oversight

Access National Mortgage Corporation, Denver, CO, Did Not Follow HUD Requirements When Submitting Two of Its Loans for Endorsement

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-07-02.

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

                                                                Issue Date
                                                                         July 2, 2010
                                                                
                                                                Audit Report Number
                                                                             2010-DE-1004




TO:        Vicki Bott, Deputy Assistant Secretary for Single Family Housing, HU

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 8AGA


SUBJECT: Access National Mortgage Corporation, Denver, CO, Did Not Follow HUD
           Requirements When Submitting Two of Its Loans for Endorsement


                                  HIGHLIGHTS

 What We Audited and Why

            We audited Access National Mortgage Corporation (Access National), a Federal
            Housing Administration (FHA)-approved direct endorsement lender. We
            reviewed a total of 25 loans underwritten by Access National. We reviewed 23
            loans to determine whether it complied with HUD regulations, procedures, and
            instructions in originating, and underwriting, the FHA-insured loans selected for
            review. We reviewed 2 FHA-insured loans to determine whether it complied with
            HUD regulations, procedures, and instructions in submitting the loans for
            endorsement. We audited Access National because its 2-year default rate was
            12.22 percent, which is higher than FHA’s national 2-year default rate of 6.04
            percent.


 What We Found

            Access National generally complied with HUD regulations, procedures, and
            instructions in the origination and underwriting of 23 insured loans selected for
            review. However, it did not comply with U.S. Department of Housing and Urban
            Development (HUD) regulations, procedures, and instructions for two insured



                                            1
           loans it submitted to HUD for endorsement. It submitted the loans, totaling more
           than $410,000, for endorsement when the loan payments were not current.

What We Recommend


           We recommend that HUD require Access National to reimburse it for the future
           loss on the two loans that should not have been insured because they were not
           current when submitted for endorsement. We also recommend that HUD ensure
           that Access National implements policies to ensure that loans are current when
           submitted to HUD for endorsement.

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

Auditee’s Response


           We provided the discussion draft of the audit report to Access National on June
           11, 2010, and requested its comments by June 25, 2010. Access National
           provided its written response on June 22, 2010. Access National generally
           concurred with the finding and recommendations.

           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 Objectives                                                        4

Results of Audit
      Finding: Access National Did Not Follow HUD Requirements When Submitting   5
              Loans for Endorsement

Scope and Methodology                                                            7

Internal Controls                                                                9

Appendixes
   A. Schedule of Funds To Be Put to Better Use                                  10
   B. Auditee Comments and OIG’s Evaluation                                      11
   C. Late Endorsement Loan Details                                              18




                                           3
                      BACKGROUND AND OBJECTIVES

Access National Mortgage Corporation’s (Access National) home office is located in Reston,
VA. Access National has a number of branches including two branches located in Denver, CO.
We audited the Denver branch located at West 26th Avenue (lender identification number
7729200320). The U.S. Department of Housing and Urban Development’s (HUD) Federal
Housing Administration (FHA) authorized this branch as a nonsupervised mortgage company on
July 11, 2006. A nonsupervised mortgage company is a nondepository financial entity the
principal activity of which is the lending or investment of funds in real estate mortgages. This
branch only originates loans. The home office in Reston, VA, performs the underwriting and the
quality assurance reviews.

From January 1, 2008, through December 31, 2009, the Denver branch office originated 5,334
FHA-insured loans, with a total original mortgage amount of more than $1 billion. Of the 5,334
loans, 652 (12.22 percent) defaulted within the first 2 years, which is higher than the Nation’s 2-
year default rate of 6.04 percent.

FHA mortgage insurance encourages lenders to approve borrowers with less than perfect credit
because FHA insures the mortgage against default. Approved FHA lenders are responsible for
complying with all applicable HUD regulations and are required to determine a borrower’s
ability and willingness to repay the mortgage. Approved direct endorsement lenders may
underwrite and close mortgage loans without prior FHA review or approval. To obtain direct
endorsement approval, a lender must demonstrate it has the qualifications, experience, and
expertise to underwrite mortgage loans that satisfy FHA requirements. To maintain approval, a
lender must consistently underwrite and close loans that meet FHA requirements. The lender
must submit the loan for insurance endorsement within 60 days after loan settlement or funds
disbursement, whichever is later. HUD determines whether the loan is received late for
endorsement based upon the date it actually receives the loan case binder. When a loan is
submitted late for endorsement, the lender must certify that the mortgage was not unpaid more
than 30days.

The objectives of the review were to determine whether Access National complied with HUD
regulations, procedures, and instructions in originating, underwriting, and submitting for
endorsement the FHA-insured loans selected for review.




                                                 4
                               RESULTS OF AUDIT

 Finding 1: Access National Did Not Follow HUD Requirements When
                 Submitting Loans for Endorsement
Access National submitted two loans for endorsement when the payments on those loans were
not current. This condition occurred because Access National did not have adequate written
policies to ensure that loans were current when submitted to HUD for endorsement. As a result,
HUD endorsed two ineligible loans for more than $410,000.


 Access National Submitted
 Loans That Were Not Current

              Access National submitted two loans for endorsement when the payments on
              those loans were not current. It submitted loan FHA case number 571-0809019 to
              HUD for endorsement on May 3, 2008, when the April 1, 2008, payment had not
              been made by the borrower. Additionally, it submitted loan FHA case number
              381-8612471 to HUD for endorsement on December 8, 2008, when the
              November 1, 2008, payment had not been made by the borrower.

              Chapter 3 of HUD Handbook 4165.1, REV-2, stipulates that a loan is not eligible
              for endorsement if the payment due for the month before the lender submitted the
              loan for endorsement has not been received.


 Access National Had
 Inadequate Written Policies

              Access National did not have adequate written policies. Its written policies did
              not include procedures for ensuring that loans were current when submitted to
              HUD for endorsement. Based on our review, Access National developed written
              policies for submitting loans for endorsement to ensure that it meets HUD
              requirements.

 HUD Endorsed Two
 Uninsurable Loans

              HUD endorsed two ineligible loans for more than $410,000. The FHA insurance
              fund is at risk for the potential loss to HUD on the total value of the unpaid loan
              amounts, which was $402,441. HUD will determine the final loss when it
              disposes of the properties. HUD’s most recent data disclosed that the average loss




                                               5
          rate is 60 percent. Therefore, the estimated loss to HUD is $241,464. See
          Appendix C for late endorsement loan details.

          Since we only identified two loans with this deficiency during our audit period,
          this was not a pervasive issue. However, it is an issue that needs to be addressed
          to prevent future losses to the insurance fund.

Recommendations

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

          1A.     Require Access National to indemnify HUD for the future loss on the two
                  loans. The estimated loss to HUD is $241,464.

          1B.     Ensure that Access National implements policies to ensure that loans are
                  current when submitted to HUD for endorsement.




                                           6
                          SCOPE AND METHODOLOGY

Our audit period was January 1, 2008, through December 31, 2009. Access National’s Denver
branch office originated 5,334 FHA-insured loans with beginning amortization dates during our
audit period. We did not perform a 100 percent selection or a representative selection using
statistical or nonstatistical sampling. We selected 23 of the 652 loans that defaulted within the first 2
years after closing. Of the 23 loans, five were non-streamline-refinanced loans. We sorted the non-
streamline-refinanced loans by the number of payments made before the lender reported the first 90-
day default, and the underwriters. We selected the 4 loans that were manually underwritten and had
14 or fewer payments made before the first 90 day default was reported. Additionally, we selected
the one automated underwritten loan with no payments made before the first 90 day default was
reported. The remaining 18 loans were streamline-refinanced loans that had three or fewer
payments before the lender reported the first 90-day default, were manually underwritten, and had a
default reason of excessive obligations or unable to contact the borrower. We also noted the loan’s
current status, and those in a claim status were placed higher on the list. From the list, we selected 2
loans from each of the 9 underwriters represented.

When we reviewed the loan files for the 23 loans, we determined that none of the 23 loans were
submitted late for endorsement. In order to determine if Access National followed HUD
requirements when it submitted loans late for endorsement, we identified and reviewed the two
loans with beginning amortization dates between January 1, 2008, and December 31, 2009, that
were not current when they were submitted to HUD for endorsement. We did not perform a full
review of these two loans. We only reviewed these loans to determine that they were not current
when they were submitted for endorsement.

To accomplish the audit objectives, we

       Reviewed HUD regulations and reference materials related to single-family requirements.
       Reviewed Access National’s underwriting and quality control policies and procedures.
       Reviewed HUD’s and Access National’s loan case files.
       Reviewed Access National’s quality control reports and corrective actions taken.
       Interviewed Access National’s management to obtain information regarding its policies and
        procedures.

We used origination, default, claim, and current loan status data maintained by HUD in the Single
Family Data Warehouse and Neighborhood Watch systems for background information and in
selecting our sample of loans. We did not rely on the data to base our conclusions. Therefore, we
did not assess the reliability of the data.

We classified $241,464 as funds to be put to better use. This is a projected amount of loss to
HUD for the two loans which we recommend that HUD require Access National to indemnify.
To determine the potential loss, we used HUD’s calculation for its average loss on FHA-insured
foreclosed-upon properties, which is 60 percent of the unpaid loan balance. The 60 percent is
based on the Actuarial Review of the FHA Mutual Mortgage Fund for Fiscal Year 2009.



                                                   7
We performed the onsite review work from February to March 2010 at the Denver branch office
located at 2420 West 26th Avenue, Denver, CO.

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




                                               8
                              INTERNAL CONTROLS

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

                 Management’s controls to ensure that FHA-insured loans are underwritten in
                  accordance with HUD requirements.
                 Management’s controls to ensure that loans are submitted for endorsement in
                  accordance with HUD requirements.
                 Management’s controls to ensure that a quality control plan is developed and
                  implemented in accordance with HUD requirements.

              We assessed the relevant controls identified above.

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


 Significant Weaknesses


              Based on our review, we believe that the following item is a significant weakness:

                 Controls over ensuring that loans are current when they are submitted to HUD
                  for endorsement/insuring.




                                                9
                                   APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                           Recommendation        Funds to be put
                                  number          to better use 1/

                                         1A            $241,464


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.

     Implementation of our recommendation to require Access National to indemnify HUD
     for the future loss on the two loans it submitted for endorsement when the payments on
     those loans were not current will reduce the risk of loss to the FHA insurance fund. The
     amount above reflects the amount of estimated loss to HUD incurred for the two loans.
     To determine the estimated loss, we used HUD’s calculation for its average loss on FHA-
     insured foreclosed-upon properties, which is 60 percent of the unpaid loan balance. The
     60 percent is based on the Actuarial Review of the FHA Mutual Mortgage Fund for
     Fiscal Year 2009.




                                            10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         11
Ref to OIG Evaluation   Auditee Comments




                         12
Refer to OIG Evaluation   Auditee Comments




                           13
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         14
Ref to OIG Evaluation   Auditee Comments




                         15
Ref to OIG Evaluation   Auditee Comments




                         16
                         OIG Evaluation of Auditee Comments

            Access National generally concurs with the report and has taken action to prevent
            future errors.

Comment 1   This report contains our audit results and final recommendations for resolving any
            issues identified. The facts supporting all conclusions and recommendations are
            clearly presented in the finding and the magnitude of any issues identified is
            clearly represented. Therefore, we do not believe further disclosures are
            warranted.




                                            17
Appendix C

                  LATE ENDORSEMENT LOAN DETAILS
Case number     Original       Date          Payment not    Unpaid         Sixty
                 loan       submitted for       made       principal      percent
                amount      endorsement                  balance as of
                                                         April 30, 2010
571-0809019      $205,323        5/3/2008       4/1/2008      $201,483    $120,890
381-8612471      $205,135       12/8/2008      11/1/2008      $200,958    $120,574
        Total    $410,458                                     $402,441    $241,464




                                        18