oversight

SecurityNational Mortgage Company, Murray, Utah, Did Not Follow HUD Requirements in Underwriting Insured Loans and Did Not Follow Quality Control Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-04-28.

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

                                                                Issue Date
                                                                             April 28, 2009
                                                                Audit Report Number
                                                                             2009-DE-1003




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

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, Denver, 8AGA


SUBJECT: SecurityNational Mortgage Company, Murray, Utah, Did Not Follow HUD
         Requirements in Underwriting Insured Loans and Did Not Follow Quality
         Control Requirements


                                   HIGHLIGHTS

 What We Audited and Why

             We audited SecurityNational Mortgage Company (SecurityNational), a Federal
             Housing Administration (FHA)-approved direct endorsement lender, to determine
             whether it properly underwrote insured loans and whether its quality control plan
             met the U.S. Department of Housing and Urban Development’s (HUD)
             requirements. We audited SecurityNational because of its high default rate and
             the Office of Inspector General’s strategic goal to reduce fraud in single-family
             insurance programs.

 What We Found
             SecurityNational did not follow HUD regulations when underwriting 18 FHA
             loans. One of the loans contained significant underwriting deficiencies because
             the borrower overstated their self-employment income and SecurityNational did
             not detect the borrower’s misrepresentation.
           In addition, SecurityNational did not review early payment defaults or perform
           timely reviews. It did not review all FHA-insured loans that defaulted within the
           first six months, nor did it perform its monthly quality control reviews on time.

What We Recommend


           We recommend that HUD require SecurityNational to reimburse it for the loss on
           the loan with a significant deficiency. We also recommend that HUD monitor
           SecurityNational to ensure that it effectively monitors its underwriters’ actions and
           properly performs its quality control reviews.

           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 the draft report to SecurityNational on April 16, 2009 and requested
           written comments to the report by May 1, 2009. SecurityNational provided verbal
           comments during the exit conference on April 23, 2009. SecurityNational
           concurred with the report and declined to provide formal written comments.




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                            TABLE OF CONTENTS

Background and Objectives                                                       4

Results of Audit
      Finding 1: SecurityNational Did Not Follow HUD Requirements When          5
                 Underwriting 18 FHA Loans
      Finding 2: SecurityNational Did Not Follow Quality Control Requirements   7


Scope and Methodology                                                           9

Internal Controls                                                               10

Appendixes
   A. Schedule of Funds to Be Put to Better Use                                 11
   B. Narrative Case Summary                                                    12
   C. Schedule of Minor Deficiencies                                            13




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                     BACKGROUND AND OBJECTIVES

SecurityNational Mortgage Company’s (SecurityNational) home office is located in Murray,
Utah. The U.S. Department of Housing and Urban Development’s (HUD) Federal Housing
Administration (FHA) approved SecurityNational as a nonsupervised mortgage company on
September 7, 1993.

SecurityNational is a sponsoring lender for Mortgage Financial Group Corporation and HMS
Mortgage, Inc., which are loan correspondents. Mortgage Financial Group Corporation and
HMS Mortgage, Inc., originate loans and then submit the loans to SecurityNational for
underwriting. SecurityNational underwrote 1,393 FHA-insured loans originated by
SecurityNational, Mortgage Financial Group Corporation, or HMS Mortgage, Inc., with
beginning amortization dates from December 1, 2006, through November 30, 2008. The original
mortgage amount of these loans totaled more than $113 million. Of the 1,393 loans, 111 (7.97
percent) defaulted within the first two years after closing. The original mortgage amount of the
defaulted loans totaled more than $19 million. In comparison, 4.92 percent of the FHA-insured
loans nationwide defaulted within the first two years after closing.

The objectives of the audit were to determine whether SecurityNational properly underwrote
insured loans and whether its quality control plan met HUD requirements.




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                                 RESULTS OF AUDIT

Finding 1: SecurityNational Did Not Follow HUD Requirements When
             Underwriting 18 FHA Loans
SecurityNational did not properly underwrite 18 FHA-insured loans. One of the loans contained
deficiencies that affected the credit quality (insurability) of the loan. This condition occurred
because SecurityNational’s management did not effectively monitor its underwriters’ actions.
As a result, the FHA insurance fund incurred a loss of more than $92,000.


 SecurityNational Did Not
 Properly Underwrite FHA-
 Insured Loans


               SecurityNational did not properly underwrite 18 of 20 sampled FHA-insured loans.
               One loan contained significant underwriting deficiencies because the borrower
               overstated their self-employment income and SecurityNational did not detect the
               borrower’s misrepresentation. Specifically, SecurityNational inappropriately used
               income from a corporation and did not develop a two-year trend of self-employment
               income.

               HUD Handbook 4155.1, REV-5, provides the basic underwriting requirements for
               single-family mortgages. Chapter 2 discusses self-employment income. When
               analyzing self-employment income, the lender must establish the borrower’s earning
               trend over the previous two years and include or exclude the income based on the
               type of business. SecurityNational did not follow these requirements when it
               analyzed the borrower’s self-employment income.

               Of the 20 sampled FHA-insured loans, 17 contained minor underwriting
               deficiencies. These deficiencies did not affect the overall insurability of the loans.
               However, the lender needs to ensure that it follows all facets of HUD requirements
               when underwriting FHA loans. We provided details of these deficiencies to
               SecurityNational during our review. Appendixes C and D summarize the
               deficiencies in each of the 18 loans.

 Underwriters Lacked Effective
 Supervision
               SecurityNational’s management did not effectively monitor the underwriters’
               actions. However, within the last year, SecurityNational’s management has created
               a new department to provide additional oversight and training to its underwriters.




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          The majority of the loans we reviewed closed before SecurityNational’s creation of
          the Credit Policy department.

HUD’s Insurance Fund Was at
Risk
          SecurityNational placed HUD’s insurance fund at risk by not following HUD
          underwriting requirements. The FHA insurance fund incurred a loss of more than
          $92,000 for the one loan with significant deficiencies.

Recommendations

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

          1A. Require SecurityNational to indemnify HUD for the loss on the one loan for
              which HUD has already paid claims and the property has been sold. The loss
              to the FHA insurance fund was $92,693.

          1B. Review loans recently underwritten by SecurityNational to verify that the
              underwriting deficiencies noted during our review are no longer an issue and
              SecurityNational’s Credit Policy department is providing effective monitoring
              of the underwriters’ actions.




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       Finding 2: SecurityNational Did Not Follow Quality Control
                             Requirements
SecurityNational did not review all FHA-insured loans that defaulted within the first six months,
nor did it perform its monthly quality control reviews in a timely manner. This condition
occurred because management reassigned some of its quality control staff for a short period of
time to help in another department during a period of increased loan volume. As a result, the
lender left the FHA insurance fund vulnerable to increased risk and could not ensure the
accuracy, validity and completeness of the loan originations.


 SecurityNational Did Not
 Review Early Payment Defaults
 or Perform Timely Reviews
               SecurityNational did not review all FHA-insured loans that defaulted within the
               first six months, nor did it perform its monthly quality control reviews in a timely
               manner. All of the 20 loans reviewed defaulted within the first six payments, but
               the lender did not review any of these loans as part of its quality control process.

               Additionally, of the 22 quality control reports SecurityNational should have
               completed for loans that were funded during our audit period, it only completed
               17 (78 percent) of the required reports. Of the 17 reports completed, 16 (94
               percent) were generated past the required 90 days from the end of the month in
               which the loan closed. These quality control reports were generated between 91
               and 173 days after the end of the month in which the loan closed.

               HUD Handbook 4060.1, REV-2, chapter 7, section 7, states that lenders must
               ensure that quality control reviews are performed on a regular and timely basis,
               specifically within 90 days of closing. It also requires lenders to review all loans
               going into default within the first six payments. As identified above,
               SecurityNational did not meet these requirements.
 SecurityNational Reassigned
 Staff
               SecurityNational reassigned some of its quality control staff for a short period of
               time to help in another department during a period of increased loan volume.
               This change left the quality control department shorthanded and led to the quality
               control reviews not being performed in a timely manner. The lender skipped
               several months of quality control reviews to focus on reviews of more recent
               loans, but it had been working to perform its quality control reviews in a more
               timely manner.




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The FHA Insurance Fund Was
Vulnerable

          SecurityNational left the FHA insurance fund vulnerable to increased risk. The
          lender could not ensure that it complied with HUD’s and its own underwriting
          requirements consistently and in a timely manner; protected itself and HUD from
          unacceptable risk; and guarded against errors, omissions, and fraud.


Recommendations

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

          2A.     Review SecurityNational’s monthly quality control reports to ensure that
                  they include all FHA-insured loans that defaulted within the first six
                  months and that all monthly quality control reviews are timely.




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                         SCOPE AND METHODOLOGY

SecurityNational underwrote 1,393 FHA-insured loans originated by SecurityNational, Mortgage
Financial Group Corporation, and HMS Mortgage, Inc., with beginning amortization dates from
December 1, 2006, through November 30, 2008. SecurityNational is a sponsoring lender for
Mortgage Financial Group Corporation and HMS Mortgage, Inc. We reviewed 20 of the 111
loans that defaulted within the first two years after closing. We reviewed the 20 loans that had
the least number of payments made before the lender reported the first 90-day default.

To accomplish the audit objectives, we

•   Reviewed HUD regulations and reference materials related to single-family requirements.
•   Reviewed Security National’s underwriting and quality control policies and procedures.
•   Reviewed SecurityNational’s loan case files.
•   Reviewed SecurityNational’s quality control reports and corrective actions taken.
•   Interviewed SecurityNational staff to obtain information regarding its policies and
    procedures.

We used data maintained by HUD in the Single Family Data Warehouse and Neighborhood
Watch systems for background information and in selecting our sample of loans. We did not
rely on the data to reach our conclusions. Therefore, we did not assess the reliability of the data.

We classified $92,693 as funds to be put to better use. This is the amount of loss to HUD for the
one loan for which we recommend that HUD require SecurityNational to indemnify it.

We performed the on-site review work in Murray, Utah, during January 2009. We conducted the
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.




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                              INTERNAL CONTROLS

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

   •   Program operations,
   •   Relevance and reliability of information,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding of assets and resources.

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



 Relevant Internal Controls
              We determined that the following internal controls were relevant to our audit
              objectives:

              •       Management’s controls to ensure that it underwrites FHA-insured loans in
                      accordance with HUD requirements.
              •       Management’s policies and procedures to ensure that it implements a quality
                      control plan and performs related reviews in accordance with HUD
                      requirements.

              We assessed the relevant controls identified above.

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


 Significant Weaknesses


              Based on our review, we believe that the following items are significant weaknesses:

              •       SecurityNational did not have adequate procedures to ensure that it followed
                      HUD requirements in the underwriting of FHA-insured loans (finding 1).
              •       SecurityNational did not follow its quality control plan in monitoring the
                      underwriting of FHA-insured loans (finding 2).



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                                   APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                           Recommendation        Funds to be put
                                  number         to better use 4/
                                          1A            $92,693



1/   Recommendations 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. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified.

     Implementation of our recommendation to require SecurityNational to indemnify HUD
     for the one materially deficient loan will reduce the risk of loss to the FHA insurance
     fund. The amount above reflects the amount of loss HUD incurred for the one loan.




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Appendix B

                            NARRATIVE CASE SUMMARY

HUD case number:              5216383061
Loan amount:                  $221,523
Closing date:                 April 13, 2007
Status at time of review:     First 90-day default reported after no payments
Current status:               Property conveyed to insurer
Loss to HUD:                  $92,693

SecurityNational underwrote and approved the mortgage based on overstated income.
Specifically, the lender inappropriately used income from a corporation and did not use a two-
year average of self-employment income to qualify the borrower. Additionally, we noted the
following deficiencies with the loan:

       •   The liability amounts listed on the mortgage credit analysis worksheet did not agree
           with the documentation in the file,
       •   Incorrect gift and appraisal amounts were listed on the mortgage credit analysis
           worksheet,
       •   The gift was not listed on the HUD-1 settlement statement, and
       •   The wrong gift amount was entered into Neighborhood Watch.

Therefore, HUD insured the loan based on SecurityNational’s inaccurate representation that the
borrower met HUD qualifying guidelines.

Overstated Income
HUD Handbook 4155.1, REV-5, CHG-1, paragraph 2-9C, requires the lender to establish the
borrower’s earnings trend over the previous two years. The lender did not use a two-year
average of self-employment income.

Unsupported Liabilities
HUD Handbook 4155.1, REV-5, chapter 2, section 4, discusses liabilities. The liability amounts
listed on the mortgage credit analysis worksheet did not agree with the documentation in the file.
No explanation for the discrepancies was documented in the loan file.




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Appendix C

                    SCHEDULE OF MINOR DEFICIENCIES




*mortgage credit analysis worksheet

Unsupported Income
HUD Handbook 4155.1, REV-5, chapter 2, section 2, discusses income. SecurityNational did
not document the computation used to determine the effective income, and the OIG auditor could
not replicate the amount used to qualify the borrower.

According to HUD Handbook 4155.1, REV-5, paragraph 2-7A, the lender must develop an
average of bonus or overtime income for the past two years. Periods of less than two years may
be acceptable provided the lender justifies and documents in writing the reason for using the
income for qualifying purposes. SecurityNational did not develop a two-year average of bonus
or overtime income and did not provide written justification in the loan file for using less than a
two-year average.

Unsupported Employment History
According to HUD Handbook 4155.1, REV-5, paragraph 2-6, the lender must verify the
borrower’s employment for the most recent full two years. The borrower also must explain any
gaps in employment spanning one month or more. SecurityNational did not verify a full two
years of employment history or document the reason for gaps in employment.

According to HUD Handbook 4155.1, REV-5, paragraph 3-1E, to verify employment, the lender
must obtain a verification of employment and the borrower’s most recent pay stub. As an
alternative to obtaining a verification of employment, the lender may obtain the borrower’s
original pay stubs covering the most recent 30-day period, along with original Internal Revenue
Service W-2 forms from the previous two years. SecurityNational did not obtain all of the
documentation required to verify current employment.

Unsupported Assets
HUD Handbook 4155.1, REV-5, paragraph 3-1F, states that a verification of deposit and most
recent bank statements are to be provided. As an alternative to obtaining a verification of
deposit, the lender may obtain original bank statement(s) covering the most recent three-month


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period. Provided the bank statement shows the previous month’s balance, this requirement is
met by obtaining the two most recent consecutive statements. SecurityNational did not obtain
the verification of deposit and current bank statement or the alternative documentation.

Unsupported Credit History
HUD Handbook 4155.1, REV-5, paragraphs 2-3A and 3-1J, state that a verification of rent or
payment history of mortgage is required as part of the application and can be used to analyze a
borrower’s credit history. SecurityNational did not obtain a verification of rent or mortgage
payment history.

HUD Handbook 4155.1, REV-5, paragraph 2-3, requires a written explanation from the borrower
for major indications of derogatory credit, including judgments and collections.
SecurityNational did not obtain written explanations for the borrower’s derogatory credit.

Unsupported Liabilities
HUD Handbook 4155.1, REV-5, chapter 2, section 4, discusses liabilities. The liabilities used to
qualify the borrower did not agree with documentation, and there was no explanation for the
discrepancies in SecurityNational’s loan files.

Compensating Factors Not Documented
HUD Handbook 4155.1, REV-5, chapter 2, section 5, states that debt-to-income qualifying ratios
can be exceeded when significant compensating factors are documented. SecurityNational did
not provide compensating factors when the qualifying ratios exceeded the allowable limits.

Unsigned Documents
HUD Handbook 4155.1, REV-5, paragraph 3-1, states that applications and addendums must be
signed by all the borrowers and the lender. The application addendum was not signed by the
loan officer.




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