oversight

Financial Freedom Senior Funding Corporation, Irvine, California, Did Not Fully Follow HUD's Reverse Mortgage Requirements for Loans in the San Antonio, Texas Area

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-07-14.

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

                                                                     Issue Date
                                                                              July 14, 2009
                                                                     Audit Report Number
                                                                                  2009-FW-1012




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


FROM:          Gerald R. Kirkland
               Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: Financial Freedom Senior Funding Corporation, Irvine, California, Did Not
         Fully Follow HUD’s Reverse Mortgage Requirements for Loans in the San
         Antonio, Texas Area


                                        HIGHLIGHTS

    What We Audited and Why

                We audited Financial Freedom Senior Funding Corporation (Financial Freedom)
                as part of our annual audit plan objective of improving the integrity of single-
                family insurance programs. Our objective was to determine whether Financial
                Freedom complied with U. S. Department of Housing and Urban Development
                (HUD) origination requirements for the Home Equity Conversion Mortgage
                program, commonly known as a reverse mortgage.


    What We Found

                Financial Freedom generally followed HUD reverse mortgage requirements for
                the borrower’s age and completion of a counseling program for the 10 loans
                reviewed. However, it did not fully follow other requirements1 for five of the
                loans totaling $753,000. Financial Freedom originated one ineligible loan for a
                home that was not the borrower’s primary residence, one loan for a home that the
                borrower apparently no longer occupied, and three loans that had issues with
1
     HUD Handbook 4235.1, REV-1, Home Equity Conversion Mortgages.
                 repairs. Most of these conditions occurred because Financial Freedom’s
                 underwriters did not follow up on conflicting information or properly interpret
                 HUD’s requirements.

                 We attempted to review an additional 10 loans with maximum claim amounts2
                 totaling more than $1 million, but HUD could not locate the loan case binders. In
                 cooperation, Financial Freedom offered copies of the loan case binders, but was
                 unable to provide the binders within our time limits, resulting in an audit scope
                 limitation. At the exit conference on June 18, 2009 Financial Freedom Officials
                 stated the binders are in their possession and ready for review.

    What We Recommend


                 We recommend the Assistant Secretary for Housing-Federal Housing
                 Commissioner cancel the mortgage insurance on the ineligible loan, require
                 Financial Freedom to contact the borrower and ascertain the occupancy status and
                 if the borrower no longer lives in the property seek repayment of the ineligible
                 loan, require Financial Freedom to ensure that the repairs have been completed
                 for two loans, consider administrative action against an inspector if warranted,
                 and require Financial Freedom to issue guidance to its underwriters on repairs
                 affecting the health and safety of the occupants or the security and the soundness
                 of the property.

                 We further recommend that Financial Freedom provide its files for the 10
                 additional loans to HUD’s Quality Assurance Division for review or indemnify
                 the loans.

    Auditee’s Response


                 We provided Financial Freedom with a draft report on June 5, 2009, and
                 requested its comments by June 26, 2009. We held an exit conference with
                 Financial Freedom on June 18, 2009, where it requested and we granted an
                 extension for its response to July 9, 2009. We received Financial Freedom’s
                 response on that date. Financial Freedom did not agree with our conclusions for
                 two loans. However, it did agree to ensure the repairs are completed on three
                 loans and to provide its underwriters additional training in regards to Mortgagee
                 Letter 05-48. Further, it has the additional loan files available for review.

                 The complete text of the auditee’s response, along with our evaluation of that
                 response, can be found in appendix B of this report.



2
     The maximum claim amount is the lesser of the appraised value or the maximum principal amount for a one-
     family residence under Section 203(b)(2) of the National Housing Act that HUD will insure in the area.


                                                       2
TABLE OF CONTENTS

Background and Objective                                                           4

Results of Audit
       Finding:    Financial Freedom Did Not Fully Follow HUD’s Reverse Mortgage   5
                   Requirements for Loans in the San Antonio, Texas Area

Scope and Methodology                                                              10

Internal Controls                                                                  11

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use               12
   B. Auditee Comments and OIG’s Evaluation                                        13




                                            3
                       BACKGROUND AND OBJECTIVE

Financial Freedom Senior Funding Corporation (Financial Freedom) originates and services
home equity conversion mortgages, commonly called reverse mortgages. Financial Freedom
was a subsidiary of IndyMac Bancorp until Dunn Capital purchased it on March 30, 2009. Its
offices are located at 1 Banting, Irvine, California. In 2009, it had 12 branch offices nationwide
and in Texas, it originated $12.7 million in reverse mortgages.

A reverse mortgage is a nonrecourse loan that enables homeowners that are at least 62 years of
age to convert the equity in their principal residence into monthly streams of income and/or lines
of credit. Another requirement of a reverse mortgage is that the homeowner receives reverse
mortgage counseling before the loan application is processed. Unlike traditional residential
mortgages, which are repaid in periodic payments, a reverse mortgage is repaid in one payment,
after the death of the homeowner or when the homeowner no longer occupies the property as a
principal residence.

Our objective was to determine whether Financial Freedom complied with U. S. Department of
Housing and Urban Development (HUD) origination requirements for the Home Equity
Conversion Mortgage program, commonly known as a reverse mortgage. Specifically, we
wanted to determine whether Financial Freedom ensured that (1) the borrower was at least 62
years of age, (2) the subject property was and continued to be the borrower’s principal residence,
(3) the Federal Housing Administration (FHA) case file contained documentation showing that
the borrower had completed a reverse mortgage counseling program, and (4) the borrower had
completed required repairs if applicable.




                                                 4
                                      RESULTS OF AUDIT

Finding: Financial Freedom Did Not Fully Follow HUD’s Reverse
         Mortgage Requirements for Loans in the San Antonio, Texas
         Area
Financial Freedom generally complied with HUD’s reverse mortgage requirements concerning
the borrower’s age and completion of a counseling program for the 10 loans reviewed.
However, it did not fully follow other requirements. It did not follow up on conflicting file
information; thus, it originated an ineligible $139,500 loan for a home that was not the
borrower’s primary residence. Also, a $234,000 loan was no longer eligible as the borrower no
longer occupied the property. An additional $111,000 loan may have been ineligible as the
repairs had not been completed and may not have met local building code. This condition
occurred because Financial Freedom relied on an improper inspection by an inspector. Further,
Financial Freedom’s underwriters misinterpreted HUD’s Mortgagee Letter 2005-48 and waived
repairs that affected the soundness of the properties for two loans totaling $388,500. We
attempted to review an additional 10 loans with maximum claim amounts totaling more than $1
million, but HUD could not locate the loan case binders, and Financial Freedom was unable to
promptly provide its loan files, resulting in an audit scope limitation.


    Financial Freedom Originated
    an Ineligible Loan


                  Financial Freedom originated a loan with maximum claim amount totaling
                  $139,5003 for a property that was not the borrower’s principal residence. HUD
                  requires that eligible properties for the reverse mortgage program be the
                  borrower’s principal residence.4 Financial Freedom did not resolve file
                  information showing that the address on the borrower’s driver`s license did not
                  match the property address. In addition, the file contained a credit report warning
                  of an address mismatch, which also indicated that the property was not the
                  borrower’s principal residence. We obtained the county property tax records and
                  a ChoicePoint5 report showing that the borrower’s address was not the subject
                  property. If Financial Freedom had researched and resolved the conflicting
                  information in the loan file during the underwriting process, it would have
                  discovered that the property was not eligible. Since the property was not eligible
                  for the program, the mortgage insurance should be cancelled.



3
     FHA case # 495-7573113, Financial Freedom # 3000068249
4
     HUD Handbook 4235.1 REV-1, Home Equity Conversion Mortgages, chapter 4, paragraph 4-4
5
     ChoicePoint, a data aggregation company, combines personal data sourced from multiple public and private
     databases for sale to the government and the private sector.


                                                        5
    The Mortgaged Property Was
    No Longer Occupied

                 At a site visit on January 7, 2009, the borrower no longer appeared to occupy a
                 mortgaged property with maximum claim amount of $234,000.6 When the
                 mortgaged property is no longer the primary residence, HUD’s requirement states
                 that the mortgage becomes due and payable.7 Financial Freedom indicated that it
                 was unaware that the borrower did not occupy the property as the annual
                 verification was mailed in February 2009. Financial Freedom stated it was in the
                 process of determining occupancy.


    A Property’s Repairs Had Not
    Been Completed and May Not
    Have Met Building Code
    Requirements
                 At another site visit on January 7, 2009, the required repairs on a mortgaged
                 property8 had not been completed and may not have met local building code.
                 Financial Freedom is responsible for determining whether a property is eligible
                 for the program. It selects an appraiser to value and inspect the property for major
                 defects and required repairs. The appraiser or an inspector ensures that the
                 required repairs have been completed.9 On the subject property, the appraiser
                 required roof repairs, some painting, sheetrock repairs, and the water heater to be
                 raised due to its location in a storage area. Financial Freedom said that the repairs
                 were inspected and completed on May 7, 2008. Our inspection showed that the
                 roof repairs had not been painted after the repair was completed (see unpainted
                 roof repair and soffit pictures below).




                          Unpainted roof repair                     Unpainted soffit

                 Further, a HUD construction analyst reviewed the property’s water heater
                 photograph at our request. The analyst did not see a pressure relief valve, a
                 drainage tube, a drainage pan, or fire protection on the exposed wood walls,
                 which he indicated might not have met code (see water heater picture next page).


6
     FHA case # 495-7569834, Financial Freedom # 3000066542
7
     HUD Handbook 4235.1 REV-1, Home Equity Conversion Mortgages, chapter 1, paragraph 1-3
8
     FHA case # 495-7580505, Financial Freedom # 3000071652
9
     HUD Handbook 4150.2, Valuation Analysis for Single Family One to Four Unit Dwellings, chapter 3,
     paragraphs 3-0, 3-1, and 3-6


                                                      6
                                                                                            10
                                              Water heater may not meet code requirements

                   According to Financial Freedom, it relied on an inspection report by the inspector;
                   however, it did not provide the inspection report for review. HUD should
                   consider taking administrative action against the inspector that inspected the work
                   and require Financial Freedom to ensure that the incomplete items are repaired
                   adequately.


     Underwriters Waived Required
     Repairs

                   Two of the files reviewed showed that the appraiser required repairs, but
                   Financial Freedom’s underwriter waived the repairs and did not make them a
                   condition of the loan. In one case, a picture from the appraiser showed significant
                   peeling paint on the property’s siding. However, the borrower painted the house
                   after obtaining the loan, although the underwriter did not require repairs, which
                   corrected the condition.11

                   In another case, a site visit to the property revealed that the paint was peeling and
                   the siding and fascia were rotting (below).12




                                        FHA # 495-7615502, Financial Freedom # 3000083946

10
      According to the HUD construction analyst, the picture was poor quality, and the pressure relief valve and
      drainage tube could have been out of sight in the picture.
11
      FHA # 495-7587923, Financial Freedom # 3000075207
12
      FHA # 495-7615502, Financial Freedom # 3000083946


                                                           7
                   Financial Freedom stated that Mortgagee Letter 2005-48 allowed its underwriter
                   to waive the repairs cited above. We disagree. The mortgagee letter provides
                   additional guidance regarding FHA's repair and inspection requirements for
                   existing properties and that it has shifted from HUD’s historical emphasis on the
                   repair of minor property deficiencies to now only requiring repairs for those
                   property conditions that rise above the level of cosmetic defects, minor defects, or
                   normal wear and tear. One of the examples cited in the mortgagee letter that still
                   requires automatic repair for existing properties is defective exterior paint
                   surfaces where the finish is unprotected. Therefore, Financial Freedom’s
                   underwriters misinterpreted the mortgagee letter.

     Missing Loan Files Caused a
     Scope Limitation


                   We attempted to review an additional 10 loans with maximum claim amounts
                   totaling more than $1 million, but HUD could not locate the loan case binders.
                   Financial Freedom offered copies of the loan case binders, but was unable to
                   provide the binders within our time limit, resulting in an audit scope limitation.
                   At the exit conference on June 18, 2009, Financial Freedom Officials stated the
                   files are in their possession and ready for review. HUD should require Financial
                   Freedom to provide its files for the 10 additional loans to HUD’s Quality
                   Assurance Division for review or indemnify the loans. The outstanding balance
                   of the 10 loans as of January 29, 2008, totaled $549,268. Based on a 42 percent
                   loss severity rate,13 $230,693 represents funds that can be put to better use for
                   future loans if Freedom Financial indemnifies the loans.


     Conclusion


                   Financial Freedom generally complied with HUD’s reverse mortgage
                   requirements concerning the borrower’s age and completion of a counseling
                   program for the 10 loans reviewed. However, Financial Freedom originated an
                   ineligible $139,500 loan for a home that was not the borrower’s primary residence
                   and a $234,000 loan for a property that the borrower no longer occupied. In
                   addition it relied on an improper inspection by an appraiser. As a result, a
                   $111,000 loan may have been ineligible because the repairs had not been
                   completed and may not have met local building code. Further, Financial
                   Freedom’s underwriters misinterpreted HUD’s Mortgagee Letter 2005-48 and
                   waived repairs for two loans totaling $388,500 that affected the soundness of the
                   properties. Also, we were unable to review 10 loans because HUD was not able


13
      The loss severity rate reflects that, upon sale of the mortgaged properties, FHA’s average loss experience is
      about 42 percent of the unpaid principal balance based upon statistics provided by HUD.


                                                            8
          to locate the case binders and Financial Freedom was not able to provide its loan
          files in a timely manner.

Recommendations



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

          1A. Cancel the mortgage insurance totaling $139,500 on the ineligible loan.

          1B. Require Financial Freedom to contact the borrower and ascertain the
              occupancy status and if the borrower no longer lives in the property seek
              repayment of the ineligible mortgage totaling $234,000.

          1C. Consider taking administrative action against the inspector for the improper
              inspection.

          1D. Require Financial Freedom to ensure that the repairs are completed and meet
              local building code for one loan totaling $111,000 or cancel the mortgage
              insurance.

          1E. Require Financial Freedom to ensure that the property exterior for the one
              loan totaling $271,500 is repaired in accordance with Mortgage Letter 2005-
              48 or cancel the insurance.

          1F. Require Financial Freedom to issue guidance to its underwriters on Mortgagee
              Letter 2005-48, clarifying that repairs affecting the health and safety of the
              occupants or the security and the soundness of the property cannot be waived.

          1G. Require Financial Freedom to provide its files for the 10 additional loans to
              HUD’s Quality Assurance Division for review or indemnify the loans.

          1H. Indemnify the 10 additional loans selected for review if Financial Freedom is
              unable to provide them for review or have HUD’s Quality Assurance Division
              review the loans for compliance with requirements if the loans are located.
              The outstanding balance of the 10 loans as of January 29, 2008, totaled
              $549,268. Based on a 42 percent loss severity rate for indemnified loans,
              $230,693 represents funds that can be put to better use for future loans.




                                           9
                         SCOPE AND METHODOLOGY

To accomplish our objective, we

       Reviewed reverse mortgage program requirements;
       Interviewed Financial Freedom staff and others connected to the loan files;
       Assessed internal controls;
       Obtained 10 loans for review from HUD archives;
       Attempted to review an additional 10 loans; however, HUD could not locate the loan case
       binders, and Financial Freedom was unable to promptly provide its loan files, resulting in
       an audit scope limitation;
       Made site visits to 10 properties to inspect whether repairs had been completed without the
       assistance of an appraiser and to ensure that the borrower still lived in the property; and
       Examined loan files for documentation supporting program requirements that
           o The borrowers were at least 62 years of age,
           o The borrowers had completed a reverse mortgage counseling program, and
           o The property was the borrower’s principal residence.

We used EZQuant, a DCAA statistical sampling software package, to randomly select a
nonstatitical sample of 20 loans out of a total of 32 reverse mortgage loan files endorsed by
Financial Freedom in the San Antonio, Texas area during 2007. The maximum claim amounts for
the initial 10 loans, the second 10 loans, and all 32 loans were $1,059,000, $1,144,500, and
$3,581,750, respectively. We did not select a statistical sample as we anticipated reviewing the
majority of files. However, we encountered a scope limitation when HUD was unable to provide
additional files for review (see finding 1). We used information in Neighborhood Watch to identify
and select the universe of 32 loans for our review. We determined that the data in Neighborhood
Watch was generally reliable. We did not use any other computer processed data in meeting our
objective, instead we based our conclusions on information in the hard copy files.

Our review was conducted between November 2008 and April 2009. We limited our review to
loans in the San Antonio, Texas area. We performed our audit at our offices in San Antonio,
Texas, and we also performed fieldwork at the sampled properties in the San Antonio, Texas
area. We did not perform our audit at Financial Freedom’s offices. 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 objective.




                                                10
                              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:

                      Program eligibility,
                      Required repairs completed, and
                      Ongoing principal residence status.

              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 item is a significant weakness:

                  Financial Freedom’s underwriters misinterpreted HUD’s Mortgagee Letter
                  2005-48 and waived repairs that affected the soundness of two properties.




                                               11
                                              APPENDIXES

Appendix A

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

              Recommendation                 Ineligible 1/     Unsupported 2/         Funds to be put
                  number                                                              to better use 3/
                                 1A             $139,500
                                 1B              234,000
                                 1D                                   $111,000
                                 1E                                    271,500
                                 1H                                                           $230,693

                             Totals             $373,500              $382,500                $230,693




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

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity when we
     cannot determine eligibility at the time of the audit. Unsupported costs require a decision by HUD program
     officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation
     or clarification of departmental policies and procedures.

3/   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. In this instance, the amount represents the amount that FHA can use for future loans.




                                                          12
Appendix B

         AUDITEE COMMENTS AND OIG’S EVALUATION

Financial Freedom requested the draft report in Microsoft Word format to facilitate its response.
Financial Freedom typed its response into the report in the highlights section and Appendix B,
Auditee Comments and OIG Evaluation. We extracted Financial Freedom’s response word for
word and included it below. We added subtitles in italics for organizational and readability
purposes.

Ref to OIG Evaluation                         Auditee Comments

               Financial Freedom has reviewed the findings and the recommendations.
               Below is a summary of our response. Additional detail is contained in Exhibit
               B along with supporting documentation as applicable.

Comment 1          o Of the 5 loans specifically identified, we disagree with the findings on
                       two of the loans and are in general agreement with the findings on the 3
                       loans related to repairs in that going forward if we are to waive repairs
                       per Mortgagee Letter 05-48, we will obtain additional documentation
                       from appraiser if the severity of the repair is not specifically addressed.
                       See Exhibit B for detailed responses.
                       (Note – all loan amounts in report reflect the Mortgage Amount which
                       is 150% of the Maximum Claim Amount)
                   o We agree with the recommendation to provide further guidance to
                       underwriters regarding repairs that affect the health and safety of the
                       occupants or the security and the soundness of the property.
               As stated above by the Auditor, Financial Freedom has the requested files (11
               loans were on the 2nd request list provided, not 10 loans) and they are ready for
               review. Please notify us when and where to send the files, if necessary.

               Financial Freedom appreciates the opportunity to provide our response and
               request reconsideration of the findings. Please find the detailed responses in
               Exhibit B.

               Loan number: FHA case # 495-7573113, Financial Freedom # 3000068249

               In reviewing this file, Financial Freedom agrees that the underwriter did a poor
               job of documenting the discrepancies in addresses; however, based on the
               documentation contained in the file it is evident that the borrower resided in
               the subject property. We verified occupancy as follows per HUD guidelines:
                    o The initial and final 1009 indicates that the borrower and the niece
                       occupied the subject.
                    o The appraisal identifies that the subject property is owner occupied.



                                                13
Ref to OIG Evaluation                                             Auditee Comments

                  o A phone number search was performed and identified the borrower
                       phone number at the subject property address.
                  o Hazard Insurance indicates that it is for an owner occupied property.
                  o The property has a Homestead exemption in the state of Texas which
                       can be only obtained on a principal residence by the property owner.
              We acknowledge that there are discrepancies; however, in most cases (i.e. the
              Driver’s license, tax bill) the address listed is a P.O. Box which is not
              uncommon. Additionally, it appears that the address indicated on the credit
              report is the borrower’s business address as confirmed by Lexis Nexis.

              Furthermore, Financial Freedom recently had an inspector perform a site visit
              and verified with a neighbor that the borrower occupies the property in
              addition to the face-to-face interview performed by the OIG Auditor with the
              borrower at the subject property where the borrower stated she occupies the
              subject property. Additionally, Financial Freedom has sent out two annual
              certifications for occupancy to the property address in 2007, and 2008,
              according to HUD guidelines, and received both of them back from the
              borrower verifying the property is owner occupied. The last one was dated
              1/7/2009. Financial Freedom believes by the documentation we have received
              and reviewed that this property is owner occupied.

              Financial Freedom agrees that we should have documented more thoroughly
              the loan file to explain the use of a P.O. Box and additional addresses that
              appeared on the credit report. It is not uncommon for seniors to use a P.O.
              Boxes for mail delivery for a variety of reasons.

              However, Financial Freedom did verify the information indicated in the above
              paragraph in the underwriting process and based on that as well as the
              additional subsequent information obtained, we believe that this loan is an
              insurable loan and qualifies for FHA insurance based on the guidelines. Our
              post funding investigation did not uncover anything that would lead us to
              believe that the P. O. Box or other addresses on the credit report would
              conclusively prove that this borrower does not reside at this property as her
              permanent residence according to FHA occupancy guidelines. Disagree
Comment 2     mortgage insurance should be canceled.

              Loan number: FHA case # 495-7569834, Financial Freedom # 3000066542

              Financial Freedom funded this loan on January 13, 2007. According to FHA
              guidelines, Financial Freedom certified verbally by telephoning the borrower
              confirming she resides in the property as her permanent residence as of May 8,
              2008. The second annual Occupancy Certificate was sent out according to
              FHA guidelines on January 15, 2009, and resent again on February 15, 2009.
              The account was suspended for occupancy on March 17, 2009 due to not


                                            14
Ref to OIG Evaluation                                               Auditee Comments

              receiving the signed Occupancy Certification. Our servicing department has
              been investigating to see if the property has been abandoned as FHA requires
              definitive proof before they will allow the loan to be called Due and Payable in
              order to begin the foreclosure proceedings. Additionally, FF pulled a Kroll
              Factual Data Tru Alert report at origination and again on 6/30/09 to verify that
              the borrower’s social security number has not been reported deceased and
              confirmed it has not.

Comment 3     On June 24, 2009, we did receive an acknowledgement from our outside field
              service company that a neighbor has verified that this borrower still resides in
              this property. Disagree that the borrower is deceased. As such, foreclosure
              proceedings cannot take place. If OIG Auditor can provide documentation
              showing that the borrower is deceased, then FF will take the appropriate
              actions.

              Loan number: FHA case # 495-7580505, Financial Freedom # 3000071652

Comment 1     The roof was inspected by an approved home inspection company that was not
              affiliated with the FHA approved appraiser who completed the appraisal report
              on this property. A+ Home Inspection Company reviewed the repairs on the
              roof and certified that they were completed and up to code (a CIR is attached).

              In addition, A+ Home Inspection also inspected the water heater as the
              appraiser indicated that it needed to be raised 18 inches above ground, and,
              this company signed off the water heater repair (CIR attached). Financial
              Freedom will ensure repairs are completed to code and obtain the necessary
              documentation to evidence completion. The appraiser should not be
              sanctioned as he was not the party that did the inspection. An independent
              third party company inspected the home for the completed required repair
              work. Financial Freedom will ensure repairs are completed to code and obtain
              the necessary documentation to evidence completion.

              Loan numbers: FHA # 495-7587923, Financial Freedom # 3000075207and #
              495-7615502, Financial Freedom # 3000083946

Comment 1     In regard to the first loan mentioned, we agree that the underwriter should have
              obtained additional information from the appraiser to determine whether or not
              the finish was unprotected or not prior to waiving the paint repairs according
              to Mortgagee Letter 05-48. As the OIG Auditor states above, the borrower
              painted the house subsequent to loan closing which corrected the condition
              cited by the Auditor.




                                             15
Ref to OIG Evaluation                                             Auditee Comments


Comment 1     In regard to the second loan mentioned, the paint repair indicated by the
              appraiser was for chipped and peeling paint. These repair conditions were
              addressed and waived by the underwriter according to Mortgagee Letter 05-48.
              As stated above, we agree that the underwriter should have obtained additional
              information from the appraiser to determine whether or not the finish was
              unprotected or not prior to waiving the paint repairs according to Mortgagee
              Letter 05-48.

              Financial Freedom will ensure repairs are completed and obtain the necessary
              documentation to evidence completion. Financial Freedom agrees with this
              recommendation and will provide additional training to underwriters on the
              interpretation of Mortgagee Letter 05-48 as well as modify procedures as
              necessary.

              Missing Loan Files Caused a Scope Limitation

              As stated OIG Auditor, Financial Freedom has the requested files (11 loans
              were on the 2nd request list provided, not 10 loans) and they are ready for
              review. Please notify us when and where to send the files, if necessary.
              Financial Freedom is prepared to provide the files upon request.
              Recommendation 1H will be addressed by Financial Freedom at the time of
              the additional file review.




                                            16
                         OIG Evaluation of Auditee Comments

Comment 1   Financial Freedom did agree with the findings on loans related to repairs. We
            acknowledge its response.

Comment 2   Financial Freedom disagreed that borrower did not live at the subject property,
            but agreed it was poorly documented. We affirm our original conclusion as the
            borrower’s driver license address, which is a rural post office box address, is not
            the insured property address and the addresses are 40 miles apart.

Comment 3   Financial Freedom indicated a neighbor has said the borrower still lives at the
            property. We question that conclusion. During two site inspections, we noted
            mail several months old stacked on the front porch, and the house was filled with
            stacked moving boxes. However, as Financial Freedom indicates it is unsure if
            the borrower is deceased, we will change the report and recommendation to
            require Financial Freedom to contact the borrower and ascertain the occupancy
            status and if the borrower no longer lives in the property seek repayment of the
            loan.




                                             17