Department of Housing and Urban Development, Office of Inspector General | Housing and Urban Development | CitiMortgage Did Not Follow HUD Requirements When Underwriting 20 Loans and Performing Its Quality Control Program

CitiMortgage Did Not Follow HUD Requirements When Underwriting 20 Loans and Performing Its Quality Control Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-11-13.

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

Issue Date
November 13, 2008
Audit Report Number
2009-KC-1001

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

//signed//
FROM: Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT: CitiMortgage Did Not Follow HUD Requirements When Underwriting 20 Loans
and Performing Its Quality Control Program

HIGHLIGHTS

What We Audited and Why

We reviewed 60 Federal Housing Administration (FHA) loans underwritten by
CitiMortgage, Incorporated (CitiMortgage), of St. Louis, Missouri. Our audit
objectives were to determine whether CitiMortgage followed U.S. Department of
Housing and Urban Development (HUD) requirements for underwriting loans and
performing its quality control program for single-family production.

We audited CitiMortgage due to its volume of FHA loans and because of its
above-average default-to-claim rate. During the two-year period ending
December 2007, CitiMortgage underwrote more than 5,000 FHA loans. Of the
loans that later defaulted, 7.76 percent became claims.

What We Found
CitiMortgage did not properly underwrite 20 of the 60 defaulted loans reviewed.
These loans had material underwriting deficiencies that affected the insurability of
the loans. In addition, CitiMortgage did not meet HUD’s quality control
requirements.
What We Recommend
We recommend that the Assistant Secretary for Housing – Federal Housing
Commissioner require CitiMortgage to indemnify HUD against future losses for 19
loans1 with unpaid principal balances totaling more than $3 million and reimburse
HUD for two loans for which HUD incurred losses totaling more than $100,000
when it sold the properties.

Further, we recommend that HUD verify that CitiMortgage implements

• Adequate controls that allow managers to identify, mitigate, and prevent
underwriting problems and
• A revised quality control plan that complies with HUD requirements.

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 CitiMortgage on October 20, 2008, and requested
a response by November 4, 2008. CitiMortgage provided written comments on
November 4, 2008. It generally agreed with our conclusions.

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

1
This includes 18 of the loans with material underwriting deficiencies (see finding 1, recommendation 1A) and one
loan improperly submitted for late endorsement (see finding 2, recommendation 2B).

2
TABLE OF CONTENTS

Background and Objectives 4

Results of Audit
Finding 1: CitiMortgage Did Not Properly Underwrite 20 Loans 5
Finding 2: CitiMortgage Did Not Meet HUD’s Quality Control Requirements 8

Scope and Methodology 11

Internal Controls 13

Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 14
B. Auditee Comments and OIG’s Evaluation 15
C. Schedule of Significant Underwriting Deficiencies 21
D. Case Narratives 22
E. Schedule of Recommendations and Loan Status for Loans with Significant 46
Underwriting Deficiencies

3
BACKGROUND AND OBJECTIVES

CitiMortgage, Incorporated (CitiMortgage), is a nonsupervised direct endorsement lender based
in St. Louis, Missouri. CitiMortgage received approval from the Federal Housing
Administration (FHA) in May of 1981 and currently operates branch offices in 10 states.

FHA’s mortgage insurance programs help low- and moderate-income families become
homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance
also encourages lenders to approve mortgages for otherwise creditworthy borrowers and projects
that might not be able to meet conventional underwriting requirements by protecting the lender
against default. The direct endorsement program simplifies the process for obtaining FHA
mortgage insurance by allowing lenders to underwrite and close the mortgage loan without prior
HUD review or approval. Lenders are responsible for complying with all applicable HUD
regulations and are required to evaluate the borrower’s ability and willingness to repay the
mortgage debt.

From January 2006 through December 2007, CitiMortgage approved more than 5,000 FHA
loans, valued at more than $700 million. During this same period, 795 of the loans (14.3
percent) were at least 30 days delinquent. Additionally, CitiMortgage’s rate of defaults to claims
is above the national average with 7.76 percent of its defaulted loans later becoming claims.

Our audit objectives were to determine whether CitiMortgage followed HUD requirements for
underwriting loans and performing its quality control program for single-family production.

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RESULTS OF AUDIT

Finding 1: CitiMortgage Did Not Properly Underwrite 20 Loans
CitiMortgage did not properly underwrite 20 of 60 loans reviewed. This condition occurred
because CitiMortgage did not have adequate controls over FHA underwriting. As a result, the
lender placed the FHA insurance fund at an increased risk of loss on 20 loans with original
mortgage amounts totaling more than $3.2 million.

Underwriting Did Not Meet
HUD Standards

CitiMortgage did not properly underwrite 20 of 60 loans reviewed. The following
table summarizes the material deficiencies identified.

Area of noncompliance # of loans
Credit history/liabilities 10
Assets 8
Income 8
Miscellaneous 9

Appendix C contains a schedule of the material deficiencies identified in each of the
20 loans. Appendix D contains detailed narratives for each of the 20 loans.

Credit History/Liabilities
CitiMortgage did not properly assess the credit history and/or liabilities of borrowers
for 10 loans. In some cases, the lender failed to obtain explanations for derogatory
credit, document payment of outstanding judgments, adequately verify child support
obligations, or follow up on credit report inquiries. In other cases, the lender omitted
debts without proper documentation.

For example, in sample #52, CitiMortgage failed to include the borrower’s Chapter
13 bankruptcy payments as an ongoing liability despite having evidence that the
payments would continue for several years after closing. When including this
liability, the borrower’s total debt ratio grossly exceeded HUD’s limit of 43 percent.

Assets
CitiMortgage did not properly evaluate the assets used to qualify for eight loans. In
several cases, the lender failed to evidence the source of funds used by gift donors or
document proper transfer of gift funds. In other cases, the lender did not adequately
document and support borrower assets needed to close or claimed as reserves when
submitted for automated underwriting.

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For example, in sample #35, the lender submitted $9,861 in reserves from three asset
accounts to the automated underwriting system. However, only one account totaling
$1,910 was properly supported. The documentation provided for one of the other
accounts showed a large unexplained deposit, and the other account showed a
significantly lower balance than claimed.

Income
CitiMortgage did not properly evaluate the income used to compute qualifying ratios
on eight loans. In many cases, the lender overstated or improperly included income
from self-employment or commissions. In other cases, the employment documents
in the file contained inconsistencies or cast doubt on the stability of the borrower’s
income.

For example, in sample #50, while a verification supported the coborrower’s current
employment, she had only been employed for two months before closing. The file
did not contain documentation covering one of her two previous employers or an
explanation for the eight-month period of unemployment listed on her application.

Miscellaneous
CitiMortgage also failed to follow HUD rules in other areas for nine loans. For
example, it did not properly

• Verify prior mortgage payments for refinance transactions,
• Evaluate nonpurchasing spouse transactions,
• Document manual underwriter approval, and
• Verify information submitted to automated underwriting systems.

CitiMortgage Did Not Have
Adequate Controls

CitiMortgage did not have adequate controls over FHA underwriting. While
underwriting management staff frequently evaluated group performance, their
reviews did not necessarily include FHA loans because these loans comprised
such a small portion of the company’s workload. Further, the review process did
not evaluate individual underwriter performance. These factors, combined with a
compensation structure based upon group performance, created an environment in
which underwriters were not held responsible for their FHA loan approvals.

In addition, because CitiMortgage’s quality control review process did not fully
meet HUD requirements (see finding 2), management was not made aware of
underwriting problems that would have indicated a need for additional training
and accountability.

Loans Placed the FHA
Insurance Fund at an Increased 6
Risk of Loss
CitiMortgage placed the FHA insurance fund at an increased risk of loss for 20
loans with original mortgage amounts totaling more than $3.2 million. The
following table summarizes the status of the loans as of September 9, 2008.

Loan status # of loans
Claim 9
Currently in default 10
No longer in default 1

These loans unnecessarily placed the FHA insurance fund at risk for more than
$1.25 million in potential losses and losses already incurred. Additionally, HUD
had paid nearly $33,000 for loss mitigation on eight of the loans.

Recommendations

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

1A. Require CitiMortgage to indemnify HUD for 18 loans for which HUD has
not yet incurred a loss with unpaid principal balances totaling $2,946,632.
The projected loss is $1,149,186 based on the FHA insurance fund average
loss rate of 39 percent for fiscal year 2007.

1B. Require CitiMortgage to reimburse HUD for two loans for which HUD
incurred losses totaling $109,315 when it sold the properties.

1C. Verify that CitiMortgage implements adequate controls that allow managers
to identify, mitigate, and prevent underwriting problems.

Appendix E contains a detailed schedule of our recommendations and lists the
current status of the 20 loans with material underwriting deficiencies.

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Finding 2: CitiMortgage Did Not Meet HUD’s Quality Control
Requirements
CitiMortgage did not meet HUD’s quality control requirements. This condition occurred
because the lender misunderstood HUD’s quality control requirements and did not have adequate
controls over its review process. As a result, CitiMortgage was unable to ensure the accuracy,
validity, and completeness of its loan origination operations.

The Quality Control Process
Did Not Meet HUD Standards

CitiMortgage did not meet HUD’s quality control requirements. Specifically, it did
not

• Perform reviews of all early payment default loans,
• Consistently address all required evaluation elements for loans it reviewed,
• Consistently follow the required reverification process for loans it reviewed,
• Obtain new credit reports when required for loans it reviewed, and
• Check all employees against restricted participation lists.

Early Payment Default Loans Not Reviewed
HUD Handbook 4060.1, REV-2, section 7-6D, requires lenders to review all early
payment default loans, which include loans that become 60 days or more delinquent
within the first six payments. Of the loans approved by CitiMortgage during our
audit period, at least 194 became 60 days or more delinquent within the first six
payments. CitiMortgage reviewed less than 60 percent of these early payment
default loans.

Required Evaluation Elements Not Addressed
HUD Handbook 4060.1, REV-2, section 7-7, requires lenders to address specific
evaluation elements when performing quality reviews of loans. Of the 40 quality
control reviews examined, the majority of the review files did not adequately
document that staff had reviewed all required evaluation elements. In some cases,
review files contained a checklist of required elements, but the checklist was not
completed. In other cases, the file did not contain a checklist, and the review form
used did not address all required evaluation elements.

Appropriate Reverification Process Not Followed
HUD Handbook 4060.1, REV-2, section 7-6E-2, requires lenders to follow a process
for attempting reverification of income and funds needed to close when performing
quality control reviews of loans. This process includes attempting written
reverification of documents, followed by attempts at telephone reverification. Of the
40 quality control reviews examined, 33 of the review files did not document that

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staff followed the proper reverification process. In some cases, review files did not
document an attempt at the required reverifications. In other cases, review files
documented some level of reverification but did not evidence that staff followed the
proper reverification process.

New Credit Reports Not Obtained
HUD Handbook 4060.1, REV-2, section 7-6E-1, requires lenders to obtain new
credit reports for certain loans when performing quality control reviews of loans. Of
the 40 quality control reviews examined, CitiMortgage failed to obtain new credit
reports for three of the loans when required.

Employee List Not Checked
HUD Handbook 4060.1, REV-2, section 7-3L, requires lenders to check employees
involved in FHA transactions against restricted participation lists at least
semiannually. While CitiMortgage performed this step quarterly, its practice was to
only check a sample of new employees against the lists.

CitiMortgage Misunderstood
Requirements

CitiMortgage misunderstood HUD’s quality control requirements and did not
have adequate controls over its review process.

For example, while HUD requires lenders to review all early payment default
loans, CitiMortgage thought it was acceptable to skip certain loans, such as
streamlined refinances and loans it identified as having an acceptable reason for
default.

In other cases, while CitiMortgage understood HUD’s rules, it did not have
adequate controls in place to ensure that employees followed the requirements.
For example, while CitiMortgage’s written policy demonstrated an understanding
of HUD’s requirement to perform reverifications, its system allowed regular
quality control reviews to be closed out before completed reverifications were
received.

CitiMortgage Was Unable to
Ensure Proper Loan
Originations

Without a properly implemented quality control program, CitiMortgage was
unable to ensure the accuracy, validity, and completeness of its loan origination
operations.

9
In addition, the lender might not identify potential deficiencies and make needed
corrections in a timely manner, resulting in an increased risk to the FHA
insurance fund. For example, CitiMortgage’s quality control review failed to
identify an improper late endorsement loan (sample #23), which was ineligible for
endorsement. Additionally, there were significant underwriting deficiencies in 17
of the 40 loans with quality control reviews and in three additional early payment
default loans which CitiMortgage should have reviewed (see appendix C).

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

2A. Verify that CitiMortgage implements a revised quality control plan that
complies with HUD requirements.

2B. Require CitiMortgage to indemnify HUD for the loan improperly submitted
for late endorsement (sample #23, case number 105-2718946). The
projected loss for this loan is $64,343 based on the FHA insurance fund
average loss rate of 39 percent for fiscal year 2007 and the $164,981 unpaid
principal balance.

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SCOPE AND METHODOLOGY

To accomplish our objectives, we

• Reviewed HUD’s and CitiMortgage’s policies and procedures,
• Interviewed HUD and CitiMortgage staff,
• Reviewed HUD and CitiMortgage loan files,
• Reviewed quality control reports and related review files,
• Reviewed payment histories, and
• Obtained reverifications as appropriate.

From January 2006 through December 2007, CitiMortgage approved more than 5,000 FHA
loans, valued at more than $700 million. To select our underwriting review sample of 60 loans,
we first selected all 31 loans in claim or foreclosure status as of April 9, 2008. We then selected
23 early payment default loans, including
• the five purchases or non-streamline refinance loans with the largest original mortgage
amounts that were at least three months delinquent, had at least a 90 percent loan-to-
value ratio, and had not been reviewed by CitiMortgage's quality control staff;
• the five streamline refinance loans with the largest original mortgage amounts that were
at least three months delinquent, had at least a 90 percent loan-to-value ratio, and had not
been reviewed by CitiMortgage's quality control staff;
• the six loans that were at least three months delinquent, had at least a 90 percent loan-to-
value ratio, and had been post-close reviewed by CitiMortgage's quality control staff; and
• the seven loans with the largest original mortgage amounts that were at least three months
delinquent, had at least a 90 percent loan-to-value ratio, and had been reviewed by
CitiMortgage's quality control staff as early payment defaults.
To aid in our review of CitiMortgage’s quality control process, we also selected six loans that
CitiMortgage had identified significant issues with during its quality control reviews. We
selected these six because of their default records and to obtain a mix of findings which appear to
represent an increased risk to the FHA insurance fund.

When identifying underwriting deficiencies, we assessed whether the deficiencies were material
and should have caused the lender to disapprove the loan. We considered any deficiencies that
affected the approval and insurability of the loans as significant and recommend that HUD take
appropriate action on these loans.

When reviewing the 40 quality control reviews that CitiMortgage performed on our sample
loans, we determined whether CitiMortgage obtained new credit reports when required; properly
reverified employment, income, and funds needed to close; and addressed the required review
elements in its review files.

We relied on computer-processed data contained in HUD’s Single Family Data Warehouse
system and provided by CitiMortgage. During the audit, we assessed the reliability of the data
and found the data to be adequate. We also performed sufficient tests of the data, and based on

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the assessments and testing, we concluded that the data were sufficiently reliable to be used in
meeting our objectives.

We assigned a value to the potential savings to HUD if it implements our recommendations to
require CitiMortgage to indemnify loans with material deficiencies. For those loans for which
HUD had not yet incurred a loss, we applied FHA’s average loss experience for fiscal year 2007
provided by HUD.

We performed audit work from February through July 2008 at CitiMortgage’s office at 1000
Technology Drive, O’Fallon, Missouri.

We conducted our 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 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:

• Controls to ensure that FHA loans met HUD underwriting requirements.
• Controls to ensure that the lender’s quality control program for single-family
production met 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 the following items are significant weaknesses:

• CitiMortgage did not have adequate controls in place to ensure that FHA
loans met HUD underwriting requirements (see finding 1).
• CitiMortgage did not have adequate controls in place to ensure that its
quality control program met HUD requirements (see finding 2).

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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 $1,149,186
1B $109,315
2B $64,343

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/ 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. This includes reductions 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.

Implementation of our recommendations to require CitiMortgage to indemnify HUD for
materially deficient loans will reduce the risk of loss to the FHA insurance fund. The
amount above reflects that, upon sale of the mortgaged property, FHA’s average loss
experience is about 39 percent of the unpaid principal balance based upon statistics
provided by HUD. [$2,946,632 x .39 = $1,149,186]

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Appendix B

AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation Auditee Comments

Comment 1

Comment 2

15
Ref to OIG Evaluation Auditee Comments

Comment 3

16
Ref to OIG Evaluation Auditee Comments

17
Ref to OIG Evaluation Auditee Comments

Comment 4

18
Ref to OIG Evaluation Auditee Comments

19
OIG Evaluation of Auditee Comments

Comment 1 OIG acknowledges that CitiMortgage’s default rate was less than the national
average. However, we selected CitiMortgage because it was the third largest
lender in the region and because its default-to-claim rate was above average.
Additionally, its home office had not been reviewed by HUD in approximately
three years.

While CitiMortgage may partially disagree with our rationale for performing this
audit, it agrees that the number of underwriting errors identified during the audit
was unacceptable (see auditee comments, “Summary – CMI’s Response”).

Comment 2 CitiMortgage generally agreed with the draft report findings. We commend
CitiMortgage for taking steps, including additional training, to enhance its
underwriting and quality control processes.

Comment 3 We have revised our highlights section to acknowledge that the loans reviewed
were defaulted loans. We also revised the scope and methodology section to
better explain our sample selection.

Comment 4 CitiMortgage indicates that it is now performing the full review process on early
payment default loans. This should include not only loans it identifies as having
an acceptable reason for default, but also all streamline refinances which default
within the first six payments.

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Appendix C

SCHEDULE OF SIGNIFICANT UNDERWRITING
DEFICIENCIES

Credit history/liabilities

compensating factors 3
Qualifying ratios and
Income
Original

Assets

Other
Sample Underwriter
Case number mortgage
number type
amount

12 011-5540866 Automated $128,397 x
21 011-5582128 Manual $141,382 x x x x
31 011-5630173 Manual $108,202 x x
82 052-4061296 Automated $127,382 x
10 1 091-4050096 Automated $207,303 x
15 1 093-6021602 Manual $176,001 x
16 1 093-6061472 Automated $203,162 x
19 1 094-5152234 Manual $167,475 x x
29 2 151-8064846 Automated $153,589 x x
31 1 151-8163546 Automated $77,647 x x
33 1 201-3607534 Automated $81,023 x
34 1 249-5066109 Automated $324,800 x x x
35 1 251-3253052 Automated $326,830 x x x
37 1 261-9074387 Manual $119,059 x x x x x
42 1 361-3016830 Automated $183,092 x
44 1 371-3555645 Manual $126,996 x x x
50 1 481-2573751 Automated $152,506 x x
51 1 483-3622021 Manual $150,045 x
52 1 483-3673682 Manual $116,725 x x x
58 1 501-7299082 Automated $163,922 x x
Total $3,235,538 10 8 8 9 6

1 - Quality control reviews for these loans were also reviewed (see finding 2).
2 - These early payment defaults should have been reviewed by CitiMortgage (see finding 2).
3 - These deficiencies are related to income/liability issues cited on manually underwritten loans.

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Appendix D

CASE NARRATIVES

Sample number: 1
Case number: 011-5540866
Closing date: July 19, 2006
Underwriter type: automated
Original mortgage amount: $128,397
Loan status as of September 9, 2008: claim (loss not yet determined)
Unpaid balance: $126,462

Credit History/Liabilities
CitiMortgage failed to document the required payoff of a $10,247 outstanding judgment listed on
the borrower’s credit report. While the file contained a partial release of judgment for $5,209,
the document was not fully legible and did not evidence that the judgment was fully satisfied.

Criteria
Condition #18 of the automated underwriting report required evidence of payoff of any
outstanding judgments shown on the credit report.

Sample number: 2
Case number: 011-5582128
Closing date: November 17, 2006
Underwriter type: manual
Original mortgage amount: $141,382
Loan status as of September 9, 2008: claim
Actual loss on sale of property: $57,708

Credit History/Liabilities
The underwriter failed to support its omission of a mortgage for the borrower’s current residence
and explain the source of funds used to pay off an auto loan during the months preceding closing.

While the underwriting worksheet indicated that the borrower’s current residence was sold, the
file did not contain documentation to evidence the sale and subsequent payoff of the mortgage.
According to the credit report, the mortgage account had a $92,593 balance and $834 monthly
payment. Further, bank statements indicated that the borrower had made recent payments on the

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account. During our audit, CitiMortgage indicated that it requested documentation of a sale from
the settlement company.

While the borrower’s credit report and related update indicated that he paid off an auto loan with
a $12,908 balance during the months preceding closing, the underwriter failed to document the
source of the payoff.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-11A, states that the borrower’s liabilities include
real estate loans and all other continuing obligations.

Assets
The underwriter failed to verify $2,689 of the borrower’s total cash investment in the property.
The borrower’s assets included $324 in a depository account plus proceeds from the sale of his
previous residence. While the file adequately documented the depository assets, it did not
contain documentation to support the sale of the borrower’s previous residence. According to
the settlement statement, the borrower’s total cash investment in the property was $3,013 after
applying gift funds. The borrower was $2,689 short of meeting his cash investment in the
property.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-10E, states that a fully executed settlement
statement must be provided as satisfactory evidence of the cash sales proceeds accruing to the
property. Lenders must document both the actual sale of a currently owned property and the net
proceeds required for settlement.

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed liabilities, the
borrower’s total fixed payment-to-effective income ratio would increase to 73.93 percent. While
the underwriting worksheet noted several potential compensating factors, these factors were
inadequate and unsupported.

Criteria
HUD Mortgagee Letter 2005-16 states that the borrower’s qualifying ratios are currently limited
to 31 percent (payment-to-income ratio) and 43 percent (debt-to-income ratio). If either or both
ratios are exceeded on a manually underwritten loan, the lender must describe the compensating
factors used to justify loan approval.

HUD Handbook 4155.1, REV-5, paragraph 2-13, lists various compensating factors that may be
used in justifying approval of loans with excessive qualifying ratios. Underwriters must state the
compensating factors used to support loan approval in the “remarks” section of the underwriting
worksheet.

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Other
The underwriter failed to consider the income, debts, and credit history of a purchasing spouse.
According to the application and underwriting worksheet, there was only one borrower on this
loan. However, based on the loan file documentation, both the borrower and his spouse were
purchasing borrowers. In addition to signing the mortgage, the borrower’s spouse signed the
purchase agreement and addendum, the earnest money check, and the settlement statement.
Further, she was listed on the title insurance commitment and on the warranty deed from the
sellers. Based on these documents, the underwriter should have considered the income, debts,
and credit history of both the borrower and his spouse when approving this loan.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-2D, states that unless required by state law, a
nonpurchasing spouse is not to appear on the security instrument or otherwise take title to the
property at loan settlement.

Sample number: 3
Case number: 011-5630173
Closing date: May 16, 2007
Underwriter type: manual
Original mortgage amount: $108,202
Loan status as of September 9, 2008: claim (loss not yet determined)
Unpaid balance: $107,102

Income
The underwriter did not adequately evaluate the borrower’s income and employment history.
According to the underwriting worksheet, the borrower earned $2,912 in base monthly income.
An employment verification supported this pay rate. However, borrower paystubs, Internal
Revenue Service (IRS) Forms 1099-MISC, and tax return summaries indicated that the borrower
may have been be self-employed and averaged only $1,674 over 21 months after subtracting
known business expenses. The underwriter failed to resolve these inconsistencies.

Criteria
HUD Handbook 4000.4, REV-4, CHG-1, paragraph 2-4C, states that underwriters are required to
perform underwriting decisions with due diligence in a prudent manner. Underwriters must have
an awareness of warning signs that may indicate irregularities and the ability to detect fraud.

HUD Handbook 4155.1, REV-5, paragraph 2-7, states that the income of each borrower must be
analyzed to determine whether it can reasonably be expected through at least the first three years
of the loan.

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HUD Handbook 4155.1, REV-5, paragraph 2-9B, states that tax returns and business credit
reports (for certain business types), along with a profit-and-loss statement and balance sheet, are
required for self-employed borrowers.

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income, the
borrower’s qualifying ratios would increase to 55.15 and 74.93 percent. While the underwriting
worksheet noted several potential compensating factors, these factors were inadequate.

Sample number: 8
Case number: 052-4061296
Closing date: March 16, 2007
Underwriter type: automated
Original mortgage amount: $127,382
Loan status as of September 9, 2008: claim (loss not yet determined)
Unpaid balance: $125,275

Other
The underwriter failed to consider the income, debts, and credit history of a purchasing spouse.
According to the application and underwriting worksheet, there was only one borrower on this
loan. However, based on the loan file documentation, both the borrower and his spouse were
purchasing borrowers. In addition to signing the mortgage, the borrower’s spouse signed the
purchase agreement, counterproposal, and settlement statement. Further, she was listed on the
title insurance commitment and on the warranty deed from the sellers. Based on these
documents, the underwriter should have considered the income, debts, and credit history of both
the borrower and his spouse when approving this loan.

Criteria

25
HUD Handbook 4155.1, REV-5, paragraph 2-2D, states that unless required by state law, a
nonpurchasing spouse is not to appear on the security instrument or otherwise take title to the
property at loan settlement.

Sample number: 10
Case number: 091-4050096
Closing date: February 24, 2006
Underwriter type: automated
Original mortgage amount: $207,303
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $201,216
Loss mitigation: $8,578

Assets
CitiMortgage did not properly state funds required, funds available, and reserves after closing
when submitting the loan for automated underwriting.

According to the automated underwriting report, the borrower needed $0 to close and would
receive $122 cash back at closing. However, the settlement statement indicated that the
borrower received $0 at closing and needed $2,800 to close.

According to the automated underwriting report, the borrower had $3,000 in retirement assets
available. However, according to the settlement statement, underwriting worksheet, and
application, the borrower’s assets also included a $2,800 gift.

According to the automated underwriting report, the borrower had $3,000 in reserves after
closing. However, because the $2,800 gift was not properly documented, the borrower would
have needed the $3,000 to close and would not have had the reserves submitted to the automated
underwriting system.

Criteria
Chapter 1 of the TOTAL Mortgage Scorecard User Guide indicates that the lender is responsible
for the integrity of the data used to obtain the risk assessment and for resubmitting the loan when
material changes are discovered or otherwise occur during loan processing.

Sample number: 15
Case number: 093-6021602

26
Closing date: May 24, 2006
Underwriter type: manual
Original mortgage amount: $176,001
Loan status as of September 9, 2008: claim (loss not yet determined)
Unpaid balance: $172,291

Credit History/Liabilities
The underwriter did not adequately assess the borrower’s credit history and evaluate the
transaction. Because the borrower was discharged from a Chapter 7 bankruptcy in 2003, he was
required to have reestablished good credit (or have chosen not to incur new credit obligations)
and to have demonstrated a documented ability to responsibly manage his financial affairs.
Additionally, because the purpose of this loan was to consolidate more than $37,000 in debt with
the borrower’s current mortgage, the underwriter was required to carefully evaluate the
transaction as it represented considerable risk.

While the borrower had reestablished good credit, he had not demonstrated an ability to
responsibly manage his financial affairs. During the 40 months after the bankruptcy was
discharged, the borrower built up approximately $31,000 in unsecured debt. Further, while he
had recently taken out more than $40,000 in equity from his home, he had only $1,818 in
available assets. Combined with the previous bankruptcy, the borrower had demonstrated an
inability to live within his means, instead continuously building up unsecured debt to the point
that he requested a second significant cash-out refinance in just over a year.

Further, the borrower’s qualifying ratios were 44.95 and 50.25 percent, which significantly
exceed HUD’s guidelines. The high mortgage payment-to-income ratio of 44.95 percent was
especially troubling, considering the borrower’s documented history of building up unsecured
debt. While the underwriting worksheet noted several potential compensating factors, these
factors were inadequate and unsupported.

In summary, the underwriter did not adequately assess the borrower’s ability to manage financial
affairs and evaluate the transaction. Based on the analysis documented above, the underwriter
should not have approved this debt-consolidation cash-out refinance.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 1-11B, states that “cash-out” refinances for debt
consolidation represent considerable risk, especially if the borrowers have not had an attendant
increase in income. Such transactions must be carefully evaluated.

HUD Handbook 4155.1, REV-5, paragraph 2-3E, states that a Chapter 7 bankruptcy does not
disqualify a borrower if at least two years have elapsed since the date of discharge. Additionally,
the borrower must have reestablished good credit or chosen not to incur new credit obligations.
The borrower must have demonstrated a documented ability to manage his or her financial
affairs.

27
HUD Mortgagee Letter 2005-16 states that the borrower’s qualifying ratios are currently limited
to 31 percent (payment-to-income ratio) and 43 percent (debt-to-income ratio). If either or both
ratios are exceeded on a manually underwritten loan, the lender must describe the compensating
factors used to justify loan approval.

Sample number: 16
Case number: 093-6061472
Closing date: October 20, 2006
Underwriter type: automated
Original mortgage amount: $203,162
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $198,681
Loss mitigation: $7,144

Income
CitiMortgage did not properly evaluate the eligibility of the $5,892 monthly commission income
submitted to the automated underwriting system. Specifically, the income did not meet HUD
requirements for projected or hypothetical income or commission income. The application and
employment documents indicated that the borrower had been with the employer for less than one
month as of closing. While a note on the verification of employment indicated that the borrower
was expected to earn $75,000 per year, the verification figures and paystub did not support this
income amount. CitiMortgage failed to resolve these inconsistencies and ensure that the income
met applicable requirements.

A reverification performed by CitiMortgage quality control staff found that an unauthorized
manager had improperly estimated the $75,000 income on the original verification. The
reverification also stated that the borrower’s employment ended 10 days after closing.

Criteria
Condition #26 of the automated underwriting report required the lender to verify the borrower’s
commission income.

Chapter 2 of the TOTAL Mortgage Scorecard User Guide indicates that the lender is responsible
for documenting that income meets the stability of income requirements and is otherwise
acceptable according to chapter 2 of HUD Handbook 4155.1, REV-5.

28
HUD Handbook 4155.1, REV-5, paragraph 2-7D, states that commissions earned for less than
one year are not considered effective income.

HUD Handbook 4155.1, REV-5, paragraph 2-7R, states that projected or hypothetical income is
not acceptable for qualifying purposes. However, exceptions are permitted for income from
cost-of-living adjustments, performance raises, bonuses, etc., which are both verified by the
employer in writing and scheduled to begin within 60 days of loan closing.

Sample number: 19
Case number: 094-5152234
Closing date: January 18, 2006
Underwriter type: manual
Original mortgage amount: $167,475
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $162,262
Loss mitigation: $8,386

Credit History/Liabilities
The underwriter did not properly evaluate the borrower’s credit history and liabilities.

First, the borrower’s credit report listed several collection accounts. While HUD does not
require that collection accounts be paid off as a condition of mortgage approval, the borrower
must explain in writing all collections. There was no explanation from the borrower in the file.

Second, the underwriter improperly omitted student loan payments from the borrower’s total
monthly debt. According to the application and credit report, the borrower had $62,248 in
student loans with monthly payment amounts totaling $303. The file included documentation
showing that payments were not scheduled to begin until June 2006 and a letter from the
borrower’s school stating that she was reentering school. However, because the letter was
forwarded by the borrower and did not contain conclusive evidence that the borrower was
eligible for continued deferment of the student loans through at least January 18, 2007, the $303
in monthly student loan payments should have been included in the borrower’s credit analysis.
A reverification indicated that the borrower did not enter into an in-school deferment in June
2006.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-3C, states that the borrower must explain all
collections in writing.

HUD Handbook 4155.1, REV-5, paragraph 2-11C, states that if a student loan is scheduled to
begin within 12 months of closing, the lender must include the anticipated monthly obligation in

29
the underwriting analysis, unless the borrower provides written evidence that the debt will be
deferred to a period outside this timeframe.

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. According to the underwriting worksheet,
the borrower’s qualifying ratios were 45.16 and 48.33 percent. Using the recomputed liabilities,
the borrower’s total fixed payment-to-effective income ratio would increase to 58.66 percent.
While the underwriting worksheet noted several potential compensating factors, these factors
were inadequate and unsupported.

Sample number: 23
Case number: 105-2718946
Closing date: June 16, 2006
Underwriter type: automated
Original mortgage amount: $169,342
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $164,981

Late Endorsement (see finding 2)
CitiMortgage improperly submitted the loan for late endorsement. This loan closed on June 16,
2006. While the file contained a November 3, 2006, late request for endorsement letter
certifying that "no mortgage payment is currently unpaid more than 30 days," a payment history
showed that the borrower did not make the October 2006 payment until 2007. Therefore, the
loan was not eligible for late endorsement. Further, because the borrower has not been current
on the loan since first becoming delinquent with the October 2006 payment, the loan is still not
eligible for endorsement.

Criteria

30
HUD Mortgagee Letter 2005-23 states that when lenders are unable to submit applications for
mortgage insurance within 60 days of closing, they must certify that no payment is more than 30
days overdue.

Sample number: 29
Case number: 151-8064846
Closing date: April 21, 2006
Underwriter type: automated
Original mortgage amount: $153,589
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $149,403
Loss mitigation: $300

Credit History/Liabilities
CitiMortgage did not resolve a potential obligation revealed during the loan process. According
to a letter of explanation present in the auditee file, the borrowers were in consumer credit
counseling. The file did not contain verification of the obligation. Additionally, the file did not
document that one year of the payout period had elapsed, that the borrowers had a satisfactory
payment history, and that the borrowers had received written permission from the counseling
agency to enter into the mortgage transaction.

Criteria
Condition #23 of the automated underwriting report indicated that when a debt or obligation was
revealed during the loan process that was not listed on the loan application and/or credit report
that was not considered by the automated underwriting system, the lender was required to verify
the actual monthly payment amount and resubmit the loan if the liability was greater than $100
per month.

Chapter 2 of the TOTAL Mortgage Scorecard User Guide indicates that in the event that
derogatory credit items are revealed during processing that are not reflected on the credit report
and, thus, were not considered by the automated underwriting system, the lender must
downgrade the loan to a refer decision and manually underwrite the loan.

HUD Handbook 4155.1, REV-5, paragraph 2-3F, states that participation in a consumer credit
counseling plan does not disqualify a borrower provided the lender documents that one year of
the payout period has elapsed under the payment plan and the borrower’s payment performance
has been satisfactory. In addition, the borrower must receive written permission from the
counseling agency to enter into the mortgage transaction

Other

31
CitiMortgage did not resolve significant discrepancies between the automated underwriting
report and the underwriting worksheet. For example, the documents listed different interest rates
(6 percent versus 6.5 percent), expenses ($732 versus $1,626), total expense ratios (28.46 percent
versus 42.97 percent), and approval dates (April 18, 2006, versus April 11, 2006). Further,
because the last page of the automated underwriting report was missing, we were unable to
determine the funds required and reserves used in the underwriting analysis. The file did not
contain an explanation for these inconsistencies.

Sample number: 31
Case number: 151-8163546
Closing date: September 1, 2006
Underwriter type: automated
Original mortgage amount: $77,647
Loan status as of September 9, 2008: claim (loss not yet determined)
Unpaid balance: $76,011

Assets
CitiMortgage did not properly state funds available and reserves after closing when submitting
the loan for automated underwriting. According to the automated underwriting report, the
borrowers had $1,172 in funds available and reserves after closing. However, according to
verifications of deposit, the borrowers’ account balances totaled only $233. While the borrowers
did not need funds to close this loan, the automated underwriting system considers reserves in its
analysis.

Criteria
Condition #28 of the automated underwriting report required the lender to verify depository
assets.

Chapter 2 of the TOTAL Mortgage Scorecard User Guide indicates that the cash reserves are
considered in the automated underwriting analysis.

Income
CitiMortgage did not properly evaluate the $820 coborrower disability income submitted to the
automated underwriting system. While the file contained a verification letter, the letter
documented only $631 in monthly income, was dated one year before closing, and indicated that

32
the borrower was only expected to be disabled for five months. The file did not contain
additional documentation evidencing that the coborrower was receiving the income at the time of
closing and was expected to continue receiving the income for the next three years. Without this
income, the borrowers' qualifying ratios increase significantly to 51.40 and 61.07 percent.

Criteria
Condition #11 of the automated underwriting report required verification documents to be dated
within 120 days of the closing date.

Condition #21 of the automated underwriting report required the lender to verify the
coborrower’s Social Security/disability income and indicated that if the income would expire
within three years, it could be used as a compensating factor only.

Sample number: 33
Case number: 201-3607534
Closing date: June 30, 2006
Underwriter type: automated
Original mortgage amount: $81,023
Loan status as of September 9, 2008: claim
Actual loss on sale of property: $51,607

Assets
CitiMortgage failed to verify $2,469 of the borrower’s total cash investment in the property.
According to the settlement statement, the borrower’s total cash investment was $2,469, which
was to be paid by a gift from a nonprofit received at closing. However, a wire confirmation
indicated that the funds were not received by the settlement agent until July 5, 2006,
approximately one week after closing. Without these funds, the loan should not have closed.

Criteria
Condition #31 of the automated underwriting report required verification of the transfer of gift
funds available for closing.

Sample number: 34
Case number: 249-5066109
Closing date: March 23, 2007
Underwriter type: automated
Original mortgage amount: $324,800

33
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $319,586

Credit History/Liabilities
CitiMortgage failed to support its omission of nine liabilities from the automated underwriting
analysis, including an $18,776 collection for a previous mortgage debt.

Criteria
Condition #13 of the automated underwriting report required that accounts omitted from the
underwriting analysis during liability reconciliation be supported by documentation.

Income
CitiMortgage overstated the base income submitted to the automated underwriting system. The
automated underwriting analysis was performed using $4,087 in monthly base employment
income for the borrower. However, paystubs indicated that the borrower was using a large
amount of leave without pay and earned only $2,334 over four weeks.

A reverification indicated that the borrower’s employment ended within three months of closing
and confirmed that during the weeks leading up to and after closing, the borrower earned only a
fraction of the income used to qualify.

Criteria
Condition #21 of the automated underwriting report required the lender to verify the borrower’s
employment income.

Other
CitiMortgage failed to properly evaluate the borrowers’ eligibility for a cash-out refinance. The
lender was required to document that the borrowers had made the March 2006-February 2007
payments within the month due. While the credit report did not list late payments, the previous
mortgage accounts were last active in November 2006, and the file did not contain additional
documentation to evidence payments for the full 12-month period as required. Further, based on
the current balance shown on the credit report ($315,676) and the payoff amount listed on the
settlement statement ($317,444), it appeared that the borrowers were not current for the month
due and would not have been eligible for a 95 percent cash-out refinance.

Criteria
Condition #11 of the automated underwriting report required the lender to verify that the
borrowers had not been more than 30 days late on their previous mortgage for the past 12
months.

34
Sample number: 35
Case number: 251-3253052
Closing date: February 13, 2007
Underwriter type: automated
Original mortgage amount: $326,830
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $321,259

Assets
CitiMortgage overstated cash reserves when submitting the loan for automated underwriting.
The automated underwriting analysis was performed using $9,861 in cash reserves, which
included $3,401 checking, $4,550 money market, and $1,910 retirement account balances.
While the retirement account was adequately documented, the documentation provided for the
checking account showed a large unexplained deposit, and the money market documentation
showed a significantly lower balance than claimed.

Criteria
Condition #25 of the automated underwriting report required verification of all assets used to
underwrite this case.

Condition #27 of the automated underwriting report required explanation and documentation for
recent large deposits.

Chapter 2 of the TOTAL Mortgage Scorecard User Guide indicates that the cash reserves are
considered in the automated underwriting analysis.

Income
CitiMortgage improperly submitted the borrower’s base income to the automated underwriting
system. The automated underwriting analysis was performed using $3,768 in monthly base
employment income for the borrower. While the file submitted to HUD contained a verbal
verification and various paystubs and IRS Forms W-2 supporting the base income, the auditee
file contained a faxed employer verification indicating that the borrower’s employment had
ended. Because the fax was received on January 30, 2007, the income information should have
been removed when the loan was submitted for automated underwriting on January 31, 2007. A
reverification confirmed that the borrower’s employment ended on January 12, 2007.

Criteria
Condition #19 of the automated underwriting report required the lender to verify the borrower’s
employment income.

Other

35
CitiMortgage failed to properly evaluate the borrowers’ eligibility for a cash-out refinance. The
lender was required to document that the borrowers had made the February 2006-January 2007
payments within the month due for both their first and second mortgages. While the credit report
did not list late payments, the previous mortgage accounts were last active in October 2006. The
file did not contain payment histories to document the remainder of the 12-month period.
However, payoff statements indicated that the January 2007 payment for the first mortgage and
December 2006 payment for the second mortgage had not yet been made. CitiMortgage failed to
document that the borrowers were eligible for a 95 percent cash-out refinance.

Criteria
Condition #11 of the automated underwriting report required the lender to verify that the
borrowers had not been more than 30 days late on their previous mortgage for the past 12
months.

Sample number: 37
Case number: 261-9074387
Closing date: May 5, 2006
Underwriter type: manual
Original mortgage amount: $119,059
Loan status as of September 9, 2008: claim (loss not yet determined)
Unpaid balance: $116,551

Credit History/Liabilities
The underwriter did not adequately evaluate the borrowers’ credit history. The borrowers were
discharged from Chapter 7 bankruptcy in 2003. The file contained a positive rental verification,
and the credit report showed several accounts with a positive payment history. However, the
credit report listed several late payments on an automobile lease and indicated that several
collection accounts had been opened since the bankruptcy was discharged. While the file
contained some explanations, they did not satisfactorily explain all significant negative credit
and all recent inquiries listed on the credit report.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-3B, states that the borrower must explain all
inquiries shown on the credit report in the last 90 days in writing.

HUD Handbook 4155.1, REV-5, paragraph 2-3C, states that the borrower must explain all
collections in writing.

36
The borrower must have demonstrated a documented ability to manage his or her financial
affairs.

Assets
The underwriter failed to verify $6,610 of the borrower’s total cash investment in the property,
including $6,150 in gift funds and $460 in earnest money and prepaid expenses.

According to the settlement statement, the borrowers needed $797 before closing for the earnest
money and hazard insurance. While the file contained bank statements and a copy of the earnest
money check, the check was dated after the statements, and the statements only showed $337 in
available assets.

The settlement statement indicated that the borrowers received a $6,150 gift from a nonprofit at
closing. However, the supporting documents indicated that the donor improperly wired $10,000
to the title company, despite a request to reduce the gift amount.

Without proper verification of the $6,610 in gift funds and funds needed to cover earnest money
and prepaid expenses, the loan should not have closed.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-10, indicates that the borrower’s cash investment
in the property must equal the difference between the amount of the insured mortgage (excluding
any upfront mortgage insurance premium) and the cost to acquire the property (including prepaid
expenses and closing costs). All funds for the borrower’s investment in the property must be
verified and documented.

HUD Handbook 4155.1, REV-5, paragraph 2-10C, states that for gift funds to be provided at
closing, the lender may document that the closing agent received funds from the donor for the
amount of the purported gift.

Income
The underwriter did not establish the stability of the borrower’s employment. While paystubs
and a verification supported the $2,080 current income claimed, various employment documents
and an IRS Form 1099-G showing unemployment income in 2005 cast doubt on the stability of
income earned with the temporary staffing company. The underwriter failed to resolve these
inconsistencies.

A reverification indicated that the borrower’s income ended six months after closing. Further,
the reverification confirmed that shortly after beginning with the temporary staffing company in
December 2004, the borrower had an approximate five-month break in income. The file did not
contain an explanation for this large gap in employment income. Without this income, the
borrowers had only $1,761 total monthly income.

Criteria

37
HUD Handbook 4155.1, REV-5, paragraph 2-6, states that lenders must verify the borrower’s
employment for the most recent two full years. The borrower must explain any gaps in
employment spanning one month or more. To analyze and document the probability of
continued employment, lenders must examine the borrower’s past employment record,
qualifications for the position, and previous training and education and the employer’s
confirmation of continued employment.

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. Using the recomputed income, the
borrower’s qualifying ratios would increase to 56.12 and 94.57 percent. The underwriting
worksheet did not cite potential compensating factors.

Other
CitiMortgage failed to resolve discrepancies regarding which underwriter approved the loan and
the type of approval given. While the direct endorsement approval and underwriting worksheet
listed the same underwriter identification number, they were signed by different employees.
Further, the underwriting worksheet indicated that it was only a “preapproval” and listed several
conditions including verification of assets to close and further clarification of the borrower’s
employment status with a temporary employment company. The file did not contain an
explanation for these discrepancies.

Sample number: 42
Case number: 361-3016830

38
Closing date: April 27, 2006
Underwriter type: automated
Original mortgage amount: $183,092
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $177,504
Loss mitigation: $100

Credit History/Liabilities
CitiMortgage did not properly evaluate the borrowers’ income and expenses on their current
residence. According to the initial application, the borrowers had owned their manufactured
home for nine years, owed $31,242 on the related mortgage, and intended to sell or rent out the
property. Based on a residential lease agreement and borrower explanation letters, it appeared
that the borrowers still owned the manufactured home as of closing and had decided to rent out
the property. CitiMortgage failed to evaluate the actual monthly net income or loss from real
estate and failed to properly submit the information to the automated underwriting system.
Further, the file did not contain the documentation necessary to properly calculate the net income
or loss.

Sample number: 44
Case number: 371-3555645
Closing date: May 3, 2006
Underwriter type: manual
Original mortgage amount: $126,996
Loan status as of September 9, 2008: active (no longer in default)
Unpaid balance: $123,667
Loss mitigation: $5,940

Credit History/Liabilities
The underwriter did not adequately assess the borrowers’ credit history and liabilities.

The underwriter did not properly evaluate the borrowers’ payment history of housing
obligations. While the application indicated that the borrowers had been renting the subject
property for the past 10 years, the file did not contain verification documenting rental payments.
Additionally, bank statements covering the period August 2005 through February 2006 did not

39
show payments which appeared to match the $950 rent amount listed on the application and
underwriting worksheet.

The underwriter failed to document the required payoff of five outstanding judgments listed on
the borrowers’ credit report totaling $6,733. Further, the underwriter did not obtain an
explanation for the major indications of derogatory credit, including previous bankruptcy and
various judgments, collections, and tax liens, listed on the credit report.

The underwriter did not properly evaluate the borrower’s child support liability. The borrower’s
paycheck showed a deduction for child support in the amount of $32.50 on his biweekly
paycheck. This would equal approximately $70.41 monthly in recurring obligations for child
support. The mortgage credit analysis worksheet showed an $8 per month payment of child
support. This amount was $62.41 short of the actual amount of child support. The borrower’s
monthly debt payment should have been increased by $62.41.

The underwriter failed to adequately evaluate coborrower liabilities. Because the credit report
was run on the wrong Social Security number, there could have been additional coborrower
liabilities not considered during the underwriting analysis.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-3, states that major indications of derogatory credit
require a written explanation from the borrower.

HUD Handbook 4155.1, REV-5, paragraph 2-3A, states that the lender must determine the
borrower’s payment history of housing obligations.

HUD Handbook 4155.1, REV-5, paragraph 2-3C, states that court-ordered judgments must be
paid off before the loan is eligible for insurance. Further, the borrower must explain all
judgments in writing.

HUD Handbook 4155.1, REV-5, paragraph 2-4A3, states that the credit report must identify each
borrower’s name and Social Security number.

HUD Handbook 4155.1, REV-5, paragraph 2-11A, states that the borrower’s liabilities include
child support.

Qualifying Ratios and Compensating Factors
According to the underwriting worksheet, the borrowers’ qualifying ratios were 32.74 and 46.89
percent. The underwriting worksheet did not cite potential compensating factors. Further, the
total fixed payment-to-income ratios were understated due to the improperly calculated child
support liability as well as the possibility of additional coborrower liabilities not considered
during the underwriting analysis.

Criteria

40
HUD Mortgagee Letter 2005-16 states that the borrower’s qualifying ratios are currently limited
to 31 percent (payment-to-income ratio) and 43 percent (debt-to-income ratio). If either or both
ratios are exceeded on a manually underwritten loan, the lender must describe the compensating
factors used to justify loan approval.

Other
The underwriter did not properly evaluate the parameters of the purchase. The borrowers were
purchasing the home they had been renting for the past 10 years. The file did not contain
evidence confirming that the borrowers had been renting the property for at least six months
immediately predating the sales contract, and the underwriter did not evaluate whether the loan
was subject to inducement to purchase rules.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 1-8A, states that when a current tenant purchases the
property that he or she has rented for at least six months immediately predating the sales
contract, a lease or other written evidence must be submitted to verify occupancy. Otherwise,
the loan is only eligible for 85 percent financing.

HUD Handbook 4155.1, REV-5, paragraph 2-10N, indicates that when a current tenant
purchases the property that he or she has rented, the cumulative amount of the rental payments
exceeding fair market rent may be considered part of the borrower’s cash investment.
Conversely, if the renter has been living rent free or at a rental amount considerably below fair
market value, this situation must be treated as an inducement to purchase with an appropriate
reduction to the mortgage amount.

Sample number: 50
Case number: 481-2573751
Closing date: July 25, 2006
Underwriter type: automated
Original mortgage amount: $152,506
Loan status as of September 9, 2008: claim (loss not yet determined)
Unpaid balance: $150,306

Assets

41
CitiMortgage failed to support the funds available and reserves submitted to the automated
underwriting system and failed to evidence that the borrowers met the statutory investment
requirement for their loan.

According to the automated underwriting report, the borrower had $9,696 in funds available and
$4,258 in reserves after closing. However, the file did not contain documentation to support a
$5,600 retirement account included in the funds available and reserves.

According to the automated underwriting report, the statutory investment requirement for this
loan was $4,647. This amount was equal to 3 percent of the contract sales price. As documented
on the settlement statement, the borrowers only met $4,163 of the requirement. The borrowers
were $484 short of meeting the statutory investment requirement for their loan.

Criteria
Condition #3 of the automated underwriting report indicated that the minimum statutory
investment requirement was $4,647.

Condition #34 of the automated underwriting report required the lender to verify retirement
funds to support sufficient funds to close and reserves.

Income
CitiMortgage did not establish the stability of the coborrower’s employment. While the file
contained a verification of employment for the coborrower’s current income, she had only been
employed for two months before closing. According to the application and current verification,
the coborrower had two previous employers during the two-year period before closing and was
unemployed for eight months immediately before her current employment. The file did not
contain documentation to support one of the previous periods of employment and did not contain
an explanation for the period of unemployment. Without the required documentation and
explanation, 14 months of the previous two years were unaccounted for, bringing the stability of
the coborrower’s employment into question.

Criteria
Condition #27 of the automated underwriting report required lenders to obtain an explanation of
employment gaps greater than six months that had occurred in the last two years.

Condition #29 of the automated underwriting report required lenders to verify the coborrower’s
employment history for the previous two years.

Sample number: 51
Case number: 483-3622021
Closing date: February 3, 2006

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Underwriter type: manual
Original mortgage amount: $150,045
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $145,538
Loss mitigation: $1,500

Assets
The underwriter failed to verify $4,000 of the borrower’s total cash investment in the property.
According to the settlement statement, the borrower’s total cash investment was $6,990,
including a $4,000 gift received at closing. While the file contained a gift letter and cashier’s
check, a donor bank transaction history indicated that she had deposited the gift amount less than
two weeks before closing. The file did not contain an explanation for the large deposit. The
underwriter failed to adequately document that the gift funds ultimately were not provided from
an unacceptable source. Without these funds, the loan should not have closed.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-10C, states that for gift funds that are in the
homebuyer’s bank account, the lender must document the transfer of funds from the donor to the
homebuyer, including documentation showing that the funds are from the donor’s account.

Sample number: 52
Case number: 483-3673682
Closing date: August 25, 2006
Underwriter type: manual
Original mortgage amount: $116,725
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $114,028

Credit History/Liabilities
CitiMortgage did not properly assess the borrower’s credit history and liabilities.

The underwriter failed to include the borrower’s Chapter 13 bankruptcy payments as an ongoing
liability, despite having evidence that the payments would continue for several years after
closing. According to a letter from the Chapter 13 trustee, the borrower had more than $34,000
remaining on her bankruptcy and was required to pay $1,562 monthly. Paystubs confirmed
regular garnishments covering the required monthly payment, and an employment reverification
confirmed that the garnishments continued after closing. The underwriter should have included
the $1,562 monthly bankruptcy garnishment when computing the borrower’s liabilities.

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The underwriter also failed to evidence that the borrower was granted permission by the
bankruptcy court to enter in to a mortgage transaction.

Criteria
HUD Handbook 4155.1, REV-5, paragraph 2-3E, states that a Chapter 13 bankruptcy does not
disqualify a borrower provided the lender documents that one year of the payout period has
elapsed and the borrower’s payment performance has been satisfactory. In addition, the
borrower must receive permission from the court to enter into the mortgage transaction.

HUD Handbook 4155.1, REV-5, paragraph 2-11A, states that the borrower’s liabilities include
all recurring charges extending 10 months or more.

Qualifying Ratios and Compensating Factors
The underwriter understated the borrower’s qualifying ratios and failed to present significant
compensating factors to justify approval of this loan. According to the underwriting worksheet,
the borrower’s qualifying ratios were both 34.69 percent. Using the recomputed liabilities, the
borrower’s total fixed payment-to-effective income ratio would increase to 92.53 percent. The
underwriting worksheet did not cite potential compensating factors.

Other
The underwriter failed to properly evaluate the borrower’s eligibility for a refinance. The lender
was required to document that the borrower was paid through the July 2006 payment. However,
according to the payoff statement, the borrower had only paid through the March 2006 payment.
The underwriter failed to document that the borrower made the April 2006 through July 2006
payments.

Criteria
HUD Mortgagee Letter 2005-43 states that the mortgage being refinanced must be current for the
month due.

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Sample number: 58
Case number: 501-7299082
Closing date: April 5, 2006
Underwriter type: automated
Original mortgage amount: $163,922
Loan status as of September 9, 2008: active (in default)
Unpaid balance: $159,490
Loss mitigation: $750

Income
CitiMortgage did not properly evaluate the eligibility of the $2,627 monthly commission income
submitted to the automated underwriting system. While a 24-month average from the 2003 and
2004 tax returns supported the commission income used, recent paystubs did not document
commission income received in 2005 or 2006. Without documentation that the borrower was
still receiving commission income during the 15 months before closing, CitiMortgage should not
have considered the commission income when submitting the loan for automated underwriting.

Criteria
Condition #22 of the automated underwriting report required the lender to verify the borrower’s
commission income.

HUD Handbook 4155.1, REV-5, paragraph 2-7D, states that commission income must be
averaged over the previous two years. The borrower must provide copies of signed tax returns
for the last two years, along with the most recent pay stub. Unreimbursed business expenses
must be subtracted from gross income.

Other
CitiMortgage failed to properly evaluate the borrower’s eligibility for a cash-out refinance.
Based on the settlement statement date, the lender was required to document that the borrowers
had made the March 2005-February 2006 payments within the month due. While the credit
report and various verification documents indicated that all 12 payments had been made, they did
not evidence whether the February 2006 payment was made within the month due.

Criteria
Condition #13 of the automated underwriting report required the lender to verify that the
borrowers had not been more than 30 days late on their previous mortgage for the past 12
months.

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Appendix E

SCHEDULE OF RECOMMENDATIONS AND LOAN STATUS
FOR LOANS WITH SIGNIFICANT UNDERWRITING
DEFICIENCIES

Actual
Loss
Sample Loan status as of Unpaid loss on
Case number mitigation
number September 9, 2008 balance1 sale of
cost
property2
1 011-5540866 Claim (loss not yet determined) $126,462
2 011-5582128 Claim $57,708
3 011-5630173 Claim (loss not yet determined) $107,102
8 052-4061296 Claim (loss not yet determined) $125,275
10 091-4050096 Active (in default) $201,216 $8,578
15 093-6021602 Claim (loss not yet determined) $172,291
16 093-6061472 Active (in default) $198,681 $7,144
19 094-5152234 Active (in default) $162,262 $8,386
29 151-8064846 Active (in default) $149,403 $300
31 151-8163546 Claim (loss not yet determined) $76,011
33 201-3607534 Claim $51,607
34 249-5066109 Active (in default) $319,586
35 251-3253052 Active (in default) $321,259
37 261-9074387 Claim (loss not yet determined) $116,551
42 361-3016830 Active (in default) $177,504 $100
44 371-3555645 Active (no longer in default) $123,667 $5,940
50 481-2573751 Claim (loss not yet determined) $150,306
51 483-3622021 Active (in default) $145,538 $1,500
52 483-3673682 Active (in default) $114,028
58 501-7299082 Active (in default) $159,490 $750
Total $2,946,632 $109,315 $32,698

1 - The unpaid principal balance is used support recommendation 1A.
2 - The actual loss on sale of property is used support recommendation 1B.