management Did Not Address
Quality Control Review
Findings

        Our review of two randomly selected early payment default quality control
        reports found that although quality control reports identified deficiencies that
        needed to be addressed, management did not provide written responses to the
        findings nor document what corrective action was taken or would be taken to
        address the material findings noted. Paragraph 7-3I of HUD Handbook 4060.1,
        REV-2, requires that management take prompt action to deal appropriately with
        any material findings. The final report or an addendum must identify actions
        being taken, the timetable for their completion, and any planned followup
        activities. Mortgage Access Corporation officials mentioned that upon
        completion of reviews, regular meetings were held with operations managers to
        discuss findings and the corrective action plan verbally. However, they did not
        document their actions. Officials stated that they would implement the
        procedures, and in addition to regular meetings, a written response would be
        required from management.



                                        10
Conclusions

              Mortgage Access Corporation had weakensses in the implementation of its quality
              control plan because it did not review all early payment defaulted loans, ensure
              that quality control reviews were conducted in a timely manner, reverify
              appropriate loan documents, address quality control findings, or document that
              corrective action was taken or would be taken. As a result, the effectiveness of its
              quality control plan was lessened. Thus, Mortgage Access Corporation’s
              inadequate quality control reviews of early payment defaulted loans could have
              contributed to origination and underwriting deficiencies/problems going
              undetected.

Recommendations

              We recommend that the Assistant Secretary for Housing – Federal Housing
              Commissioner require

              2A.    Mortgage Access Corporation to establish procedures to ensure that (1) all
                     HUD-insured loans that default within the first six payments are properly
                     reviewed, (2) quality control reviews are performed in a timely manner,
                     (3) the appropriate loan documents are reverified, and (4) adequate
                     management follow-up is provided for any material findings resulting
                     from quality control reviews.

              2B.    HUD’s Homeownership Center’s Quality Assurance Division to follow up
                     with Mortgage Access Corporation within one year to ensure that the
                     lender has implemented early payment default quality control reviews as
                     required.




                                               11
                         SCOPE AND METHODOLOGY

To achieve our objectives, we reviewed applicable laws, regulations, HUD handbooks,
mortgagee letters, and reports from HUD’s Quality Assurance Division. We reviewed
independent audit reports issued by Mortgage Access Corporation’s independent auditor and
interviewed Mortgage Access Corporation’s quality control officials to obtain an understanding
of its internal controls.

We selected 20 defaulted loans from the Neighborhood Watch System that were underwritten by
Mortgage Access Corporation with beginning amortization dates between May 1, 2005, and
April 30, 2007. Loan selection was based on the following factors: loans that (1) defaulted
within 12 or fewer payments, (2) were not indemnified by HUD, (3) were not reviewed by the
Homeownership Center in Philadelphia, and (4) were not streamline refinanced. After review of
the Homeownership Center files, we selected seven loans which appeared to have material
underwriting deficiencies for on-site verification with Mortgage Access Corporation’s files. The
results of our detailed testing only apply to the seven loans tested and cannot be projected.

We performed detailed testing and review of Mortgage Access Corporation’s underwriting
procedures and reviewed documentation from both HUD’s Homeownership Center endorsement
files and loan files provided by Mortgage Access Corporation officials. Our detailed testing and
review involved (1) analysis of borrowers’ income, assets, and liabilities; (2) review of the
borrowers’ savings ability and credit history; (3) verification of selected data on the underwriting
worksheet and settlement statements; and (4) confirmation of employment and gifts. We
discussed compliance issues with HUD and Mortgage Access Corporation officials.

We also reviewed Mortgage Access Corporation’s quality control plan as well as its quality
control reports, logs, and checklist. We tested the sufficiency and timeliness of quality control
reviews for closed, rejected, and early payment defaulted loans. We selected a sample of 14
quality control reports, which included quality control reviews of nine closed loans, three
rejected loans, and two early payment default loans, to test the adequacy of quality control
review procedures and to determine compliance with HUD requirements.

We performed the audit fieldwork from November 2007 through January 2008. We conducted
our audit 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:

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

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

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

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

              We assessed the relevant controls identified above.

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




                                               13
Significant Weaknesses
           Based on our review, we believe the following items are significant weaknesses:

           •      Mortgage Access Corporation did not ensure that certain loans were
                  processed in accordance with all applicable HUD underwriting requirements
                  (see finding 1).

           •      Mortgage Access Corporation did not adequately implement its quality
                  control plan to ensure compliance with HUD’s and its own quality control
                  requirements (see finding 2).




                                           14
                                   APPENDIXES

Appendix A

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

                  Recommendation            Ineligible 1/   Funds to be put
                         number                              to better use 2/
                                1A                93,500
                                1B                                  480,897



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.

2/   Recommendation that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. This includes reduction in outlays, deobligation of funds, withdrawal of
     interest subsidy costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     which are specifically identified. In this instance, if HUD implements our
     recommendations to indemnify loans that were not originated in accordance with FHA
     requirements, it will reduce FHA’s risk of loss to the insurance fund. The amount above
     reflects HUD’s statistics reflecting that FHA has an average loss experience of 39 percent
     of the claim amount when it sells a foreclosed property.




                                             15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         16
Ref to OIG Evaluation   Auditee Comments




                         17
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3


Comment 4




Comment 3




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 3

Comment 6


Comment 3




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 3




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 3




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 9


Comment 3




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         25
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         26
                         OIG Evaluation of Auditee Comments

Comment 1   The lender agreed that the income was higher than what was reflected on the
            borrower’s pay stub. HUD-OIG did not imply that the averaging of the
            borrower’s income is unacceptable. The income calculated by the auditee
            included either overtime or bonus income. Income to qualify may include
            overtime, bonus, and commission income, however, the lender will need to verify
            receipt over the past 2 years and the probability of its continuance as per HUD
            Handbook 4155.1, REV-5, section 2-7 A. The verbal verification of employment
            (VOE) did not list any overtime and/or bonus income, or the probability of its
            continuation. Therefore, we conclude that the borrower’s monthly income was
            overstated.

            In addition, during the course of our review, we also noted that the routine quality
            control review of this loan by the lender’s quality control department also noted
            that “income was not properly documented and QC ratios were 41.12 percent and
            51.25 percent”. Thus, the ratios calculated by its quality control department are
            almost in line with HUD OIG calculated ratios of 41.85 and 51.97 percent.

Comment 2   Based on the document in the file, this loan had received a risk classification as
            ‘refer,’ therefore it required a manual underwriting review per the FHA Total
            Mortgage Scorecard User Guide. Accordingly, Mortgagee Letter 2005-16 states
            that for manually underwritten mortgages, the lender must describe the
            compensating factors used to justify mortgagee approval when the borrower’s
            mortgage payment to effective income ratio (front) and total fixed payment to
            income ratios (back) exceeded 31 and 43 percent respectively.

Comment 3   The lender generally agrees with our determinations.

Comment 4   The lender concurs that HUD-1 settlement statement for the sale of a home was
            not fully executed. HUD Handbook 4155.1, REV-5, section 2-10 E provides that
            a fully executed HUD-1 settlement statement must be provided as satisfactory
            evidence of the cash proceeds accruing to the borrower. If the property has not
            been sold by the time of the underwriting, then loan approval must be conditioned
            upon verifying the actual proceeds received by the borrower. Since the
            borrower’s only source of funds appeared to be from proceeds from the sale of a
            home, we conclude that the lender did not verify and document all funds for the
            borrower’s investment in the property and the borrower did not have sufficient
            funds to close the FHA loan, as required by HUD Handbook 4155.1, REV-5,
            section 2-10.

Comment 5   The lender did not provide any comment because they were unable to locate the
            applicable documents in their file. Our exceptions were based on the review of
            the documents contain in the Homeownership Center’s (HOC) file.




                                             27
Comment 6   The lender provided a copy of an invoice for paid-outside-closing cost for the
            appraisal fee of $400. As such, we removed this deficiency and modified the
            negative cash reserve deficiency to reflect that the borrower still had a deficit
            (negative cash reserve) of $3,283 at closing because cash due from the borrower
            on the HUD-1 settlement statement was $4,100 whereas the borrower only had an
            asset of $817 as per the mortgage credit analysis worksheet. We excluded the gift
            of $5,100 listed on the mortgage credit analysis worksheet because the lender did
            not document the transfer of gift funds as required by HUD Handbook 4155.1,
            REV-5, section 2-10 C.

Comment 7   The HUD-1 settlement statement indicated that the borrower was required to pay
            $6,734 at closing. Due to the unsupported earnest money deposit of $5,745 and
            the unsupported paid-outside-closing cost of $79, the borrower would have been
            required to pay $12,558. The source of the funds to close the FHA loan appeared
            to be proceeds from the sale of a home. However, the HUD-1 settlement
            statement indicated that the closing for both properties took place on the same
            day. Therefore, there was no evidence as to which property was closed first. If
            the FHA loan was closed before the closing of the other property then the
            borrower would not have proceeds available to close the FHA loan.

            Thus, the lender did not verify the actual proceeds received by the borrower
            because the file did not contain a copy of a check or verification of the transfer of
            funds from the buyer of the property to the borrower. HUD handbook 4155.1,
            REV-5, section 2-10 E provides that a fully executed HUD-1 settlement statement
            must be provided as satisfactory evidence of the cash proceeds accruing to the
            borrower. If the property has not been sold by the time of the underwriting, then
            loan approval must be conditioned upon verifying the actual proceeds received by
            the borrower. Section 2-10 of the Handbook also states that all funds for the
            borrower’s investment in the property must be verified and documented; this was
            not done.

Comment 8   The lender stated that the loan file contained sufficient documentation to evidence
            that the borrower obtained gift funds because the file contained a cashier’s check
            for $3,800 and the funds were deposited directly into the real estate selling agent’s
            account. However, the copy of the cashier’s check indicates that it was purchased
            by the borrower, not the donor. The borrower’s bank statement had a handwritten
            notation of the word “gift,” which indicated that gift funds were in the borrower’s
            bank account. Therefore, we conclude that the transfer of gift funds was not
            adequately documented because the lender did not document the transfer from the
            donor and failed to determine whether the gift funds were provided from an
            acceptable source and were the donor’s own funds as required by HUD handbook
            4155.1, REV-5, section 2-10 C.

Comment 9   The lender disagreed that the transfer of gift funds was not adequately
            documented. As per the lender, the gift was verified because the file contains a
            copy of the cashier’s check for $11,500 made payable to the borrower. However,



                                             28
the copy of the check is illegible and therefore we consider it as an inadequate
supporting document. We conclude that the transfer of gift funds was not
adequately documented because the lender did not document the transfer of gift
funds and failed to determine that gift funds were provided from an acceptable
source and were the donor’s own funds as required by HUD handbook 4155.1,
REV-5, section 2-10 C.




                                29
Appendix C
      SUMMARY OF UNDERWRITING DEFICIENCIES




                      30
Appendix D

                        CASE SUMMARY NARRATIVES
                                                                                Appendix D-1
                                                                                  Page 1 of 3
  Case number:         351-4737353
  Loan amount:         $153,869
  Settlement date:     July 22, 2005
  Default status:      Delinquent

  Pertinent Details:

  A. Income Overstated

  The borrower’s monthly income of $3,602 shown on the mortgage credit analysis worksheet
  was overstated. The borrower’s recent pay stub in the file showed an annual salary of
  $40,058, which equals $3,338 in monthly income. Therefore, monthly income was
  overstated by $264. The lender averaged the borrower’s income over a period of 17.33
  months, and it appeared that income used to calculate the year-to-date amount as of June 16,
  2005, included either overtime or bonus income because it reflected a higher income. The
  borrower’s current year-to-date income as of June 16, 2005, should have been $18,360 (5.5
  months) based on the $40,058 annual salary; however, the pay stub as of June 16, 2005,
  showed total compensation of $23,731. HUD Handbook 4155.1, REV-5, section 2-7 A,
  provides that overtime and bonus income may be used as qualifying income if the borrower
  has received such income for approximately the past two years and there are reasonable
  prospects of its continuance. The verbal verification of employment did not list any overtime
  and/or bonus income or the probability of its continuance. The verbal verification also did
  not list the borrower’s earnings or employer’s name and telephone number.

  B. Incorrect Debt-to-Income Ratios

  C. Excessive Debt-to-Income Ratios without Compensating Factors

  The ratios calculated by the lender were incorrect because the borrower’s monthly income
  was overstated. On the mortgage credit analysis worksheet, the lender listed a mortgage
  payment-to-effective income ratio (front) and total fixed payment-to-effective income ratio
  (back) as 38.78 and 48.16 percent, respectively. Based on monthly income of $3,338, we
  calculated ratios of 41.85 and 51.97 percent, respectively. Mortgagee Letter 2005-16 states
  that the lender must describe the compensating factors used to justify mortgage approval
  when the borrower’s mortgage payment-to-effective income ratio (front) and total fixed
  payment-to-income ratio (back) exceeds 31 and 43 percent, respectively. The lender did not
  list compensating factors.




                                             31
                                                                                 Appendix D-1
                                                                                   Page 2 of 3
D. Inadequate Credit Analysis

The lender did not conduct an adequate analysis of the borrower’s credit history. HUD
Handbook 4155.1, REV-5, section 2-3, provides that major indications of derogatory credit
require a sufficient written explanation from the borrower. The credit report in the file
indicated (1) various major derogatory accounts including judgments and collection actions,
(2) late payment instances on a prior FHA real estate mortgage loan and other accounts, and
(3) credit inquiries in the past 90 days.

The lender did not (1) obtain a written explanation from the borrower about major derogatory
accounts and various credit inquiries, (2) analyze the borrower’s payment history for housing
obligations, and (3) document its analysis as to whether the late payments were based on a
disregard for financial obligations, an inability to manage debt, or factors beyond the
borrower’s control.

E. Funds to Close Not Verified

HUD Handbook 4155.1, REV-5, section 2-10, provides that all funds for the borrower’s
investment in the property must be verified and documented. The mortgage credit analysis
worksheet indicated that the borrower’s source of funds was the $50,000 assets available
from a pending real estate sale. The file did not contain a fully executed HUD-1 settlement
statement for the property (it did not contain signatures of the buyers and seller). Section 2-
10 E of the handbook provides that a fully executed HUD-1 settlement statement must be
provided as satisfactory evidence of the cash proceeds accruing to the borrower. If the
property has not been sold by the time of the underwriting, then loan approval must be
conditioned upon verifying the actual proceeds received by the borrower. The lender must
document both the actual sale and the sufficiency of the net proceeds required for settlement.
The file did not contain any such documents.

F. Negative Cash Reserve on HUD-1

The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower’s investment
in the property be verified and documented. Cash due from the borrower on the HUD-1
settlement statement was $38,593. The borrower’s only source of funds appeared to have
been proceeds from a pending property sale. Since the proceeds from prior real estate
transactions were not verified as explained in the paragraph above, the borrower did not have
sufficient funds to close the loan.




                                            32
                                                                           Appendix D-1
                                                                             Page 3 of 3

 G. Incomplete Sales Contract

Pages from the sales contract were missing from the Homeownership Center and lender’s
binders. HUD Handbook 4165.1, REV-2, section 1-5, provides that the lender has the
responsibility to ensure that all documentation is appropriate and conforms to the
requirements. The lender must assemble the processing and closing documents and place
them in the case binder.




                                         33
                                                                              Appendix D-2
                                                                                 Page 1 of 2
Case number:        351-4764552
Loan amount:        $167,250
Settlement date:    November 18, 2005
Default status:     Servicing transferred

Pertinent Details

A. Incomplete Gift Fund Transfer

The mortgage credit analysis worksheet listed $5,100 in gift funds. The file contained a copy
of a gift letter, dated November 8, 2005, and a letter from the donor, dated November 9,
2005. The borrower’s bank statements covering the period October 5 through November 3,
2005, did not indicate whether the gift funds were deposited. HUD Handbook 4155.1, REV-
5, section 2-10 C, requires the lender to document the transfer of gift funds from donor to
borrower by obtaining a copy of a cancelled check or other withdrawal documents showing
that the withdrawal is from the donor’s personal accounts, along with the homebuyer’s
deposit slip and bank statement showing the deposit. Further, the lender must be able to
determine that the gift funds ultimately were not provided from an unacceptable source and
were indeed the donor’s own funds. This information was not documented.

B. Verification of Deposit Not Obtained

The borrower’s bank statement indicated that the bank account was new and there were
several unexplained nonpayroll deposits totaling $11,855 from September 2 through
November 3, 2005. HUD Handbook 4155.1, REV-5, section 2-10 B, states that if there is a
large increase in a bank account or the bank account was opened recently, the lender must
obtain a credible explanation of the source of those funds. The lender did not obtain a
credible explanation of the source of funds.

C. Inadequate Credit Analysis

The lender did not conduct an adequate analysis of the borrower’s credit history. HUD
Handbook 4155.1, REV-5, section 2-3, provides that major indications of derogatory credit
require a sufficient written explanation from the borrower. The borrower’s credit report
showed four derogatory accounts, three of which were placed for collection. However, the
lender did not obtain a written explanation of the derogatory accounts from the borrower.




                                            34
                                                                                  Appendix D-2
                                                                                    Page 2 of 2

D. Negative Cash Reserve on HUD-1

The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower’s investment
in the property be verified and documented. Cash due from the borrower on the HUD-1
settlement statement was $4,100. We excluded gift fund of $5,100 because the lender did not
verify and document it as explained in section A. Thus, the borrower only had an asset of
$817 according to the mortgage credit analysis worksheet; therefore, the borrower would
have had a deficit of $3,283 at closing.

E. Excessive Debt-to-Income Ratios

F. Compensating Factors Listed Unallowable

The mortgage credit analysis worksheet listed mortgage payment-to-effective income ratio
(front) as 38.56 percent and total fixed payment-to-effective income ratio (back) as 47.03
percent, which exceeded the HUD threshold. Mortgagee letter 2005-16 states that for
manually underwritten mortgages in which the direct endorsement underwriter must make
the credit decision, the qualifying ratios are raised to 31 and 43 percent, and if either or both
ratios are exceeded on a manually underwritten mortgage, the lender must describe the
compensating factors used to justify mortgage approval. Compensating factors listed on the
mortgage credit analysis worksheet were not allowable according to HUD Handbook 4155.1,
REV-5, section 2-13.

G. Verification of Rent Expense Not Obtained

The lender did not verify the borrower’s rental payment history. The borrower’s current
housing expenses on the loan application were listed as $600 for rent. HUD Handbook
4155.1, REV-5, section 2-3 A, states that the payment history of the borrower’s housing
obligations holds significant importance in evaluating credit. The lender must determine the
borrower’s payment history of housing obligations through either the credit report or
verification of rent directly from the landlord. Since the borrower’s credit report did not
reflect the rental payment history, the lender should have verified rent directly from the
borrower’s landlord.




                                             35
                                                                                Appendix D-3
                                                                                  Page 1 of 2

Case number:        351-4776935
Loan amount:        $188,500
Settlement date:    January 27, 2006
Default status:     Repayment

Pertinent Details

A. Insufficient Employment Documentation

The lender did not obtain the borrower’s original pay stubs covering the most recent 30-day
period. HUD Handbook 4155.1, REV-5, section 3-1 E, requires the lender to obtain a
verification of employment and the most recent pay stub showing year-to-date earnings of at
least one month.

B. Inadequate Earnest Money Deposit Documents

The HUD-1 settlement statement reported an earnest money deposit of $5,745 that exceeded
2 percent of the sale price. The lender did not obtain supporting documents as required by
HUD regulations. HUD Handbook 4155.1, REV-5, section 2-10A, provides 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
the amount of the deposit and the source of funds.

C. Inadequate Credit Analysis

The credit report in the file indicated that the borrower had numerous late payments incurred
within less than two years of the loan closing; however, the lender did not obtain a written
explanation from the borrower. HUD Handbook 4155.1, REV-5, section 2-3, provides that
major indications of derogatory credit require a sufficient written explanation from the
borrower.

D. Funds to Close Not Verified

The mortgage credit analysis worksheet and loan application listed $14,417 and $25,000 as
assets, which appeared to be respectively the borrower’s retirement savings account funds
and estimated net proceeds from the sale of real estate. The file did not contain evidence of
redemption of the retirement savings funds. Also, the copy of the HUD-1 settlement
statement for the property owned at that time indicated that closing for both properties took
place on the same day. Therefore, there was no evidence that proceeds from the real estate
property sale were available to close the FHA loan. The lender did not verify actual
proceeds. HUD Handbook 4155.1, REV-5, section 2-10, requires that all funds for the
borrower’s investment in the property be verified and documented.




                                            36
                                                                                 Appendix D-3
                                                                                   Page 2 of 2

E. Negative Cash Reserve on HUD-1

The HUD-1 settlement statement for the FHA loan indicated that the borrower was required
to pay $6,734. Due to the unsupported earnest money deposit of $5,745 (explained in
paragraph B) and the unsupported paid-outside-closing costs of $79 (explained in paragraph
H), the borrower would have been required to pay $12,558. Since the funds to close were not
verified as explained above, the borrower did not have sufficient funds to close the loan.

F. Incorrect Debt-to-Income Ratios

G. Incomplete Mortgage Credit Analysis Worksheet

The mortgage credit analysis worksheet listed mortgage payment-to-effective income (front)
and total fixed payment-to-income (back) ratios as 23.40 percent and 39.0 percent,
respectively. The ratios were incorrect because, the principal, interest, tax, and insurance
calculation excluded $273 in taxes on the mortgage credit analysis worksheet. After adding
the $273 into the principal, interest, tax, and insurance calculation, the front ratio would
increase to 27.89 percent and the back ratio to 43.51 percent, which is slightly higher than the
HUD threshold. The lender did not list the compensating factors as required. Mortgagee
Letter 2005-16 states that the lender must describe the compensating factors used to justify
mortgage approval when the borrower’s mortgage payment-to-effective income ratio (front)
and total fixed payment-to-income ratio (back) exceed 31 and 43 percent, respectively.

H. Verification of Paid-Outside-Closing Costs Not Obtained

HUD Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower’s
investment in the property be verified and documented. The HUD-1 settlement statement
reported that the borrower paid $79 for pest inspection before closing. However, the file did
not contain any supporting documents.




                                            37
                                                                                  Appendix D-4
                                                                                    Page 1 of 2

Case number:        351-4778778
Loan amount:        $164,400
Settlement date:    February 8, 2006
Default status:     Servicing transferred or sold

Pertinent Details

A. Inadequate Credit Analysis

The credit report in the file reported that the borrower had filed for chapter 7 bankruptcy in
the past. Contrary to HUD Handbook 4155.1, REV-5, section 2-3, the lender did not obtain a
written explanation from the borrower and did not document that the borrower’s current
situation indicated that the events that led to bankruptcy were not likely to recur. Therefore,
the lender failed to analyze how the previous failure did not represent a risk of possible
mortgage default.

B. Inadequate Gift Fund Transfer Documents

C. Gift Funds Not Meeting HUD/FHA Requirements

The lender did not document the transfer of gift funds from donor to the borrower. The
borrower’s bank statement had a hand-written notation of “gift,” which indicated that $3,800
in gift funds were in the borrower’s bank account. HUD Handbook 4155.1, REV-5, section
2-10 C, states that if the gift fund is in the borrower’s bank account, the lender is required to
document the transfer of the gift funds from the donor to the homebuyer by obtaining a copy
of the cancelled check or other withdrawal document showing that the withdrawal is from the
donor’s account. The homebuyer’s deposit slip and a bank statement that shows the deposit
is also required. The file only contained the borrower’s bank statement.

A notarized letter signed by the donor, dated January 30, 2006, that was faxed from
borrower’s place of employment stated that the donor gave a cash gift. Cash on hand is not
an acceptable source of donor’s gift funds according to section 2-10 C of the HUD handbook.
Further, regardless of when the gift funds are made available to the homebuyer, the lender
must be able to determine that the gift funds ultimately were not provided from an
unacceptable source and were indeed the donor’s own funds. In addition, the gift letter did
not include the required donor’s address and phone number.




                                             38
                                                                               Appendix D-4
                                                                                 Page 2 of 2

D. Earnest Money Deposit Not Supported

The earnest money deposit of $3,800 of the total $4,800 shown on the mortgage credit
analysis worksheet and the HUD-1 appeared to be from an unverified and unacceptable
source of gift funds as explained in the above paragraph; therefore, the $3,800 earnest money
deposit is unsupported.

E. Incorrect Calculation of Maximum Mortgage Amount

Since the gift funds did not meet HUD requirements, as explained in the above paragraphs, a
dollar-for-dollar reduction in the sale price was required. As a result, the maximum
mortgage amount should have been reduced according to HUD Handbook 4155.1, REV-5,
section 1-7 B.

F. Ratios Exceeded without Compensating Factors

The lender did not provide any compensating factors to justify the excessive debt-to-income
ratios. Mortgagee Letter 2005-16 states that the lender must describe the compensating
factors used to justify mortgage approval when the borrower’s mortgage payment-to-
effective income ratio (front) and total fixed payment-to-income ratio (back) exceed 31 and
43 percent, respectively. The borrower’s ratios were 35.25 and 47.33 percent, respectively,
according to the lender’s calculation.

G. Negative Cash Reserve on HUD-1

HUD Handbook 4155.1, REV-5, section 2-10, provides that all of the funds for the
borrower’s investment in the property must be verified and documented. The borrower did
not appear to have sufficient funds to close. If we add the $3,800 earnest money deposit,
which appeared to have come from an unverified and unacceptable gift source, and the
unsupported payment of $619 in paid-outside-closing funds toward the first quarter taxes
(explained in paragraph H), the borrower would have been required to pay $4,419 at closing.
The borrower only had $2,093 in a bank account; therefore, the borrower would have had a
negative cash reserve of $2,325.

H. Verification of Paid-Outside-Closing Costs Not Obtained

The lender did not verify the payment for the paid-outside-closing costs. HUD Handbook
4155.1, REV-5, section 2-10, requires that all funds for the borrower’s investment in the
property be verified and documented. The HUD-1 settlement statement in the file reported
that the borrower paid $619 for first quarter taxes outside the closing. However, there was no
documentation to show that this amount had been paid before closing.




                                           39
                                                                               Appendix D-5
                                                                                 Page 1 of 2

Case number:         351-4791637
Loan amount:         $267,750
Settlement date:     May 19, 2006
Default status:      Repayment

Pertinent Details:

A. Inadequate Documentation for Gift Fund Transfer

The mortgage credit analysis worksheet and gift letter listed $11,500 as a gift. According to
a Fannie Mae underwriting finding document, dated April 28, 2006, the lender was required
to document and retain a copy of the transfer of gift funds and confirm that the gift came
from an acceptable source. However, the file did not contain gift fund transfer
documentation as required by HUD Handbook 4155.1, REV-5. According to the lender, the
official check for $11,500 was made payable to the borrower. The copy of the official check
was illegible; therefore, we consider it to be an inadequate supporting document. The
borrower’s bank statement covering the period December 29, 2005, through February 24,
2006, did not provide evidence that the gift funds were deposited into the account. HUD
Handbook 4155.1, REV-5, section 2-10 C, requires the lender to document the transfer of
funds from the donor to the borrower by obtaining a copy of the cancelled check or other
withdrawal documents showing that the withdrawal was from the donor’s account, along
with the borrower’s deposit slip and bank statement that shows the deposit. Further, the
lender must be able to determine that the gift funds ultimately were not provided from an
unacceptable source and were indeed the donor’s own funds.

B. Inadequate Credit Analysis

The borrower had filed for chapter 13 bankruptcy on December 20, 2004. Contrary to HUD
Handbook 4155.1, REV-5, section 2-3 E, the lender did not document whether the one-year
payout period under bankruptcy had elapsed and whether the borrower’s payment
performance had been satisfactory. The lender also failed to obtain a sufficient written
explanation from the borrower.

C. Negative Cash Reserve on HUD-1

The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower’s investment
in the property be verified and documented. Cash due from the borrower on the HUD-1
settlement statement was $10,797. If the unsupported paid-outside-closing costs of $400 for
the appraisal fee and the $278 for property taxes (explained in paragraph E) were added,




                                           40
                                                                               Appendix D-5
                                                                                 Page 2 of 2

then the borrower needed to pay $11,475 at closing. However, according to the bank
statement and mortgage credit analysis worksheet, the borrower only had $423 in assets
available. Therefore, the borrower would have had a deficit of $11,052 at closing.

D. Ratio Exceeded without Compensating Factors

The lender calculated the mortgage payment expense-to-income ratio (front) as 32.15
percent, which exceeded HUD’s threshold; however, no compensating factors were listed.
Mortgagee Letter 2005-16 requires the lender to describe the compensating factors used to
justify mortgage approval when the maximum ratios are exceeded.

E. Verification of Paid-Outside-Closing Costs Not Obtained

HUD Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower’s
investment in the property be verified and documented. The HUD-1 settlement statement
reported that the borrower paid a $400 appraisal fee and $278.44 for property taxes outside of
closing. However, there were no documents to show that these obligations had been paid
before closing.




                                           41
                                                                               Appendix D-6
                                                                                 Page 1 of 2


Case number:         352-5447285
Loan amount:         $291,300
Settlement date:     December 6, 2005
Default status:      Modification started

Pertinent Details:

A. Inaccurate Debt-to-Income Ratios

B. Inadequate Compensating Factors

The mortgage credit analysis worksheet listed the mortgage payment-to-effective income
ratio (front) and total fixed payment-to-income ratio (back) as 42.97 and 47.62 percent,
respectively; however, these ratios were inaccurate because the lender understated liabilities
and overstated income as explained in the paragraphs below. After adjusting income and
liability, the debt-to-income ratios would increase to 54.17 and 65.11 percent. Two of the
three compensating factors listed on the mortgage credit analysis worksheet are not allowable
according to HUD Handbook 4155.1, REV-5, section 2-13. The third compensating factor
stated that the borrower had an excellent reserve, which is allowable; however, the source of
reserve appeared to be funds from an investment account, which was not verified and
documented as explained below. Therefore, we concluded that debt-to-income ratios were
exceeded without adequate compensating factors.

C. Inadequate Disclosure of Liability

The lender omitted a monthly $226 installment account payment. The account shown on the
borrower’s credit report had an outstanding balance of $2,943, and a monthly payment of
$226 was required. If the borrower had continued to make a monthly payment of $226, it
would have taken approximately 13 months to pay off the balance. HUD Handbook 4155.1,
REV-5, section 2-11 A, requires the lender to include the monthly housing expense and all
additional recurring charges extending 10 months or more, including payments on
installment accounts.

D. Employment Income Overstated

Monthly employment income on the mortgage credit analysis worksheet was listed as
$4,592; however, our calculation of the monthly employment income was $3,432.
Therefore, income was overstated by $1,160.




                                            42
                                                                                 Appendix D-6
                                                                                   Page 2 of 2

E. Inadequate Earnest Money Deposit Documentation

The HUD-1 settlement statement reported an earnest money deposit of $25,000, which
exceeded 2 percent of the sale price. The file did not contain a certification from the deposit
holder acknowledging the receipt of the funds or a copy of a cancelled check as required by
HUD Handbook 4155.1, REV-5, section 2-10 A.

F. Assets in Investment Account Not Verified

The mortgage credit analysis worksheet listed $57,549 as available assets, which appeared to
be the borrower’s assets in an investment account. The lender obtained an investment
account statement covering the period August 1 through September 30, 2005. Evidence of
redemption and/or actual receipt of funds was not verified and documented as required by
HUD Handbook 4155.1, REV-5, sections 2-10 K and L.

G. Negative Cash Reserve on HUD-1

The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower’s investment
in the property be verified and documented. The HUD-1 settlement statement reported that
cash due from the borrower was $7,281 at closing. If we add the unsupported paid-outside-
closing costs of $768 for hazard premium (explained in paragraph H) and the $25,000
unverified earnest money deposit (explained in paragraph E), the borrower would have been
required to pay $33,049 at closing. However, the borrower only had $1,414 in assets in a
bank account. Therefore, the borrower would have had a deficit of $31,635 at closing.

H. Verification of Paid-Outside-Closing Costs Not Obtained

HUD Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower’s
investment in the property be verified and documented. The HUD-1 settlement statement
reported that $768 for hazard insurance premium was paid outside of closing; however, the
file did not contain any supporting documents.




                                            43
                                                                                  Appendix D-7
                                                                                    Page 1 of 2

FHA number:          352-5499451
Loan amount:         $93,500
Settlement date:     June 23, 2006
Default status:      Reinstated by borrower

Pertinent Details:

A. Property Not Eligible for FHA Insurance

The lender approved a loan for a property that was not eligible for FHA insurance. The
property was located in a non-FHA-approved condominium building. If a condominium
building is not FHA approved, it is possible that an individual unit may qualify for spot-loan
financing. To qualify for spot-loan financing, the condominium also must meet the 51
percent owner occupancy requirements in addition to other requirements listed in Mortgagee
Letter 96-41 and regulations at 24 CFR (Code of Federal Regulations) 234.26. Based on
detailed information about condominiums obtained from HUD’s Web site, the condominium
did not meet the 51 percent owner occupancy requirements. In addition, the status of the
condominium was shown as withdrawn as of April 27, 2001; therefore, the property did not
meet the owner occupancy requirement for spot-loan financing. HUD’s Single Family
Housing, Homeownership Center Reference Guide, section 1-28, states that condominium
projects that have been previously rejected or withdrawn by HUD are not eligible under the
spot approval process.

We also noted a discrepancy between the number of units reported on the appraiser’s report
and by the condominium’s management company. Mortgagee Letter 96-41 states that the
lender must perform an underwriting analysis and certify that the project satisfies the
eligibility criteria for spot-loan approval. It also states that the lender may use information
provided by the appraiser, owners association, management company, and real estate
brokers. However, it remains the lender’s responsibility to ensure the accuracy of the
information it relies upon and perform sufficient investigation and analysis to certify that the
condominium project satisfies the eligibility criteria.

B. Inadequate Employment Documents

The lender did not obtain a recent pay stub from the borrower. HUD Handbook 4155.1,
REV-5, section 3-1 E, requires the lender to obtain the most recent pay stub showing the
year-to-date earnings of at least one month and the verification of employment. According to
the verification of employment, dated June 6, 2006, the borrower had been working in New
Jersey since January 1, 2004, whereas the credit report indicated that the borrower resided in
North Carolina from August 26, 2003, to September 2004. This discrepancy was not
explained.




                                              44
                                                                                   Appendix D-7
                                                                                     Page 2 of 2


C. Inadequate Credit Analysis

The lender did not conduct an adequate analysis of the borrower’s credit history. HUD
Handbook 4155.1, REV-5, section 2-3, provides that major indications of derogatory credit
require a sufficient written explanation from the borrower. The borrower’s credit report
showed that one collection account and two of five late payment instances were incurred
within two years of loan closing; however, the lender did not obtain an explanation from the
borrower.

D. Inadequate Bank Documents

HUD Handbook 4155.1, REV-5, section 3-1 F, requires the lender to obtain a verification of
deposit and the most recent bank statement. As an alternative to obtaining a verification of
deposit, the lender may obtain from the borrower original bank statement(s) covering the
most recent three-month period. Provided the bank statement shows the previous month’s
balance, this requirement is met by obtaining the two most recent, consecutive statements.
The lender only obtained the bank statement for one month.

E. Inadequate Gift Funds Transfer Document

The lender reported $4,800 as a gift on the mortgage credit analysis worksheet, whereas the
gift letter listed the gift as $2,850. The lender did not document the transfer of the gift funds.
HUD Handbook 4155.1, REV-5, section 2-10 C, requires the lender to document the transfer
of gift funds from the donor to the borrower by obtaining a copy of a cancelled check or
other withdrawal documents showing that the withdrawal is from the donor’s personal
accounts, along with the homebuyer’s deposit slip and bank statement showing the deposit.
Further, regardless of when the gift funds are made available to the homebuyer, the lender
must be able to determine that the gift funds ultimately were not provided from an
unacceptable source and were indeed the donor’s own funds.

F. Negative Cash Reserve on HUD-1

The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower’s investment
in the property be verified and documented. Cash due from the borrower on the HUD-1
settlement statement was $2,024 at closing. If we add the $1,000 earnest money deposit,
which appeared to be from an incomplete transfer of gift funds as explained in the paragraph
above, the borrower would have been required to pay $3,024 at closing. However, the
borrower only had $2,348 in assets available according to the bank statement and loan
application.




                                             45