oversight

DHI Mortgage Company, LTD's Scottsdale and Tucson, Arizona, Branches Did Not Always Follow FHA-Insured Loan Underwriting and Quality Control Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-10.

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

                                                                 Issue Date
                                                                       September 10, 2009
                                                                 Audit Report Number
                                                                          2009-LA-1018




TO:        Phillip Murray, Deputy Assistant Secretary for Housing, HU



FROM:      Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: DHI Mortgage Company, LTD‘s Scottsdale and Tucson, Arizona, Branches Did
         Not Always Follow FHA-Insured Loan Underwriting and Quality Control
         Requirements

                                    HIGHLIGHTS

 What We Audited and Why

      We audited Federal Housing Administration (FHA)-insured loan processes at two DHI
      Mortgage Company, LTD (DHI Mortgage) branches in Tucson and Scottsdale, Arizona,
      to determine whether DHI Mortgage originated, approved, and closed FHA-insured
      single-family loans in accordance with U.S. Department of Housing and Urban
      Development (HUD) requirements. We chose DHI Mortgage because the Scottsdale,
      Arizona, branch had a default rate that was double the default rate for FHA-insured loans
      for the state of Arizona. After our audit survey, we expanded our review to include the
      Tucson, Arizona, branch because some loans had both branch numbers on the
      documentation.

 What We Found


      DHI Mortgage did not follow HUD requirements for originating, approving, or closing
      FHA-insured loans. Our review identified the following deficiencies: 205 loans with
      prohibited restrictive addendums to the purchase contracts and 24 loans with significant
      underwriting deficiencies. In addition, we noted that DHI Mortgage‘s quality control
      processes had weaknesses, including failure to determine that 19 loans were not eligible
      for FHA insurance because the loan officer had been debarred from participation in FHA-
      insured loan transactions.
What We Recommend

     We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner
     require DHI Mortgage to (1) indemnify HUD for more than $38 million for loans that did
     not meet FHA insurance requirements, (2) refund or buy down FHA-insured loans for
     over-insurance totaling $15,749, and (3) fully implement a quality control plan in
     compliance with FHA 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 our discussion draft to DHI Mortgage on July 31, 2009, and held an exit
     conference on August 7, 2009. DHI Mortgage generally disagreed with the audit
     findings but acknowledged that the audit report uncovered some weaknesses in DHI
     Mortgage‘s operations.

     The auditee‘s response, along with our evaluation of that response, can be found in
     appendix B of this report. The auditee‘s response included an Addendum 1 that
     responded to Finding 2‘s specific underwriting deficiencies detailed in Appendix D of the
     audit report. We agreed with some of the items in this addendum and made changes to
     our report as appropriate. Exhibits A through F of the response were excluded from the
     report because it was replete with personal identifying information that would cause us to
     redact most of this response. The complete auditee‘s response is available upon request,
     as appropriate, under the Freedom of Information Act.




                                             2
                           TABLE OF CONTENTS

Background and Objective                                                            4

Results of Audit
      Finding 1: DHI Mortgage Did Not Prevent Restrictive Covenants That Violated   5
                 HUD-FHA Requirements

      Finding 2: DHI Mortgage Failed to Underwrite FHA-insured Loans in             9
                 Accordance with HUD-FHA Requirements

      Finding 3: Quality Control Was Inadequate                                     13

Scope and Methodology                                                               16

Internal Controls                                                                   18

Appendixes

   A. Schedules of Funds to Be Put to Better Use                                    20
      A-1 Loan Details for Schedule A to Purchase Contracts
      A-2 Loan Details for Underwriting Deficiencies
      A-3 Loan Details for Loans Involving Debarred Employee
   B. Auditee Comments and OIG‘s Evaluation                                         29
   C. Criteria                                                                      91
   D. Narrative Loan Summaries for Underwriting Deficiencies                        104
   E. Quality Control Review Deficiencies Noted by FHA Loan Number                  127




                                            3
                                 BACKGROUND AND OBJECTIVE

DHI Mortgage Company, LTD (DHI Mortgage) is a nonsupervised lender1 approved June 8,
1981, to originate Federal Housing Administration (FHA) loans. DHI Mortgage currently
originates loans under the lender insurance program.2 The company is a wholly owned
subsidiary of D.R. Horton, Inc., a national residential home builder, and an affiliate of DHI Title
Company (DHI Title), another wholly owned subsidiary of D.R. Horton, Inc. DHI Mortgage
headquarters is at 12357 Riata Trace Parkway, Suite C-150, Austin, Texas, and the company has
branches in 20 states. DHI Mortgage provides mortgage financing services principally to
purchasers of D.R. Horton, Inc. homes.

                                                                 D.R. Horton,
                                                                      Inc.


                                                     DHI Mortgage,
                                                                               DHI Title
                                                          LTD


DHI Mortgage‘s Scottsdale, Arizona, branch (FHA number 0542400332, now closed) was
selected for review because it had a two-year default rate of 7.22 percent—double the Arizona
default rate of 3.48 percent for the same period.3 We expanded our review to include FHA loans
from DHI Mortgage‘s Tucson, Arizona, branch (FHA number 0542400180) because we
observed this branch number on some loan applications that had closed under the Scottsdale
branch. These two DHI Mortgage branches originated 481 FHA-insured loans4 totaling more
than $84 million during our audit period. 5

FHA, created by Congress in 1934, is the largest mortgage insurer in the world. The cost of
FHA mortgage insurance is paid by the homeowners, and the mortgage insurance fund is used to
operate the program. The mortgage insurance fund pays claims to lenders in the event of a
homeowner default. Between October 1, 2008, and February 28, 2009, FHA insured almost
669,000 single-family mortgages totaling more than $119 billion, or 69 percent of the single
family insured mortgage market.6

Our objective was to determine whether DHI Mortgage FHA branch numbers 0542400180 and
0542400332 originated, approved, and closed FHA-insured loans in accordance with U.S.
Department of Housing and Urban Development (HUD)-FHA regulations and requirements.


1
  A non-supervised lender is a HUD/FHA approved lending institution that has as its principal activity the lending or investment of funds in real
estate mortgages and is not a supervised mortgagee, a loan correspondent, a governmental institution, a government sponsored enterprise or a
public or state housing agency, and has not applied for approval for the limited purpose of being an investing mortgagee.
2
  The U.S. Department of Housing and Urban Development‘s (HUD) lender insurance program allows lenders to self-insure FHA loans and
submit only those case binders (paper or electronic) requested for review by HUD. HUD requests approximately 6 percent of insured loans for
review.
3
  This information was obtained from the Neighborhood Watch system, which is HUD‘s Web-based software that displays loan performance data
using FHA-insured single-family loan information.
4
  The 481 FHA-insured loans included 479 forward (purchase) mortgages and two refinanced loans.
5
  The audit period included FHA-insured loans with beginning amortization dates between October 1, 2006, and September 30, 2008.
6
  HUD monthly report to the FHA Commissioner: FHA Portfolio Analysis Data as of February 28, 2009.



                                                                       4
                                                RESULTS OF AUDIT

Finding 1: DHI Mortgage Did Not Prevent Restrictive Covenants That
           Violated HUD-FHA Requirements
DHI Mortgage did not ensure that unallowable restrictive covenants were not filed against FHA-
insured properties. The restrictive covenants precluded the borrowers from rental or resale of
their property for one year and provided for the seller to recoup $40,000 in liquidated damages if
the borrower violated the restrictive covenants. DHI Mortgage allowed the restrictive covenants,
generally referred to as a schedule A to purchase contract, because officials believed it would
discourage investors from purchasing their affiliate‘s (the seller‘s) properties. Because the FHA
insurance program requires free assumability with no restrictions, the FHA insurance portfolio
had secured more than $36 million in unpaid mortgage balances for these 205 loans that did not
meet this FHA insurance requirement.


    Restrictive Covenants Were
    Applied to Almost Half of the
    Loans

             A review of the title files and the applicable county recorder‘s records revealed liens on
             205 FHA-insured properties of the 481 FHA-insured loans in our audit period.7 These
             liens, called schedule A to purchase contracts, restricted the new owner(s) from resale or
             rental of the property during the first year of ownership. The execution of these contracts
             with the purchase agreements violated the regulations governing HUD‘s FHA-insured
             mortgage program, which prohibited restrictive covenants and second liens. As
             illustrated in the excerpt below, the contracts stated that the ―Owner hereby grants to
             Seller a lien against the Property (the ‗Lien‘) to secure Owner‘s obligations hereunder.
             Seller may promptly initiate proceedings to foreclose the Lien if Owner defaults in its
             obligation to pay Seller liquidated damages in the amount of $40,000 on the date that
             Owner or any of its successors or assigns conveys during the Restricted Period any rights,
             title, or interest in the Property without Seller‘s written consent.‖

             Schedule A to purchase contract corresponding to FHA loan number 022-1894370




7
    Our audit period was between October 1, 2006, and September 30, 2008.



                                                                      5
             DHI Mortgage was apparently aware that this practice was not allowed for FHA-insured
             mortgages because there were instances in which the occupancy/investment disclosure
             addendum to the purchase contract contained the following exclusion from the restrictive
             covenant when the buyer purchased the property using FHA.

                Addendum to purchase contract corresponding to FHA loan number 023-2388693




             However, despite the exclusion clause number 7, to the schedule A to purchase, the
             contract was executed and recorded in 205 instances.

             Appendix A-1 contains the FHA loan numbers for which we found a schedule A to
             purchase contract. The schedule A to purchase contracts made the loans ineligible for
             FHA insurance because the contract addenda included prohibited liens against the FHA-
             insured property as well as restrictive covenants that prevented the borrower from rental
             or resale of the FHA-insured property which violated 24 CFR (Code of Federal
             Regulations) 203.32 and 203.41 respectively. The regulations under 24 CFR 203.32 state
             that after the mortgage offered for insurance has been recorded, the mortgaged property
             will be free and clear of all liens other than such mortgage. The regulations under 24
             CFR 203.41(b) state that an FHA-insured ―mortgage shall not be eligible for insurance if
             the mortgaged property is subject to legal restrictions on conveyance‖ (see the criteria
             appendix C).8

             During an interview, one of the FHA loan borrowers, whose loan contained underwriting
             deficiencies discussed under finding 2, informed us that although her financial situation
             changed shortly after purchasing the property, the restrictive covenant with the lien
             deterred her from trying to rent or sell the property within the first year after purchase to
             avoid further financial difficulty. However, after the one-year restriction period expired,
             the borrower decided that the housing market decline had depressed prices to the point
             that made it unlikely she could sell or rent the home for an amount that would cover the
             mortgage. As a result, the home went into foreclosure.

8
    The exception to free assumability is under 24 CFR 203.41(c) ―Exception for eligible governmental or nonprofit programs.‖



                                                                        6
    DHI Mortgage Officials Used
    the Covenants to Discourage
    Investment Purchasers

           DHI Mortgage officials stated that the schedule A to purchase contracts was a common
           practice designed to address a significant problem experienced by D.R. Horton, Inc. –
           Dietz-Crane (D.R. Horton) and other home builders when home prices were rapidly
           escalating. In many cases, a buyer who claimed to be purchasing a home for his or her
           residence was actually an investor seeking to purchase and then quickly sell the home at a
           profit. D.R. Horton did not consider this flipping practice to be consistent with the goal
           of building sustainable communities at a reasonable price. Officials stated that the
           ―Schedule A was not designed to prohibit or provide for liquid damages in connection
           with the bona fide purchase and resale of a home by the owner-occupant. Schedule A
           simply provides that a home may not be resold within one year of the purchase from D.R.
           Horton without D.R. Horton‘s consent.‖

    Conclusion

           The schedule A to purchase contract put additional unnecessary risk on the FHA-insured
           loans by restricting the borrower‘s ability to rent or sell a property during the first year of
           the loan and by giving sole discretion to the former seller to grant a waiver of the
           restrictions. Therefore, the 205 loans with a total unpaid mortgage balance of more than
           $36 million did not meet the requirements for FHA insurance. The projected loss to
           HUD associated with these loans was more than $15 million9 (see appendix A-1).

    Recommendations

           We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner
           require DHI Mortgage to

                1A. Indemnify HUD against losses for the 205 FHA-insured loans with unallowable
                    covenants and prohibited liens in the amount of $ 36,157,343. The projected
                    loss to HUD is $15,256,783 (see appendix A-1).




9
  This amount was calculated based on 42 percent of the unpaid mortgage balances or the actual loss to HUD when known (as of June 17, 2009).
The 42 percent indemnification rate was the average loss on FHA-insured foreclosed properties based on an independent actuarial analysis of the
economic net worth and soundness of FHA‘s Mutual Mortgage Insurance Fund. This actuarial report presents the findings with respect to the
required analysis for fiscal year 2008 using data as of March 31, 2008. The fiscal year 2008 report was issued by Integrated Financial
Engineering, Inc., of Rockville, Maryland.




                                                                       7
1B. Discontinue the use of unallowable covenants and prohibited liens with FHA-
    insured loans and refrain from executing these documents or filing them with
    the county recorder‘s office.

1C. Develop and implement verification procedures to ensure that the unallowable
    restrictive covenant and the prohibited liens are not executed and/or filed with
    the county recorder‘s office for FHA-insured loans.




                                    8
Finding 2: DHI Mortgage Failed to Underwrite FHA-Insured Loans in
           Accordance with HUD-FHA Requirements
DHI Mortgage did not underwrite 24 FHA-insured loans in accordance with HUD-FHA
requirements. This condition occurred because the lender failed to exercise due diligence in
underwriting these loans in areas such as income verification, credit evaluation, asset
verification, and contract reviews. As a result, the FHA insurance portfolio was at increased risk
of loss on more than $4.1 million in unpaid mortgage balances for loans that did not meet FHA
insurance requirements.


     Twenty-four Loan Files
     Contained Significant
     Underwriting Deficiencies


          The loan file reviews of 34 FHA-insured loans identified 24 that had significant
          underwriting deficiencies regarding the evaluation of income, credit, assets, contract, and
          other issues. DHI Mortgage did not underwrite the 24 loans as required by HUD
          Handbook 4155.1, chapter 3 which states that ―[t]he lender is responsible for asking
          sufficient questions to elicit a complete picture of the borrower's financial situation,
          source of funds for the transaction, and the intended use of the property. All information
          must be verified and [documented]. The lender must also verify and document the
          identity of the loan applicant(s).‖ The 24 loans were approved based on many factors
          that included the reported monthly income, debt obligations, or assets. However, DHI
          Mortgage closed many of the loans without obtaining the required documentation to
          support the amounts it used to approve the borrower. For example, the underwriter
          approved FHA-insured loan 022-1890152 based, in part, on the borrower‘s reported
          monthly overtime income of $1,084. However, the file documentation did not support
          the use of this amount for overtime earnings because, among other things, it failed to
          show a two-year trend for the overtime as required by HUD Handbook 4155.1, paragraph
          2-7A (see criteria in appendix C). The types of deficiencies we identified for each
          approval factor are presented below.

                     Income - Deficiencies included improperly calculated income (unqualified
                     income or unsubstantiated income10) or lack of support to validate income
                     contrary to HUD Handbook 4155.1, paragraph 2-7 and Mortgagee Letter 2004-
                     47. Additionally, this category included the failure to verify that employment was
                     likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2, as
                     well as HUD Handbook 4155.1, paragraph 2-7 and Mortgagee Letter 2004-47.




 Unqualified income is income that did not meet HUD guidelines for use in the borrower‘s ratios whereas unsubstantiated income is income that
10

was not supported or verified.



                                                                     9
       Credit - Deficiencies for debts and liabilities included the failure to provide proof
       of satisfied judgments before closing as required by HUD Handbook 4155.1,
       paragraph 2-3C; exclusion of debts from the qualifying ratios without explanation
       as required by HUD Handbook 4155.1, paragraph 2-11; and failure to properly
       support and calculate net rental income/loss as required by HUD Handbook
       4155.1, paragraph 2-7M2.

       Assets - Deficiencies included missing bank statements contrary to HUD
       Handbook 4155.1, paragraph 3-1F; failure to verify or substantiate that earnest
       money was paid by the borrower as required by HUD Handbook 4155.1,
       paragraph 2-10A; and lack of proof that retirement assets were liquid when used
       as available funds for qualifying purposes as required by Mortgagee Letter 2004-
       47.

       Contract - Deficiencies included improper restrictive covenants discussed under
       finding 1, which violated 24 CFR 203.41 and missing addendums to the sales
       contract contrary to HUD Handbook 4155.1, paragraph 3-1H.

       Other - This category includes items found in the loan file reviews that were not
       in any of the above categories. For example, we identified loan files that lacked
       evidence that the realtor had been checked against the lists for limited denial of
       participation or federal excluded parties and contained loans that were originated
       by an employee on the federal excluded parties list contrary to HUD Handbook
       4155.1, paragraph 2-5. Additionally, we identified instances where the lender
       financed loan discounts into the mortgage contrary to HUD Handbook 4000.2,
       paragraph 5-2P (see criteria in appendix C).

The table below lists the 34 FHA loan numbers reviewed and the deficient areas
associated with each loan. The table also identifies the 24 loans for which we concluded
the underwriting was significantly deficient and therefore warrant indemnification.
Appendix D provides underwriting details for each FHA loan number presented in the
table below.




                                        10
                                     Case file review revealed underwriting deficiency for                          Significant
               FHA loan                                                                                            underwriting
                number                   Income             Credit       Assets      Contract         Other         deficiencies
             022-1864520                    X                 X            X            X                                X
             022-1874931                    X                 X                         X                                X
             022-188346311                                                                X              X
             022-188378111                                                                X              X
             022-1890152                     X                 X                          X                               X
             022-1892652                     X                                                           X                X
             023-2356343                     X                                            X              X                X
             023-2375190                     X                              X                                             X
             023-2375473                     X                 X                          X                               X
             023-238386011                   X                                            X
             023-2384380                     X                 X                          X                               X
             023-238869311                                                                X
             023-2389873                     X                 X                                                          X
             023-2391447                     X                 X                                                          X
             023-240909011                                                                X
             023-241224111                                     X                          X
             023-2414288                     X                 X                                                          X
             023-2425869                     X                 X                          X                               X
             023-2426099                     X                 X                          X                               X
             023-2427150                     X                 X            X                                             X
             023-2435939                     X                                            X                               X
             023-243808011                                     X                          X
             023-2438810                                       X            X             X                               X
             023-2442707                     X                                                                            X
             023-244726311                   X                                                           X
             023-2452473                     X                                                                            X
             023-2453167                     X                                                                            X
             023-2458663                     X                 X                          X                               X
             023-246804711                                                                X              X
             023-2482980                     X                 X            X             X              X                X
             023-2487907                     X                                                                            X
             023-2529391                     X                                                                            X
             023-264010711                   X
             023-2674566                     X                                                           X                X
             Totals                          26               16            5            20              8                24




11
  These loans were not counted as having significant underwriting deficiencies because the loan files either had (1) only minor deficiencies and
were not considered for indemnification and/or (2) the deficiencies were addressed under findings 1 and/or 3. Specifically, we did not seek
indemnification for loans with minor income or credit deficiencies and we did not seek indemnification on loans that financed discount points
into the loan amount (instead we are requesting an appropriate reduction of the loan balances).



                                                                       11
     Lack of Due Diligence
     Increased Risk of Loss to the
     FHA Insurance Fund


          The foreword in HUD Handbook 4155.1 states, ―This [underwriting] decision must be
          predicated on sound underwriting principles consistent with the guidelines, rules, and
          regulations described throughout this Handbook and must be supported by sufficient
          documentation.‖ Because DHI Mortgage did not follow HUD-FHA requirements when
          underwriting it inappropriately approved the 24 loans. The lender did not exercise both
          sound judgment and due diligence when it submitted these loans for FHA insurance.
          Further, DHI Mortgage did not identify the deficiencies in its loan origination process
          because its quality control reviews of FHA-insured loans were not performed in
          accordance with HUD requirements (see finding 3). As a result, the FHA insurance fund
          was at increased risk for losses on the 24 loans with significant underwriting deficiencies.

     Conclusion

          DHI Mortgage‘s failure to follow HUD-FHA regulations and requirements placed the
          FHA insurance fund at additional risk for losses. The 24 loans that did not meet the
          requirements for FHA insurance have a total unpaid mortgage balance of more than $4.1
          million, a projected loss to HUD of $942,818,12 and overinsurance totaling $15,749 (see
          appendix A-2).

     Recommendations


          We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner
          require DHI Mortgage to

                2A. Indemnify HUD against losses for the 24 FHA-insured loans with significant
                    underwriting deficiencies in the amount of $4,114,822. The projected loss to
                    HUD is $942,818.

                2B. Refund the $15,749 in overinsurance generated from financing the loan discount
                    into the FHA-insured loan by (1) reimbursing HUD in the amount of the loan
                    discount for any claim paid on the loan; (2) paying down any amount of arrears,
                    penalties, or fees owed on the loan due to delinquency; and then, if applicable,
                    (3) applying the remaining amount of the loan discount against the principal
                    amount owed on the FHA-insured loan.




12
  This amount was calculated based on 42 percent of the unpaid mortgage balances or the actual loss to HUD when known, excluding loans
requested for indemnification under finding 1.



                                                                    12
Finding 3: Quality Control Was Inadequate
DHI Mortgage did not adequately perform quality control reviews of FHA-insured loans and
branch offices we reviewed in accordance with HUD requirements and DHI Mortgage‘s own
quality control plan. Specifically, on-site quality control reviews at the branches did not cover
all of the required items, and quality control reviews of loan files we examined did not conform
to standards. Also, DHI Mortgage did not fully comply with quality control standards pertaining
to conflicts of interest. This condition occurred because DHI Mortgage disregarded HUD‘s
quality control requirements. As a result of the inadequate quality control, a debarred individual
was allowed to participate in loan originations, which disqualified 19 FHA-insured loans valued
more than $3.4 million. Also, quality control file reviews were not completed in a timely
manner, and company officers had authority in both the lending and title functions. These and
other lapses in quality control contributed to increased risk to the FHA insurance fund.



     On-Site Quality Control Branch
     Reviews Were Inadequate

          Our evaluation of DHI Mortgage‘s on-site quality control branch reviews that occurred
          from October 1, 2006, to September 30, 2008, revealed that they were not performed in
          accordance with HUD Handbook 4060.1, paragraph 7-3G (see criteria in appendix C), or
          DHI Mortgage‘s own quality control plan. Although DHI Mortgage performed on-site
          branch reviews, certain required items were not covered. The reviews did not effectively
          establish that offices did not employ or have a contract with individuals who were under
          debarment, suspension, or a limited denial of participation. Under HUD Handbook
          4155.1, paragraph 2-5 these individuals are not eligible to participate in FHA-insured
          mortgage transactions. Reviewers also did not ensure that HUD was notified of a change
          of branch address.

          These branch review deficiencies unnecessarily increased the risk to the FHA insurance
          fund. We found 19 FHA-insured loans that DHI originated using an individual who had
          been debarred13 at the time of the loan originations. Therefore, the 19 loans with a total
          unpaid balance of more than $3.4 million did not meet requirements for FHA insurance.
          In addition, DHI Mortgage officials did not always notify HUD of branch changes in a
          timely manner. HUD relies on compiling and gathering accurate lender data from its on-
          line information system to monitor individuals and entities involved in FHA-insured
          loans.14




13
   The loan officer worked for DHI Mortgage‘s FHA branch number 0542400180. The employee originated the 23 FHA-insured loans while on
the General Service Administration‘s Excluded Parties List System; however, four of the loans have been paid in full.
14
   Neighborhood Watch aids HUD/FHA staff in monitoring lenders and HUD programs, and assists lenders and the public in facilitating self-
policing of the industry. The system is designed to highlight exceptions, so that potential problems are readily identifiable.



                                                                   13
FHA-Insured Quality Control
Reviews Were Inadequate

     We reviewed 10 quality control review files that corresponded to our underwriting
     reviews and determined that all 10 did not meet the requirements of HUD Handbook
     4060.1, paragraph 7-6, and DHI Mortgage‘s own quality control plan. Deficiencies
     included failure to: complete the quality control reviews in a timely manner, obtain an
     appropriate credit report, reverify the earnest money deposit or gift funds, conduct a desk
     or field appraisal, review and document the underwriting decision, and review and
     document the conditional clearance and closing items. The deficient quality control loan
     reviews may have prevented DHI Mortgage from correcting systemic deficiencies that
     could reduce unnecessary future risk to HUD. Appendix E provides the FHA loan
     numbers and the deficiencies we noted in each quality control review.

DHI Allowed Conflicts of
Interest

     Both the president and vice president of compliance for DHI Mortgage also worked in
     official capacities for DHI Title. However, there was no evidence that DHI Mortgage
     reviewed or otherwise provided assurance that a clear and effective separation of the two
     entities existed and that the borrowers knew at all times exactly with which entity they
     were doing business—as required by HUD Handbook 4060.1, paragraph 2-9C. Such
     dual authority raised questions regarding the independence of the lending and closing
     functions.

     Underwriters‘ compensation agreements at DHI Mortgage included compensation based
     on the number of loan decisions made. This is a form of commission contrary to HUD
     Handbook 4060.1, paragraph 2-9A (see criteria in appendix C). Commissions provide an
     incentive for underwriters to focus on quick underwriting decisions rather than
     compliance with FHA insurance requirements.

FHA Quality Control
Requirements Were
Disregarded

     The lapses in quality control occurred because DHI Mortgage disregarded HUD‘s quality
     control review requirements and its own quality control plan. DHI Mortgage officials
     informed us that they thought the quality control on-site branch review requirements had
     been met because the required items were reviewed at the corporate level. However, the
     corporate reviews did not meet HUD requirements and proved ineffective in some cases,
     as evidenced by DHI Mortgage‘s failure to identify a debarred employee and update
     branch information to HUD. DHI officials also stated that the vice president of
     compliance at DHI Mortgage filled two roles because his previous position at DHI Title
     had not been filled. DHI Mortgage‘s response to the audit report proposed improvements
     to address the quality control deficiencies we cited. (See appendix B.)


                                             14
     Conclusion

          DHI Mortgage‘s quality control failures allowed endorsements on 19 loans with a total
          unpaid mortgage balance of more than $3.4 million that did not meet the requirements for
          FHA insurance. The projected loss to HUD associated with these loans is $168,773 (see
          appendix A-3).15 DHI‘s disregard of HUD‘s requirements to check its employees against
          federal lists of ineligible individuals, as well as other quality control deficiencies,
          increased the likelihood of noncompliance and resulted in increased risk to FHA‘s
          insurance fund.


     Recommendations

          We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner
          require DHI Mortgage to

                3A. Indemnify HUD against losses for the 19 FHA-insured loans originated by a
                    debarred employee in the amount of $3,477,875. The projected loss to HUD is
                    $168,773.

                3B. Revise and implement policies and procedures to reflect HUD requirements for
                    updating FHA branch office changes and to ensure that offices do not employ or
                    have a contract with individuals who are under debarment, suspension, or a
                    limited denial of participation.

                3C. Fully implement its quality control plan related to FHA-insured loan reviews
                    and FHA branch office reviews.

                3D. Discontinue or develop and implement procedures regarding officials working
                    for DHI Mortgage and DHI Title to ensure that a clear and effective separation
                    exists between the two entities and that borrowers know at all times exactly with
                    which entity they are doing business.

                3E. Discontinue the compensation to underwriters in the form of commissions, in
                    appearance and in fact.




15
  This amount was based on 42 percent of the unpaid mortgage balances and the actual loss to HUD if known, excluding loans requested for
indemnification under findings 1 and 2.



                                                                    15
                                     SCOPE AND METHODOLOGY

We selected DHI Mortgage because of a default rate16 that was double the Arizona state average.
Our audit period covered loans with beginning amortization dates from October 1, 2006, to
September 30, 2008. During this period DHI Mortgage FHA branch numbers 0542400180 and
0542400332 originated 481 FHA-insured mortgages, with a total unpaid mortgage balance over
$84 million.

Our review included title files corresponding to 468 of the 48117 FHA-insured loans. The total
unpaid mortgage balance for these loans was over $80 million. The title file reviews were
primarily used to determine if a schedule A to purchase contract was associated with the FHA-
insured property.

We also reviewed underwriting documentation in the lender/FHA loan files for 34 FHA-insured
loans selected nonstatistically based on the existence of loan defaults and claims. Initially, we
used HUD‘s online information system for FHA loans to obtain a sample that included all FHA
loans from DHI Mortgage‘s branch number 0542400332 with beginning amortization dates
between October 1, 2006, and September 30, 2008, and then selected cases that defaulted (or
went into claims) within the first two years. This methodology resulted in a sample of 20 FHA
loans. During file reviews we noted that some loan records had the DHI Mortgage branch
number 0542400180, and so we expanded our underwriting loan reviews to include FHA loans
under the 0542400180 branch using the same selection methodology. We then obtained the most
up-to-date information, as of January 8, 2009, for our two-year audit period by directly querying
HUD‘s Single Family Data Warehouse.18 This query identified an additional 14 loans that were
in default (90 days or more delinquent) for a total sample of 34 loans.

To perform our quality control file reviews, we selected all early payment default loans and all
other quality control reviews from the lender‘s quality control log that pertained to our
underwriting review sample. As a result, we reviewed 10 of the quality control reports that DHI
Mortgage performed on the 34 loans in our underwriting review. We also reviewed DHI
Mortgage‘s on-site branch office quality control reviews covering our audit period.

We conducted our fieldwork at DHI Mortgage‘s Tucson and Scottsdale, Arizona, branch offices
between December 2008 and March 2009.



16
   Percentage of loan originations which had first defaults (i.e. became 90 days delinquent) reported by the servicing lender during the first two
years of origination.
17
   Although we attempted to review all 481 loans originated during our audit period, we did not receive 13 title files and, therefore, did not
conduct a review of those loans. This limitation did not affect the results of our audit, because we did not project our review of the files to the
entire population. Instead, we only counted deficiencies associated with the specific FHA loan numbers listed for each finding(s) as a whole;
rather, we identified items by the specific FHA loan number associated with the finding(s).
18
   The Single Family Housing Enterprise Data Warehouse (Single Family Data Warehouse) is a large and extensive collection of database tables
organized and dedicated to support the analysis, verification, and publication of single family housing data. The warehouse consists of data marts
developed to support specific business units/communities within the HUD family. Each data mart comprises one or more database tables
structured to provide HUD users easy and efficient access to single family housing case-level data on properties and associated loans, insurance,
claims, defaults, and demographics. The data is sourced from HUD systems, and contains more detailed information than the Neighborhood
Watch system.



                                                                       16
To accomplish our objective, we

          Reviewed HUD regulations and reference materials related to single-family
          requirements;
          Reviewed DHI Mortgage‘s processing, underwriting, and closing policies and
          procedures;
          Reviewed DHI Mortgage‘s loan files;
          Reviewed 468 title files corresponding to the 481 loans originated in our audit period.
          These were generally limited to the (1) settlement statement (Form HUD-1); (2) file
          balance sheet; and (3) schedule A to purchase contract, declaration of covenant restricting
          rental or resale of property, or equivalent;
          Reviewed DHI Mortgage‘s quality control plan and quality control review reports;
          Interviewed appropriate DHI Mortgage staff;
          Interviewed the branch manager of DHI Title in Scottsdale, Arizona; and
          Interviewed borrowers, when available, associated with the 34 FHA loans in our
          underwriting review.

We used the source documents in the loan case file to determine borrower income, employment
history, and debt. For the loans underwritten by an automated underwriting system, we reviewed
the FHA loan file to determine whether it contained the documentation required to support the
integrity and accuracy of the data used by the automated underwriting system to recommend
approval of the loan. For the manually underwritten loans, we reviewed the loan documents to
determine whether they supported the underwriting decision and complied with HUD Handbook
4155.1, Mortgage Credit Analysis.19

We used data maintained by HUD in its information systems for FHA loans to obtain
background information and to select our sample of loans for testing. We did not rely on the
data to reach our conclusions; therefore, we did not assess the reliability of the data.

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
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




19
  A manually underwritten loan must comply with HUD Handbook 4155.1. HUD‘s Mortgagee Letter 2004-47 explains that mortgage loans
scored as accepted or approved through FHA‘s TOTAL Mortgage Scorecard are granted a number of credit policy revisions and documentation
relief from the instructions in Handbook HUD 4155.1. However, the lenders must still comply with outstanding eligibility requirements and
ensure the integrity and accuracy of the data used to render a decision.



                                                                   17
                              INTERNAL CONTROLS

Internal control is an integral component of an organization‘s management that provides
reasonable assurance that the following objectives 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 objective:

              Policies and procedures intended to ensure that FHA-insured loans are properly
              originated, underwritten (approved), and closed.

              Policies and procedures intended to ensure that the quality control program is an
              effective tool for reducing underwriting errors.

              Policies and procedures intended to ensure that the quality control program is an
              effective tool for reducing the lender‘s branch office noncompliance.

       We assessed the relevant controls identified above.

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




                                                18
Significant Weaknesses

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

            DHI Mortgage did not have effective controls in place to ensure that FHA-insured
            loans were underwritten in accordance with HUD requirements, exposing the FHA
            insurance fund to unnecessary risk (see findings 1 and 2).

            DHI Mortgage did not have effective controls in place to ensure that FHA-insured
            loans closed in accordance with HUD requirements, exposing the FHA insurance
            fund to unnecessary risk (see finding 1).

            DHI Mortgage did not ensure that its plan for quality control loan reviews was fully
            implemented and that the reviews were conducted in a timely manner (see finding
            3).

            DHI Mortgage did not fully implement its quality control plan for on-site branch
            office reviews to ensure that each branch complied with eligibility and conflict-of-
            interest requirements for its employees (see finding 3).




                                              19
                                    APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                            Recommendation         Funds to be put
                                number             to better use 1/
                                  1A                  $15,256,783
                                  2A                      942,818
                                  2B                       15,749
                                  3A                      168,773
                                 Totals               $16,384,123


1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified.

     See the appendixes in this section for further explanation of costs.




                                              20
Appendix A-1: Loan Details for Schedule A to Purchase Contracts

The table below contains the actual, if known, and projected losses to HUD corresponding to the
loans recommended for indemnification under finding 1 resulting from FHA-insured loans with
schedule A to the purchase contracts.

                      FHA loans with schedule A to purchase contract
            FHA loan        Unpaid mortgage        Actual loss    Indemnification
             number             balance             to HUD         amount (42%)
          022-1858519             $ 148,315                             $ 62,292
          022-1858889                180,288                                75,721
          022-1861293                173,033                                72,674
          022-1864520                225,103                                94,543
          022-1865027                156,664                                65,799
          022-1867629                182,726                                76,745
          022-1868098                183,874                                77,227
          022-1869977                156,459                                65,713
          022-1873959                215,573                                90,541
          022-1874931                159,147                                66,842
          022-1876036                178,104                                74,804
          022-1876348                216,503                                90,931
          022-1879656                224,602                                94,333
          022-1882077                209,753                                88,096
          022-1882083                206,710                                86,818
          022-1882314                156,588                                65,767
          022-1882626                213,034                                89,474
          022-1882973                188,988                                79,375
          022-1883174                177,122                                74,391
          022-1883378                146,337                                61,462
          022-1883428                210,202                                88,285
          022-1883463                223,321                                93,795
          022-1883781                195,392                                82,065
          022-1884236                153,653                                64,534
          022-1884321                170,898                                71,777
          022-1884475                153,495                                64,468
          022-1885674                154,663                                64,958
          022-1886056                153,587                                64,506
          022-1886062                149,510                                62,794
          022-1886374                154,787                                65,010
          022-1886476                172,354                                72,389


                                              21
         FHA loans with schedule A to purchase contract
  FHA loan    Unpaid mortgage      Actual loss   Indemnification
   number         balance           to HUD        amount (42%)
022-1886555            153,978                             64,671
022-1886578            204,206                             85,767
022-1887101            144,200                             60,564
022-1887328            188,977                             79,370
022-1887538            203,103                             85,303
022-1887646            174,418                             73,256
022-1888188            174,277                             73,196
022-1888743            184,363                             77,433
022-1888874            157,541                             66,167
022-1889291            168,363                             70,712
022-1890152            219,081                             92,014
022-1890348            158,256                             66,468
022-1890589            184,345                             77,425
022-1890826            183,574                             77,101
022-1893107            159,150                             66,843
022-1894370            144,342                             60,624
022-1894522            169,015                             70,986
022-1894545            147,959                             62,143
022-1894618            149,699                             62,874
022-1894703            144,672                             60,762
022-1895166            158,675                             66,644
022-1895898            179,079                             75,213
022-1896024            227,919                             95,726
022-1896053            186,481                             78,322
022-1896103            164,141                             68,939
022-1896228            198,764                             83,481
022-1900289            167,463                             70,335
022-1900555            143,985                             60,474
022-1901617            177,357                             74,490
022-1902924            192,565                             80,877
022-1904035            174,363                             73,233
022-1905118            168,860                             70,921
022-1907740            182,083                             76,475
022-1910307            149,568                             62,818
022-1910575            156,298                             65,645
022-1912950            177,996                             74,758



                              22
         FHA loans with schedule A to purchase contract
  FHA loan    Unpaid mortgage      Actual loss   Indemnification
   number         balance           to HUD        amount (42%)
022-1914090            154,912                             65,063
022-1914808            165,214                             69,390
022-1914939            213,251                             89,565
022-1915718            203,335                             85,401
022-1915973            183,960                             77,263
022-1916975            199,370                             83,735
022-1917051            187,794                             78,873
022-1918398            207,841                             87,293
022-1922051            178,684                             75,047
022-1922847            203,087                             85,296
022-1924102            174,040                             73,097
022-1924437            205,529                             86,322
022-1927042            149,806                             62,919
022-1928950            131,541                             55,247
022-1929405            139,208                             58,467
022-1929457            207,936                             87,333
022-1929860            204,970                             86,087
022-1930041            158,522                             66,579
022-1930058            143,547                             60,290
022-1930574            150,570                             63,239
022-1930881            141,896                             59,596
022-1930919            185,656                             77,976
022-1931030            184,370                             77,436
022-1932444            150,248                             63,104
022-1932689            169,848                             71,336
022-1932695            196,940                             82,715
022-1932830            208,721                             87,663
022-1932882            150,803                             63,337
022-1933439            193,418                             81,236
022-1938623            184,458                             77,472
022-1939498            171,567                             72,058
022-1942208            188,971                             79,368
022-1944868            238,969                            100,367
022-1945647            136,631                             57,385
022-1949095            169,161                             71,048
022-1950364            189,700                             79,674



                              23
         FHA loans with schedule A to purchase contract
  FHA loan    Unpaid mortgage      Actual loss   Indemnification
   number         balance           to HUD        amount (42%)
022-1951268            189,629                             79,644
022-1951414            173,904                             73,040
022-1951852            290,505                            122,012
022-1952972            172,061                             72,266
022-1953689            278,540                            116,987
022-1954308            140,875                             59,168
022-1954314            168,235                             70,659
022-1954451            160,600                             67,452
022-1954501            141,341                             59,363
022-1955723            168,333                             70,700
022-1956895            247,904                            104,120
022-1958850            209,989                             88,195
022-1961446            166,560                             69,955
022-1962277            219,036                             91,995
022-1962514            285,068                            119,729
022-1962884            187,539                             78,766
022-1964719            147,468                             61,937
022-1965346            218,331                             91,699
022-1966017            190,743                             80,112
022-1966703            223,843                             94,014
022-1967324            135,395                             56,866
022-1967505            151,041                             63,437
022-1968053            139,424                             58,558
022-1968388            138,213                             58,049
022-1968421            248,174                            104,233
022-1968438            170,538                             71,626
022-1968444            182,274                             76,555
022-1968500            243,500                            102,270
022-1971233            156,844                             65,875
022-1971370            189,186                             79,458
022-1971472            213,542                             89,688
022-1971618            169,525                             71,201
022-1971755            135,410                             56,872
022-1972158            175,538                             73,726
022-1972216            184,052                             77,302
022-1972280            188,037                             78,976



                              24
         FHA loans with schedule A to purchase contract
  FHA loan    Unpaid mortgage      Actual loss   Indemnification
   number         balance           to HUD        amount (42%)
022-1973473            185,964                             78,105
022-1975416            162,399                             68,208
022-1975422            224,563                             94,317
022-1975576            161,928                             68,010
022-1975865            181,417                             76,195
022-1975973            224,327                             94,217
022-1976463            165,103                             69,343
022-1976492            167,627                             70,404
022-1977049            159,953                             67,180
022-1977055            181,353                             76,168
022-1978362            201,876                             84,788
023-2320644            169,128                             71,034
023-2340287            136,585                             57,366
023-2356343            192,796                             80,974
023-2375388            248,968                            104,567
023-2375473            161,815                             67,962
023-2383860            145,298                             61,025
023-2383895            161,103                             67,663
023-2383979            199,019                             83,588
023-2384380            192,236                             80,739
023-2387278            190,701                             80,094
023-2388425            133,663                             56,138
023-2388693            162,073                             68,071
023-2389790            164,684                             69,167
023-2390356            147,826                             62,087
023-2392731            158,364                             66,513
023-2400628            249,580                            104,824
023-2404478            158,152                             66,424
023-2405211            154,805                             65,018
023-2406144            138,617                             58,219
023-2406167            234,825                             98,627
023-2411433            166,259                             69,829
023-2412241            193,271                             81,174
023-2419965            200,046                             84,019
023-2424227            138,773                             58,285
023-2425869            139,647                             58,652



                              25
         FHA loans with schedule A to purchase contract
  FHA loan    Unpaid mortgage      Actual loss   Indemnification
   number         balance           to HUD        amount (42%)
023-2426099            209,080        $120,843                  0
023-2435820            223,908                             94,042
023-2435939            144,544          98,380                  0
023-2436464            131,045                             55,039
023-2438080            132,333                             55,580
023-2438810            129,867                             54,544
023-2438885            149,765                             62,901
023-2439585            163,521                             68,679
023-2444743            115,815                             48,642
023-2448485            124,296                             52,204
023-2450676            143,320                             60,194
023-2452908            158,159                             66,427
023-2454894            250,784                            105,329
023-2455303            220,548                             92,630
023-2457044            141,541                             59,447
023-2458663            137,292                             57,663
023-2468047            225,817                             94,843
023-2474700            142,334                             59,780
023-2478730            140,110                             58,846
023-2482980            138,860                             58,321
023-2487653            156,690                             65,810
023-2492828            127,724                             53,644
023-2497053            144,444                             60,666
023-2503336            128,574                             54,001
023-2504768            147,062                             61,766
023-2508248            138,698                             58,253
023-2515521            172,782                             72,568
023-2523166            124,333                             52,220
023-2528475            192,266                             80,752
023-2529520            211,510                             88,834
Total              $36,157,343       $219,223         $15,037,560




                              26
Appendix A-2: Loan Details for Underwriting Deficiencies
The table below contains the actual, if known, and projected losses to HUD corresponding to the
loans recommended for indemnification under finding 2, excluding any loans recommended for
indemnification under finding 1.
       FHA loan     Significant underwriting Unpaid mortgage Actual loss Indemnification Overinsurance
        number             deficiencies          balance      to HUD      amount (42%) from loan discount
     022-186452020              X                  $ 225,103                           0
                 20
     022-1874931                X                    159,147                           0
     022-188346321                                                                                              0                    $ 3,397
     022-188378121                                                                                              0
     022-189015220                  X                              219,081                                      0
     022-1892652                    X                              141,144                               $ 59,280
     023-235634320                  X                              192,796                                      0
     023-2375190                    X                              232,530                                  97,663
                   20
     023-2375473                    X                              161,815                                      0
     023-238386020                                                                                              0
     023-238438020                  X                              192,236                                      0
     023-238869320                                                                                              0
     023-2389873                    X                              177,952                                 74,740
     023-2391447                    X                              191,099                                 80,262
     023-240909022                                                                                              0
     023-241224120                                                                                              0
     023-2414288                    X                              119,929                                 50,370
     023-242586920                  X                              139,647                                      0
     023-242609920                  X                              209,080                                      0
     023-2427150                    X                              143,326                                 60,197
     023-243593920                  X                              144,544                                      0
     023-243808020                                                                                              0
     023-243881020                  X                              129,867                                      0
     023-2442707                    X                              192,391       $ 126,218                      0
     023-244726322                                                                                              0                      8,298
     023-2452473                    X                              202,755                                 85,157
     023-2453167                    X                              148,277           92,232                     0
     023-245866320                  X                              137,292                                      0
     023-246804720                                                                                              0                      4,054
     023-248298020                  X                              138,860                                      0
     023-2487907                    X                              151,879                                 63,789
     023-2529391                    X                              162,278                                 68,157
     023-264010722                                                                                              0
     023-2674566                    X                             201,794                                  84,753
     Totals                         24                         $4,114,822         $218,450               $724,368                   $15,749

20
   FHA loans recommended for indemnification under finding 1; therefore, the indemnification amount was excluded from this schedule to
prevent overlap.
21
   FHA loans recommended for indemnification under finding 1 and finding 3; therefore, the indemnification amount was excluded from this
schedule to prevent overlap.
22
   Although the loan had underwriting deficiencies, they were not significant enough to seek indemnification.




                                                                    27
Appendix A-3: Loan Details for Loans Involving Debarred
              Employee
The table below contains the projected losses to HUD corresponding to the loans recommended
for indemnification under finding 3 because these FHA-insured loans were originated by a
debarred loan officer.


                                                           Unpaid mortgage Indemnification
                            FHA loan number                    balance      amount (42%)
                            022-187634823                       $ 216,503
                            022-188207723                           209,753
                            022-188231423                           156,588
                            022-188297323                           188,988
                            022-188317423                           177,122
                            022-188342823                           210,202
                            022-188346324                           223,321
                            022-188378124                           195,392
                            022-188605623                           153,587
                            022-188637423                           154,787
                            022-189034823                           158,256
                            022-189082623                           183,574
                            022-189461823                           149,699
                            022-1895324                             198,515     $ 83,376
                            022-189589823                           179,079
                            022-190028923                           167,463
                            022-190161723                           177,357
                            022-190403523                           174,363
                            023-2618882                             203,326        85,397
                            Total                               $3,477,875      $168,773




23
   FHA loan recommended for indemnification under finding 1; therefore, the indemnification amount was excluded from this schedule to prevent
overlap.
24
   FHA loan recommended for indemnification under finding 1 and reported under finding 2; therefore, the indemnification amount was excluded
from this schedule to prevent overlap.



                                                                    28
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         29
Comment 1




Comment 2




            30
Comment 3




Comment 4




Comment 5




            31
Comment 5

Comment 6




Comment 7




Comment 8




            32
Comment 9
Comment 10




Comment 11




Comment 12




Comment 13


Comment 14




             33
Comment 15




Comment 16




Comment 17




             Names were redacted on this page for privacy reasons.




                                            34
Comment 18



Comment 19




Comment 20




             35
Comment 21


Comment 22




Comment 23




             36
Comment 24




Comment 25




Comment 26


Comment 27




             Names were redacted on this page for privacy reasons.




                                         37
Comment 28



Comment 29




             38
Comment 30




             39
40
Comment 31




Comment 32




Comment 33




             41
Comment 34




Comment 35




             42
Comment 36




Comment 37




             43
Comment 38




Comment 39




Comment 40




             Names were redacted on this page for privacy reasons.




                                            44
Comment 41




             45
Comment 42




Comment 43




             46
Comment 43




             47
Comment 44




Comment 45




             48
49
Comment 46




Comment 47




             50
Comment 48




             51
Comment 49




Comment 50




             52
Comment 51




Comment 52




             53
Comment 53




             54
Comment 54




             55
56
Comment 55




Comment 56




Comment 57




             57
Comment 58




Comment 59




             58
Comment 60




Comment 61




             59
Comment 62




             60
Comment 63




             61
Comment 63




Comment 64




             62
Comment 65




Comment 66




Comment 67




             63
Comment 68




Comment 69




             64
Comment 70




             65
Comment 71




Comment 72




             66
Comment 73




             67
Comment 74




             68
Comment 75




             69
Comment 76




Comment 77




             70
Comment 78




             71
Comment 79




Comment 80




             72
73
74
Comment 81




             75
Comment 82




             76
Comment 83




             77
                           OIG Evaluation of Auditee Comments

Comment 1 We disagree with DHI Mortgage‘s assertion that it lacked knowledge that the
          restrictive covenants were recorded and therefore had no responsibility to ensure
          its FHA-insured loans were (1) freely assumable as required under 24 CFR (Code
          of Federal Regulations) 203.41, and (2) free and clear of all other liens as required
          under 24 CFR 203.32(a). The regulations under 24 CFR 203.32(a) state "a
          mortgagor must establish that, after the mortgage offered for insurance has been
          recorded, the mortgaged property will be free and clear of all liens other than such
          mortgage, and that there will not be outstanding any other unpaid obligations
          contracted in connection with the mortgage transaction or the purchase of the
          mortgaged property, except obligations that are secured by property or collateral
          owned by the mortgagor independently of the mortgaged property." Thus, it was
          DHI Mortgage's responsibility to ensure that the liens, which were included in the
          restrictive covenant, were not placed against the FHA-insured property. If DHI
          Mortgage had ensured its FHA loans were free of the improper liens, then it would
          have been aware that the related properties also had restrictive covenants that
          violated FHA‘s free assumability rule.

             We agree that the contractual agreement from which the schedule A to purchase
             contract originated provided exclusionary language for FHA and VA financed
             loans. Additionally, 24 CFR 203.41(b) explicitly states, "[a] mortgage shall not be
             eligible for insurance if the mortgaged property is subject to legal restrictions on
             conveyance." Because the 205 loans discussed under finding 1 of the report were
             subject to legal restrictions on conveyance, these loans were clearly ineligible for
             FHA insurance.

Comment 2 We acknowledge the auditee‘s point that the first statement of finding 1 was
          imprecise. The original statement under finding 1 ―DHI Mortgage approved 205
          FHA-insured loans with unallowable restrictive covenants‖ was intended to
          address the overall responsibilities of the FHA–approved lender, and not the
          specific underwriting function. To improve the statement‘s accuracy we changed
          the report wording to state DHI Mortgage did not ensure that unallowable
          restrictive covenants were not filed against FHA-insured properties. We did not
          change the statement "officials believed it would discourage investors from
          purchasing their affiliate's (the seller's) properties," because this was based upon
          the following excerpt from a letter dated June 5, 2009 provided to the OIG by DHI
          Mortgage‘s attorney:




                                              78
We acknowledge that DHI Mortgage used the Schedule A to Purchase Contract
with the conventional market in mind. However, 24 CFR (Code of Federal
Regulations) 203.41 was clear that such a restriction on the resale of a property
made the mortgage ineligible for FHA insurance.
       24 CFR 203.41 Free Assumability

       (a)(3) Legal restrictions on conveyance means any provision in any legal
       instrument, law or regulation applicable to the mortgagor or the mortgaged
       property, including but not limited to a lease, deed, sales contract,
       declaration of covenants, declaration of condominium, option, right of first
       refusal, will, or trust agreement, that attempts to cause a conveyance
       (including a lease) made by the mortgagor to:… (ii) Be the basis of
       contractual liability of the mortgagor for breach of an agreement not to
       convey, including rights of first refusal, pre-emptive rights or options
       related to mortgagor efforts to convey; (iii) Terminate or subject to
       termination all or a part of the interest held by the mortgagor in the
       mortgaged property if a conveyance is attempted; (iv) Be subject to the
       consent of a third party;….

       (b) Policy of free assumability with no restrictions. A mortgage shall not
       be eligible for insurance if the mortgaged property is subject to legal
       restrictions on conveyance, except as permitted by this part.

The auditee‘s response notes that, for the audit time period, DHI‘s loan origination
activity was primarily conventional financing, with its FHA activity averaging
approximately 10 percent of its total volume. It is OIG‘s opinion that, because
DHI officials were aware that the use of the Schedule A was a common practice,
they should have taken extra steps to ensure that the covenant was removed once it
was determined that a specific loan would be FHA-insured. Moreover, because
the unallowed covenant was found on 205 FHA-insured loans, DHI Mortgage‘s
failure to follow FHA‘s rule was systematic in this case, and not an isolated
technical violation.




                                  79
Comment 3 We disagree with DHI Mortgage‘s implied response that use of the restrictive
          covenant could not have harmed the homebuyers because it was used at a time of
          unprecedented growth in the homebuilding industry. The schedule A to purchase
          contract, as discussed under finding 1, states the "[s]eller may promptly initiate
          proceedings to foreclose the Lien if Owner defaults in its obligation to pay Seller
          liquidated damages in the amount of $40,000 on the date that Owner or any of its
          successors or assigns conveys during the Restricted Period any rights, title, or
          interest in the Property without Seller‘s written consent.‖ The prospect of the
          $40,000 liability could readily deter a borrower from renting or selling their
          property if the need arose. The notion expressed in the auditee‘s response that it is
          obvious that the FHA-exclusionary language in the original sales contract would
          likely take precedence over the recorded lien assumes the homebuyer has
          sophisticated legal knowledge. Finding 1 discussed the instance where a borrower
          informed us that, although she experienced financial difficulties after the first four
          month‘s mortgage payments, she believed that she could not attempt to find a
          renter for the property because of the restrictive covenant. However, after the one-
          year restriction period expired, the borrower decided that the housing market
          decline had depressed prices to a point that made it unlikely she could sell or rent
          the home for an amount that would cover the mortgage. As a result, the home
          went into foreclosure. The auditee‘s response asserts that it was the purchaser‘s
          responsibility to seek release from the lien and implies that the borrower must have
          been an investor. In OIG‘s opinion, there is no basis for either of these assertions.
          The ―life events‖ presented in the auditee response as reasons the lien would be
          released do not include financial difficulties alone.

Comment 4 This portion of the auditee‘s response pertains to conventional loans and therefore
          is not relevant to the finding regarding FHA-insured loans

Comment 5 See OIG responses to comments 1 and 2.

Comment 6 See OIG responses to comment 3.

Comment 7 See OIG responses to comments 1, 2, and 3.

Comment 8 This portion of the auditee‘s response pertains to the lender's proposed corrective
          actions for deficiencies reported under finding 1. HUD will review adequacy and
          implementation of these proposed actions during the audit resolution process.

Comment 9 The report does not recommend any specific procedures that DHI Mortgage
          should adopt to ensure that improper covenants and/or liens are not placed on
          FHA-insured properties.

Comment 10 The OIG would like to reiterate that any FHA-insured loans with an executed
           schedule A to purchase contract, which contains the restrictive covenants and the
           lien against the FHA-insured property, violate 24 CFR 203.41(b) and 203.32(a)
           respectively and are therefore not FHA insurable.



                                              80
Comment 11 OIG acknowledges that DHI Mortgage made changes as a result of HUD's March
           2008 exam of DHI Mortgage's offices.

Comment 12 This portion of the auditee‘s response pertains to the lender's proposed corrective
           actions for deficiencies reported under finding 2. HUD will review adequacy and
           implementation of these proposed actions during the audit resolution process.

Comment 13 We excluded the auditee‘s Addendum 1 which responded to the specific
           underwriting deficiencies detailed in Appendix D of our report, as well as the OIG
           comments, due to the volume of the material. We disagreed with some of the
           items in the Addendum 1, but did make changes to our report for other items, as
           appropriate. The auditee‘s response to the underwriting narratives in Appendix D
           and our comments are available on request.

Comment 14 This discussion addresses DHI Mortgage's commitment to compliance and does
           not impact the findings of the audit report.

Comment 15 We agree that the auditee‘s use of the exact name search feature for screening
           contributed to weaknesses in its verification process to identify debarred
           individuals. DHI Mortgage‘s exhibit A was excluded from the auditee response
           section of our audit report but is available upon request.

Comment 16 This portion of the auditee‘s response pertains to the lender's proposed corrective
           actions for deficiencies reported under finding 3. HUD will review adequacy and
           implementation of these proposed actions during the audit resolution process.
           DHI Mortgage‘s exhibit B was excluded from the auditee response section of our
           audit report but is available upon request.

Comment 17 This portion of the auditee‘s response relates information it gathered regarding the
           debarred loan officer after the OIG informed DHI Mortgage of the violation. This
           information does not impact the report‘s finding.

Comment 18 This portion of the auditee‘s response provides background information, but does
           not relate to the report‘s finding.

Comment 19 We acknowledge that HUD provided DHI Mortgage guidance to wait until the
           FHA branch‘s loan pipeline had cleared before terminating the FHA branch
           identification with HUD. However, the auditee‘ response acknowledges it did not
           notify HUD of the address change for the Urban Living Branch – see comment
           20. We modified the report language to state ―Reviewers also did not ensure that
           HUD was notified of a change of branch address.‖ DHI Mortgage‘s exhibit C was
           excluded from the auditee response section of our audit report but is available
           upon request.




                                              81
Comment 20 We disagree with DHI Mortgage‘s position that it did not fail to notify HUD of
           branch changes in a timely manner because the response acknowledges that it did
           not update the address for the Urban Living FHA ID immediately after the branch
           was closed and merged.

Comment 21 This portion of the auditee‘s response refers to DHI Mortgage's policies for
           branch office terminations and merges. The documents provided did not provide
           any new information that would impact the audit report finding 3. DHI
           Mortgage‘s exhibit D was excluded from the auditee response section of our audit
           report but will be made available upon request.

Comment 22 This portion of the auditee‘s response pertains to the lender's proposed corrective
           actions for the deficiencies reported under finding 3. HUD will review the
           adequacy and implementation of these proposed actions during the audit
           resolution process. DHI Mortgage‘s exhibit E was excluded from the auditee
           response section of our audit report but will be made available upon request.

Comment 23 We disagree with the auditee‘s response that the officials working in the capacity
           of both DHI Mortgage and DHI Title did not constitute a conflict of interest.
           During our review we found that the individuals worked in official capacity for
           both companies and that DHI Mortgage‘s written policies did not provide
           practices for keeping the official duties separate.

Comment 24 The letter referred to in the auditee‘s response was not part of the audit report.
           We disagree with the auditee‘s response that the letter was the basis on which
           OIG raised its concern regarding the purported lack of clear and effective
           separation of the officer‘s duties. The letter was provided to DHI Mortgage
           officials to demonstrate OIG‘s documentation that the president of DHI Mortgage
           had worked in an official capacity for both DHI Mortgage and DHI Title. OIG‘s
           concern was based on the auditee‘s lack of written policies regarding keeping the
           official duties separate for each company, because we had identified two
           individuals with dual official functions. See OIG‘s response to comment 23.

Comment 25 This portion of the auditee‘s response relates the corrective action taken to
           address an issue raised under finding 3. HUD will review the adequacy and
           implementation of the proposed corrective action during the audit resolution
           process.

Comment 26 This portion of the auditee‘s response pertains to the lender's changed policies
           related to the audit report finding 3. HUD will review the adequacy and
           implementation of the proposed corrective action during the audit resolution
           process. DHI Mortgage‘s exhibit F was excluded from the auditee response
           section of our audit report to reduce the volume of the report.




                                              82
Comment 27 We disagree with the auditee‘s response that the bonus compensation for
           underwriters did not violate HUD Handbook 4060.1, paragraph 2-9A. We
           acknowledge the bonus was tied to the total number of decisions made regardless
           of the approval outcome. However, by rewarding the quantity of underwriting
           actions, the bonus structure provided an incentive for quick decisions rather than
           compliance with FHA insurance requirements. The result was that the bonuses
           functioned as commissions.

Comment 28 This portion of the auditee‘s response pertains to the lender's proposed corrective
           actions for a deficiency cited under finding 3. HUD will review the adequacy and
           implementation of the proposed corrective action during the audit resolution
           process.

Comment 29 This portion of the auditee‘s response is a list of the exhibits provided as part of
           proposed corrective actions in response to finding 3. HUD will review the
           adequacy and implementation of the proposed corrective actions during the audit
           resolution process.

Comment 30 We acknowledge the auditee‘s expressed intent to comply fully and completely
           with all standards set forth by HUD. We also acknowledge that DHI Mortgage
           has proposed corrective actions for certain deficiencies cited in the audit report.
           HUD will review the adequacy and implementation of the proposed corrective
           actions during the audit resolution process.

Comment 31 We disagree with the auditee‘s response. The HUD-1 contained in the loan
           documents was an ―Estimated Statement‖, not a final HUD-1. Additionally, the
           credit report dated September 5, 2006 showed the monthly liability. Since, the
           monthly debt was not properly documented as paid in full prior to closing the
           monthly liability was to be used in the qualifying ratios as required by HUD
           Handbook 4155.1, paragraph 2-11 and the Fannie Mae Underwriting Findings.

Comment 32 We disagree with the auditee‘s response. The HUD-1 contained in the loan
           documents was an ―Estimated Statement‖, not a final HUD-1. DHI Mortgage
           should have provided the final HUD-1 and/or a copy of the funds received. A
           more appropriate handbook citation would have been HUD Handbook 4155.1,
           paragraph 2-10E. This has been changed in the report.

Comment 33 See OIG responses to comments 1 through 3.

Comment 34 We disagree with the auditee‘s response. The lender did not comply with the
           requirements under HUD Handbook 4155.1, paragraph 2-3E, which specifically
           states the ―borrower also must have demonstrated a documented ability to
           responsibly manage his or her financial affairs.‖ Furthermore, the 10 percent
           down on the home loan and the cash reserves discussed on the mortgage credit
           analysis worksheet in the remarks section were loan funds that came from the
           borrower‘s 401(k). The language in the audit report was revised for clarification.



                                               83
Comment 35 See OIG responses to comments 1 through 3.

Comment 36 See OIG responses to comments 1 through 3.

Comment 37 We disagree with the auditee‘s response. Regardless of what the Mortgage Credit
           Analysis Worksheet says, the Amount Financed Itemization clearly indicates the
           discount fee was financed into the FHA-insured loan. The Amount Financed
           Itemization, dated June 14, 2007, one day prior to closing, totals to $226,436.00.
           This is the same amount of the new loan balance on the HUD-1. Therefore, the
           loan includes the amounts listed on the Amount Financed Itemization, which
           includes the discount fee of $3,396.54, contrary to HUD Handbook 4000.2,
           paragraph 5-2P.

Comment 38 We disagree with the auditee‘s response. We acknowledge that the lender ran the
           loan officer‘s first and last names through the General Service Administration
           Excluded Parties List System (Excluded Parties List), with a negative result.
           However, the Excluded Parties List did contain the loan officer‘s name with the
           middle initial, but did not return the match because the lender used the exact
           match function. The fact remains that the loan officer was on the Excluded
           Parties List and HUD Handbook 4000.2, paragraph 1-6A and HUD Handbook
           4155.1, paragraph 2-5, states "If the name of any party to the transaction appears
           on either list, the application is not eligible for mortgage insurance." The report
           language in the corresponding narrative was changed to clarify that the loan was
           not eligible for FHA mortgage insurance because a party to the transaction
           appeared on a debarment list. See OIG response to comment 15.

Comment 39 See OIG responses to comments 1 through 3.

Comment 40 See OIG responses to comment 35.

Comment 41 We disagree with the auditee‘s response because the income analysis provided
           was not in the lender‘s documentation at the time of the loan‘s approval. The
           lender must document the following: (1) the reason for including the borrower‘s
           overtime pay, (2) an overtime trend over a two-year period, and (3) that the
           amount of monthly overtime income used was based on a 24-month average of
           overtime earnings prior to the loan approval.

Comment 42 See OIG responses to comments 1 through 3.

Comment 43 We disagree with the auditee that the overtime was appropriate. The analysis and
           explanation for the use of the overtime was not performed at the time of the loan
           approval. For additional clarification on the deficiencies of the loan approval we
           have added an "Other" section in appendix D of the report for loan number 022-
           1892652. In this section we demonstrate the lender's failure to follow proper
           protocol for processing an employee loan.




                                              84
Comment 44 See OIG responses to comments 1 through 3.

Comment 45 We disagree with the auditee‘s response. The response explained that the $803
           discrepancy between the debt on the Mortgage Credit Analysis Worksheet and the
           debt listed on the automated underwriting system approval was the non occupying
           coborrower‘s rental obligation. However, this discrepancy was not explained in
           the loan documents prior to loan closing. As a result, the underwriting deficiency
           will remain in the audit report.

Comment 46 We disagree with auditee‘s response. The lender documented two paystubs that
           had inconsistent pay amounts and pay periods. At a minimum, the lender should
           have inquired about the current pay discrepancy and pay period length
           discrepancy. Based on the loan documentation it appeared that some portion of
           the coborrower‘s income was either commission or a bonus. In either instance,
           additional analysis and documentation was required to conform to HUD
           Handbook 4155.1, paragraph 2-7D. We have updated the loan detail in appendix
           D to say that the qualified income contribution from the coborrower was unknown
           as was its impact on the qualifying ratios.

Comment 47 We agree with the auditee‘s response that a supplement in the file showed the $10
           monthly debt had been paid in full prior to closing. This item was removed from
           the loan details in appendix D for loan number 023-2375473.

Comment 48 See OIG responses to comments 1 through 3.

Comment 49 See OIG responses to comments 1 through 3.

Comment 50 We disagree with the auditee‘s response because the overtime analysis provided
           was not in the lender‘s documentation at the time the borrower was qualified.
           Therefore, the full amount of overtime was excluded in the OIG recalculation of
           the ratios. Because the overtime income was in apparent decline, further
           justification to support its use is required by HUD Handbook 4155.1, paragraph 2-
           7A.

Comment 51 See OIG responses to comments 1 through 3.

Comment 52 See OIG responses to comments 1 through 3.

Comment 53 We partially agree with the auditee‘s response. We accepted that one of the two
           debts excluded from the qualifying ratios appeared to be a duplicate. The audit
           report has been updated to reflect only one account was excluded; however, the
           ratios remained the same because the OIG‘s revised ratios had only included the
           amount for one of the excluded accounts.

Comment 54 We disagree with the auditee‘s response. As stated in the response, the overtime
           income was averaged over a 20.5-month period instead of a 24-month average as



                                             85
              required by HUD Handbook 4155.1, paragraph 2-7A. Further, the auditee‘s
              response below under ―Credit‖ agreed with OIG that the loan file contained other
              deficiencies related to additional borrower credit items that would have impacted
              the loan decision.

Comment 55 We agree with the auditee‘s response that the excluded debt would not have
           changed the loan decision. We did not change the audit report which already
           stated ―The FHA-insured loan had additional minor underwriting deficiencies that
           did not affect the overall insurability of the loan.‖

Comment 56 See OIG responses to comments 1 through 3.

Comment 57 We partially disagree with the auditee‘s response because HUD Handbook
           4155.1, chapter 2 section 2, states the likelihood of its (the employment‘s)
           continuance must be established to determine a borrower's capacity to repay
           mortgage debt. We acknowledge that the earnings information was provided
           through a pay stub and the audit report has been updated.

Comment 58 We disagree with the auditee‘s response. Although the nonpurchasing spouse
           provided a letter stating she did not have a Social Security number, credit history
           must still be provided in the loan file as required by HUD Handbook 4155.1,
           paragraph 2-2D.

Comment 59 We disagree with the auditee‘s response because the lender did not obtain or
           otherwise document the likelihood of the continuance of the borrower‘s Social
           Security disability income as required by HUD Handbook 4155.1, paragraph 2-
           7E. Further, the auditee‘s response stated that ―it was reasonable to conclude that
           the Social Security income would continue for the next three years.‖ However,
           this was an opinion not documented in the loan file as part of the underwriter‘s
           decision and was formed by officials in response to the report.

Comment 60 We disagree with the auditee‘s response because there were additional items that
           would have impacted the loan decision pertaining to the borrower‘s income and
           contract. See response to comments 59 and 61 pertaining to these other
           deficiencies.

Comment 61 See OIG responses to comments 1 through 3.

Comment 62 See OIG responses to comments 1 through 3.

Comment 63 We disagree with the auditee‘s response because the borrower‘s documented
           funds were limited to a downpayment assistance gift and retirement account
           funds, which did not support the ability to pay such an earnest money deposit. In
           such a case, HUD Handbook 4155.1, paragraph 2-10A requires the lender to
           document the deposit and the source of funds used to pay the deposit.




                                              86
Comment 64 The auditee‘s response agreed with OIG‘s conclusion regarding the need to
           document the likelihood of the Social Security disability income to continue. See
           OIG response to comment 59.

Comment 65 We disagree with the auditee‘s response and maintain that the loan documents did
           not support the likelihood of the coborrower‘s continued employment. The
           auditee‘s response to the audit report stated the ―coborrower had been employed
           for 3.5 years and we had no reason to question the continuance of the
           coborrower‘s employment.‖ However, this statement does not establish that the
           coborrower‘s employment was likely to continue; it simply relates the borrower‘s
           employment history with the company. Further, this opinion was formed in
           response to the audit report and was not documented by the underwriter at the
           time of loan approval.

Comment 66 See OIG responses to comments 1 through 3.

Comment 67 We partially disagree with the auditee‘s response. The underwriter was required
           to provide an explanation or proof of the reason for excluding the credit accounts
           listed on the automated approval as required by HUD Handbook 4155.1,
           paragraph 2-11 and the Fannie Mae Underwriting Findings. We did not change
           the report which already stated that this was a minor underwriting deficiency and
           did not affect the overall insurability of the loan.

Comment 68 See OIG responses to comments 1 through 3.

Comment 69 We disagree with the auditee‘s response that a demonstration of enrollment in
           additional classes was sufficient to show the borrower‘s student loans were
           deferred. The credit report listed the student loans payments to begin five months
           after loan closing and there was no letter in the loan file stating the loans would be
           deferred. Therefore, in accordance with HUD Handbook 4155.1, paragraph 2-
           11C the monthly liability was to be included in the borrower‘s qualifying ratios.

              We disagree that the lender had no way of knowing that the borrower had taken
              out new debt prior to closing. It is the lender‘s responsibility to ascertain the
              source of funds for an earnest money deposit when the borrower does not
              demonstrate the ability to pay the deposit. See the discussion of assets in
              appendix D loan under number 023-2438810.

Comment 70 See OIG responses to comments 1 through 3.

Comment 71 We disagree with the auditee‘s response. The response explained how the
           borrower‘s income was calculated, but the loan file did not provide support to
           justify the use of the borrower‘s overtime pay in the income ratios as required by
           HUD Handbook 4155.1, paragraph 2-7A. In addition, the response states the
           borrower‘s length of employment and profession support the use of the average of
           the base plus overtime income. However, this opinion was formed in response to



                                               87
              the audit report and was not established and documented by the underwriter at the
              time of loan approval.

Comment 72 We disagree with the auditee‘s response that there was no reason to believe the
           income would not continue as the employee had been with the same employer for
           eight years. This opinion was formed in response to the audit report and was not
           documented by the underwriter at the time of loan approval.

Comment 73 We disagree with the auditee‘s response. Regardless of what the Mortgage Credit
           Analysis Worksheet says, the Amount Financed Itemization clearly indicates the
           discount fee was financed into the FHA-insured loan. The Amount Financed
           Itemization, dated March 30, 2007, the same day as closing, totals to $255,335.00.
           This is the same amount of the new loan balance on the HUD-1. Therefore, the
           loan includes the amounts listed on the Amount Financed Itemization, which
           includes the discount fee of $8,298.39, contrary to HUD Handbook 4000.2,
           paragraph 5-2P. If the discount fee was financed into the loan and the borrower
           paid for the discount in the form of a cashier‘s check, then the borrower paid for
           the fee twice.

Comment 74 We disagree with the auditee‘s response and maintain that the loan documents did
           not support the likelihood of the borrower‘s continued employment. The response
           to the audit report stated the ―borrower had been employed with [the] same
           company since March 2005.‖ However, this statement does not establish that the
           borrower‘s employment was likely to continue; it simply relates the borrower‘s
           employment history with the company. Further, this opinion was formed in
           response to the audit report and was not documented by the underwriter at the
           time of loan approval.

Comment 75 We agree with the auditee‘s response regarding the Rapid Reporting Direct Check
           and have removed this deficiency from the report.

Comment 76 See OIG responses to comments 1 through 3.

Comment 77 See OIG responses to comments 1 through 3.

Comment 78 We disagree with the auditee‘s response. Regardless of what the Mortgage Credit
           Analysis Worksheet says, the Amount Financed Itemization clearly indicates the
           discount fee was financed into the FHA-insured loan. The Amount Financed
           Itemization, dated May 15, 2007, four days prior to closing, totals to $231,683.00.
           This is the same amount of the new loan balance on the HUD-1. Therefore, the
           loan includes the amounts listed on the Amount Financed Itemization, which
           includes the discount fee of $4,054.45, contrary to HUD Handbook 4000.2,
           paragraph 5-2P.




                                              88
Comment 79 We disagree with the auditee‘s response. In this instance, the loan was not
           approved through the automated underwriting system. There was an approval
           from the automated underwriting system on June 13, 2007 at 12:47 p.m.
           However, there was an automated underwriting refer on June 13, 2007 at 1:15
           p.m. Upon review of the Mortgage Credit Analysis Worksheet, dated June 17,
           2007, the June 13, 2007 automated underwriting refer is more closely related
           based on the ratios contained in the documents. However, neither automated
           underwriting printout matches the Mortgage Credit Analysis Worksheet. Based
           on the automated underwriting this loan should have been referred for manual
           underwriting. Therefore, the credit deficiencies cited in the audit report were not
           changed.

Comment 80 We disagree with the auditee‘s response because this should have been a
           manually underwritten loan, see response to comment 79. Therefore, the loan
           must contain the documentation requirements set forth in HUD Handbook 4155.1,
           which includes a bank statement accompanying the verification of deposit to
           support the borrower‘s assets under paragraph 3-1F of the handbook.

Comment 81 We agree with the auditee‘s response regarding the Rapid Reporting Direct Check
           and have removed this deficiency from the report.

Comment 82 We disagree with the auditee‘s response and maintain that the lender failed to
           document the following: (1) the reason for including the borrower‘s and co-
           borrower‘s overtime pay, (2) an overtime trend over a two-year period, and (3)
           that the amount of monthly overtime income used was based on a 24-month
           average of overtime earnings prior to the loan approval.

              The auditee‘s response stated the ―borrower had been on the job for eight years
              and received overtime for at least the past two years.‖ However, this statement
              does not establish that the borrower‘s employment was likely to continue; it
              simply relates the borrower‘s employment history with the company. Further,
              this opinion was formed in response to the audit report and was not documented
              by the underwriter at the time of loan approval. Additionally, as the lender stated
              the overtime income was averaged over 25.5-month period, thus overtime income
              was not based on a 24-month average as required by HUD Handbook 4155.1,
              paragraph 2-7A.

              The auditee‘s response stated the coborrower income verification noted ―n/a‖
              under probability of continued employment and added ―This is not uncommon
              and many employers refuse to answer this question.‖ However, HUD Handbook
              4155.1, chapter 2 section 2, states the likelihood of its continuance must be
              established to determine a borrower's capacity to repay mortgage debt.

              Although the auditee‘s response cited a two year history of employment on the
              coborrower‘s application, the loan file did not include supporting documentation




                                              89
             required under HUD Handbook 4155.1, paragraph 2-6 and Mortgagee Letter
             2004-47.

Comment 83 We disagree with auditee‘s response because the loan should have been manually
           underwritten when the automated underwriting system previously returned the
           loans as refer/eligible.




                                           90
Appendix C

                                         CRITERIA
This criteria appendix includes the referenced CFR, HUD Handbook, and Mortgagee Letter
requirements discussed in the body of the report and in the underwriting narratives under
appendix D.

Code of Federal Regulations (CFR)

24 CFR 202.5(f) Business changes states:

The lender or mortgagee shall provide prompt notification to the Secretary of all changes in its
legal structure, including, but not limited to, mergers, terminations, name, location, control of
ownership, and character of business.

24 CFR 203.32 Mortgage lien states:

       (a) …a mortgagor must establish that, after the mortgage offered for insurance has been
       recorded, the mortgaged property will be free and clear of all liens other than such
       mortgage, and that there will not be outstanding any other unpaid obligations contracted
       in connection with the mortgage transaction or the purchase of the mortgaged property,
       except obligations that are secured by property or collateral owned by the mortgagor
       independently of the mortgaged property.

24 CFR 203.41 free assumability; exceptions states:

       (a)(3) Legal restrictions on conveyance means any provision in any legal instrument, law
       or regulation applicable to the mortgagor or the mortgaged property, including but not
       limited to a lease, deed, sales contract, declaration of covenants, declaration of
       condominium, option, right of first refusal, will, or trust agreement, that attempts to cause
       a conveyance (including a lease) made by the mortgagor to:… (ii) Be the basis of
       contractual liability of the mortgagor for breach of an agreement not to convey, including
       rights of first refusal, pre-emptive rights or options related to mortgagor efforts to
       convey; (iii) Terminate or subject to termination all or a part of the interest held by the
       mortgagor in the mortgaged property if a conveyance is attempted; (iv) Be subject to the
       consent of a third party;….
       (b) Policy of free assumability with no restrictions. A mortgage shall not be eligible for
       insurance if the mortgaged property is subject to legal restrictions on conveyance, except
       as permitted by this part.
       (c) Exception for eligible governmental or nonprofit programs.

HUD Handbook 4000.2, Revision 3

Paragraph 1-6



                                                91
      HUD Limited Denial of Participation (LDP) and Federal Lists. A borrower suspended,
      debarred, or otherwise excluded from participation in the Department‘s programs is not
      eligible for a FHA-insured mortgage. The lender must examine HUD‘s LDP list and the
      government-wide General Services Administration‘s (GSA‘s) ―List of Parties Excluded
      from Federal Procurement or Nonprocurement Programs‖ and document this review on
      the HUD-92900-WS/92900-PUR. If the name of any party to the transaction appears on
      either list, the application is not eligible for mortgage insurance.

Paragraph 5-2P

      Discount points charged by the lender on a purchase transaction may be charged to the
      buyer but may not be financed into the mortgage amount.

HUD Handbook 4000.4, Revision 1, Change 1

Paragraph 1-14

      If possible, the application should be processed by a different branch or the mortgagee's
      main office. Although the draft report did not previously address this, the case must be
      clearly identified in the remarks section of the Mortgage Credit Worksheet and beneath
      Box F, "Employment," on the front of the case binder.

HUD Handbook 4060.1, Revision 2

Paragraph 2-9A

      Employees are those individuals who are under the direct supervision and control of an
      FHA approved mortgagee and where the individuals are exclusively employed by the
      FHA approved mortgagee in the mortgage lending and real estate fields. The mortgagee
      must demonstrate the essential characteristics of the employer-employee relationship
      upon inquiry by the Department. [See also paragraphs 2-9(D) and 2-9(G)]

      Compensation of employees may be on a salary, salary plus commission, or commission
      only basis and includes bonuses. All compensation must be reported on Form W-2.
      Employees who perform underwriting and loan servicing activities may not receive
      commissions.

Paragraph 2-9C

      If a mortgagee has any of the same officers, stockholders, partners, or members as
      another entity, the officers may represent more than one entity if:
      1. There is a clear and effective separation of the two entities, and mortgagors know at all
      times exactly with which entity they are doing business.




                                               92
Paragraph 7-3G

      A mortgagees‘ offices, including traditional, nontraditional branch and direct lending
      offices engaged in origination or servicing of FHA-insured loans, must be reviewed to
      determine that they are in compliance with the Departments requirements.
      1. The review must include, but not necessarily be limited to, confirmation of the
      following items:
              * The office is properly registered with FHA and the address is current;
              * Operations are conducted in a professional, business-like environment;...
              * The office is sufficiently staffed with trained personnel;
              * Office personnel have access to relevant statutes, regulations, HUD issuances
              and Handbooks, either in hard copy or electronically;
              * Procedures are revised to reflect changes in HUD requirements and personnel
              are informed of the changes;
              * Personnel at the office are all employees of the mortgagee or contract
              employees performing functions that FHA allows to be outsourced; and
              * The office does not employ or have a contract with anyone currently under
              debarment or suspension, or a Limited Denial of Participation….
      3. When it is not feasible for Quality Control staff to visit each branch, qualified
      personnel from another office of the mortgagee, not involved in the day-to-day processes
      they are reviewing, or an outside firm may perform the review.

Paragraph 7-6

      In order for a Quality Control Program to be useful and acceptable to FHA, there are
      several requirements that must be met. Mortgagees must adhere to each of the
      requirements below when conducting reviews.
      A. Timeliness. Loans must be reviewed within 90 days from the end of the month in
      which the loan closed. This requirement is intended to ensure that problems left
      undetected prior to closing are identified as early after closing as possible.
      B. Frequency. For mortgagees closing more than 15 loans monthly, quality control
      reviews must be conducted at least monthly and must address one months activity.
      Mortgagees closing 15 or fewer loans monthly may perform quality control reviews on a
      quarterly basis….
      D. Early Payment Defaults. In addition to the loans selected for routine quality control
      reviews, mortgagees must review all loans going into default
      within the first six payments. As defined here, early payment defaults are loans that
      become 60 days past due.
      E. Documentation Review and Verification. The Quality Control Program must provide
      for the review and confirmation of information on all loans selected for review.
      1. Credit Report. A new credit report must be obtained for each borrower whose loan is
      included in a Quality Control Review, unless the loan was a streamline refinance or was
      processed using a FHA approved automated underwriting system exempted from this
      requirement.... A full Residential Mortgage Credit Report must be obtained from a
      different credit source on cases in which the in-file report reveals discrepancies with the
      original credit report.



                                              93
2. Credit Document Reverification. Documents contained in the loan file should be
checked for sufficiency and subjected to written reverification. Examples of items that
must be reverified include, but are not limited to, the mortgagors‘ employment or other
income, deposits, gift letters, alternate credit sources, and other sources of funds. Sources
of funds must be acceptable as well as verified. Other items that may be reverified
include mortgage or rent payments. If the written reverification is not returned to the
mortgagee, a documented attempt must be made to conduct a telephone reverification. If
the original information was obtained electronically or involved alternative documents, a
written reverification must still be attempted. Any discrepancies must be explored to
ensure that the original documents (except blanket verification releases) were completed
before being signed, were as represented, were not handled by interested third parties and
that all corrections were proper and initialed. All conflicting information in the original
documentation should have been resolved before the complete file was submitted to the
underwriter.

3. Appraisals. A desk review of the property appraisal must be performed on all loans
chosen for a Quality Control review... The desk review must include a review of the
appraisal data, the validity of the comparables, the value conclusion (as repaired to meet
safety and soundness requirements in HUD Handbook 4905.1 (as revised)), any changes
made by the underwriter and the overall quality of the appraisal. Mortgagees are
expected to perform field reviews on 10 % of the loans selected during the sampling
process outlined previously in paragraph 7-6 C and D. Field reviews must be performed
by licensed appraisers listed on FHAs Roster of Appraisers. Mortgagees should select
loans for field reviews based on factors such as those listed previously in paragraph 7
6(C)(2) and the following:
        * Property complaints received from mortgagors;
        * Discrepancies found during desk reviews;
        * Large adjustments to value;
        * Comparable sales more than six months old;
        * Excessive distances from comparables to the subject property;
        * Repetitive sales activity for the subject property;
        * Investor-sold properties;
        * Identity of interest between buyer and seller;
        * Seller identity differs from owner of record; and
        * Vacant properties.
In addition, a field review should be completed on loans selected in accordance with
paragraphs 7-6(C) and (D) where the desk review revealed significant
problems/deficiencies with the appraisal report. If serious deficiencies or patterns are
uncovered, mortgagees must report these items, in writing, to the Quality Assurance
Division in the HUD Homeownership Center having jurisdiction.

4. Occupancy Reverification. In cases where the occupancy of the subject property is
suspect, mortgagees must attempt to determine whether the mortgagor is occupying the
property.... If it is found that the mortgagor is not occupying a property mortgaged as
owner-occupied, mortgagees must report this, in writing, to the Quality Assurance
Division in the HUD Homeownership Center having jurisdiction....



                                         94
       F. Underwriting Decisions. Each Direct Endorsement loan selected for a quality control
       review must be reviewed for compliance with HUD underwriting requirements,
       sufficiency of documentation and the soundness of underwriting judgements.

       G. Condition Clearance and Closing. Each loan selected for a quality control review
       must be reviewed to determine whether:
              * Conditions which were required to be satisfied prior to closing were in fact met
              prior to closing...
              * The loan was closed and funds disbursed in accordance with the mortgagees
              underwriting and subsequent closing instructions; and
              * The closing and legal documents are accurate and complete.

HUD Handbook 4155.1, Revision 5


Foreword

       This Handbook describes the basic mortgage credit underwriting requirements for single
       family (one to four units) mortgage loans insured under the National Housing Act. For
       each loan FHA insures, the lender must establish that the borrower has the ability and
       willingness to repay the mortgage debt. This decision must be predicated on sound
       underwriting principles consistent with the guidelines, rules, and regulations described
       throughout this Handbook and must be supported by sufficient documentation....

       While it is not FHA's intent to insure mortgages that are likely to result in default,
       regardless of the borrower's equity, lenders may exercise some discretion in the
       underwriting of home mortgages where the borrower's financial and other circumstances
       are not specifically addressed by this Handbook. However, lenders are expected to
       exercise both sound judgment and due diligence in the underwriting of loans to be
       insured by FHA.

Chapter 2, section 2

       The anticipated amount of income, and the likelihood of its continuance, must be
       established to determine a borrower's capacity to repay mortgage debt. Income may not
       be used in calculating the borrower's income ratios if it comes from any source that
       cannot be verified, is not stable, or will not continue. This section describes acceptable
       types of income, procedures for calculating effective income, and requirements for
       establishing income stability.

Paragraph 2-2

       Except for the obligations specifically excluded by state law, the debts of the non-
       purchasing spouse must be included in the borrower‘s qualifying ratios if the borrower
       resides in a community property state or the property to be insured is located in a
       community property state. Although the nonpurchasing spouse's credit history is not to



                                               95
      be considered a reason for credit denial, a credit report that complies with the
      requirements of paragraph 2-4 must be obtained for the non-purchasing spouse in order to
      determine the debt-to-income ratio.

Paragraph 2-3

      …While minor derogatory information occurring two or more years in the past does not
      require explanation, major indications of derogatory credit–including judgments,
      collections, and any other recent credit problems–require sufficient written explanation
      from the borrower….

      When reviewing the borrower's credit and credit report, the lender must pay particular
      attention to the following:
      A. Previous Rental or Mortgage Payment History. The payment history of the
      borrower's housing obligations holds significant importance in evaluating credit. The
      lender must determine the borrower's payment history of housing obligations through
      either the credit report, verification of rent directly from the landlord (with no identity-of-
      interest with the borrower) or verification of mortgage directly from the mortgage
      servicer, or through canceled checks covering the most recent 12-month period.
      B. Recent and/or Undisclosed Debts. The lender must ascertain the purpose of any
      recent debts, as the indebtedness may have been incurred to obtain part of the required
      cash investment on the property being purchased. Similarly, the borrower must provide a
      satisfactory explanation for any significant debt that is shown on the credit report but not
      listed on the loan application. The borrower must explain in writing all inquiries shown
      on the credit report in the last 90 days.
      C. Collections and Judgments. Court-ordered judgments must be paid off before the
      mortgage loan is eligible for FHA insurance endorsement.... FHA does not require that
      collection accounts be paid off as a condition of mortgage approval. Collections and
      judgments indicate a borrower‘s regard for credit obligations and must be considered in
      the analysis of creditworthiness with the lender documenting its reasons for approving a
      mortgage where the borrower has collection accounts or judgments. The borrower must
      explain in writing all collections and judgments….

      E. Bankruptcy. A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower
      from obtaining an FHA-insured mortgage if at least two years have elapsed since the date
      of the discharge of the bankruptcy. Additionally, the borrower must have re-established
      good credit or chosen not to incur new credit obligations. The borrower also must have
      demonstrated a documented ability to responsibly manage his or her financial affairs....
      A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured
      mortgage provided the lender documents that one year of the payout period under the
      bankruptcy has elapsed and the borrower‘s payment performance has been satisfactory
      (i.e., all required payments made on time). In addition, the borrower must receive
      permission from the court to enter into the mortgage transaction.




                                                96
Paragraph 2-5

      A borrower must be rejected if any of the following conditions apply:

      A. HUD Limited Denial of Participation (LDP) and the U.S. General Services
      Administration‘s ―List of Parties Excluded from Federal Procurement and Non-
      Procurement Programs‖ (GSA List) A person suspended, debarred, or otherwise excluded
      from participation in the Department‘s programs is not eligible to participate in FHA-
      insured mortgage transactions. The lender must examine HUD‘s LDP list and the
      government-wide General Services Administration‘s (GSA) ―List of Parties Excluded
      from Federal Procurement or Nonprocurement Programs‖ and document this review on
      the HUD 92900-WS/92900-PUR. If the name of the borrower, seller, listing or selling
      real estate agents, or loan officer appears on either list, the application is not eligible for
      mortgage insurance....

Paragraph 2-6

      We do not impose a minimum length of time a borrower must have held a position of
      employment to be eligible. However, the lender must verify the borrower's employment
      for the most recent two full years.... The borrower also must explain any gaps in
      employment spanning one month or more. Allowances for seasonal employment, such as
      is typical in the building trades, etc., may be made if documented by the lender.

Paragraph 2-7

      The income of each borrower to be obligated for the mortgage debt must be analyzed to
      determine whether it can reasonably be expected to continue through at least the first
      three years of the mortgage loan. If the borrower intends to retire during this period, the
      effective income must be the amount of documented retirement benefits, social security
      payments, or other payments expected to be received in retirement....

      In most cases, the borrower‘s income will be limited to salaries or wages. Income from
      other sources can be included as effective income with proper verification by the lender.
      Procedures for analyzing other acceptable income sources besides salaries and wages are
      described below:
      A. Overtime and Bonus Income. Both overtime and bonus income may be used to qualify
      if the borrower has received such income for the past two years and it is likely to
      continue. The lender must develop an average of bonus or overtime income for the past
      two years, and the employment verification must not state that such income is unlikely to
      continue.
      Periods of less than two years may be acceptable provided the lender justifies and
      documents in writing the reason for using the income for qualifying purposes.

      An earnings trend also must be established and documented for overtime and bonus
      income. If either type shows a continual decline, the lender must provide a sound
      rationalization in writing for including the income for borrower qualifying. If bonus



                                                97
      income varies significantly from year to year, a period of more than two years must be
      used in calculating the average income….

      D. Commission Income. 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.) Individuals whose commission income shows a decrease
      from one year to the next require significant compensating factors to allow for loan
      approval. Borrowers with commission income received for more than one but less than
      two years may be considered favorably provided the underwriter is able to make a sound
      rationalization for acceptance and can document the likelihood of continuance.
      Commissions earned for less than one year are not considered effective income.
      Exceptions may be made for situations in which the borrower's compensation was
      changed from a salary to commission within a similar position with the same employer.
      A borrower also may qualify when the portion of earnings not attributed to commissions
      would be sufficient to qualify the borrower for the mortgage.

      E. Retirement and Social Security Income. Retirement and social security income require
      verification from the source (former employer, Social Security Administration) or federal
      tax returns. If any benefits expire within the first full three years, the income source may
      be considered only as a compensating factor….

      M…. 2. Current Leases. If a property was acquired since the last income tax filing and
      is not shown on Schedule E, a current signed lease or other rental agreement must be
      provided. The gross rental amount must be reduced for vacancies and maintenance by 25
      percent (or the percentage developed by the jurisdictional HOC [homeownership center]),
      before subtracting PITI and any homeowners' association dues, etc., and applying the
      remainder to income (or recurring debts, if negative)....

Paragraph 2-9

      The following conditions apply to underwriting self-employed borrowers:
      A. Minimum Length of Self Employment. Income from self-employment is considered
      stable and effective if the borrower has been self-employed for two or more years. The
      high probability of failure during the first few years of a business makes the following
      requirements necessary for individuals who have been self-employed less than two years:
      1. Between One and Two Years. An individual self-employed between one and two
      years must have at least two years of documented previous successful employment (or a
      combination of one year of employment and formal education or training) in the line of
      work in which the borrower is self-employed or in a related occupation to be eligible...
      B. Documentation Requirements. The following documents are required from self-
      employed borrowers:
      1. Signed and dated individual tax returns, plus all applicable schedules, for the most
      recent two years.
      2. Signed copies of federal business income tax returns for the last two years, with all
      applicable schedules, if the business is a corporation, an "S" corporation, or a partnership.



                                               98
      3. A year-to-date profit and loss (P&L) statement and balance sheet…

Paragraph 2-10

      The cash investment in the property must equal the difference between the amount of the
      insured mortgage, excluding any upfront MIP [mortgage insurance premium], and the
      total cost to acquire the property including prepaid expenses and closing costs as
      described in paragraph 1-9. All funds for the borrower's investment in the property must
      be verified and documented. Acceptable sources of these funds include the following:
      A. Earnest Money Deposit. If the amount of the earnest money deposit exceeds 2 percent
      of the sales price or appears excessive based on the borrower's history of accumulating
      savings, the lender must verify with documentation the deposit amount and the source of
      funds. Satisfactory documentation includes a copy of the borrower's cancelled check. A
      certification from the deposit-holder acknowledging receipt of funds and separate
      evidence of the source of funds is also acceptable. Evidence of source of funds includes
      a verification of deposit or bank statement showing that at the time the deposit was made
      the average balance was sufficient to cover the amount of the earnest money deposit….
      E. Sales Proceeds. The net proceeds from an arms-length sale of a currently owned
      property may be used for the cash investment on a new house. A fully executed HUD-1
      Settlement Statement must be provided as satisfactory evidence of the cash sales
      proceeds accruing to the borrower. If the property has not sold by the time of
      underwriting, loan approval must be conditioned upon verifying the actual proceeds
      received by the borrower. The lender must document both the actual sale and the
      sufficiency of the net proceeds required for settlement….
      G. Sale of Personal Property. If the borrower intends to sell personal property items
      (cars, recreational vehicles, stamps, coins, baseball card collections, etc.) to obtain funds
      required for closing, the borrower must provide a satisfactory estimate of their worth, in
      addition to conclusive evidence the items have been sold. The estimated worth of the
      items being sold may be in the form of published value estimates, such as those issued by
      automobile dealers, philatelic or numismatic associations, or a separate written appraisal
      by a qualified appraiser with no financial interest in the loan transaction. Only the lesser
      of this estimate of value or the actual sales price is considered as assets to close.

Paragraph 2-11

      The following are types of liabilities that must be considered in qualifying borrowers:
      A. Recurring Obligations. The borrower's liabilities include all installment loans,
      revolving charge accounts, real estate loans, alimony, child support, and all other
      continuing obligations. In computing the debt-to-income ratios, the lender must include
      the monthly housing expense and all other additional recurring charges extending ten
      months or more, including payments on installment accounts, child support or separate
      maintenance payments, revolving accounts and alimony, etc. Debts lasting less than ten
      months must be counted if the amount of the debt affects the borrower's ability to make
      the mortgage payment during the months immediately after loan closing; this is
      especially true if the borrower will have limited or no cash assets after loan closing.




                                               99
      The following additional information deals with revolving accounts and alimony
      payments:
      1. Revolving Accounts. If the account shown on the credit report has an outstanding
      balance, monthly payments for qualifying purposes must be calculated at the greater of 5
      percent of the balance or $10 (unless the account shows a specific minimum monthly
      payment)....

      C. Projected Obligations. If a debt payment, such as a student loan, is scheduled to begin
      within twelve months of the mortgage loan closing, the lender must include the
      anticipated monthly obligation in the underwriting analysis, unless the borrower provides
      written evidence that the debt will be deferred to a period outside this timeframe.
      Similarly, balloon notes
      that come due within one year of loan closing must be considered in the underwriting
      analysis.
      D. Obligations Not Considered Debt. Obligations not to be considered debt (or
      subtracted from gross income) include federal, state, and local taxes; FICA or other
      retirement contributions such as 401(k) accounts (including repayment of debt secured by
      these funds); commuting costs; union dues; open accounts with zero balances; automatic
      deductions to savings accounts; child care; and voluntary deductions.

Paragraph 2-13

      Compensating factors that may be used to justify approval of mortgage loans with ratios
      exceeding our benchmark guidelines are those listed below. Underwriters must record on
      the "remarks" section of the HUD 92900-WS/HUD 92900-PUR the compensating
      factor(s) used to support loan approval. Any compensating factor used to justify
      mortgage approval must be supported by documentation.
      A. The borrower has successfully demonstrated the ability to pay housing expenses equal
      to or greater than the proposed monthly housing expense for the new mortgage over the
      past 12-24 months.
      B. The borrower makes a large downpayment (ten percent or more) toward the purchase
      of the property.
      C. The borrower has demonstrated an ability to accumulate savings and a conservative
      attitude toward the use of credit.
      D. Previous credit history shows that the borrower has the ability to devote a greater
      portion of income to housing expenses.
      E. The borrower receives documented compensation or income not reflected in effective
      income, but directly affecting the ability to pay the mortgage, including food stamps and
      similar public benefits.
      F. There is only a minimal increase in the borrower's housing expense.
      G. The borrower has substantial documented cash reserves (at least three months‘ worth)
      after closing. In determining if an asset can be included as cash reserves or cash to close,
      the lender must judge whether or not the asset is liquid or readily convertible to cash and
      can be done so absent retirement or job termination. Also see paragraph 2-10K. Funds
      borrowed against these accounts may be used for loan closing, but are not to be
      considered as cash reserves. ―Assets‖ such as equity in other properties and the proceeds



                                              100
      from a cash-out refinance are not to be considered as cash reserves. Similarly, funds
      from gifts from any source are not to be included as cash reserves.
      H. The borrower has substantial non-taxable income (if no adjustment was made
      previously in the ratio computations).
      I. The borrower has a potential for increased earnings, as indicated by job training or
      education in the borrower's profession.
      J. The home is being purchased as a result of relocation of the primary wage earner, and
      the secondary wage-earner has an established history of employment, is expected to
      return to work, and reasonable prospects exist for securing employment in a similar
      occupation in the new area. The underwriter must document the availability of such
      possible employment.

Chapter 3

      The lender is responsible for asking sufficient questions to elicit a complete picture of the
      borrower's financial situation, source of funds for the transaction, and the intended use of
      the
      property. All information must be verified and [documented]. The lender must also
      verify and document the identity of the loan applicant(s).

Paragraph 3-1

      … The following documents are generally required for mortgage credit analysis in all
      transactions except for certain streamline refinances…
      C. Social Security Number [SSN] Evidence. For all borrowers, including US citizens,
      the lender is required to document a valid SSN for each borrower, co-borrower, and co-
      signer on the mortgage.... Each borrower must provide the lender with evidence of his or
      her own valid SSN as issued by the Social Security Administration (SSA).... While the
      actual social security card is not required, the lender is required to validate the SSN.
      Lenders may use various means for validating the SSN including examining the
      borrower‘s pay stubs, passport, valid tax returns, and may use service providers including
      those with direct access to the SSA. The lender is also required to resolve any
      inconsistencies or multiple SSNs for individual borrowers that are revealed during loan
      processing and underwriting. (Also see paragraph 2-2 B)….
      F. VOD. VOD and most recent bank statements are to be provided. ―Most recent‖
      means at the time the initial loan application is made. Provided the document is not more
      than 120 days old when the loan closes (180 days old on new construction), it does not
      have to be updated. Alternative Documentation. As an alternative to obtaining a VOD,
      the lender may obtain from the borrower original bank statement(s) covering the most
      recent three-month period. Provided the bank statement shows the previous month's
      balance, this requirement is met by obtaining the two most recent, consecutive
      statements….
      H. Sales Contract. The sales contract and any amendments or other agreements and
      certifications are to be included in the case binder. Either an original or a certified true
      copy of the sales contract received by the lender is required.




                                              101
Mortgagee Letter 2004-47

      The lender using the TOTAL Mortgage Scorecard must conduct a manual underwriting
      review according to FHA requirements for all loan applications that generate a ―refer‖
      rating. The DE underwriter must determine if the borrower is creditworthy in accordance
      with FHA standard credit policies and requirements. It is FHA policy that no borrower
      will be denied a FHA insured mortgage loan solely on the basis of a risk assessment
      generated by the TOTAL Mortgage Scorecard….

      Current Employment---The lender must obtain the single most recent pay stub
      (showing year-to-date earnings of at least one month) and any one of the following to
      verify current employment:
                      Written Verification of Employment (VOE)
                      Verbal verification of employment (Lender or service provider must
              document individual verifying the employment.)
                      Electronic verification acceptable to FHA….

      Employment History---The lender is required to verify the applicant‘s employment
      history for the previous two years. However, direct verification is not required if all of
      the following conditions are met:
                      The current employer confirms a two-year employment history (this may
              include a paystub indicating a hiring date)
                      Only base pay is used to qualify (no overtime or bonuses)
                      The borrower signs form IRS 4506 or 8821 for the previous two tax years.

      If the applicant has not been employed with the same employer for the previous two
      years and/or all conditions immediately above cannot be met, then the lender must
      obtain one of the following for the most recent two years to verify the applicant‘s
      employment history:
                      W-2(s)
                      VOE(s)
                      Electronic verification acceptable to FHA….

      Cash reserves may include certain retirement accounts. To account for withdrawal
      penalties and taxes, only 60% of the vested amount of the account may be used. The
      lender must document the existence of the account with the most recent depository or
      brokerage account statement. In addition, evidence must be provided that the retirement
      account allows for withdrawals for conditions other than in connection with the
      borrower's employment termination, retirement, or death. If withdrawals can only be
      made under these circumstances, the retirement account may not be included as cash
      reserves. If any of these funds are also to be used for loan settlement, that amount must
      be subtracted from the amount included as cash reserves.




                                             102
Mortgagee Letter 2005-16

      [F]or manually underwritten mortgages where the Direct Endorsement (DE) underwriter
      must make the credit decision, the qualifying ratios are raised to 31% and 43%.... As
      always, if either or both ratios are exceeded on a manually underwritten mortgage, the
      lender must describe the compensating factors used to justify mortgage approval.




                                            103
Appendix D

      NARRATIVE LOAN SUMMARIES FOR UNDERWRITING
                     DEFICIENCIES
The following narratives provide the details for the deficiencies noted in the table contained in
finding 2.

FHA loan number: 022-1864520                                      Loan status: Claim25
Requesting indemnification: Yes                                   Default status: Preforeclosure sale completed26

     We are seeking indemnification of this loan based on the lender's failure to properly
     determine the borrower‘s capacity to repay the mortgage debt and based on the executed
     schedule A to purchase contract.

     Income
     Although the lender obtained a verification of employment, the lender failed to obtain the
     most recent pay stub or any other current paystub for the borrower that reflected at least one
     month of year-to-date earnings as required by Mortgagee Letter 2004-47 to verify current
     employment. Thus, the lender should have obtained an additional pay stub for the borrower
     before closing. Since the lender could not verify the borrower‘s wages properly, the income
     may not be used in calculating the borrower‘s income ratios,27 as stated in HUD Handbook
     4155.1, chapter 2, section 2. Accordingly, because the lender could not verify the borrower's
     qualifying wages, it failed to properly determine the borrower's capacity to repay the debt.

     Credit
     The lender excluded one of the borrower‘s accounts listed on the credit report without
     providing an explanation or proof that the account should not have been included. Thus, the
     additional monthly liability of $1,247 per month must be used in qualifying the borrower as
     required by HUD Handbook 4155.1, paragraph 2-11, and the Fannie Mae Underwriter
     Findings.

     The loan file did not contain an explanation for the three significant credit report inquiries on
     the borrower‘s credit report and the five significant credit report inquiries on the
     nonpurchasing spouse‘s credit report that were within 90 days of the credit report date as
     required by HUD Handbook 4155.1, paragraph 2-3B. Additionally, the lender did not
     determine whether the material inquiries resulted in new debts as required by the Fannie Mae
     Underwriting Findings.

25
   A loan status of claim means the loan was conveyance claim terminated. A claim is the amount of the insurance benefit prescribed by HUD
related to the default.
26
   A default status of preforeclosure sale completed means that a a borrower in default sold their home and used the sale proceeds to satisfy the
mortgage debt even if the proceeds were less than the amount owed. The lender can then file a claim for certain insurance benefits.
27
   The mortgage payment expense-to-effective income (mortgage payment-to-income) ratio is the total mortgage payment (which includes the
principal and interest, escrow deposits for real estate taxes, hazard insurance, the mortgage insurance premium, homeowners‘ association dues,
ground rent, special assessments, and payments for any acceptable secondary financing) divided by the gross effective monthly income. The total
fixed payment-to-effective income (total fixed payments-to-income) ratio is the total of the mortgage payment and all recurring charges
(including installment debts, revolving accounts, and child support) divided by the gross effective income.



                                                                     104
     Assets
     The $11,000 in net equity assets used to qualify the borrower was not verified and
     documented as required by HUD Handbook 4155.1, paragraph 2-10E, and the Fannie Mae
     Underwriting Findings.

     Contract
     A schedule A to purchase contract was executed and contained a covenant restricting resale
     or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
     A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
     24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
     ineligible for FHA insurance.

FHA loan number: 022-1874931                                      Loan status: Active28
Requesting indemnification: Yes                                   Default status: Special forbearance29

     We are seeking indemnification of this loan because a Chapter 7 bankruptcy rendered it
     ineligible at the time of closing and based on the executed schedule A to purchase contract.

     Income
     The borrower‘s monthly income used in the qualifying ratios was based on the annual salary.
     However, the borrower‘s current pay stub showed year-to-date earnings that did not reflect
     the entire salary. The impact on the ratios was not material.

     Credit
     The borrower had a Chapter 7 bankruptcy discharged on July 28, 2005, and the loan closed
     on April 6, 2007; therefore, two years did not elapse between the bankruptcy and the loan
     closing. The lender failed to document the borrower‘s ability to responsibly manage his or
     her financial affairs as required by HUD Handbook 4155.1, paragraph 2-3E.

     Contract
     A schedule A to purchase contract was executed and contained a covenant restricting resale
     or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
     A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
     24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
     ineligible for FHA insurance.




28
   A loan status of active means that the loan is currently insured by the Federal Housing Administration (FHA) and is not conveyance claim
terminated or terminated with no claim.
29
   A default status of special forbearance means that the borrower has a written repayment agreement.



                                                                     105
FHA loan number: 022-1883463                                       Loan status: Claim
Requesting indemnification: Yes                                    Default status: Property conveyed to insurer30

        We are seeking indemnification of this loan based on the debarred loan officer and the
        executed schedule A to purchase contract. The FHA-insured loan had an additional minor
        underwriting deficiency that did not affect the overall insurability of the loan.

        Contract
        A schedule A to purchase contract was executed and contained a covenant restricting resale
        or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
        A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
        24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
        ineligible for FHA insurance.

        Other
        The lender included a loan discount fee of $3,396.54 in the loan amount financed contrary to
        HUD Handbook 4000.2, paragraph 5-2P, which states that ―[d]iscount points charged by the
        lender on a purchase transaction may be charged to the buyer but may not be financed into
        the mortgage amount.‖ Additionally, the loan discount fee was not included in the good faith
        estimate that was prepared four days before settlement.

        The loan was originated by a loan officer employed by DHI Mortgage who was listed on the
        General Services Administration Excluded Parties List System31 contrary to HUD Handbook
        4000.2, paragraph 1-6A, which states "[i]f the name of any party to the transaction appears
        on either list, the application is not eligible for mortgage insurance."

FHA loan number: 022-1883781                                       Loan status: Active
Requesting indemnification: Yes                                    Default status: Special forbearance

        We are seeking indemnification of this loan based on the debarred loan officer and the
        executed schedule A to purchase contract. We did not identify other underwriting
        deficiencies for this loan.

        Contract
        A schedule A to purchase contract was executed and contained a covenant restricting resale
        or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
        A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
        24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
        ineligible for FHA insurance.

        Other
        The loan was originated by a loan officer employed by DHI Mortgage who was listed on the
        General Services Administration Excluded Parties List System, contrary to HUD Handbook


30
     This means that the property was conveyed to HUD (the insurer).
31
     List of parties excluded from federal procurement or nonprocurement programs.



                                                                      106
        4000.2, paragraph 1-6A, which states "[i]f the name of any party to the transaction appears
        on either list, the application is not eligible for mortgage insurance."

FHA loan number: 022-1890152                                           Loan status: Active
Requesting indemnification: Yes                                        Default status: Special forbearance

        We are seeking indemnification of this loan based on the revised mortgage payment-to-
        income and total fixed payments-to-income ratios, which reflect the allowable qualifying
        income as calculated by the OIG in accordance with HUD/FHA requirements, and based on
        the executed schedule A to purchase contract. After revision, the ratios were 38.52 and 58.95
        percent respectively, which far exceeded HUD‘s mortgage payment-to-income and total
        fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee
        Letter 2005-16. The lender did not document any compensating factors that could have
        justified the excessive ratios.

        Income
        The loan file did not contain the appropriate support to justify the overtime pay used in the
        ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The
        lender did not document the following: (1) the reason for including the borrower‘s overtime
        pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly
        overtime income used was based on a 24-month average of overtime earnings. Thus, the
        borrower‘s overtime income was inappropriately included, resulting in an overstatement of
        the monthly income by $1,084.29.

        Credit
        The loan file did not contain an explanation for the 11 credit report inquiries that were within
        90 days of the completed credit report, as required by HUD Handbook 4155.1, paragraph 2-
        3B. Additionally, the lender did not determine whether the material inquiries resulted in new
        debts as required by the Fannie Mae Underwriting Findings.

        Contract
        A schedule A to purchase contract was executed and which contained a covenant restricting
        resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The
        schedule A included a grant of lien to the seller in the amount of $40,000, which is also
        prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered
        the property ineligible for FHA insurance.

FHA loan number: 022-1892652                                           Loan status: Claim
Requesting indemnification: Yes                                        Default status: Foreclosure sale held32

        We are seeking indemnification of this loan based on the revised mortgage payment-to-
        income and total fixed payments-to-income ratios, which reflect the allowable qualifying
        income as calculated by the OIG in accordance with HUD/FHA requirements. After
        revision, the ratios were 41.54 and 51.40 percent, respectively, which far exceeded HUD‘s
        mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31

32
     A default status of foreclosure sale held means that the foreclosure sale was held.



                                                                          107
   and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any
   compensating factors that could have justified the excessive ratios.

   Income
   The loan file did not contain the appropriate support to justify the overtime pay used in the
   ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The
   lender did not document the following: (1) the reason for including the borrower‘s overtime
   pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly
   overtime income used was based on a 24-month average of overtime earnings. Thus, the
   borrower‘s overtime income was inappropriately included in the borrower‘s monthly income,
   resulting in overstating the monthly income by $557.12. Additionally, the lender did not
   establish that the borrower‘s overall employment would likely continue as required by HUD
   Handbook 4155.1, chapter 2, section 2, which requires the likelihood of its continuance be
   established to determine a borrower‘s capacity to repay mortgage debt.

   The borrower, at the time of loan approval, was employed by DHI Mortgage and was laid off
   shortly after the loan was approved. Therefore, the lender should have known the
   employment would not have lasted for at least the first three years of the loan, which is
   required to be established by HUD Handbook 4155.1, chapter 2, section 2, to determine a
   borrower‘s capacity to repay mortgage debt.

   Other
   A different branch or the main office should have processed the application because it was an
   employee loan. HUD Handbook 4000.4, paragraph 1-14, ―If possible, the application should
   be processed by a different branch or the mortgagee's main office. Although the draft report
   did not previously address this, the case must be clearly identified in the remarks section of
   the Mortgage Credit Worksheet and beneath Box F, "Employment," on the front of the case
   binder.‖ The processor, originator and interviewer were all from the local Tucson office.
   Additionally, the MCAW did not identify the loan as an employee loan. Although the
   underwriter may not have known about the impending borrower layoff, if the Mortgage
   Credit Analysis Worksheet had been properly identified, then individuals who processed the
   loan may have been able to halt the loan or inform the underwriter.

FHA loan number: 023-2356343                Loan status: Active
Requesting indemnification: Yes             Default status: Special forbearance

   We are seeking indemnification of this loan based on the revised total fixed payments-to-
   income ratio, which reflects the allowable qualifying income and liabilities as calculated by
   the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A
   to purchase contract. After revision, the ratio was 83.78 percent, which far exceeded HUD‘s
   total fixed payments-to-income benchmark ratio of 43 percent as stated in Mortgagee Letter
   2005-16. The lender did not document any compensating factors that could have justified the
   excessive ratio.




                                              108
   Income
   The loan was qualified, in part, on the borrower‘s base employment income. However, the
   borrower received Internal Revenue Service Form 1099-MISC, showing nonemployee
   compensation from the company listed as his current employer, which indicated that he was a
   contractor rather than an employee. Therefore, the income he received should have been
   treated as self-employed income rather than employment income. Coborrower A‘s income
   also appeared to be nonemployee compensation because no taxes were withheld from the
   weekly checks and no pay stubs were provided. Therefore, the income coborrower A
   received should also have been treated as self-employment income.

   Neither the borrower‘s income nor coborrower A‘s income met the two-year minimum
   length of self-employment criteria to be included in qualifying income as required by HUD
   Handbook 4155.1, paragraph 2-9A. This condition resulted in the overstatement of the
   borrower‘s monthly income by $2,080 and coborrower A‘s monthly income by $400.
   Additionally, the lender failed to provide any of the required documents for self-employed
   income contrary to HUD Handbook 4155.1, paragraph 2-9B.

   Bonus income from coborrower B was used in the qualifying income. However, the file did
   not contain evidence of bonus income for coborrower B as required by HUD Handbook
   4155.1, paragraph 2-7A. Thus, the bonus income was inappropriately included, and
   coborrower B‘s monthly income was overstated by $300.

   Contract
   A schedule A to purchase contract was executed and contained a covenant restricting resale
   or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
   A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
   24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
   ineligible for FHA insurance.

   Other
   The mortgage credit analysis worksheet provided in the file with the examiner‘s approval
   contained different figures than those used for approval in the Automatic Underwriting
   System. Further, the automated underwriting approval included an additional $803 per
   month liability that was not listed in the credit and liabilities section of the Fannie Mae
   Underwriting Findings. The lender did not explain the additional $803 debt.

FHA loan number: 023-2375190                 Loan status: Claim
Requesting indemnification: Yes              Default status: Property conveyed to insurer

   We are seeking indemnification of this loan based on the revised total fixed payments-to-
   income ratio, which reflects the allowable qualifying income as calculated by the OIG in
   accordance with HUD/FHA requirements. After revision, the ratio was 51.44 percent, which
   far exceeded HUD‘s total fixed payments-to-income benchmark ratio of 43 percent as stated
   in Mortgagee Letter 2005-16. The lender did not document any compensating factors that
   could have justified the excessive ratio.




                                               109
     Income
     The loan file did not contain the appropriate support to justify the overtime pay used in the
     ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The
     lender failed to (1) support that the coborrower had received such income for the past two
     years and that it was likely to continue, (2) develop an average of overtime income for the
     past two years, and (3) establish and document an earnings trend for the coborrower‘s
     overtime income. Thus, the lender inappropriately included the coborrower‘s overtime pay
     in the ratios, overstating the qualifying total monthly income by $1,562.87.

     Assets
     The lender used a retirement account balance of $10,443 to assist in qualifying the borrower
     for the loan. However, the account statement listed only $8,702.57 in funds available to
     borrow against the account. Additionally, the lender did not provide evidence that the
     retirement account allowed for withdrawals for conditions other than in connection with the
     borrower‘s employment termination, retirement, or death as required by Mortgagee Letter
     2004-47. Therefore, the retirement account funds of $10,443 used to assist in qualifying the
     borrower should not have been used as a borrower asset.

FHA loan number: 023-2375473                                       Loan status: Active
Requesting indemnification: Yes                                    Default status: Delinquent33

     We are seeking indemnification of this loan based on the revised mortgage payment-to-
     income and total fixed payments-to-income ratios and based on the executed schedule A to
     purchase contract. The qualified income contribution from the coborrower was unknown as
     was its impact on the qualifying ratios. The lender did not document any compensating
     factors that could have justified the excessive ratios.

     Income
     The lender documented two paystubs that had inconsistent pay amounts and pay periods. At
     a minimum, the lender should have inquired about the current pay discrepancy and pay
     period length discrepancy. Based on the loan documentation it appeared that some portion of
     the coborrower‘s income was either commission or a bonus. In either instance, additional
     analysis and documentation was required to conform to HUD Handbook 4155.1, paragraph
     2-7D. We were unable to determine the coborrower‘s qualified income contribution, or the
     impact on the qualifying ratios.

     Credit

     The loan file did not contain an explanation for the 14 credit report inquiries that were within
     90 days of the completed credit report as required by HUD Handbook 4155.1, paragraph 2-
     3B. Additionally, the lender did not determine whether the material inquiries resulted in new
     debts as required by the Fannie Mae Underwriting Findings.



33
  A default status of delinquent means that the account has a payment due and is unpaid, and there is no other action reportable. This code must
be reported as the initial delinquency code.



                                                                      110
        Contract
        A schedule A to purchase contract was executed and contained a covenant restricting resale
        or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
        A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
        24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
        ineligible for FHA insurance.

FHA loan number: 023-2383860                                          Loan status: Active
Requesting indemnification: Yes                                       Default status: Repayment34

        We are seeking indemnification based on the executed schedule A to purchase contract. The
        FHA-insured loan had additional minor underwriting deficiencies that did not affect the
        overall insurability of the loan.

        Income
        The lender failed to obtain the most recent pay stub for the borrower that reflected at least
        one month of year-to-date earnings as required by Mortgagee Letter 2004-47. Thus, the
        lender should have obtained an additional pay stub for the borrower before closing to
        properly document the borrower‘s income.

        Contract
        A schedule A to purchase contract was executed and contained a covenant restricting resale
        or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
        A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
        24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
        ineligible for FHA insurance.

FHA loan number: 023-2384380                                          Loan status: Active
Requesting indemnification: Yes                                       Default status: Special forbearance

        We are seeking indemnification of this loan based on the revised mortgage payment-to-
        income and total fixed payments-to-income ratios, which reflect the allowable qualifying
        income as calculated by the OIG in accordance with HUD/FHA requirements, and based on
        the executed schedule A to purchase contract. After revision, the ratios were 46.05 and 49.80
        percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total
        fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee
        Letter 2005-16. The lender did not document any compensating factors that could have
        justified the excessive ratios.

        Income
        The loan file did not contain the appropriate support to justify the overtime pay used in the
        ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The
        lender did not document a two year overtime trend analysis as required by HUD Handbook
        4155.1, paragraph 2-7 A. The lender also used a thirty two month average for qualifying
        rather than a twenty four month average as required by HUD Handbook 4155.1, paragraph 2-

34
     A default status of repayment means that a repayment plan has been entered into (any repayment plan that is not a special forbearance).



                                                                        111
   7 A. The twenty four month average resulted in a declining overtime average which requires
   additional documentation. However, the lender did not provide a sound rationalization in
   writing for including the declining overtime income as required by HUD Handbook 4155.1,
   paragraph 2-7A. Thus, the borrower‘s overtime income was inappropriately included and
   resulted in an overstatement of the monthly income by $319.21.

   Credit
   The loan file did not contain an explanation for the seven credit report inquiries that were
   within 90 days of the completed credit report as required by HUD Handbook 4155.1,
   paragraph 2-3B. Additionally, the lender did not determine whether the material inquiries
   resulted in new debts as required by the Fannie Mae Underwriting Findings.

   Contract
   A schedule A to purchase contract was executed and contained a covenant restricting resale
   or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
   A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
   24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
   ineligible for FHA insurance.

FHA loan number: 023-2388693                 Loan status: Claim
Requesting indemnification: No               Default status: Property conveyed to insurer

   We are seeking indemnification based on the executed schedule A to purchase contract.

   Contract
   A schedule A to purchase contract was executed and contained a covenant restricting resale
   or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
   A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
   24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
   ineligible for FHA insurance.

FHA loan number: 023-2389873                 Loan status: Active
Requesting indemnification: Yes              Default status: Special forbearance

   We are seeking indemnification of this loan based on the revised mortgage payment-to-
   income and total fixed payments-to-income ratios, which reflect the allowable qualifying
   income and liabilities as calculated by the OIG in accordance with HUD/FHA requirements.
   After revision, the ratios were 42.29 and 60.49 percent, respectively, which far exceeded
   HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios
   of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document
   any compensating factors that could have justified the excessive ratios.

   Income
   The loan file did not contain the appropriate support to justify the overtime, commission, and
   bonus income used in the income ratios to qualify the borrower as required by HUD
   Handbook 4155.1, paragraph 2-7A, when the borrower was with the employer for less than
   two years. Thus, the borrower‘s overtime, commission, and bonus income was


                                               112
   inappropriately included in the borrower‘s monthly income, resulting in an overstatement of
   the borrower‘s monthly income by $1,057.30.

   Credit
   The lender excluded one of the borrower‘s accounts listed on the credit report without
   providing an explanation or proof of the reason for the exclusion. Thus, the total monthly
   liability of $57.85 must be used in qualifying the borrower as required by HUD Handbook
   4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings.

FHA loan number: 023-2391447                Loan status: Claim
Requesting indemnification: Yes             Default status: Property conveyed to insurer

   We are seeking indemnification of this loan based on the revised total fixed payments-to-
   income ratio, which reflects the qualifying liabilities as calculated by the OIG in accordance
   with HUD/FHA requirements. After revision, the ratio was 47.96, which exceeded HUD‘s
   total fixed payments-to-income benchmark ratio of 43 percent as stated in Mortgagee Letter
   2005-16. The lender did not document any compensating factors that could have justified the
   excessive ratio. Additionally, we were unable to calculate the true total fixed payments-to-
   income ratio as the details provided in the loan file did not contain the information needed to
   accurately calculate the borrower‘s net rental income or loss.

   Income
   The overtime income used to qualify the borrower was not based on a 24-month average of
   overtime earnings as required by HUD Handbook 4155.1, paragraph 2-7A.

   Credit
   The credit report contained a civil judgment with a handwritten statement which stated that it
   would be paid at closing. However, the lender did not provide support that the civil
   judgment was satisfied before closing as required by HUD Handbook 4155.1, paragraph 2-
   3C. The HUD-1 settlement statement listed the judgment to be paid at closing, but the title
   file showed that the check to pay off the judgment was voided.

   The loan file contained nothing to support that the borrower received permission from the
   court to enter into the mortgage transaction as required by HUD Handbook 4155.1,
   paragraph 2-3E, after the borrower filed for Chapter 13 bankruptcy.

   We were unable to determine the actual net loss on the borrower‘s rental property, as the loan
   file did not contain enough information to determine the additional expenses associated with
   the rental property. The lender did not determine the amount for the fee listed as ―TRASH‖
   payable by the owner on the lease agreement. Additionally, the lender did not obtain
   information as to whether the rental property had corresponding monthly mortgage insurance
   premiums or homeowners‘ association dues. Therefore, the lender did not properly calculate
   the net rental profit or loss in accordance with HUD Handbook 4155.1, paragraph 2-7M2,
   which requires that, after the gross rental amount is reduced for vacancies and maintenance,
   then the principal and interest, homeowners‘ association dues, etc., are to be subtracted to
   determine the net profit or loss on the rental property.



                                              113
   The lender excluded the borrower‘s Chevron account listed on the credit report without
   providing an explanation or proof of the reason for the exclusion. Thus, the total monthly
   liability of $10 must be used in qualifying the borrower as required by HUD Handbook
   4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings.

FHA loan number: 023-2409090                 Loan status: Active
Requesting indemnification: No               Default status: Special forbearance

   The FHA-insured loan had minor underwriting deficiencies that did not affect the overall
   insurability of the loan.

   Contract
   The lender did not provide the addendum to the purchase contract for occupancy/investment
   disclosure in the FHA loan file as required by HUD Handbook 4155.1, paragraph 3-1H, and
   the Fannie Mae Underwriter Findings.

FHA loan number: 023-2412241                 Loan status: Active
Requesting indemnification: Yes              Default status: Special forbearance

   We are seeking indemnification of this loan based on the executed schedule A to purchase
   contract. The FHA-insured loan had additional minor underwriting deficiencies that did not
   affect the overall insurability of the loan.

   Credit
   The lender excluded the coborrower‘s auto lease listed on her pay stub without providing an
   explanation or proof of the reason for the exclusion. Thus, the additional monthly liability of
   $356.38 must be used in qualifying the borrower as required by HUD Handbook 4155.1,
   paragraph 2-11, and the Fannie Mae Underwriter Findings.

   Contract
   A schedule A to purchase contract was executed and contained a covenant restricting resale
   or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
   A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
   24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
   ineligible for FHA insurance.

FHA loan number: 023-2414288                 Loan status: Claim
Requesting indemnification: Yes              Default status: Foreclosure sale held

   We are seeking indemnification of this loan based on the inability to determine the
   borrower‘s liabilities.

   Income
   The borrower‘s income was not verified through a completed verification of employment as
   required by the Fannie Mae Underwriting Findings. The verification of employment did not
   contain the probability of continued employment and was marked ―n/a,‖ indicating
   nonapplicable.


                                               114
        Credit
        The lender did not obtain a credit history for the borrower‘s nonpurchasing spouse as
        required by HUD Handbook 4155.1, paragraph 2-2D, which requires a credit report for a
        nonpurchasing spouse in a community property state such as Arizona. Although the
        nonpurchasing spouse provided a letter stating that she did not have a Social Security
        number, it remains the lender‘s responsibility to exhaust all possible means to resolve the
        issue. Without obtaining the nonpurchasing spouse‘s credit report or establishing alternative
        credit, the lender was unable to determine the coborrower‘s liabilities.

FHA loan number: 023-2425869                                            Loan status: Active
Requesting indemnification: Yes                                         Default status: First legal action to commence
                                                                        foreclosure35

        We are seeking indemnification of this loan based on the revised mortgage payment-to-
        income and total fixed payments-to-income ratios, which reflect the allowable qualifying
        income and liabilities as calculated by the OIG in accordance with HUD/FHA requirements,
        and based on the executed schedule A to purchase contract. After revision, the ratios were
        53.89 and 84.26 percent, respectively, which far exceeded HUD‘s mortgage payment-to-
        income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated
        in Mortgagee Letter 2005-16. The lender did not document any compensating factors that
        could have justified the excessive ratios.

        Income
        The borrower‘s income used to qualify was based, in part, on Social Security disability
        income; however, the lender did not obtain supporting documents to show that this income
        was likely to continue for at least the first three years of the mortgage as required by HUD
        Handbook 4155.1, paragraph 2-7E. Therefore, the income did not meet the requirements for
        use in qualifying the borrower. This condition resulted in an overstatement of the borrower‘s
        income by $1,886.63.

        Credit
        The lender excluded one of the borrower‘s accounts listed on the credit report without
        providing an explanation or proof of the reason for the exclusion. Thus, the total monthly
        liability of $103 must be used in qualifying the borrower as required by HUD Handbook
        4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings.

        Contract
        A schedule A to purchase contract was executed and contained a covenant restricting resale
        or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
        A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
        24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
        ineligible for FHA insurance.




35
     This default status means that the first public legal action required to initiate foreclosure was completed.



                                                                           115
FHA loan number: 023-2426099                 Loan status: Claim
Requesting indemnification: Yes              Default status: Property conveyed to insurer

   We are seeking indemnification of this loan based on the revised mortgage payment-to-
   income and total fixed payments-to-income ratios, which reflect the allowable qualifying
   income as calculated by the OIG in accordance with HUD/FHA requirements, and based on
   the executed schedule A to purchase contract. After revision, the ratios were 37.35 and 71.32
   percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total
   fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee
   Letter 2005-16. The lender did not document any compensating factors that could have
   justified the excessive ratios.

   Income
   The loan file did not contain the appropriate support to justify the overtime pay used in the
   income ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-
   7A. The lender did not document the following: (1) the reason for including the borrower‘s
   overtime pay and (2) an overtime trend over a two-year period. Although the lender
   documented on the verification of employment that the overtime income was likely to
   continue and that it was based on a 24-month average, the most recent pay stub provided for
   the new year did not support the continuance of the overtime income. Thus, the borrower‘s
   overtime income was inappropriately included in the borrower‘s monthly income, resulting
   in an overstatement of the borrower‘s monthly income by $3,323.93.

   Debt
   The lender did not include a new debt, a timeshare that resulted from a material inquiry,
   ―Merchants Credit Info,‖ listed on the borrower‘s credit report as required by HUD
   Handbook 4155.1, paragraph 2-3B, and the Fannie Mae Underwriting Findings. The
   inclusion of this debt would have further increased the total fixed payments-to-income ratio.

   Contract
   A schedule A to purchase contract was executed and contained a covenant restricting resale
   or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
   A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
   24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
   ineligible for FHA insurance.

FHA loan number: 023-2427150                 Loan status: Claim
Requesting indemnification: Yes              Default status: Property conveyed to insurer

   We are seeking indemnification of this loan based on the revised mortgage payment-to-
   income and total fixed payments-to-income ratios, which reflect the allowable qualifying
   income as calculated by the OIG in accordance with HUD/FHA requirements. After
   revision, the ratios were 46.67 and 73.99 percent, respectively, which far exceeded HUD‘s
   mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31
   and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any
   compensating factors that could have justified the excessive ratios.



                                               116
   Income
   The loan file did not contain the appropriate support to justify the inclusion of bonus earnings
   in the qualifying ratios as required by HUD Handbook 4155.1, paragraph 2-7A. The lender
   did not document the following: (1) the reason for including the borrower‘s bonus pay, (2) a
   bonus trend over a two-year period, (3) that the amount of monthly bonus income used was
   based on a 24-month average, and (4) the likelihood that the bonus income would continue.
   Thus, the borrower‘s bonus income was inappropriately included and resulted in an
   overstatement of the monthly income by $1,198.68. Additionally, the lender did not
   establish that the borrower‘s overall employment was likely to continue as required by HUD
   Handbook 4155.1, chapter 2, section 2, which requires the likelihood of its continuance be
   established to determine a borrower‘s capacity to repay mortgage debt.

   Credit
   The lender did not provide supporting documentation of the deposit amount and the source of
   funds the borrower used to pay the $1,000 earnest money deposit as required by HUD
   Handbook 4155.1, paragraph 2-10A, when the borrower‘s documented savings does not
   support the ability to pay such deposit. During an interview with the borrower, we were
   informed that the $1,000 earnest money deposit was borrowed from family. However, we
   did not include this information in the revision of the borrower‘s ratios, although doing so
   would have further increased the borrower‘s total fixed payments-to-income ratio.

   Assets
   The $1,380 in retirement assets listed to qualify the borrower was not verified and
   documented as required by HUD Handbook 4155.1, paragraph 2-10, and the Fannie Mae
   Underwriting Findings.

FHA loan number: 023-2435939                 Loan status: Claim
Requesting indemnification: Yes              Default status: Property conveyed to insurer

   We are seeking indemnification of this loan based on the revised mortgage payment-to-
   income and total fixed payments-to-income ratios, which reflect the allowable qualifying
   income as calculated by the OIG in accordance with HUD/FHA requirements, and based on
   the executed schedule A to purchase contract. After revision, the ratios were 59.44 and
   103.94 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and
   total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee
   Letter 2005-16. The lender did not document any compensating factors that could have
   justified the excessive ratios.

   Income
   The borrower‘s income used to qualify was based on Social Security disability income;
   however, the lender did not obtain supporting documents to show that this income was likely
   to continue for at least the first three years of the mortgage as required by HUD Handbook
   4155.1, paragraph 2-7E. Therefore, the income did not meet the requirements for use to
   qualify the borrower. This condition resulted in an overstatement of the borrower‘s monthly
   income by $2,013.75.




                                               117
        The coborrower‘s employment was not verified as likely to continue as required by HUD
        Handbook 4155.1, chapter 2, section 2, which requires the likelihood of its continuance be
        established to determine a borrower‘s capacity to repay mortgage debt.

        Contract
        A schedule A to purchase contract was executed and contained a covenant restricting resale
        or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
        A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
        24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
        ineligible for FHA insurance.

FHA loan number: 023-2438080                                          Loan status: Active
Requesting indemnification: Yes                                       Default status: Servicing transferred or sold to
                                                                      another lender36

        We are seeking indemnification of this loan based on the executed schedule A to purchase
        contract. The FHA-insured loan had additional minor underwriting deficiencies that did not
        affect the overall insurability of the loan.

        Credit
        The lender excluded four of the borrower‘s accounts listed on the credit report without
        providing an explanation or proof of the reason for the exclusion as required by HUD
        Handbook 4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings.

        Contract
        A schedule A to purchase contract was executed and contained a covenant restricting resale
        or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
        A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
        24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
        ineligible for FHA insurance.

FHA loan number: 023-2438810                                          Loan status: Claim
Requesting indemnification: Yes                                       Default status: Servicing transferred or sold to
                                                                      another lender

        We are seeking indemnification of this loan based on the revised total fixed payments-to-
        income ratio, which reflects the qualifying liabilities as calculated by the OIG in accordance
        with HUD/FHA requirements, and based on the executed schedule A to purchase contract.
        After revision, the ratio was 78.57 percent, which far exceeded HUD‘s total fixed payments-
        to-income benchmark ratio of 43 percent as stated in Mortgagee Letter 2005-16. The lender
        did not document an allowable compensating factor that could have justified the excessive
        ratio.




36
     This is used to advise that the servicing was transferred to new mortgage servicer - both the losing and gaining mortgages servicers must report.



                                                                         118
   Credit
   The documentation in the loan file did not support that the six student loans were deferred or
   otherwise should have been excluded from the borrower‘s total fixed payments-to-income
   ratio. The student loan repayments, according to the borrower‘s credit report, were set to
   begin September 13, 2007. Since the repayment of the loans was to begin within six months
   of closing, the student loans were required to be included as a monthly liability as stated in
   HUD Handbook 4155.1, paragraph 2-11C. Additionally, debts without a monthly repayment
   term specified on the credit report are to be calculated at 5 percent of the balance or $10 per
   month, whichever is greater. Thus, the balance of the student loan accounts of $32,365
   multiplied by 5 percent equates to an additional monthly debt of $1,618.25, which was not
   included by the lender in the total fixed payments-to-income ratio.

   In addition to the excluded liabilities discussed above, the borrowers informed us that they
   borrowed about $3,600 before closing with repayment terms of at least $150 per month. This
   would have increased the ratios further; however, we did not include this monthly obligation
   in our revision of the ratios because we did not have the exact amount of the debt or the
   repayment terms.

   Assets
   A recent bank statement accompanying the verification of deposit—needed to support the
   borrower‘s assets—was not provided as required by HUD Handbook 4155.1, paragraph 3-1F.
   Additionally, the lender failed to obtain documentation of the source of funds used for the
   earnest money deposit when the verification of deposit did not support the borrower‘s ability
   to fund the earnest money deposit as required by HUD Handbook 4155.1, paragraph 2-10A.

   Contract
   A schedule A to purchase contract was executed and contained a covenant restricting resale
   or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
   A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
   24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
   ineligible for FHA insurance.

FHA loan number: 023-2442707                 Loan status: Claim
Requesting indemnification: Yes              Default status: Property conveyed to insurer

   We are seeking indemnification of this loan based on the revised mortgage payment-to-
   income and total fixed payments-to-income ratios, which reflect the allowable qualifying
   income and liabilities as calculated by the OIG in accordance with HUD/FHA requirements.
   After revision, the ratios were 32.28 and 48.40 percent, respectively, which exceeded HUD‘s
   mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31
   and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any
   compensating factors that could have justified the excessive ratios.

   Income
   The loan file did not contain the appropriate support to justify the overtime pay used in the
   income ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-



                                               119
   7A. Although the lender documented that the borrower had received overtime income in the
   past, the lender failed to support that the overtime income was likely to continue. Further,
   the most current pay stub used to support the borrower‘s income provided a gross pay
   amount for the current year that did not support the continuance of the overtime pay. Thus,
   the borrower‘s overtime income was inappropriately included and resulted in an
   overstatement of monthly income by $544.08. Additionally, the lender did not establish that
   the borrower‘s overall employment was likely to continue as required by HUD Handbook
   4155.1, chapter 2, section 2.

FHA loan number: 023-2447263                Loan status: Active
Requesting indemnification: No              Default status: Servicing transferred or sold to
                                            another lender

   The FHA-insured loan had minor underwriting deficiencies that did not affect the overall
   insurability of the loan.

   Income
   The loan file did not support that the bonus income used to assist in qualifying the borrower
   was likely to continue as required by HUD Handbook 4155.1, paragraph 2-7A. Additionally,
   the lender did not establish that the borrower‘s overall employment was likely to continue as
   required by HUD Handbook 4155.1, chapter 2, section 2.

   Other
   The lender included a loan discount fee of $8,298.39 in the loan amount financed, contrary to
   HUD Handbook 4000.2, paragraph 5-2P, which states that ―[d]iscount points charged by the
   lender on a purchase transaction may be charged to the buyer but may not be financed into
   the mortgage amount.‖ Additionally, the loan file demonstrated that the borrower paid the
   closing funds for the loan discount of $8,298.39 in the form of a cashier‘s check. Thus, the
   borrower paid twice for the loan discount.

FHA loan number: 023-2452473                Loan status: Active
Requesting indemnification: Yes             Default status: Servicing transferred or sold to
                                            another lender

   We are seeking indemnification of this loan because the lender failed to support the use of
   the borrower‘s commission income, which was the sole income used to qualify the borrower.

   Income
   The borrower had been with the current employer for seven months at the time of the income
   verification. The employer remarks stated, ―commission paid by flag hour or per job,‖ and
   listed the borrower‘s year-to-date earnings under commissions as the sole income used to
   qualify the borrower. The borrower‘s previous employer listed income as base pay and not
   as commission income. Therefore, the lender failed to support the use of the borrower‘s
   commission income as required by HUD Handbook 4155.1, paragraph 2-7D, which requires
   at least one year of earned commissions with a sound rationalization for acceptance
   documented by the lender.



                                             120
FHA loan number: 023-2453167                Loan status: Claim
Requesting indemnification: Yes             Default status: Property conveyed to insurer

   We are seeking indemnification of this loan based on the revised mortgage payment-to-
   income and total fixed payments-to-income ratios, which reflect the allowable qualifying
   income as calculated by the OIG in accordance with HUD/FHA requirements. After
   revision, the ratios were 40.18 and 63.28 percent, respectively, which far exceeded HUD‘s
   mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31
   and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any
   compensating factors that could have justified the excessive ratios.

   Income
   The loan file did not contain the appropriate support to justify the overtime pay used in the
   ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The
   lender did not document the following: (1) the reason for including the borrower‘s overtime
   pay, (2) an overtime trend over a two-year period, (3) that the amount of monthly overtime
   income used was based on a 24-month average, and (4) the likelihood that the overtime
   income would continue. Thus, the borrower‘s overtime income was inappropriately included
   and resulted in an overstatement of the monthly income by $789.80. Additionally, the lender
   did not establish that the borrower‘s overall employment was likely to continue as required
   by HUD Handbook 4155.1, chapter 2, section 2.


FHA loan number: 023-2458663                Loan status: Active
Requesting indemnification: Yes             Default status: First legal action to commence
                                            foreclosure

   We are seeking indemnification of this loan based on the revised mortgage payment-to-
   income and total fixed payments-to-income ratios, which reflect the allowable qualifying
   income as calculated by the OIG in accordance with HUD/FHA requirements, and based on
   the executed schedule A to purchase contract. After revision, the ratios were 37.04 and 59.84
   percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total
   fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee
   Letter 2005-16. The lender did not document any compensating factors that could have
   justified the excessive ratios.

   Income
   The loan file did not contain the appropriate support to justify the overtime, bonus, and
   stipend pay used in the income ratios to qualify the borrower as required by HUD Handbook
   4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for
   including the borrower‘s overtime, bonus, and stipend pay; (2) an overtime, bonus, and
   stipend trend over a two-year period; (3) that the amount of monthly overtime, bonus, and
   stipend was based on 24-month average earnings; and (4) the likelihood that the overtime,
   bonus, and stipend income would continue. Thus, the borrower‘s overtime, bonus, and
   stipend income was inappropriately included and resulted in an overstatement of the monthly
   income by $3,247.01.



                                             121
   Credit
   The loan file did not contain an explanation for the 12 credit report inquiries that were within
   90 days of the completed credit report as required by HUD Handbook 4155.1, paragraph 2-
   3B. Additionally, the lender did not determine whether the material inquiries resulted in new
   debts as required by the Fannie Mae Underwriting Findings.

   Contract
   A schedule A to purchase contract was executed and contained a covenant restricting resale
   or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
   A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
   24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
   ineligible for FHA insurance.

FHA loan number: 023-2468047                 Loan status: Active
Requesting indemnification: Yes              Default status: Servicing transferred or sold to
                                             another lender

   We are seeking indemnification based on the executed schedule A to purchase contract. The
   FHA-insured loan had an additional minor underwriting deficiency that did not affect the
   overall insurability of the loan.

   Contract
   A schedule A to purchase contract was executed and contained a covenant restricting resale
   or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
   A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
   24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property
   ineligible for FHA insurance.

   Other
   The lender included a loan discount fee of $4054.45 in the loan amount financed, contrary to
   HUD Handbook 4000.2, paragraph 5-2P, which states, ―[d]iscount points charged by the
   lender on a purchase transaction may be charged to the buyer but may not be financed into
   the mortgage amount.‖

FHA loan number: 023-2482980                 Loan status: Active
Requesting indemnification: Yes              Default status: Delinquent

   We are seeking indemnification of this loan based on the revised total fixed payments-to-
   income ratio and the executed schedule A to purchase contract. The total fixed payments-to-
   income ratio was 53.76 percent which reflects allowable qualifying income as calculated by
   the OIG in accordance with HUD/FHA requirements. The total fixed payments-to-income
   ratio far exceeded HUD‘s total fixed payments-to-income benchmark ratio of 43 percent as
   stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors
   that could have justified the excessive ratios.




                                               122
Income
The loan file did not contain the appropriate support to justify the monthly base pay used in
the income ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph
2-7A. Thus, the borrower‘s monthly income was overstated; however, the difference was not
material.

Credit
The borrower‘s credit report showed a late mortgage payment that would require an
explanatory statement according to HUD Handbook 4155.1, paragraph 2-3, which states that
major indications of derogatory credit require written sufficient explanation from the
borrower. Further, according to HUD Handbook 4155.1, paragraph 2-3A, the payment
history of the borrower‘s housing obligations holds significant importance in evaluating
credit. However, no such information was provided.

The borrower had an inquiry on the credit report that was not explained as required by HUD
Handbook 4155.1, paragraph 2-3B. Additionally, three months before settlement the
borrower opened a new credit card that had a balance owed of $1,339. The lender did not
determine the purpose of the debt as required by HUD Handbook 4155.1, paragraph 2-3B.

The lender stated on the mortgage credit analysis worksheet that ―[t]he borrower is leasing
her existing [mortgaged property], however she qualified with the full mortgage payment.‖
The fixed payment-to-income ratio (53.76 percent) exceeded HUD‘s allowable limit of 43
percent without appropriate compensating factors as required by HUD Handbook 4155.1,
paragraph 2-13.

Assets
A recent bank statement accompanying the verification of deposit—necessary to support the
borrower‘s assets—was not provided as required by HUD Handbook 4155.1, paragraph 3-1F.

Contract
A schedule A to purchase contract was executed and contained a covenant restricting resale
or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule
A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by
24 CFR part 203.32(a). Therefore, the schedule A to purchase contract rendered the property
ineligible for FHA insurance.

Other
The lender did not determine whether the real estate agent was on HUDs limited denial of
participation list or the General Services Administration‘s Excluded Parties List System as
required by HUD Handbook 4000.2, paragraph 1-6A.




                                           123
FHA loan number: 023-248790737                                Loan status: Claim
Requesting indemnification: Yes                               Default status: Property conveyed to insurer

        We are seeking indemnification of this loan based on the revised mortgage payment-to-
        income and total fixed payments-to-income ratios, which reflect the allowable qualifying
        income as calculated by the OIG in accordance with HUD/FHA requirements. After
        revision, the ratios were 50.01 and 63.38 percent, respectively, which far exceeded HUD‘s
        mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31
        and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any
        compensating factors that could have justified the excessive ratios.

        Income
        The loan file did not contain the appropriate support to justify the overtime pay used in the
        ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The
        lender did not document the following: (1) the reason for including the borrower‘s overtime
        pay, (2) an overtime trend over a two-year period, (3) that the amount of monthly overtime
        income used was based on a 24-month average of overtime earnings, and (4) the likelihood
        that the overtime income would continue. Thus, the borrower‘s overtime income was
        inappropriately included and resulted in an overstatement of the monthly income by
        $1,070.35. Additionally, the lender did not establish that the borrower‘s overall employment
        was likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2.

FHA loan number: 023-2529391                                  Loan status: Active
Requesting indemnification: Yes                               Default status: Delinquent

        We are seeking indemnification of this loan based on the revised mortgage payment-to-
        income and total fixed payments-to-income ratios, which reflect the allowable qualifying
        income as calculated by the OIG in accordance with HUD/FHA requirements. After
        revision, the ratios were 62.30 and 64.84 percent, respectively, which far exceeded HUD‘s
        mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31
        and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document an
        allowable compensating factor that could have justified the excessive ratios.

        Income
        The loan file did not contain the appropriate support to justify the overtime pay used in the
        ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The
        lender did not document the following: (1) the reason for including the borrower‘s overtime
        pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly
        overtime income used was based on a 24-month average of overtime earnings. Thus, the
        borrower‘s overtime income was inappropriately included and resulted in an overstatement
        of the monthly income by $435. Additionally, the borrower‘s pay stubs did not support 40
        hours per week of wages that were used to qualify. The borrower‘s year-to-date earnings
        supported a monthly income of $2,167.35, and this reduced the borrower‘s qualifying base
        monthly income by another $640.65.


37
     DHI Mortgage had FHA loan number 023-2487907 recorded as 023-248667-0.



                                                                 124
FHA loan number: 023-2640107                       Loan status: Active
Requesting indemnification: No                     Default status: Special forbearance

   The FHA-insured loan had minor underwriting deficiencies that did not affect the overall
   insurability of the loan.

   Income
   The loan file did not contain the appropriate support to justify the overtime and bonus pay
   used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph
   2-7A. The lender did not document the following: (1) the reason for including the
   borrower‘s overtime and bonus pay, (2) an overtime and bonus trend over a two-year period,
   and (3) that the amount of monthly overtime and bonus income used was based on a 24-
   month average of overtime and bonus earnings. Additionally, the lender did not provide a
   sound rationalization in writing for including the declining bonus and overtime income in
   qualifying income as required by HUD Handbook 4155.1, paragraph 2-7A. Thus, the
   borrower‘s overtime income was inappropriately included and resulted in an overstatement
   of the monthly income by $380.24. The resulting ratio(s) met HUD‘s threshold(s) after the
   correct income was applied.

FHA loan number: 023-2674566               Loan status: Claim
Requesting indemnification: Yes            Default status: Property conveyed to insurer

   We are seeking indemnification of this loan based on the revised total fixed payments-to-
   income ratios, which reflect the allowable qualifying income as calculated by the OIG in
   accordance with HUD/FHA requirements. After revision, the ratio was 56.36 percent, which
   far exceeded HUD‘s total fixed payments-to-income benchmark ratio of 43 percent as stated
   in Mortgagee Letter 2005-16. The lender did not document any compensating factors that
   could have justified the excessive ratios.

   Income
   The loan file did not contain the appropriate support to justify the overtime pay used in the
   income ratios to qualify the borrower and coborrower as required by HUD Handbook 4155.1,
   paragraph 2-7A. The lender did not document the following: (1) the reason for including the
   borrower‘s and coborrower‘s overtime pay, (2) an overtime trend over a two-year period, and
   (3) that the amount of monthly overtime income used was based on a 24-month average of
   overtime earnings. Thus, the borrower‘s and coborrower‘s overtime income was
   inappropriately included and resulted in an overstatement of the monthly income by $457.
   On the mortgage credit analysis worksheet, although the underwriter‘s approval was present,
   the remarks section indicated that overtime income was not used to qualify the borrowers.
   Additionally, the lender did not establish that the borrower‘s and coborrower‘s overall
   employment was likely to continue as required by HUD Handbook 4155.1, chapter 2, section
   2. Further, the most recent two years of employment for the coborrower were not verified as
   required by HUD Handbook 4155.1, paragraph 2-6, and Mortgagee Letter 2004-47.




                                             125
Other
The loan officer noted that at one time, this FHA loan was rated by the automated
underwriting system as refer/eligible; however, the loan was ultimately approved/eligible
through the automated underwriting system. This is contrary to the Fannie Mae
Underwriting Findings and Mortgagee Letter 2004-47, which indicate that a registered direct
endorsement underwriter must fully underwrite those applications in which the automated
underwriting system refers the loan application to an underwriter for review and comply with
the underwriting requirements described in HUD Handbook 4155.1 and applicable
mortgagee letters.




                                          126
Appendix E

          QUALITY CONTROL REVIEW DEFICIENCIES NOTED BY FHA LOAN NUMBER
The table below contains the quality control review deficiencies noted for the 10 FHA loans reviewed, as discussed in finding 3.

                                                                                                                                                         Were the
                                                       Was a new                                                                                         condition
                                                      credit report                            Were all     Was a desk or                             clearance and
                                      Was the review   pulled and                              required     field appraisal Was the underwriting       closing items
      FHA loan        Type of quality completed in a compared with                          reverifications      review     decision reviewed and     reviewed and
       number         control review timely manner? the original?                            completed?       conducted?        documented?           documented?
                                                                                       No, lacking
              Early payment                                                            reverification of
022-1883463 default                        No, 5 months.        Yes                    deposit and gift.   No              No                        No
022-189265238 Regular review               No                   No                     No                  No              No                        No
                                                                                                                           No, the reviewer stated
                                                                                                                           ―QC [quality control
                                                                                                                           reviewer] found
                                                                                                                           significant errors, but
                                                                                                                           agrees with the loan
                                                                No, missing                                                decision.‖ No
                                                                nonpurchasing          No, lacking                         explanation provided
                                                                spouse‘s credit        reverification of                   for contradictory
023-2414288 Regular review                 Yes                  report.                deposit and gift.   No              decision.                 No
                                                                                       No, lacking
            Early payment                                                              reverification of
023-2426099 default                        No, 11 months.       Yes                    deposit and gift.   No              No                        No
                                                                                       No, lacking
            Early payment                                                              reverification of
023-2442707 default                        No, 12 months.       Yes                    deposit and gift.   No              No                        No
                                                                No, credit report      No, lacking
                                                                was not                reverification of
023-2447263 Regular review                 Yes                  compared.              deposit and gift.   No              No                        No

38
     DHI Mortgage did not provide any quality control review documents for this FHA loan.

                                                                                                 127
                                                                                                                              Were the
                                              Was a new                                                                       condition
                                             credit report           Were all     Was a desk or                            clearance and
                             Was the review   pulled and             required     field appraisal Was the underwriting      closing items
  FHA loan   Type of quality completed in a compared with         reverifications      review     decision reviewed and    reviewed and
   number    control review timely manner? the original?           completed?       conducted?        documented?          documented?
                                                                 No, lacking
            Early payment                                        reverification of
023-2453167 default         No, 7 months.    Yes                 deposit and gift. No            No                       No
                                                                 No, lacking
                                                                 reverification of
                                                                 deposit and gift.
                                                                 Verification of
                                                                 employment hire
                                                                 date differed two
                                                                 years from that in
                                                                 loan file - no
            Early payment                                        discussion or
023-2458663 default         No, 13 months.   Yes                 resolution.        No           No                       No
                                             No. Discrepancy
                                             with original
                                             versus quality
                                             control credit
                                             report. Failed to
                                             pull a credit
                                             report from a       No, lacking
            Early payment                    different           reverification of
023-2640107 default         Yes, 3 months.   company.            deposit and gift.   No          No                       No
                                             No. Discrepancy
                                             with original
                                             versus new credit
                                             report. Failed to
                                             pull a credit
                                             report from a       No, lacking
            Early payment                    different           reverification of
023-2674566 default         No, 8 months.    company.            deposit and gift.   No          No                       No




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