oversight

Dell Franklin Financial, LLC, Millersville, MD, Did Not Properly Underwrite a Selection of FHA Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-07-30.

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

                                             U.S. Department of Housing and Urban Development
                                             Office of Inspector General for Audit, Region V
                                             Ralph H. Metcalfe Federal Building
                                             77 West Jackson Boulevard, Suite 2646
                                             Chicago, IL 60604-3507

                                             Phone (312) 353-7832 Fax (312) 353-8866
                                             Internet http://www.hud.gov/offices/oig/




                                                                                MEMORANDUM NO:
                                                                                     2010-CH-1810

July 30, 2010

MEMORANDUM FOR: Vicki Bott, Deputy Assistant Secretary for Single Family, HU
                Dane M. Narode, Associate General Counsel for Program
                  Enforcement, CACC


FROM: Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: Dell Franklin Financial, LLC, Millersville, MD, Did Not Properly Underwrite a
          Selection of FHA Loans

                                      INTRODUCTION

We reviewed 20 Federal Housing Administration (FHA) loans that Dell Franklin Financial, LLC
(Dell), underwrote as an FHA direct endorsement lender. Our review objective was to determine
whether Dell underwrote the 20 loans in accordance with FHA requirements. This review is part
of Operation Watchdog, an Office of Inspector General (OIG) initiative to review the
underwriting of 15 direct endorsement lenders at the suggestion of the FHA Commissioner. The
Commissioner expressed concern regarding the increasing claim rates against the FHA insurance
fund for failed loans.

For each recommendation without a management decision, please respond and provide status
reports in accordance with U.S. Department of Housing and Urban Development (HUD)
Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued
because of the audit

We provided our discussion draft memorandum report to Dell’s legal counsel during the review.
We asked Dell to provide written comments on our discussion draft memorandum report by June
30, 2010. Dell’s president provided written comments to the discussion draft report, dated June
30, 2010. The president disagreed with our finding and recommendations. The complete text of
the lender’s comments, along with our evaluation of that response, can be found in appendix C of
this report, except for 22 exhibits of 60 pages of documentation that was not necessary to
understand the lender’s comments. We provided HUD’s Deputy Assistant Secretary for Single
Family Housing and Associate General Counsel for Program Enforcement with a complete copy
of Dell’s written comments plus the 60 pages of documentation.

                                     METHODOLOGY AND SCOPE

Dell is 1 of 15 direct endorsement lenders we selected from HUD’s publicly available
Neighborhood Watch1 system (system) for a review of underwriting quality. These direct
endorsement lenders all had a compare ratio2 in excess of 200 percent of the national average as
listed in the system for loans endorsed between January 1, 2005, and December 10, 2009. We
selected loans that had gone into claim status. We selected loans for Dell that defaulted within
the first 30 months and were associated with an underwriter (usually an individual) with a high
number of claims.

                                               BACKGROUND

Dell is a nonsupervised direct endorsement lender based in Millersville, MD. FHA approved
Dell as a direct endorser in July 2003. FHA’s mortgage insurance programs help low- and
moderate-income families become homeowners by lowering some of the costs of their mortgage
loans. FHA mortgage insurance also encourages lenders to approve mortgages for otherwise
creditworthy borrowers that might not be able to meet conventional underwriting requirements
by protecting the lender against default. The direct endorsement program simplifies the process
for obtaining FHA mortgage insurance by allowing lenders to underwrite and close the mortgage
loan without prior HUD review or approval. Lenders are responsible for complying with all
applicable HUD regulations and are required to evaluate the borrower’s ability and willingness
to repay the mortgage debt. Lenders are protected against default by FHA’s mutual mortgage
insurance fund, which is sustained by borrower premiums.

The goal of Operation Watchdog is to determine why there is such a high rate of defaults and
claims. We selected up to 20 loans in claim status from the 15 lenders. The 15 lenders selected
for Operation Watchdog endorsed 183,278 loans valued at $31.3 billion during the period
January 2005 to December 2009. These same lenders also submitted 6,560 FHA insurance
claims with an estimated value of $794.3 million from November 2007 through December 2009.
During this period, Dell endorsed 1,777 loans valued at more than $388 million and submitted 37
claims worth more than $7.1 million.

Our objective was to determine whether the 20 selected loans were properly underwritten and if
not, whether the underwriting reflected systemic problems.

We performed our work from January through May 2010. We conducted our work in
accordance with generally accepted government auditing standards, except that we did not
consider the internal controls or information systems controls of Dell, consider the results of

1
  Neighborhood Watch is a system that aids HUD/FHA staff in monitoring lenders and its programs. This system
allows staff to oversee lender origination activities for FHA-insured loans and tracks mortgage defaults and claims.
2
  HUD defines “compare ratio” as a value that reveals the largest discrepancies between the direct endorser’s default
and claim percentage and the default and claim percentage to which it is being compared. FHA policy establishes a
compare ratio of more than 200 percent as a warning sign of a lender’s performance.

                                                         2
previous audits, or communicate with Dell’s management in advance. We did not follow
standards in these areas because our objective was to aid HUD in identifying FHA single-family
insurance program risks and patterns of underwriting problems or potential wrongdoing in poor-
performing lenders that led to a high rate of defaults and claims against the FHA insurance fund.
To meet our objective, it was not necessary to fully comply with the standards, nor did our
approach negatively affect our review results.

                                    RESULTS OF REVIEW

Dell did not properly underwrite 3 of the 20 loans reviewed because its underwriters did not
follow FHA’s requirements. As a result, FHA’s insurance fund suffered actual losses of more
than $540,000 on the three loans, as shown by the following table.

                                              Number of
                                               payments         Original     Actual
                  FHA loan                    before first     mortgage      loss to
                   number      Closing date     default         amount        HUD
                 241-7744658     6/16/06          24          $282,170     $107,214
                 241-7768099    10/17/06           4           367,100      358,049
                 483-3658679     9/27/06           2            90,823       77,067
                                  Totals                      $740,093     $542,330

The following table summarizes the material deficiencies that we identified in the three loans.

                                                             Number of
                                 Area of noncompliance         loans
                               Income                            1
                               Liabilities                       1
                               Excessive ratios                  2
                               Assets                            1

Appendix A shows a schedule of material deficiencies in each of the 3 loans. Appendix B
provides a detailed description of all loans with material underwriting deficiencies noted in this
report.

Income

Dell overstated the income for one loan by inappropriately including overtime income although
there was no expectation of continuance of the overtime. HUD does not allow overtime income
to be used in calculating a borrower’s income ratios if the borrower has not received such income
for the past 2 years and it is not likely to continue (see appendix B for detailed requirements).

For loan number 241-7744658, Dell’s underwriter overstated the borrowers’ income by $1,387
by including the overtime income although the verifications of employment did not confirm
expected continuance of the overtime. The loan was processed through the automated
underwriting system. The borrower’s income was overstated by $1,101 and the coborrower’s by
$286.


                                                 3
Liabilities

Dell did not properly assess the borrowers’ financial obligations for one loan. HUD requires
lenders to consider debts if the amount of the debts affects the borrower’s ability to make the
mortgage payment during the months immediately after loan closing (see appendix B for detailed
requirements).

For loan number 241-7768099, Dell did not include all of the borrowers’ liabilities that were on
the latest credit report. In the automated system, Dell’s underwriter listed debts with monthly
payments of $1,220; however, the latest credit report in the loan file listed liabilities with total
monthly payments of $1,620. As a result, the borrowers’ monthly liabilities were understated by
$400.

Excessive Ratios

Dell improperly approved two loans when the borrowers’ ratios exceeded FHA’s requirements.
Effective April 13, 2005, the mortgage payment-to-effective income and total payment-to-
effective income ratios were increased from 29 and 41 percent to 31 and 43 percent, respectively.
If either or both ratios are exceeded, the lender is required to describe the compensating factors
used to justify the mortgage approval (see appendix B for detailed requirements).

For example, for loan number 483-3658679, Dell’s underwriter failed to document adequate
compensating factors for the excessive total fixed payment-to-effective income ratio. The loan
was initially processed through the automated underwriting system. It was rated as “refer” by
the system and was then manually underwritten. The total fixed payment-to-income ratio was
45.739 percent, above the allowable 43 percent.

Assets

Dell did not properly document the source of the borrower’s funds to close for one loan. HUD
requires the lender to verify and document the borrowers’ investment in the property (see
appendix B for detailed requirements).

For loan number 241-7768099, Dell processed this loan through the automated underwriting
system without confirming the source of the borrower’s assets. Dell’s underwriter listed total
assets of $13,614 in the system, which was comprised of $4,104 in a savings account, $6,616 in a
checking account, and $2,894 in a retirement account. A savings account inquiry dated October
10, 2006 showed an available balance of $9,904. It showed deposits of $4,203, $4,299 and a
memo credit of $5,801. The loan file did not document or contain an explanation for the source
of these funds to ensure that they were not obtained from an undocumented loan or another
excludable source. For the retirement account, there was no documentation of redemption as
required by HUD.




                                                 4
Incorrect Underwriter’s Certifications Submitted to HUD

We reviewed the certifications for the three loans with material underwriting deficiencies for
accuracy, including one manually underwritten loan and two automated underwritten loans.
Dell’s direct endorsement underwriters incorrectly certified that due diligence was used in
underwriting the one manual loan and incorrectly certified to the integrity of the data used to
determine the quality of the loan in underwriting the two automated loans. When underwriting a
loan manually, HUD requires a direct endorsement lender to certify that it used due diligence and
reviewed all associated documents during the underwriting of a loan, and when underwriting a
loan using an automated system, HUD requires a direct endorsement lender to certify to the
integrity of the data used to determine the quality of the loan.

The Program Fraud Civil Remedies Act of 1986 (231 U.S.C. (United States Code) 3801)
provides Federal agencies, which are the victims of false, fictitious, and fraudulent claims and
statements, with an administrative remedy (1) to recompense such agencies for losses resulting
from such claims and statements; (2) to permit administrative proceedings to be brought against
persons who make, present, or submit such claims and statements; and (3) to deter the making,
presenting, and submitting of such claims and statements in the future.

                                             RECOMMENDATIONS

We recommend that HUD’s Associate General Counsel for Program Enforcement

1A.        Determine legal sufficiency and if legally sufficient, pursue remedies under the Program
           Fraud Civil Remedies Act against Dell and/or its principals for incorrectly certifying to
           the integrity of the data used in determining the quality of the loan or that due diligence
           was exercised during the underwriting of three loans that resulted in losses to HUD
           totaling $542,330, which could result in affirmative civil enforcement action of
           approximately $1,107,1603.

We recommend that HUD’s Deputy Assistant Secretary for Single Family

1B.        Take appropriate administrative action against Dell and/or its principals for the material
           underwriting deficiencies cited in this report once the affirmative civil enforcement
           action cited in recommendation 1A is completed.


                                           Schedule of Ineligible Cost 1/

                                        Recommendation
                                            number                     Amount
                                                1A                     $542,330



3
    Double damages plus a $7,500 fine for each of the three incorrect certifications.

                                                             5
1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations. The amount shown represents the actual loss HUD incurred when
     it sold the affected properties.




                                             6
Appendix A

SUMMARY OF MATERIAL UNDERWRITING DEFICIENCIES




                                                        Excessive debt-to-income ratio



                                                                                             Underreported liabilities
                               Unsupported income




                                                                                                                             Unsupported assets
             FHA loan number
               241-7744658                          X                                    X
               241-7768099                                                                                               X                        X
               483-3658679                                                               X




                                                        7
Appendix B

 LOANS WITH MATERIAL UNDERWRITING DEFICIENCIES

Loan number: 241-7744658

Mortgage amount: $282,170

Section of Housing Act: 203(b)

Loan purpose: Purchase

Date of loan closing: June 16, 2006

Status: Claim

Payments before first default reported: 24

Loss to HUD: $107,214

Summary: We found material underwriting deficiencies relating to the borrowers’ income and
excessive ratios.

Income:

Dell overstated the borrowers’ income by $1,386 by including overtime income although the
verifications of employment in the loan file did not confirm expected continuance of the income.
The loan was processed through the automated underwriting system. The borrower’s income
was overstated by $1,101 and the coborrower’s by $286.

For the borrower, Dell’s underwriter used a calculated income value of $3,675 in the automated
system. Income was not separated into base pay and overtime pay, and the loan file did not
contain documentation to show how the base income was calculated by the underwriter. Based
on an hourly rate of $14.85 as shown on the payroll documents, we calculated a base income of
$2,574. The underwriter’s improperly derived calculated income of $3,675 was comprised of
base income of $2,574 and overtime income of $1,101. There were no documents in the loan file
to show how the overtime was calculated. The borrower’s employment history did not support
the consistency of monthly earnings remaining the same or increasing. A telephone verification
of employment with the borrower’s employer did not document that the overtime income was
likely to continue or expected. We calculated that the borrower’s income was overstated by
$1,101 ($3,675 minus $2,574).

For the coborrower, Dell’s underwriter used a calculated income of $3,752 in the automated
system. The underwriter calculated the base income by using the total earnings, including the
overtime, for the last 17.25 months ($64,735.94 divided by 17.25). Based on the verification of

                                               8
employment and payroll information, we calculated the coborrower’s base income to be $3,466
per month. The verification of employment from the coborrower’s employer documented that
the overtime income was not likely to continue. As a result, Dell’s underwriter overstated the
base income by $286 ($3,752 minus $3,466).

HUD/FHA Requirements:

HUD Handbook 4155.1, REV-5, paragraph 2-7A, states that overtime income may be used to
qualify if the borrower has received such income for the past 2 years and it is likely to continue.
The lender must develop an average of the overtime income for the past 2 years, and the
employment verification must not state that such income is unlikely to continue. An earnings
trend also must be established and documented for overtime and bonus income.

The FHA Single Family Total Mortgage Scorecard User Guide, chapter 1, states that the lender
is responsible for the integrity of the loan when material changes are discovered. The lender is
required to resubmit the loan through the automated underwriting system for an updated
evaluation under conditions such as when borrowers’ income is decreased.

Excessive Ratios:

The recomputed income for the borrowers would be $6,040 ($2,574 plus $3,466). Using the
recomputed income, the mortgage payment-to-income effective ratio would be 32.183 percent,
and the total fixed payment-to-income ratio would be 51.916 percent, above HUD’s maximum
ratios of 31 and 43 percents, respectively.

HUD/FHA Requirements:

HUD Handbook 4155.1, REV-5, paragraph 2-12, and Mortgagee Letter 2005-16 states for
manually underwritten mortgages for which the direct endorsement underwriter must make the
credit decision, the qualifying ratios were raised to 31 and 43 percent, respectively. As always, if
either or both ratios are exceeded on a manually underwritten mortgage, the lender must provide
compensating factors to justify approving the mortgage.

Mortgagee Letter2005-16, dated April 13, 2005, increased the payment-to-income and debt-to-
income ratios from 29 and 41 percent to 31 and 43 percent, respectively If either or both ratios
are exceeded on a manually underwritten mortgage, the lender is required to describe the
compensating factors used to justify the mortgage approval.




                                                 9
Loan number: 241-7768099

Mortgage amount: $367,100

Section of Housing Act: 203(b)

Loan purpose: Purchase

Date of loan closing: October 17, 2006

Status: Claim

Payments before first default reported: Four

Loss to HUD: $358,049

Summary: We found material underwriting deficiencies relating to the borrower’s assets and
liabilities.

Assets:

Dell processed this loan through the automated underwriting system without confirming the
borrowers’ source of assets. Dell’s underwriter listed total assets of $13,614 in the system,
which was comprised of $4,104 in a savings account, $6,616 in a checking account, and $2,894
in a retirement account.

The loan file contained a savings account inquiry dated October 10, 2006 which showed an
available balance of $9,904. It showed deposits of $4,203, $4,299 and a memo credit of $5,801.
The loan file did not document or contain an explanation for the source of these funds to ensure
that they were not obtained from an undocumented loan, an interested party, or another
excludable source. For the retirement account, there was no evidence of redemption as required
by HUD.

HUD/FHA Requirements:

HUD Handbook 4155.1, REV-5, paragraph 2-10, states all funds for the borrower’s investment
in the property must be verified and documented. Paragraph 2-10 B specifies that verification of
savings and checking accounts are to be performed. For large increases or recent account
openings, the lender must obtain a credible explanation of the source of those funds. Paragraph
2-10 K specifies that evidence of redemption of retirement funds is required if these funds are
used.

Liabilities:

Dell did not include all of the borrowers’ liabilities that were on the latest credit report. In the
automated system, Dell’s underwriter listed debts with monthly payments of $1,220. The credit

                                                 10
report, dated September 20, 2006, listed liabilities with total monthly payments of $1,620. As a
result, the borrowers’ monthly liabilities were understated by $400.

HUD performed a postendorsement technical review4 and informed Dell that FHA’s Total
Scorecard failed to reflect all liabilities on the borrowers’ credit report. In response, Dell
supplied another credit report and told HUD that this credit report was initially used to
underwrite the report. However, this credit report, dated August 23, 2006, was not the latest
credit report available to Dell. Dell’s underwriter should have used the latest available credit
report of September 20, 2006, to calculate the borrowers’ monthly liabilities.

Inclusion of the additional monthly liabilities of $400 would increase the total payment-to-
income ratio to 51.85 percent, well above HUD’s allowable ratio of 43 percent. Therefore,
Dell’s exclusion of the $400 in monthly liabilities was material.

HUD/FHA Requirements:

The FHA Single Family Total Mortgage Scorecard User Guide states that the lender is
responsible for the integrity of the data used to obtain the risk assessment and for resubmitting
the loan when material changes are discovered or otherwise occur during loan processing. The
lender is required to resubmit the loan through the automated underwriting system for an updated
evaluation of changes that are discovered which would negatively affect the borrowers’ ability to
repay the mortgage.

HUD Handbook 4155.1, REV-5, paragraph 2-11A, states recurring obligations must be
considered in qualifying borrowers. The borrower’s recurring obligations 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 recurring charges extending 10 months or more, including
payments on installment accounts, child support or separate maintenance payments, revolving
accounts, etc.

HUD Handbook 4155.1, REV-5, paragraph 2-12, and Mortgagee Letter 2005-16 state that for
manually underwritten mortgages for which the direct endorsement underwriter must make the
credit decision, the qualifying ratios were raised to 31and 43 percent, respectively.




4
  HUD’s Processing and Underwriting Division performs postendorsement technical reviews to ensure that lenders
understand and comply with HUD’s requirements. Reviews of selected mortgages after endorsement are performed
to execute this function. The process includes a review of the appraisal report, mortgage credit analysis,
underwriting decisions, and the closing documents from the mortgage case endorsement file.

                                                     11
Loan number: 483-3658679

Mortgage amount: $90,823

Section of Housing Act: 203(b)

Loan purpose: Purchase

Date of loan closing: September 27, 2006

Status: Claim

Payments before first default reported: Two

Loss to HUD: $77,068

Summary: We found a material underwriting deficiency relating to the borrower’s ratios.

Excessive Ratio:

Dell failed to document adequate compensating factors for the excessive total fixed payment-to-
effective income ratio. The loan was initially processed through the automated underwriting
system. It was rated as “refer” by the system and was then manually underwritten. The total
fixed payment-to-effective income ratio was 45.739 percent, above the allowable 43 percent.
Two compensating factors were provided to support the underwriting of the mortgage. The first
compensating factor stated that the borrower’s previous credit history showed that the borrower
had the ability to devote a greater portion of income to housing expenses. The second
compensating factor identified that the borrower had a potential for increased earnings through
job training in the borrower’s profession. There were no other explanations or documentation to
support these statements.

HUD/FHA Requirements:

Mortgagee Letter 2005-16, dated April 13, 2005, states that the borrower’s qualifying ratios are
limited to 31 percent (mortgage-payment-to-income ratio) and 43 percent (total fixed payment-
to-income ratio). If either or both ratios are exceeded on a manually underwritten mortgage, the
lender must provide compensating factors to justify approving the mortgage.

Mortgagee Letter 2005-16, dated April 13, 2005, increased the payment-to-income and debt-to-
income ratios from 29 and 41 percent to 31 and 43 percent, respectively. If either or both ratios
are exceeded on a manually underwritten mortgage, the lender is required to describe the
compensating factors used to justify the mortgage approval.




                                                12
APPENDIX C

         LENDER COMMENTS AND OIG’s EVALUATION


Ref to OIG Evaluation    Lender Comments




 




 




                          13
Ref to OIG Evaluation   Lender Comments

 




 




 




                         14
Ref to OIG Evaluation   Lender Comments

 




 




 




                         15
Ref to OIG Evaluation   Lender Comments

 




 




 




                         16
         LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation    Lender Comments

 




 




 




Comment 1




                          17
Ref to OIG Evaluation   Lender Comments

 




 




 




                         18
Ref to OIG Evaluation   Lender Comments

 




 




 




Comment 2




                         19
Ref to OIG Evaluation   Lender Comments

 




 




 




                         20
Ref to OIG Evaluation   Lender Comments

 




 




 




Comment 3




                         21
Ref to OIG Evaluation   Lender Comments

 




 




 
Comment 4




                         22
Ref to OIG Evaluation   Lender Comments

 




 




 
Comment 5




                         23
Ref to OIG Evaluation   Lender Comments

 




 




 
Comment 6




                         24
Ref to OIG Evaluation   Lender Comments

 




 




 




                         25
Ref to OIG Evaluation   Lender Comments

 




 




 




                         26
Ref to OIG Evaluation   Lender Comments

 




 




 




                         27
Ref to OIG Evaluation   Lender Comments

 




 




 




                         28
                           OIG’s Evaluation of Lender Comments

Comment 1   For loan number 241-7744658, Dell disagreed with our report and asserted that its
            underwriter was correct in including the borrower’s overtime income of $1,101.
            Dell based its assertion on the borrower’s earnings for the most recent 5.4 months.
            Dell’s response did not include any additional information than what was already
            in the loan file and we had reviewed. As stated in our draft report, the overtime
            income should not have been included because the borrower’s employment
            history did not support the consistency of monthly earnings remaining the same or
            increasing. Further, the verification of employment also did not document that
            the overtime income was likely to continue. Based on Dell’s response, we did not
            change our conclusion and recommendation.

Comment 2   Dell acknowledged that its underwriter should have included the additional debts
            referenced in the latest credit report and stated that it was an oversight. However,
            Dell stated that the compensating factors, like stable employment, would have
            offset the higher than average ratio. We disagree. Had Dell’s underwriter
            included the actual liabilities, the total payment-to-income ratio would have
            increased to 51.85 percent, well above HUD’s allowable ratio of 43 percent.
            Further, stable employment is not an allowable compensating factor under HUD
            regulations. Based on Dell’s response, we did not change our conclusion and
            recommendation.

Comment 3   Dell acknowledged that the coborrower’s income should not have included
            overtime earnings; but maintained that it properly included the borrower’s
            overtime earnings. However Dell; did not provide any additional documentation
            to support its assertion. We stated in our draft report that the verification of
            employment in the loan file did not document that the overtime income was likely
            to continue. We also said that the borrower’s employment history did not support
            the consistency of monthly earnings remaining the same or increasing. Dell did
            not provide additional information or documentation to clarify or support
            changing the analysis of the stated issues in our report. Therefore, we did not
            change our conclusion that Dell overstated the borrowers’ income by $1,386 by
            including unsupported overtime income. By using the recomputed income
            without the overtime earnings, the mortgage payment-to-income ratio would be
            32.183 percent and the total fixed payment-to-income ratio would be 51.916
            percent, above HUD’s allowable ratios of 31 and 43 percents, respectively.

            We agree with Dell’s statement that a downpayment of nearly $100,000 is
            significant along with a substantial cash reserve. Dell stated that these factors
            would have compensated for higher ratios. We considered these factors when we
            analyzed Dell’s underwriting. After considering Dell’s response, we did not
            change our conclusion in the final report because: (1) the total payment-to-income
            ratio would be 51.916 percent, substantially above HUD’s allowable ratio; (2) the
            borrower’s monthly mortgage payment were more than 300 percent greater than
            the previous payment, a very substantial increase. According to the mortgage

                                             29
            credit analysis worksheet, the current housing expense was $659 per month
            compared to the future mortgage payments of $2,275, an increase of $1,616 per
            month.

Comment 4   Dell agreed that the total payment-to-income ratio exceeded HUD’s allowable
            ratio, but stated that the borrower had the potential for increased earnings through
            job training. However, there was no documentation to support this compensating
            factor in the loan file. Further, Dell did not provide any written evidence or any
            statement from the borrower’s employer that the borrower had received any kind
            of training or potential of any future training that would increase the earnings.

            Dell stated that its underwriter noted on the mortgage credit analysis worksheet a
            compensating factor that the borrower had the ability to devote a greater portion
            of income to housing expenses. Dell explained that the underwriter derived this
            conclusion from the fact that the borrower’s non-purchasing spouse would reside
            in the subject property and would have income to contribute for household
            expenses. However, Dell did not provide any documentation to support that the
            spouse had income to contribute.

            Although not noted on the mortgage credit analysis worksheet, Dell stated in its
            response the loan file documented that the borrower had cash reserves in a
            retirement account after closing. We determined that the borrower had a cash
            reserve of two months in mortgage payments. However, HUD requires three
            months of cash reserves. After evaluating Dell’s comments, we did not change
            our conclusion and recommendation in this report.

Comment 5   We agree with Dell’s assertion that the savings account was not opened with a
            deposit of $9,904 on September 15, 2006, and we adjusted our memorandum
            report. The loan file contained a savings account inquiry, dated October 10, 2006,
            which showed an available balance of $9,904. It also showed deposits of $4,203,
            $4,299, and a memo credit of $5,801.

            In our draft report, we stated that the loan file did not contain documentation to
            support the source of funds in the savings account and there was no evidence of
            redemption of the retirement funds. Dell’s underwriter listed available assets of
            $13,614 that comprised of $4,104 in a savings account, $6,616 in a checking
            account, and $2,894 in a retirement account. Dell stated that $4,104 was part of
            the $4,299 deposit which came from the borrower’s retirement account. Dell also
            asserted that the loan file contained evidence that the borrower’s retirement
            account had available funds. However, Dell did not provide the required
            redemption documentation if the funds were obtained from the retirement
            account. After evaluating Dell’s comments, we did not change our conclusion
            and recommendation in this report.

Comment 6   Dell disagreed with our recommendation and asserted that its underwriters made a
            reasonable decision to approve the loans after exercising due diligence. The two

                                             30
underwriters involved with the three materially deficient loans did not use due
diligence in underwriting these loans. Appendix B of this report provides detailed
descriptions of the material underwriting deficiencies. We did not change our
recommendation as this recommendation is appropriate based on the issues cited
in this report. Violations of FHA rules are subject to administrative and civil
action. The appropriateness of civil money penalties will be determined by HUD.




                                31