oversight

Eagle Home Mortgage, Kirkland, Washington, Did Not Always Comply with HUD Guidelines When Underwriting Federal Housing Administration-Insured Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-07-20.

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

                                                                   Issue Date
                                                                                July 20, 2009
                                                                   Audit Report Number
                                                                            2009-SE-1003




TO:         David H. Stevens, Assistant Secretary for Housing - Federal Housing
            Commissioner, H



FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Region X, 0AGA

SUBJECT: Eagle Home Mortgage, Kirkland, Washington, Did Not Always Comply with
         HUD Guidelines When Underwriting Federal Housing Administration-Insured
         Loans.

                                     HIGHLIGHTS

 What We Audited and Why

      We audited single-family loan originations at Eagle Home Mortgage (Eagle Mortgage) to
      determine whether it originated Federal Housing Administration (FHA)-insured loans in
      accordance with U.S. Department of Housing and Urban Development (HUD)
      requirements. Although its default rate was less than half the national average, we
      audited Eagle Mortgage because its default-to-claim rate was more than twice the
      national average.


 What We Found

      Eagle Mortgage did not always originate FHA insured loans in accordance with HUD
      requirements. Specifically, Eagle Mortgage did not follow HUD's underwriting
      requirements for 15 of the 36 FHA insured loans reviewed, three of which had
      deficiencies that affected the insurability of the loan. In addition, Eagle Mortgage did not
      adequately follow its HUD-approved quality control plan when reviewing loans with
      early payment defaults when it failed to review one loan which defaulted after only four
      payments.
    What We Recommend

     We recommend that the Assistant Secretary for Housing – Federal Housing
     Commissioner (1) require Eagle Mortgage to reimburse or indemnify HUD for actual and
     potential losses on three loans with underwriting deficiencies, (2) review loans recently
     underwritten by Eagle Mortgage to verify that the underwriting deficiencies noted during
     our review are no longer an issue, (3) review Eagle Mortgage’s monthly quality control
     reports to ensure that they include all FHA-insured loans that defaulted within the first six
     months, and (4) require Eagle Mortgage to conduct training on its quality control plan.

     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 Eagle Mortgage on June 17, 2009, and held an exit
     conference on June 30, 2009. We requested a response by July 2, 2009 and Eagle
     Mortgage provided it on July 1, 2009. Eagle Mortgage generally disagreed with finding
     one and agreed with finding two.

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




                                              2
                             TABLE OF CONTENTS

Background and Objective                                                         4

Results of Audit
        Finding 1: Eagle Mortgage Did Not Follow HUD Underwriting Requirements   5
                   for Three FHA-Insured Loans

        Finding 2: Eagle Mortgage Did Not Always Follow Quality Control          9
                   Requirements

Scope and Methodology                                                            11

Internal Controls                                                                12

Appendixes

   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use           13
   B.   Auditee Comments and OIG’s Evaluation                                    14
   C.   Summary of Loan Deficiencies                                             23
   D.   Projected Losses                                                         25




                                              3
                           BACKGROUND AND OBJECTIVE
Eagle Home Mortgage

The U.S. Department of Housing and Urban Development (HUD) authorized Eagle Home
Mortgage (Eagle Mortgage) as a Federal Housing Administration (FHA) nonsupervised lender
on April 9, 1987. Headquartered in Kirkland, Washington, Eagle Mortgage currently has 23
active branches with offices in Arizona, Colorado, Florida, Idaho, Nevada, Oregon, and
Washington. During our audit period, January 1, 2007, to December 31, 2008, Eagle Mortgage
originated 1,405 loans. According to FHA’s Neighborhood Watch1 Web site, only 2.56 percent
of these loans went into default within their first two years. However, the defaults-to-claims
ratio2 for Eagle Mortgage’s defaulting loans was in excess of 11 percent, more than double the
national average defaults-to-claims ratio of 4.5 percent.

Eagle Mortgage originates FHA-insured loans using an automated underwriting system that
transmits loan application data to FHA’s TOTAL Scorecard (scorecard). The scorecard then
uses these data to evaluate the credit risk of the loans and classifies the risk as either
“accept/approve” or “refer” in the automated underwriting system findings report (findings
report). Along with the classification, the findings report lists the approval conditions and
documentation requirements for the loan. For loans rated “accept/approve,” the loan is eligible
for FHA insurance provided the data entered into the automated underwriting system are true,
complete, properly documented, and accurate and the loan package meets all other FHA
requirements. For loans rated “refer,” the lender must manually underwrite the loan in
accordance with FHA standard credit policies and requirements. HUD allows reduced
documentation requirements for loans processed with automated underwriting systems.

Federal Housing Administration

The Federal Housing Administration, created by Congress in 1934, is the largest mortgage
insurer in the United States. The cost of this mortgage insurance is paid by the homeowners and
this 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,
an increase of 186 percent over the same period in 2008. This was 68 percent of all insured
mortgage endorsements.

Our Objective

Our objective was to determine whether Eagle Mortgage properly underwrote FHA-insured
loans.


1
  Neighborhood Watch system is HUD’s web-based software that displays loan performance data using FHA-
insured single family loan information.
2
 The percentage of first defaults reported by the servicing lender that were claim terminated within the first two
years of origination.


                                                          4
                                        RESULTS OF AUDIT

Finding 1: Eagle Mortgage Did Not Follow HUD Underwriting
           Requirements for Three FHA-Insured Loans
Eagle Mortgage did not always originate FHA insured loans in accordance with HUD
requirements. Specifically, Eagle Mortgage did not follow HUD's underwriting requirements for
15 of the 36 FHA insured loans reviewed, three of which had deficiencies that affected the
insurability of the loan. For these three loans, it did not (1) document compensating factors, (2)
analyze borrower credit reports and income documents, or (3) satisfy automated underwriting
system requirements for loan approval. As a result, it exposed the FHA insurance fund to an
unnecessary risk of $626,711, the total insured amount for the three loans.



    Eagle Mortgage Did Not
    Properly Underwrite FHA-
    Insured Loans

         Of the 36 loans reviewed, three contained deficiencies that affected the insurability of the
         loans. Those deficiencies are discussed below. Twelve others contained less serious
         underwriting deficiencies that did not affect the overall insurability of the loans.
         However, the lender needs to ensure that it follows all facets of HUD requirements when
         underwriting FHA loans. We provided details of these deficiencies to Eagle Mortgage
         during our review. Appendix C summarizes the deficiencies in these 15 loans.

    Eagle Mortgage Did Not
    Document Compensating
    Factors

         FHA-Insured Loan # 431-4283353

         FHA’s scorecard rated this loan as “refer.” For referred loans, the TOTAL Mortgage
         Scorecard User’s Guide (user’s guide) requires lenders to determine whether a borrower
         is creditworthy in accordance with standard FHA requirements.3 In addition, the
         scorecard findings report required Eagle Mortgage to document the reasons, including
         compensating factors, for approving loans that exceed FHA-established debt ratios.
         Lenders use debt ratios to determine whether a borrower can reasonably be expected to
         meet the expenses involved with homeownership and otherwise provide for the family.



3
  See chapter two, underwriting requirements, in the “refer” paragraph in the risk classification and related
responsibilities section.


                                                           5
         In this manually underwritten loan, the borrowers’ mortgage payment-to-income ratio4 of
         41 percent and total fixed payment-to-income ratio5 of 49 percent exceeded HUD’s limits
         of 31 percent and 43 percent, respectively. HUD allows ratios exceeding these limits if
         borrowers have compensating factors, but these borrowers did not.

         HUD expects lenders to exercise sound judgment and due diligence in underwriting loans
         because simply establishing that a loan meets minimum standards does not necessarily
         constitute prudent underwriting. Other loan file documents raised additional concerns
         about the borrowers' ability to repay the loan. The borrowers reported five dependent
         children on their 2006 tax return and $87 in liquid assets on their loan application. Also,
         the borrower’s recent $950 per month pay raise did not completely offset the $1,280
         increase in monthly housing expense.

         Eagle Mortgage approved this loan without compensating factors for the excessive debt
         ratios. In addition, the monthly housing expense effectively increased by $330, and the
         borrowers had no cash reserves. HUD paid a $251,155 claim on this loan, which
         reportedly defaulted after four payments due to excessive obligations.

    Eagle Mortgage Did Not Verify
    All of the Borrower’s Income
    Sources

         FHA-Insured Loan # 561-8321239

         The scorecard rated this loan as “approve/eligible.” The scorecard user’s guide6 states
         that all income entered into the automated underwriting system for risk assessment
         purposes must meet the requirements for qualifying income listed in HUD Handbook
         4155.1 REV-57 (handbook) and that lenders are responsible for ascertaining that the
         income meets those requirements. For this loan, Eagle Mortgage used the borrower’s
         2006 yearly income of $46,640 from a December 23, 2006 pay stub to determine a
         monthly income of $3,886. Eagle Mortgage then entered this amount into the automated
         underwriting system as the borrower’s base pay. However, the pay stub showed a base
         pay of $15.29 per hour, or $2,650 per month, almost one-third less than the amount that
         Eagle Mortgage entered into the automated underwriting system as base pay.



4
   Also known as the front ratio, the mortgage payment-to-income ratio is the ratio of the borrower’s total mortgage
payment (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) to the borrower’s effective income as defined in section 2 of chapter 2 of HUD Handbook
4155.1 REV 5.
5
  Also known as the back ratio, the total fixed payment-to-effective income is the ratio of the borrower’s mortgage
payment and recurring charges to the borrower’s effective income as defined in section 2 of chapter 2 of HUD
Handbook 4155.1 REV 5.
6
  Loan application information and definitions in Chapter 1.
7
  Section 2-6


                                                         6
     Although the pay stub did not explain the extra income, the most likely source is a bonus,
     overtime, or some combination of the two. In paragraph 2-7A, the handbook requires
     lenders to average overtime or bonus income over two years and to develop an earnings
     trend. Using the two-year average of the borrower’s bonus/overtime income increases
     the borrower’s total fixed payment-to-income ratio from 54.63 percent to 58.18 percent.
     Further, it would be impossible to determine the required earnings trend if the extra
     income is a combination of bonuses and overtime. For example, if the borrower received
     $7,000 in overtime and $2,000 in bonuses in 2005 and $4,000 in overtime and $11,000 in
     bonuses in 2006, this would show a decline in overtime requiring written rationalization
     to include it as effective income. Also, HUD requires lenders to average bonus income
     for more than two years if it varies significantly.

     The scorecard approved this loan with a total fixed payment-to-income ratio of 54.63
     percent based on the assumption that the borrower’s base pay was $3,886 and that Eagle
     Mortgage verified that the income met HUD requirements. Instead, the total fixed
     payment-to-income ratio was 58.18 percent, and about one-third of the borrower’s pay
     did not meet HUD requirements. This $154,280 loan was delinquent and reported as
     defaulted due to unemployment.


Eagle Mortgage Did Not
Document Income Stability


     FHA-Insured Loan # 561-8375765

     The scorecard rated this loan as “approve/eligible.” The scorecard findings report
     required Eagle Mortgage to obtain the borrower’s most recent year-to-date pay stub and
     verify his current employment. Paragraph 2-7 of the handbook requires lenders to
     determine whether a borrower’s income can be reasonably expected to continue through
     the first three years of the mortgage. The borrower, an enlisted man in the armed forces,
     provided a leave and earnings statement showing a discharge date in August 2007, the
     month of closing. The case file contained no evidence that the borrower was going to
     reenlist or that he was eligible for reenlistment.

     Also, Eagle Mortgage did not include the $171 per month payment for a home equity
     loan on the borrower’s rental property, which would have increased the total fixed
     payment debt-to-income ratio to more than 52 percent. Further, Eagle Mortgage did not
     determine the purpose of an $8,000 unsecured loan and a $300 line of credit shown on
     the coborrower’s credit report. In addition, the loan application did not have the
     borrower’s signature as required by paragraph 3-5 of the handbook, which states that
     military personnel overseas should sign either the original or final application by
     facsimile or mail.

     The scorecard approved this loan, based on Eagle Mortgage’s determination that the
     borrower’s income could be reasonably expected to continue for three years; however,
     the loan file showed that the income used to qualify the borrower for the loan would end


                                             7
    shortly after the loan closed. HUD paid a $91,280 claim on this loan, which defaulted
    after two payments reportedly due to unemployment.

Conclusion

    Human error and inadequate management review caused the underwriting deficiencies
    found in the three loans identified above. Eagle Mortgage approved these three FHA-
    insured loans without (1) documenting acceptable compensating factors for excessive
    qualifying ratios, (2) verifying a borrower’s income source, or (3) documenting a
    borrower’s income stability. Eagle Mortgage’s quality control reviews of FHA-insured
    loans did not always provide the feedback necessary for management to address the
    deficiencies and improve future loan originations (see finding 2). These deficiencies
    caused a projected loss to the FHA insurance fund of $249,772 (see appendix D).

    As a result of the audit, Eagle Mortgage has revised its underwriting worksheets to
    provide a more in-depth review of file documentation and additional guidance to
    underwriters and quality assurance auditors.

 Recommendations

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

        1A. Require Eagle Mortgage to repay the FHA insurance fund $91,280 for the loss
            on FHA-insured loan 561-8375765.

        1B Require Eagle Mortgage to indemnify HUD for $158,492, the projected loss on
           FHA-insured loans 431-4283353 and 561-8321239 (see appendix D).

        1C. Review loans recently underwritten by Eagle Mortgage to verify that the
            underwriting deficiencies noted during our review are no longer an issue.




                                            8
Finding 2: Eagle Mortgage Did Not Always Follow Quality Control
           Requirements
Eagle Mortgage did not review one FHA-insured loan on which the borrower defaulted after
making only four monthly loan payments. Also, four of seventeen quality control reviews
performed by Eagle Mortgage did not find observable deficiencies in the loans. As a result,
Eagle Mortgage management did not always have the accurate feedback needed to improve its
loan origination process.



 Eagle Mortgage Did Not Review
 All Early Payment Defaults

       Eagle Mortgage was aware that 15 of the 36 loans from our sample had defaulted within
       six months. Paragraph 7-6D of HUD Handbook 4060.1, REV 2, requires all lenders to
       review all such early defaulting loans. However, Eagle Mortgage did not perform a
       quality control review on one of these loans that was shown in HUD’s Neighborhood
       Watch system as being in default after only four payments. Eagle Mortgage explained
       that the loan was not reviewed because the person responsible for reviewing early
       defaulting loans was laid off around the time that the loan was first reported by
       Neighborhood Watch as being in default.


 Eagle Mortgage’s Quality Control
 Reviews Were Not Always
 Effective

       Eagle Mortgage performed quality control reviews on 17 of the 36 loans we examined,
       but the reviews were not always effective in finding deficiencies. Following Eagle
       Mortgage’s FHA-approved quality control plan, we found four loans containing
       deficiencies that were not noted in its quality control reviews of the loans.

       For FHA-insured loan # 023-2487210, the scorecard findings report showed that all of a
       borrower’s income was base pay, but the associated pay stub in the loan file showed that
       the income included bonus income. The quality control plan methodology requires the
       reviewer to compare income from the findings report to the case file documentation.

       For FHA-insured loan # 561-8308118, the scorecard findings report required Eagle
       Mortgage to obtain a verification of employment, an Internal Revenue Service (IRS)
       Form W-2, or acceptable electronic verification to document a two-year employment
       history for the coborrower. However, the loan file only contained a pay stub supporting a
       10-month employment period. The quality control plan methodology requires the
       reviewer to check for the correct forms, pay stubs, and IRS Forms W-2 and to verify that
       all findings report conditions were met.


                                               9
    For FHA-insured loan # 561-8370071, the scorecard findings report required Eagle
    Mortgage to verify the borrower’s depository assets, but Eagle Mortgage double-counted
    $10,000 in borrower assets. The quality control plan methodology requires the reviewer
    to compare assets and the source of funds from the findings report to the loan file and to
    verify that all findings report conditions were met.

    For FHA-insured loan # 431-4283353, the scorecard findings report required Eagle
    Mortgage to document the reasons, including compensating factors, for approving loans
    that exceed FHA-established debt limits. However, for this loan with excessive debt
    ratios, Eagle Mortgage cited no compensating factors. The quality control plan
    methodology requires the reviewer to determine whether there are sufficient and
    documented compensating factors if the debt ratios exceed FHA limits.

Conclusion

    HUD’s single-family quality control program is designed to ensure compliance with loan
    origination requirements; protect FHA from unacceptable risk; guard against errors,
    omissions, and fraud; and ensure corrective action. Eagle Mortgage inadvertently
    overlooked the quality control review on one early payment default because of a
    consolidation of staff responsibilities after a downsizing and has since instituted
    procedures to ensure that it reviews all early payment defaults. However, other errors
    occurred because Eagle Mortgage did not follow its quality control plan, thus
    compromising the internal controls that protect the FHA insurance fund from
    unnecessary risk. Further, Eagle Mortgage management did not always have the
    information it needed to take corrective action to improve its loan origination process.

    As a result of our audit, Eagle Mortgage stated it has revised its early payment default
    review process and is in the process of increasing its quality control staff.


Recommendations

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

       2A. Review Eagle Mortgage’s monthly quality control reports to ensure that they
           include all FHA-insured loans that defaulted within the first six months.

       2B. Require Eagle Mortgage to provide training for appropriate staff on the quality
           control plan audit methodology.




                                            10
                         SCOPE AND METHODOLOGY

We selected Eagle Mortgage because of a default-to-claim rate that was more than double the
national average. Eagle Mortgage underwrote 1,405 FHA-insured single-family loans with
beginning amortization dates between January 1, 2007, and December 31, 2008. We reviewed
all 36 of these loans that had a first default within two years of amortization. The total mortgage
amount for these loans is almost $6,789,000. According to Neighborhood Watch, these loans
were originated by Eagle Mortgage offices in Washington, Oregon, Idaho, Colorado, New
Mexico, Nevada, or Arizona. Of these loans, FHA’s scorecard approved 29, and seven were
manually underwritten. In addition, we reviewed all 17 of the quality control reports that Eagle
Mortgage performed on the 36 loans in our review.

We conducted our fieldwork at Eagle Mortgage’s headquarters office in Kirkland, Washington,
between February and April 2009. To accomplish our objectives, we

       Reviewed HUD regulations and reference materials related to single-family requirements.
       Reviewed Eagle Mortgage’s underwriting policies and procedures.
       Reviewed Eagle Mortgage’s loan files.
       Reviewed Eagle Mortgage’s quality control plan and quality control review reports.
       Interviewed appropriate Eagle Mortgage staff.
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 case file to determine whether it contained the documentation required by the findings
report and whether the source documents supported the information in the findings report. For
the manually underwritten loans, we reviewed the FHA case file to determine whether it
supported the underwriting decision.
We used data maintained by HUD in the Neighborhood Watch system for background
information and in selecting our sample of loans. We did not rely on the data to reach our
conclusions, therefore we did not assess the reliability of the data.

We 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.




                                                11
                              INTERNAL CONTROLS

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

       Effectiveness and efficiency of operations,
       Safeguarding of assets and resources, and
       Compliance with applicable laws and regulations.

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



 Relevant Internal Controls

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

              Policies and procedures intended to ensure that FHA-insured loans are properly
              originated and underwritten.

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

       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.

 Significant Weaknesses

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

              Eagle Mortgage’s quality control process did not always detect underwriting
              deficiencies in FHA-insured loans (see finding 1).

              Eagle Mortgage did not adequately monitor the effectiveness of its quality control
              reviews of FHA-insured loans (see finding 2).




                                                12
                                      APPENDIXES

Appendix A

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

                      Recommendation          Ineligible   Funds to be put
                          number                costs 1/   to better use 2/
                              1A                $91,280

                              1B                              $158,492



1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that
   the auditor believes are not allowable by law; contract; or federal, state, or local polices or
   regulations. The claim amount is HUD’s actual loss on an insured loan for a home that was
   sold in a short sale.

2/ Recommendations that funds be put to better use are estimates of amounts that could be used
   more efficiently if an Office of Inspector General 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.
   If HUD implements our recommendations to indemnify loans that were not originated in
   accordance with FHA requirements, it will reduce FHA’s risk of loss to the insurance fund.
   The amount above reflects HUD’s calculation that FHA loses an average of about 42 percent
   of the claim amount when it sells a foreclosed property.




                                                13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         14
Comment 2




Comment 3




Comment 4




Comment 5




            15
Comment 6




Comment 7




Comment 8




Comment 8


Comment 9




            16
17
18
19
20
                           OIG Evaluation of Auditee Comments

Comment 1     Eagle Mortgage expresses concern about our comment in the internal control
              section "Eagle Mortgage did not always underwrite FHA-insured loans in
              accordance with HUD requirements, exposing the FHA insurance fund to
              unnecessary risk" and states that at no time did they underwrite a loan they did not
              think was sound. Since our statement might be misinterpreted, we revised the
              comment in the internal controls section associated with finding 1 to more
              accurately reflect the significant weakness associated with the finding.

Comment 2 Eagle Mortgage states that although it did not separate the borrower's base income
          from other earnings, the verified income was more than the base pay for the
          previous two years and that his income was increasing. Also, since the borrower
          had steady employment for nine and one-half years and was a supervisor, the
          underwriter was confident the borrower's income would continue. Our issue for
          this loan is not with the stability nor the amount of the borrower's income but that
          Eagle Mortgage did not accurately analyze that income. As a result, almost one-
          third of the borrower's income that Eagle Mortgage reported to the automated
          underwriting system was overtime or bonus income and did not meet the
          requirements of the handbook, as required by the user's guide.

Comment 3 Eagle Mortgage states that the reason for the default was unemployment and, with
          steady employment and increasing income, the underwriter had no reason to
          believe unemployment would be imminent. Regardless of the reason for the
          default, FHA-insured loans must meet HUD requirements when they are
          underwritten.

Comment 4 Eagle Mortgage states that it computed the co-borrower's income in accordance
          with HUD requirements. We agree that Eagle Mortgage documented the
          coborrower's earnings in accordance with HUD requirements. In our analysis, we
          did not use the co-borrower's reduced year to date income in any calculation, we
          mentioned it was an additional concern because it was 38 percent less than the
          average income as computed by the Eagle Mortgage, placing further strain on the
          family’s financial situation. Since this statement may be confusing, we removed
          it from the report.

Comment 5 Eagle Mortgage states that compensating factors for the qualifying ratios of 41
          percent and 49 percent, and the increase in housing expense of $1,280 would be
          an increase in the borrower's income of $950 per month. The Handbook does not
          list increased income as a compensating factor. In addition, this increased income
          in the form of a raise which the borrower received from his father, his employer,
          two months before the loan closed, is already included in the excessive qualifying
          ratios. Eagle Mortgage also states that the $330 increase in monthly housing
          expense is an average increase without significant payment shock, however, the
          actual increase in monthly housing expense was $1,280. In our opinion, even a
          monthly increase of $330 would not be minimal for a family of seven with $87 in



                                               21
              the bank who was paying 49 percent of their income for housing and other fixed
              payments. The Handbook lists two compensating factors related to housing
              expense: (1) 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 and (2) There is only a minimal
              increase in the borrower's housing expense. Since the borrowers’ monthly
              housing expense increased by $1,280, neither of these apply to this loan.

Comment 6 Eagle Mortgage states the underwriter averaged the bonus income based on the
          2005 and 2005 IRS Forms W-2. We noted that the borrower’s 2005 W-2 was
          from a different company than his present employer and his 2006 W-2s showed
          he worked for 5 different Sonic restaurants and were therefore not indicative of
          his current income. However, we reevaluated this loan and determined that even
          though the borrower’s 2005 and 2006 bonus incomes were not representative of
          his current bonus income, the total current income Eagle Mortgage used was
          adequately supported by documentation in the loan file. Therefore, we are
          removing this loan from the finding.

Comment 7 Eagle Mortgage states that the automated underwriting system does not require
          collection accounts to be paid at closing nor would any of those amounts be
          included in the qualifying ratio calculations. The findings report for this loan
          required Eagle Mortgage to document why 16 accounts were omitted from the
          underwriting analysis and, although Eagle Mortgage did not specifically provide
          the reason the accounts were omitted in the case file as required, all 16 appear on
          the credit report as collections and would not have needed to have been paid at
          closing. This was the same loan discussed in Comment 6, which we removed
          from the finding.

Comment 8 Eagle Mortgage states that it has revised its review process to assure no loans are
          missed in the future and that it is in the process of increasing its quality assurance
          staff. In finding 2, we added a statement to that effect.


Comment 9 Eagle Mortgage provided underwriting worksheets to provide a more in-depth
          review of file documentation and to provide additional guidance to underwriters
          and quality assurance auditors. In finding 1, we added a statement to that effect.




                                               22
Appendix C

                     SUMMARY OF LOAN DEFICIENCIES
                   Loan                A   B    C    D    E   F   G H     I   J   K
                   561-8321239         X
                   023-2480690                  X
                   331-1286823                       X    X
                   052-4230423         X
                   431-4310357             X
                   561-83081181            X
                   023-2487210         X
                   361-3087627                  X
                   431-42833531                               X   X
                   561-83141941            X                          X
                   561-83532191                 X
                   561-8370071                            X
                   561-8375765                       X                    X   X
                   561-8482245                                                    X
                   561-8480057         X
                   Total               4    3    3   2    2   1   1   1   1   1   1

1) Eagle Mortgage manually underwrote these loans.

Legend

    A.   Failed to analyze bonus and overtime income
    B.   Failed to document employment history
    C.   Overstated Social Security income
    D.   Omitted liabilities from underwriting analysis
    E.   Failed to verify reserves
    F.   Failed to obtain adequate pay stub
    G.   Failed to document compensating factors
    H.   Overstated retirement fund amount
    I.   Failed to verify continuity of income
    J.   Failed to determine purpose of new debt
    K.   Failed to document gift

    A. Eagle Mortgage submitted to the automated underwriting system that all borrower pay
       was base pay although some was bonus or overtime pay. Paragraph 2-7A of HUD
       Handbook 4155.1, REV-5 (handbook) requires an analysis before a bonus or overtime
       can be included as effective income.




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B. Eagle Mortgage did not document borrowers’ two-year employment history. The
   findings reports for three loans required the lender to obtain either IRS Forms W-2,
   verifications of employment, or other electronic documentation acceptable to FHA. The
   loan files for these three loans did not contain these documents.

C. Eagle Mortgage improperly increased Social Security income by 125 percent for three
   loans. Paragraph 2-7 of the handbook allows lenders to increase nontaxable income by
   125 percent if the borrower was not required to file a federal income tax return. If a
   borrower filed a tax return, lenders may increase nontaxable income by the borrower’s
   tax rate. For three loans, the borrowers had other income that may have required a tax
   return and, thus, might have affected taxability of the Social Security income, thereby
   decreasing the amount of the increase allowed.

D. Eagle Mortgage omitted monthly payments from the qualifying ratio calculations for two
   loans.

E. Eagle Mortgage did not verify borrower reserves for two loans. The findings report
   required the lender to verify the reported assets by either a verification of deposit or
   statements. For one loan, Eagle Mortgage did not obtain the required documentation for
   a retirement account and a savings account, and for the other, it failed to notice that a
   $10,000 gift had been counted twice.

F. Eagle Mortgage did not obtain a pay stub stating the borrower’s year-to-date income as
   required by the findings report.

G. Eagle Mortgage failed to document compensating factors for a manually underwritten
   loan with qualifying ratios that exceeded HUD requirements. Paragraph 2-13 of the
   handbook lists the acceptable compensating factors necessary to approve loans with
   excessive qualifying ratios.

H. Eagle Mortgage used the entire amount of a retirement account in calculating the
   borrower’s reserves, contrary to the findings report, which states that only 60 percent can
   be used.

I. Eagle Mortgage failed to document that the borrower’s income would be likely to
   continue for three years as required by paragraph 2-7 of the handbook. The borrower’s
   Leave and Earnings Statement stated that he would be discharged from military service
   the same month as the loan closed. The file had no indication of reenlistment or
   prospective employment.

J. Eagle Mortgage did not determine the purpose of more than $8,000 of new co-borrower
   debt, as required by the findings report.

K. Eagle Mortgage did not document the gift, possibly from the borrower’s parents, that was
   used for earnest money.




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Appendix D

                                 PROJECTED LOSSES

   FHA case          Unpaid loan     Estimated loss (2)       Actual loss       Total
    number            balance (1)
431-4283353        $    226,963     $    95,325
561-8375765                                               $     91,280(3)
561-8321239        $   150,397      $ 63,167
Total                               $ 158,492             $     91,280      $   249,772

(1) Unpaid principal balance shown in Neighborhood Watch as of March 31, 2009.

(2) Unpaid principal balance multiplied by 42 percent. This estimates the loss to the FHA
    insurance fund.

(3) The property was sold in a short sale. The claim amount is HUD’s actual loss.




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