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.
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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.
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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.
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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.
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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
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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.
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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
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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.
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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
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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.
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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
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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.
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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.
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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....
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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
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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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
128
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)