Issue Date
October 9, 2009
Audit Report Number
2010-NY-1002
TO: Vicki Bott, Deputy Assistant Secretary for Single Family Housing, HU
FROM:
Edgar Moore, Regional Inspector General for Audit, New York/New Jersey,
2AGA
SUBJECT: Jersey Mortgage Company, Cranford, New Jersey, Did Not Always Comply
with HUD/FHA Loan Underwriting Requirements
HIGHLIGHTS
What We Audited and Why
We audited the Jersey Mortgage Company (Jersey Mortgage), a nonsupervised1
lender located in Cranford, New Jersey. Jersey Mortgage was selected for review
because its default rate of 7.40 percent for loans with beginning amortization
dates between August 1, 2006, and July 31, 2008, was higher than the state of
New Jersey‘s default rate of 5.35 percent.
The audit objectives were to determine whether Jersey Mortgage (1) approved
Federal Housing Administration (FHA)-insured loans in accordance with the
requirements of the U.S. Department of Housing and Urban Development
(HUD)/FHA, which include adherence to prudent lending practices, and (2)
developed and implemented a quality control plan in compliance with HUD/FHA
requirements.
What We Found
Jersey Mortgage did not always approve FHA-insured loans in accordance with
the requirements of the HUD/FHA. Specifically, Jersey Mortgage approved 13
1
A non-supervised lender is a FHA approved non-depository financial entity that has as its principal activity the
lending or investing of funds in real estate mortgages.
loans in which there were significant underwriting deficiencies such as (1)
inadequate verification of borrower‘s credit, (2) inadequate compensating factors
for loans with high debt-to-income ratios, (3) inadequate verification of funds to
close loans, and (4) improper verification of employment and income information.
As a result, loans were approved for potentially ineligible borrowers, which
caused HUD/FHA to incur an unnecessary insurance risk. The remaining two
loans contained technical deficiencies. These deficiencies occurred because
Jersey Mortgage lacked adequate controls to ensure that loans were processed in
accordance with HUD requirements.
Jersey Mortgage failed to ensure that its quality control plan was implemented in
accordance with HUD/FHA‘s requirements. Specifically, (1) quality control
reviews were not conducted for the loans that defaulted within the first six
payments after closing or for the rejected loans, and (2) management did not
provide responses or corrective actions for the deficiencies identified in quality
control reviews. Consequently, the effectiveness of its quality control plan, which
was designed to ensure accuracy, validity, and completeness in its loan
underwriting process, was lessened.
What We Recommend
We recommend that the Deputy Assistant Secretary for Single Family Housing
require Jersey Mortgage to (1) indemnify HUD against future losses on 12 loans
with significant underwriting deficiencies, (2) reimburse HUD for the amount of
claims and associated fees paid on one loan with significant underwriting
deficiencies, and (3) implement quality control procedures to ensure compliance
with the requirements to review early defaults and rejected loans. We also
recommend that HUD‘s Homeownership Center‘s Quality Assurance Division
follow up with Jersey Mortgage within six months to ensure that quality control
review procedures were properly implemented.
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 a draft report to Jersey Mortgage officials on July 6, 2009 and
requested their response by July 22, 2009. We discussed the results of our review
during the audit and at an exit conference held on July 29, 2009. Jersey Mortgage
officials provided written comments at the exit conference and generally
disagreed with the draft report findings. The complete text of Jersey Mortgage‘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 1: Jersey Mortgage Did Not Always Comply with HUD/FHA‘s 5
Underwriting Requirements
Finding 2: Jersey Mortgage Had Weaknesses in the Implementation 10
of its Quality Control Plan
Scope and Methodology 12
Internal Controls 13
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 15
B. Auditee Comments and OIG‘s Evaluation 16
C. Summary of Underwriting Deficiencies 53
D. Case Summary Narratives
54
3
BACKGROUND AND OBJECTIVES
Jersey Mortgage Company (Jersey Mortgage) became an approved U.S. Department of Housing
and Urban Development (HUD) lender in 1986. The company originates loans, which it then sells
to investors and other mortgage bankers.
Jersey Mortgage is a non-supervised lender that has as its principal activity the lending or investing
of funds in real estate mortgages. A non-supervised lender may originate, underwrite, purchase,
hold, service and sell FHA insured mortgages and submit applications for mortgage insurance. A
non-supervised lender may maintain an FHA approved branch office for the origination of FHA
insured mortgages, and must maintain a warehouse line of credit or other mortgage funding
program that is acceptable to the Department. For continued approval a non-supervised lender must
submit to the Department an acceptable audit report within 90 days of the close of its fiscal year.
The main office of Jersey Mortgage is located at 20 Commerce Drive, Suite 340, Cranford, New
Jersey, and it has one branch office in Manasquan, New Jersey. Jersey Mortgage has five
underwriters and ten loan officers.
Between August 1, 2006, and July 31, 2008, Jersey Mortgage underwrote 649 Federal Housing
Administration (FHA)-insured mortgages in New Jersey and experienced a default rate of 7.40
percent, which was significantly higher than the New Jersey state average default rate of 5.35
percent.
The objectives of this audit were to determine whether Jersey Mortgage (1) approved FHA-insured
loans in accordance with the requirements of HUD/FHA, which include adherence to prudent
lending practices, and (2) developed and implemented a quality control plan in compliance with
HUD/FHA requirements.
4
RESULTS OF AUDIT
Finding 1: Jersey Mortgage Did Not Always Comply with HUD/FHA‘s
Underwriting Requirements
Jersey Mortgage did not always approve FHA-insured loans in accordance with the requirements
of HUD/FHA. Specifically, Jersey Mortgage approved 132 loans in which there were significant
underwriting deficiencies such as (1) inadequate verification of borrower‘s credit, (2) inadequate
compensating factors for loans with high debt-to-income ratios, (3) inadequate verification of
funds to close loans, and (4) improper verification of employment and income information. For
one of the 13 loans, HUD paid a claim that resulted in a loss of $229,427. There were two loans
that contained technical violations. As a result, loans were approved for potentially inelgible
borrowers, and contributed to HUD/FHA‘s assuming an unnecessary insurance risk. The
deficiencies occurred because Jersey Mortgage did not have adequate controls to ensure that
loans were processed in accordance with HUD/FHA requirements.
Significant Underwriting
Deficiencies
Our review of 15 loans with amortization dates between August 1, 2006, and July
31, 2008, disclosed significant underwriting deficiencies in 13 loans. The
deficiencies occurred because Jersey Mortgage did not follow prudent lending
practices and regulations prescribed by HUD in its origination and underwriting of
the loans.
HUD Handbook 4155.1, REV-5, ―Mortgage Credit Analysis for Mortgage
Insurance,‖ prescribes basic underwriting requirements for FHA-insured single-
family mortgage loans. The lender must ensure that the borrower has the ability
and willingness to repay the mortgage debt. This assessment must be based on
sound underwriting principles in accordance with the guidelines, rules, and
regulations described in the handbook and supported by sufficient documentation.
In addition, chapter 3-1 of the handbook requires that the application package
contain sufficient documentation to support a lender‘s decision to approve a
mortgage. While this decision involves some subjectivity, our examination of 15
loans approved by Jersey Mortgage disclosed significant underwriting
deficiencies in the approval of 13 loans. Specifically, Jersey Mortgage did not
always (1) adequately verify borrowers‘ credit, (2) obtain adequate compensating
factors for loans with high debt-to-income ratios, (3) verify that there were
2
We originally reviewed 21 loans for our audit; however, two of the loans had insurance status terminated and two
loans that contained deficiencies were cleared when loans were reviewed on-site. In addition, two loans that
contained deficiencies were also cleared when we reviewed documentation provided at the exit conference. As a
result, we are reporting on 15 loans.
5
sufficient cash reserves to close the loans, and (4) properly verify employment
and/or income information.
Significant deficiencies are noted in the chart below and in appendix C. The
deficiencies noted are not independent of one another, as one loan may have
contained more than one deficiency.
Areas of deficiencies Number of loans
Inadequate credit analysis 3 of 13 loans
Excessive debt-to-income ratios without 6 of 13 loans
adequate compensating factors
Inadequate verification of funds to close 9 of 13 loans
on HUD-1 settlement statement
Inadequate verification of income and/or 7 of 13 loans
employment
Specific examples of these significant underwriting deficiencies follow:
For FHA case #352-5605932, the lender did not conduct an adequate
analysis of the borrower‘s credit history. The credit report in the file
contained two judgments in March 2002 and May 2003. However, the
lender did not obtain information on the status of the judgments or an
explanation from the borrower as required by HUD Handbook 4155.1,
REV-5, section 2-3. In addition, the lender did not adequately verify the
source of the donor‘s gift. The donor of the gift deposited $9,000 into his
own account on July 25, 2007, and then made the gift payment of $8,000
on July 25, 2007, to the coborrower. The assets available on the mortgage
credit analysis worksheet were shown as $8,010, and the HUD-1
settlement statement indicated that the borrower would have needed
$8,000 to close. If we do not include the gift amount, the borrower would
have had $10 available to close and would not have had sufficient funds to
close the loan. Also, the monthly employment income on the mortgage
credit analysis worksheet was listed as $6,515; however our calculation of
the monthly employment income based on the paystubs was $5,958. The
employment income was overstated, which resulted in the lender
calculating incorrect debt-to-income ratios of 41.24 and 48.44 percent.
After adjusting the borrower‘s income, these ratios would increase to
45.09 and 52.97 percent. The lender also did not list compensating factors.
Mortgagee Letter 2005-16 states that the lender must describe the
compensating factors used to justify mortgage approval when the
borrower‗s mortgage payment-to-income ratio (front) and the total fixed
payment-to-income ratio (back) exceed 31 and 43 percent. In addition, for
one of the coborrowers, there were employment gaps for the months of
April 2006, August 2006, and September 2006. The lender did not obtain
an explanation for the gaps in employment as required by HUD Handbook
4155.1 REV-5, section 2-6.
6
For FHA case #352-5601063, the lender did not conduct an adequate
analysis of the borrower‘s credit history. The credit report in the file
contained derogatory items, and a judgment was listed for the coborrower.
The file contained a letter written by the coborrower; however, it was
inadequate because it did not explain the derogatory items and judgments
listed on the credit report as required by HUD Handbook 4155.1, REV-5,
section 2-3. The lender also did not obtain an explanation for the source of
funds in the file per HUD Handbook 4155.1, REV-5, section 2-10C. The
HUD-1 settlement statement showed an earnest money deposit of $10,000.
A total of $9,000 of the $10,000 earnest money deposit had been
transferred from the borrower‘s checking account as of May 29, 2007.
However, on May 29, 2007, an unexplained deposit of $1,170 was made to
the borrower‘s checking account, resulting in a pretransfer balance of
$9,080. If this deposit had not been made on May 29, 2007, the checking
account balance would have been $7,910. The HUD-1 settlement
statement for the FHA loan indicated that the borrowers were required to
pay $5,044 at closing. Due to the unsupported earnest money deposit of
$1,170, the borrowers would have needed $6,214 at closing. Also, the
checking account statement contained two non-payroll deposits during the
period July 19 through July 20, 2007, totaling $2,230. There was no
explanation by the borrower for these excessive deposits. Since the funds
to close were not verified, the borrowers did not have sufficient funds to
close. Further, employment income was overstated, as the lender used
monthly income of $5,388 on the mortgage credit analysis worksheet
which resulted in the lender calculating incorrect debt-to-income ratios of
46.29 and 48.53 percent. After adjusting the borrower‘s income to the
documented monthly income of $5,328, these ratios would have increased
to 46.81 and 49.08 percent. Mortgage Letter 2005-16 states that for
manually underwritten mortgages in which the direct endorsement
underwriter must make the credit decision, the qualifying ratios are raised
to 31 percent and 43 percent and if either or both ratios are exceeded on a
manually underwritten mortgage, the lender must describe the
compensating factors used to justify mortgage approval. The
compensating factors listed on the mortgage credit analysis worksheet that
the borrower had an excellent work history and was making the down
payment from his own funds were not allowable according to HUD
Handbook 4155.1, REV-5, section 2-13.
For FHA case #352-5545714, the lender did not conduct an adequate
analysis of the borrower‘s credit history. The credit report indicated that
several accounts were in collection; however, the lender did not obtain an
explanation from the borrower as required by HUD Handbook 4155.1,
REV-5, section 2-3. The HUD-1 settlement statement reported an earnest
money deposit of $10,000 that exceeded 2 percent of the sale price; the
lender did not obtain supporting documentation for the deposit as required
7
by HUD Handbook 4155.1, REV-5, section 2-10 A. The HUD-1
settlement statement also indicated that the borrower was required to pay
$12,382 at closing, yet due to the unsupported earnest money deposit of
$10,000, the borrower would have needed $22,382 to close. Since the
funds to close were not all verified, the borrower did not have sufficient
funds to close the loan. Also, the mortgage credit analysis worksheet and
the loan application listed $36,011 as assets, which appeared to be the
borrower‘s retirement account of $34,612 and the checking account
balance of $1,399. The lender obtained a copy of the retirement statement
from October 1 through December 31, 2006. However, the lender did not
obtain evidence of redemption as required by HUD Handbook 4155.1,
REV-5, section 2-10K.
For FHA case #351-4900883, the lender did not adequately verify
employment income when the lender did not obtain the borrower‘s
original pay stubs covering the most recent 30-day period per HUD
Handbook 4155.1, REV-5, section 3-1E. The property was later conveyed
to the insurer, and HUD paid a claim of $229,427.
Technical Underwriting
Deficiencies
Two of the fifteen cases audited contained technical deficiencies of
noncompliance with HUD requirements that were not serious enough to
negatively impact approval of the loans. For FHA case #352-5532937, there were
missing bank statements in the file. For FHA case #351-4824525, the total fixed
payment-to-income ratio was 46 percent, and there were no compensating factors
listed on the mortgage credit analysis worksheet
Conclusion
Jersey Mortgage did not always approve FHA-insured loans in accordance with
the requirements of HUD/FHA. These deficiencies occurred because Jersey
Mortgage did not have adequate procedures and controls to ensure that all HUD
underwriting requirements were properly implemented and documented. As a
result, it approved 13 loans for which HUD paid a claim on one loan totaling
$229,427 and remains at risk for more than $3 million in potential claims for the
other 12 loans (see appendix C). The final loss that HUD will incur depends upon
what HUD realizes when it disposes of the property. HUD‘s most recent data
disclosed that its loss rate is 42 percent. Net sales proceeds after considering
carrying and sales expenses may mitigate the amount of the claim paid. Loans for
which HUD remains at risk can be mitigated by requesting that the lender
indemnify HUD. In this case, the lender reimburses HUD for any insurance
claim, taxes, interest, and other expenses connected with the disposition of the
property, reduced by any amount recouped by HUD via sale or other disposition.
8
Appendix C of the report provides a summary of the underwriting deficiencies
noted in the 13 cases. Appendix D of this report provides a more detailed
description of the deficiencies by case.
Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing
require Jersey Mortgage Company to
1A. Indemnify HUD against future losses of $1,281,3143 related to the 12
loans with significant underwriting deficiencies.
1B. Reimburse HUD for the $96,3594 in loss funds resulting from the amount
of claims and associated fees paid on one loan with significant
underwriting deficiencies (case #351-4900883).
1C. Establish procedures to ensure that all HUD underwriting requirements are
properly implemented and documented.
3
The amount of cost savings or funds to be put to better use on the loans for which indemnification is
recommended is estimated at $1,281,314 (42 percent of the unpaid principal balance of $3,050,747)
4
Based upon HUD‘s current 42 percent default loss experience, the amount of ineligible costs for one loan for
which a claim was paid is estimated at $96,359 (42 percent of the claim paid of $229,427)
9
Finding 2: Jersey Mortgage Had Weaknesses in the Implementation of
its Quality Control Plan
Jersey Mortgage had weaknesses in the implementation of its quality control plan. It did not
always comply with HUD‘s and its own quality control requirements to ensure that (1) HUD-
insured FHA loans that went into default within the first six months were reviewed, (2) 10
percent of rejected loans were reviewed, and (3) management addressed the material deficiencies
in the quality control findings. These noncompliances occurred because Jersey Mortgage did not
establish procedures to ensure that its quality control plan was properly implemented.
Consequently, the effectiveness of its quality control plan, which was designed to ensure
accuracy, validity, and completeness in its loan underwriting process, was lessened.
Loans Defaulting within the
First Six Payments Not
Reviewed
Loans that defaulted within the first six payments (early payment defaults) were not
reviewed as required by HUD regulations and the lender‘s own quality control plan.
HUD Handbook 4060.1, REV-2, section 7-6D, requires that lenders review all loans
going into default within the first six payments. Jersey Mortgage‘s quality control
plan, section 3, states that all FHA loans that go into default within the first six
months will be reviewed. However, quality control reviews were not conducted for
30 of the 32 early defaulted loans. Further, the two loans reviewed were apparently
randomly selected, as opposed to being selected because they defaulted within six
months. This condition occurred because Jersey Mortgage did not adequately
implement its quality control plan. Quality control reviews of early defaulted loans
can provide valuable information about the causes of default that may indicate
inadequate underwriting. Jersey Mortgage officials acknowledged this weakness
and stated that review of these defaulted loans would be enforced.
Rejected Loans Not Reviewed
HUD Handbook 4060.1, REV-2, section 7-8A, states that of the total loans rejected,
a minimum of 10 percent or a statistical random sampling that provides a 95
percent confidence level with 2 percent precision must be reviewed. Our review
disclosed that Jersey Mortgage did not follow this requirement. Jersey Mortgage
officials acknowledged this weakness and stated that review of rejected loans
would be enforced. Jersey Mortgage officials did not maintain records that
permitted identification of the FHA rejected loans so it was impossible to
determine how many rejected loans should have been reviewed.
10
Quality Control Review
Findings Not Addressed
Management did not provide written responses to the quality control review findings
or document what corrective action was taken to address the noted material findings.
HUD Handbook 4060.1, REV-2, section 7-3I, requires that management take
prompt action to deal appropriately with any material findings. The final report or
an addendum must identify actions being taken, the timetable for their
completion, and planned follow-up activities. Review of loan files revealed that
no management response was provided for the quality control review findings.
The quality control liaison stated that management follow-up and corrective
action were conducted verbally; however, management officials did not document
their actions. Jersey Mortgage officials agreed to implement the required control
procedures and stated that written responses to quality control findings would be
documented.
Conclusion
Jersey Mortgage had weaknesses in the implementation of its quality control plan
because it did not ensure that (1) all HUD-insured FHA loans that went into
default within the first six months were reviewed, (2) 10 percent of rejected loans
were reviewed, and (3) management provided follow-up for quality control
findings. These noncompliances occurred because Jersey Mortgage did not
establish procedures to ensure that its quality control plan was properly
implemented. Consequently, the effectiveness of its quality control plan, which
was designed to ensure accuracy, validity, and completeness in its loan
underwriting process, was lessened.
Recommendation
We recommend that the Deputy Assistant Secretary for Single Family Housing
require
2A. Jersey Mortgage to implement its quality control procedures, to ensure that
(1) all loans that default within the first six payments and 10 percent of
rejected loans are properly selected and reviewed, and (2) adequate
management follow-up is provided for any material findings resulting from
quality control reviews.
2B. HUD‘s Homeownership Center‘s Quality Assurance Division to follow up
with Jersey Mortgage in six months to ensure that the required quality
control procedures were implemented.
11
SCOPE AND METHODOLOGY
To achieve our audit objectives, we reviewed applicable laws, regulations, HUD handbooks,
mortgagee letters, and reports from HUD‘s Quality Assurance Division. We reviewed the
independent audit reports issued by Jersey Mortgage‘s independent auditor and interviewed
Jersey Mortgage‘s quality control officials, originators, and underwriters to obtain an
understanding of its internal controls.
We reviewed 17 defaulted loans from HUD‘s Neighborhood Watch system that were
underwritten by Jersey Mortgage with beginning amortization dates between August 1, 2006,
and July 31, 2008. Loan selection was based on the following factors: (1) less than six
payments were made before the first 90-day default was reported, and (2) the loan was not a
streamline refinance.
We performed detailed testing and review of Jersey Mortgage‘s underwriting procedures and
reviewed documentation from both HUD‘s Homeownership Center endorsement files and loan
files provided by Jersey Mortgage officials. Our detail testing and review involved (1) analysis
of borrowers‘ income, assets, and liabilities; (2) review of borrowers‘ credit history and savings
ability; (3) verification of selected data on the underwriting worksheets and settlement
statements; and (4) confirmation of employment and gifts. We communicated compliance issues
with HUD and Jersey Mortgage officials. The results of our detailed testing only apply to the 17
loans tested and cannot be projected.
We also reviewed Jersey Mortgage‘s quality control plan, as well as its quality control reports
and logs. We tested the sufficiency and timeliness of quality control reviews for closed loans.
We selected a sample of nine quality control reports to test the adequacy of quality control
review procedures and to determine compliance with HUD requirements.
We performed the audit fieldwork from January through March 2009 at Jersey Mortgage‘s main
office located at 20 Commerce Drive, Suite 340, Cranford, New Jersey. Our audit generally
covered the period August 1, 2006, through July 31, 2008, and was expanded as necessary.
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.
12
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:
Program operations - Policies and procedures that management has
implemented to reasonably ensure that a program meets its objective.
Compliance with laws and regulations - Policies and procedures that
management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
Safeguarding resources - Policies and procedures that management has
implemented to reasonably ensure that resources are safeguarded against
waste, loss, and misuse.
Validity and reliability of data - Policies and procedures that management
has implemented to reasonably ensure that valid and reliable data are
obtained, maintained, and fairly disclosed in reports.
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.
13
Significant Weaknesses
Based on our review, we believe that the following items are significant weaknesses:
Jersey Mortgage did not ensure that certain loans were processed in
accordance with all applicable HUD underwriting requirements (see finding
1).
Jersey Mortgage did not adequately implement its quality control plan to
ensure compliance with HUD‘s and its own quality control requirements
(see finding 2).
14
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Funds to be put
number Ineligible 1/ to better use 2/
1A $1,281,314
1B $96,359
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.
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 (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. In this instance, if HUD implements our
recommendations to indemnify the loans that were not originated in accordance with
HUD/FHA requirements, it will reduce HUD‘s risk of loss to the insurance fund. The
above amount reflects statistics showing that HUD has an average loss experience of 42
percent of the claim amount when it sells a foreclosed property.
15
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
16
17
Comment 1
18
19
Comment 2
Comment 3
20
Comment 3
Comment 4
21
Comment 4
Comment 5
22
Comment 5
Comment 6
23
Comment 7
24
Comment 8
25
Comment 8
Comment 8
Comment 7
26
Comment 7
Comment 9
27
Comment 10
28
Comment 11
29
Comment 12
Comment 13
30
Comment 14
31
Comment 15
Comment 7
32
Comment 7
33
Comment 7
Comment 16
34
Comment 3
35
Comment 3
Comment 17
36
Comment 17
Comment 18
37
Comment 18
Comment 19
38
Comment 20
Comment 21
39
Comment 21
Comment 22
40
Comment 23
Comment 23
41
Comment 23
42
Comment 23
Comment 24
43
Comment 24
Comment 1
Comment 1
44
45
OIG Evaluation of Auditee Comments
Comment 1 Jersey Mortgage officials indicate that several of the findings in the report are at
variance with the facts and do not constitute violations of HUD/FHA
requirements or affect the underlying loans insurability. However, based on
evaluation of Jersey Mortgage officials‘ comments and additional documentation
provided at the exit conference, we believe the findings in the report are not at
variance with the facts and do constitute violations of HUD/FHA requirements.
As such, OIG‘s overall conclusions are provided in the below evaluation of
auditee comments and were necessary we have revised the report to reflect the
additional information provided.
Comment 2 Jersey Mortgage officials indicated that borrower‘s with limited recurring
expenses are allowed greater latitude on the front end ratio and that the
Verification of Rent (VOR) had demonstrated the borrower‘s excellent rental
payment history. HUD Handbook 4155.1 REV-5, section 2-13 states that any
compensating factor used to justify mortgage approval must be supported by
documentation. Present housing expenses paid timely is not an allowable
compensating factor. Section 2-13 cites allowable compensating factors and
indicates that if 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 this would be an acceptable
compensating factor. However, the borrower‘s current housing expense was
$2,000 per month and the proposed housing expenses were $3,182 per month,
which is significantly higher (59% increase) than the current housing expenses.
Also, Jersey Mortgage officials indicated the borrower had been employed in the
same line of work for over five years and that the loan was underwritten and
approved by the New Jersey Housing & Mortgage Finance Agency with no
conditions. However, these are not allowable compensating factors per HUD
Handbook 4155.1 REV-5, section 2-13. As such; Jersey Mortgage officials did
not have adequate documented compensating factors to justify the high debt to
income ratio. Therefore this deficiency will remain in the report and the case is
still recommended for indemnification.
Comment 3 Jersey Mortgage officials provided documentation to show that the loan had
complied with the automated underwriting requirements for Fannie Mae‘s
Desktop Underwriter. As such, we revised the report to eliminate this case from
the report.
Comment 4 Jersey Mortgage officials indicated that the Mortgage Credit Analysis Worksheet
(MCAW) and file contained significant compensating factors regarding the high
debt to income ratio. The MCAW listed as compensating factors excellent work
history and that the down payment came from the borrowers‘ own funds.
However, these are not allowable compensating factors per HUD Handbook
4155.1 REV-5, section 2-13. Since, the borrower did not make a large deposit of
ten percent or more, the use of his own funds for the deposit is not an allowable
46
compensating factor. Jersey Mortgage officials also stated that $1,600 of monthly
income from a job started by the co-borrower in March 2007 was not included in
income, therefore this qualified as a compensating factor. We recalculated the co-
borrowers $19,166 paid for ten months as being equal to $1,916 in additional
income a month, which results in recomputed ratios of 34.42 and 36.09 percent
(front and back respectively). However, the front ratio is still in excess of the
HUD limit of 31 percent thus, the additional income is not an adequate
compensating factor, per HUD Handbook 4155.1, REV-5, Sec 2-13; therefore,
this case will remain in the report.
Comment 5 Jersey Mortgage officials indicated that the debt to income ratios were accurately
computed and that because the borrowers had made timely rental payments over
three years, only had a $300 increase in housing expenses, and had satisfied all
outstanding debts before the closing; these were adequate compensating factors.
The original debt to income ratios were 37.20 and 45.45 percent and exceeded the
HUD limits. The compensating factors cited by Jersey Mortgage officials are not
allowable per HUD Handbook 4155.1 REV-5, section 2-13, which requires that
any compensating factor used to justify mortgage approval must be supported by
documentation. The proposed mortgage payment on the MCAW was $1,890,
which was substantially higher (26% increase) than the $1,500 current rental
payment. Section 2-13 requires documentation that 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, however the file did not contain such documentation. Therefore, this
deficiency will remain in the report and the case is still recommended for
indemnification.
Comment 6 Jersey Mortgage officials stated that the file contained evidence of additional
income from the co-borrower, which was not used to qualify the borrowers and
was a compensating factor as was the borrower‘ excellent work history. HUD
Handbook 4155.1 REV-5, section 2-13 states that any compensating factor used
to justify mortgage approval must be supported by documentation. Excellent work
history is not an allowable compensating factor per section 2-13. Jersey Mortgage
officials cited additional income from the co-borrower as being a compensating
factor, which was supported by the borrowers‘ tax return for 2007. However, the
documentation provided included tax transcripts for 2007 that revealed the co-
borrower had earned a total of $3,599 in 2007 from two new/different employers.
Jersey Mortgage officials did not provide adequate documentation to show what
the monthly earnings were, when the employments had started, and proof that the
co-borrower was still employed at the time of the closing; thus the additional
income was not adequately supported. Furthermore, re-computation of the debt to
income ratios using an additional $300 of monthly income resulted in a front end
ratio of 36.02 percent, which still exceeded the HUD limit of 31 percent.
Therefore, this deficiency will remain in the report and the case is still
recommended for indemnification.
47
Comment 7 Jersey Mortgage officials indicated that the income used in underwriting the loan
was not overstated. We evaluated Jersey Mortgage official‘s response and
supporting documentation and conclude that the borrowers‘ income were not
materially overstated; as such, since the ratios were reduced to be within HUD
limits we have eliminated this case from the report.
Comment 8 Jersey Mortgage officials demonstrated that it had complied with HUD guidelines
in analyzing the borrower‘s credit profile and debt for child support; thus they had
adequately resolved the cited deficiencies. As such, we have adjusted the report
to eliminate the cited credit and debt deficiencies. However, the case is still
recommended for indemnification based on the other significant deficiencies that
existed.
Comment 9 Jersey Mortgage officials acknowledged that they did not obtain an explanation
regarding the referenced debts and stated that they obtained a written explanation
during the course of the audit. HUD Handbook 4155.1 REV-5, section 2-3 states
that major indications of derogatory credit including judgments, collections, and
any other recent credit problems require sufficient written explanation from the
borrower. As such, since this information was not obtained during the
underwriting of the loan the case remains in the report, and is still recommended
for indemnification.
Comment 10 Jersey Mortgage officials acknowledged that the borrower needed additional
funds to close. They state that the underwriter was not informed of the fact and
was not provided the opportunity to obtain additional asset verification, but Jersey
Mortgage officials indicated that the additional funds could have been provided
from the borrower‘s $1,900 biweekly pay. HUD Handbook 4155.1 REV-5,
section 2-10 states that all funds for the borrower‘s investment in the property
must be verified and documented. The HUD-1 settlement statement indicates that
the borrower needed $5,835 to close. However, review of the checking account
bank statement revealed that the borrower had $3,043 in available funds. Jersey
Mortgage officials did not verify and document all of the sources of the funds to
close. As such, at the time of the closing, officials did not document that the
borrower had sufficient funds available for closing the loan. Therefore this
deficiency will remain in the report and the case is still recommended for
indemnification.
Comment 11 Jersey Mortgage officials indicated that it had verified all large or excessive
increases in account funds used to close the loan. Jersey Mortgage officials
indicated that no written explanation for two deposits totaling $3,500 made in
December was required because similar deposits were made in August and
October 2006. HUD Handbook 4155.1 REV-5, section 2-10 states that all funds
for the borrower‘s investment in the property must be verified and documented.
Thus, Jersey Mortgage officials did not obtain a credible written explanation for
the large deposits before the loan closed. Therefore this deficiency will remain in
the report and the case is still recommended for indemnification.
48
Comment 12 Jersey Mortgage officials indicated that the borrower had sufficient verified funds
to close because the $900 deposit was not large in relation to the borrower‘s
income and could have come from the borrower‘s salary. HUD Handbook 4155.1
REV-5, section 2-10 states that all funds for the borrower‘s investment in the
property must be verified and documented at the time of closing. Jersey
Mortgage officials did not verify or document the $900 deposit; therefore the
borrower did not have sufficient verified funds to close the loan. This deficiency
will remain in the report and the case is still recommended for indemnification.
Comment 13 Jersey Mortgage officials obtained documentation regarding the withdrawal of
$35,000 from the borrower‘s retirement account in response to our audit which
provided sufficient funds to pay the earnest money deposit and close the loan.
HUD Handbook 4155.1 REV-5, section 2-10 states that all funds for the
borrower‘s investment in the property must be verified and documented. When
this loan was underwritten the lender did not exercise due diligence to verify and
document all funds required to close the loan, as such there was not sufficient
verified funds to close the loan. Therefore, this deficiency will remain in the
report and the case is still recommended for indemnification.
Comment 14 Jersey Mortgage officials indicated that they verified that the borrower had
received overtime income over the last three years and that the verification of
employment did not state that the overtime was not likely to continue. HUD
Handbook 4155.1 REV-5, section 2-7A states both overtime and bonus income
may be used to qualify if the borrower has received such income for the past two
years and it is likely to continue. The lender must develop an average of bonus or
overtime income for the past two years, and the employment verification must not
state that such income is unlikely to continue. The verification of employment
form did not indicate whether overtime was likely to continue and officials did
not obtain any other statements from the employer regarding overtime. As such,
there was a lack of documented assurance that the overtime was likely to
continue. Therefore this deficiency will remain in the report and the case is still
recommended for indemnification.
Comment 15 Jersey Mortgage officials indicated that the co-borrowers income was not
overstated and that there were four pay stubs covering the 30 day period prior to
closing. HUD Handbook 4155.1 REV-5, section 3-1 E provides that as an
alternative to obtaining a VOE, the lender may obtain the borrower‘s original pay
stub(s) covering the most recent 30-day period, along with original IRS W-2
Forms from the previous two years. However, the lender did not obtain four
consecutive pays stubs covering the 30 day period prior to closing. The lender
provided copies of checks that were not cashed or processed by the bank, and did
not have copies of pay stubs, therefore the co-borrower‘s monthly income was not
adequately supported. Therefore, this deficiency will remain in the report and the
case is still recommended for indemnification.
49
Comment 16 Jersey Mortgage officials stated that it complied with the HUD requirements by
obtaining four pay stubs covering a 30 day period prior to closing. HUD
Handbook 4155.1 REV-5, section 3-1 E provides that as an alternative to
obtaining a VOE, the lender may obtain the borrower‘s original pay stub(s)
covering the most recent 30-day period, along with original IRS W-2 Forms from
the previous two years. The lender did not obtain four consecutive pays stubs
covering the 30 day period prior to closing. Therefore, this deficiency will remain
in the report and the case is still recommended for indemnification.
Comment 17 Jersey Mortgage officials stated that the verification of gift funds met all of
HUD‘s requirements. HUD Handbook 4155.1 REV-5, section 2-10C, states that
the lender must be able to determine that the gift funds were not ultimately
provided from an unacceptable source and were indeed the donor‘s own funds.
The donor of the gift deposited $9,000 into his own account on July 25, 2007, and
then made the gift payment of $8,000 on July 25, 2007, to the co-borrower. The
lender did not adequately verify the source of the donor‘s gift because the
documentation on file did not support that the funds were indeed the donor‘s own
funds and not provided from an unacceptable source. Therefore, this deficiency
will remain in the report and the case is still recommended for indemnification.
Comment 18 Jersey Mortgage officials acknowledged that the file did not contain bank
statements for the most recent two month consecutive period before the closing.
In response to our audit Jersey Mortgage officials subsequently obtained the bank
statement covering the four month period before the closing. HUD Handbook
4155.1, Rev-5, section 3-1F, provides that if the bank statement shows the
previous month‘s balance, the requirement is met by obtaining the two most
recent, consecutive statements. However, the lender did not obtain bank
statements for the two most recent consecutive months at the time of the closing.
The lender also did not obtain a credible explanation for non-payroll deposits, nor
adequately verify the funds to close; as such sufficient verified funds were not
available to close the loan. Therefore, this case is still recommended for
indemnification.
Comment 19 Jersey Mortgage officials indicated that the borrower had enough verified funds to
close the loan and that the $3,220 in deposits were not used to close the loan.
Upon further review, since the bank statement did show two deposits totaling
$7,300 from a gift and a federal tax refund that had been adequately verified and
would have provided adequate funds to close; we eliminated the deficiency
regarding an inadequate savings pattern or source of funds, pertaining to this case,
from the report.
Comment 20 Although the lender did not obtain a credible explanation for $5,169 of non-
payroll deposits to the borrower‘s checking account Jersey Mortgage officials
indicated that the borrower had sufficient verified assets to be able to close the
loan and that they had complied with the HUD guidelines. Jersey Mortgage
officials indicated that the borrower had at least $14,375 of verified assets that
50
would have covered the $10, 348 of funds needed to close the loan. The
documentation provided by Jersey Mortgage officials consisted of a quarterly
statement for a mutual fund that had a balance of $14,376. HUD Handbook
4155.1 REV-5, section 2-10L requires the lender to verify that stocks and bonds
were redeemed; however this was not done for this case.
Further, Jersey Mortgage officials used FHA Total Mortgage Scorecard to
underwrite this loan. The FHA Total Mortgage Scorecard User Guide required the
lender to obtain the most recent statements for each account to verify that there
were sufficient funds to close and to resubmit the loan when material changes are
discovered or otherwise occur during loan processing. Jersey Mortgage officials
did not resubmit the loan through the automated underwriting system even though
there had been a substantial decrease in the borrower‘s assets from $47,219 when
underwritten to only $15,014 on the final loan application which included the
balance of the mutual fund that had no evidence of redemption. Therefore, this
deficiency will remain in the report and the case is still recommended for
indemnification.
Comment 21 Jersey Mortgage officials indicated that the $800 rental payment by the borrower
appears to be a typographical error and that the borrower had provided a June 27,
2007, letter which explained that he lived rent free with his parents and therefore
no further verification was needed. HUD Handbook 4155.1 REV-5, section 2-3 A
requires the lender determine the borrower's payment history of housing
obligations through either the credit report, verification of rent directly from the
landlord (with no identity-of-interest with the borrower) or verification of the
mortgage directly from the mortgage servicer, or through canceled checks
covering the most recent 12-month period. The borrower signed the initial and
final loan applications that both listed a monthly rental payment of $800 which
was used in preparing the mortgage credit analysis worksheet. However, prior to
closing the lender failed to obtain a credible explanation for the discrepancy in the
rent information provided on loan applications, which had been certified as being
true and correct by the borrower. Therefore, this deficiency will remain in the
report and the case is still recommended for indemnification.
Comment 22 Jersey Mortgage officials acknowledged that the loan file did not contain the
required documentation to justify including more than 60 percent of the value of
the retirement account in the underwriting analysis. As such, in response to the
audit, Jersey Mortgage officials obtained documentation from the borrower to
show that the retirement funds had been redeemed and that the higher percentage
of funds in the account was available for the closing. HUD Handbook 4155.1
REV-5, section 2-10 states that all funds for the borrower‘s investment in the
property must be verified and documented. When this loan was underwritten the
lender did not verify all the funds required to close the loan; as such, sufficient
verified funds were not available at the closing. This deficiency will remain in the
report and the case is still recommended for indemnification.
51
Comment 23 Jersey Mortgage officials disagreed with the amount cited in the report as being
the potential loss for the loans with significant underwriting deficiencies. Jersey
Mortgage indicated that it is not possible to know the amount of the actual losses
and whether there will be any loss on these loans. The amount recommended for
indemnification is based on historical experience and represents 42 percent of the
unpaid principal balance. The actual loss on individual loans may be higher or
lower than the average loss experience. The purpose of indemnification is to
protect the government from having to pay claims for loans that were not properly
underwritten. The government will not have to absorb the loss for any of the
loans recommended for indemnification and if no claim is filed on a loan the
lender will not have to make any reimbursement. The recommendations presented
in the report are based on an analysis performed by HUD-OIG and does not
represent any final decision determined by HUD.
Comment 24 The comments made by Jersey Mortgage officials related to our finding 2 are
responsive to the finding.
52
Appendix C
SUMMARY OF UNDERWRITING DEFICIENCIES
Case Unpaid Amount Excessive Inadequate Inadequate Inadequate Inadequate Other
number balance requested for debt-to- credit verification support support for deficiencies Appendix
amount indemnification income ratios analysis of funds to for income employment 1/ reference
without close on calculation
adequate HUD-1
compensating settlement
factors statement
352- $324,136 $136,137
5568382 X X D-1
352- $212,414 $89,214
5531330 X X X D-2
352- $340,945 $143,197
5516470 X X D-3
352- $255,729 $107,406
5601063 X X X X X D-4
352- $303,594 $127,509
5605932 X X X X X D-5
352- $217,899 $91,518
5526607 X X X X X D-6
352- $283,352 $119,008
5564815 X X X D-7
351- $212,201 $89,124
4842564 X X D-8
351- $225,411 $94,673
4902260 X X D-9
351- $0 $0 2/
4900883 X D-10
352- $229,938 $96,574
5503273 X D-11
352- $177,120 $74,390
5596824 X X D-12
352- $268,008 $112,563
5545714 X X X D-13
Total $3,050,747 1,281,3143/ 6 3 9 4 3 11
Notes:
1/ The other deficiencies include inadequate evaluation of savings pattern, verification of assets in retirement
savings account not verified, inadequate bank account documentation, inadequate gift fund transfer, inadequate
earnest money deposit documentation, inadequate support for assets, inaccurate debt-to-income ratios, need to
resubmit the loan through the automated underwriting system, incomplete MCAW, and inadequate verification
of rent payments.
2/ Based on HUD‘s current 42 percent default loss experience, the amount of ineligible costs for one loan for which
a claim was paid is estimated at $96,359 (42 percent of the claim paid of $229,427).
3/ The amount of cost savings or funds to be put to better use on the loans for which indemnification is
recommended is estimated at $1,281,314 (42 percent of the unpaid principal balance of $3,050,747)
53
Appendix D
CASE SUMMARY NARRATIVES
Appendix D-1
Page 1 of 1
Case number: 352-5568382
Loan amount: $324,901
Unpaid balance: $324,136
Closing date: July 12, 2007
Default status: First legal action to commence foreclosure
Pertinent Details:
A. Inadequate Gift Fund Transfer
In the file, there was a gift letter; however, there was no documentation for the gift fund transfer.
The amount of the gift was $3,220. The donor made the gift with a cashier‘s check, and the
cashier‘s check was dated July 17, 2007; however, the date of the closing for the loan was July
12, 2007. Thus, the gift was provided after the loan closed. Further, HUD Handbook 4155.1,
REV-5, section 2-10C, states that if the donor purchased a cashier‘s check, money order, official
check, or any other type of bank check as a means of transferring the gift funds, the donor must
provide a withdrawal document or canceled check for the amount of the gift, showing that the
funds came from the donor‘s personal account. The lender must be able to determine that the
gift funds ultimately were not provided from an unacceptable source and were indeed the donor‘s
own funds. In the FHA case file, there was no documentation showing that the funds came from
the donor‘s personal account.
B. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower‘s investment in
the property be verified and documented. The HUD-1 settlement statement indicated that the
borrowers were required to pay $11,762. If the gift amount of $3,220 is added back because the
lender did not verify and document the source of funds (see in section A), the borrower would
have been required to pay $14,982. According to the mortgage credit analysis worksheet, the
borrower only had assets of $5,765. Thus, the borrower would have been short of funds to close
by $9,217 ($14,982 – $5,765) and did not have sufficient funds to close the loan.
54
Appendix D-2
Page 1 of 1
Case number: 352-5531330
Loan amount: $214,150
Unpaid balance: $212,414
Closing date: November 30, 2006
Default status: Delinquent
Pertinent Details:
A. Inaccurate Debt-to-Income Ratios
B. Excessive Debt-to-Income Ratios without Adequate Compensating Factors
The ratios calculated by the lender were incorrect because the borrower‘s and co-borrower‘s
monthly income was overstated. On the mortgage credit analysis worksheet, the lender listed the
mortgage payment-to-income ratio (front) as 39.36 percent and the total fixed payment-to-
income ratio (back) as 51.44 percent. Based on the corrected monthly income of $3,610, we
calculated ratios of 50.50 percent and 67.25 percent, respectively. Mortgagee Letter 2005-16
states that the lender must describe the compensating factors used to justify mortgage approval,
when the borrower‘s mortgage payment-to-income ratio (front) and the total fixed payment-to-
income ratio (back) exceeds 31 and 43 percent, respectively. However, the mortgage credit
analysis worksheet did not list compensating factors. The compensating factors provided later
by the lender that there was an 84 percent loan-to-value ratio, the borrower had two months cash
reserve, and present housing expenses were paid in a timely manner are not considered to be
allowable compensating factors according to HUD Handbook 4155.1, REV-5, section 2-13.
C. Inadequate Support for Income Calculation
The borrowers‘ monthly income of $4,720, shown on the mortgage credit analysis worksheet and
the loan application, was overstated by $1,110. The borrower‘s base pay was listed as $2,397.
The coborrower‘s base pay was listed as $1,213. The borrower‘s other earnings were listed as
$1,110. In the file, there was a checking statement as of October 16, 2006, which showed
monthly Social Security direct deposits of $460 on September 1 and October 3, 2006. It
appeared that the lender included the Social Security income. HUD Handbook 4155.1, REV-5,
section 2-7E, states that retirement and Social Security income require verification from the
source (former employer, Social Security Administration) or federal tax returns. Also, the lender
appears to have included income from the borrower‘s son as her other earnings of $650 per
month. In the file, there were copies of checks from her son‘s income for September 2, 2006
($159); September 9, 2006 ($173); October 7, 2006 ($158); October 14, 2006 ($142); and
November 25, 2006 ($142). However, these checks did not add up and were not verified.
Therefore, we calculated the monthly employment income to be $3,610 ($2,397 + $1,213)
because the borrower‘s Social Security income and borrower‘s son‘s income had not been
properly verified and documented. Therefore, monthly income was overstated by $1,110.
55
Appendix D-3
Page 1 of 1
Case number: 352-5516470
Loan amount: $345,100
Unpaid balance: $340,945
Closing date: May 14, 2007
Default status: Reinstated by Mortgagor
Pertinent Details:
A. Excessive Debt-to-Income Ratios without Adequate Compensating Factors
The lender calculated the mortgage payment expense-to-income ratio (front) as 41.31 percent,
which exceeded HUD‘s threshold; however, no allowable compensating factors were listed.
Mortgagee Letter 2005-16 states that if either or both ratios exceed 31 percent and 43 percent,
the lender must describe the compensating factors used to justify the mortgage approval.
B. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
The HUD-1 settlement statement indicates that the borrower needed $5,835 to close. However,
review of the checking account bank statement revealed that the borrower had $3,043 in
available funds. It appeared that the borrower did not have sufficient funds to close and was
short of funds to close by $2,792 ($5,835 - $3,043).
56
Appendix D-4
Page 1 of 2
Case number: 352-5601063
Loan amount: $256,795
Unpaid balance: $255,729
Closing date: July 23, 2007
Default status: First legal action to commence foreclosure
Pertinent Details:
A. Inaccurate Debt-to-Income Ratios
B. Excessive Debt-to-Income Ratios without Adequate Compensating Factors
The ratios calculated by the lender were incorrect because the borrower‘s monthly income was
overstated. On the mortgage credit analysis worksheet, the lender listed the mortgage payment
expense-to-income ratio (front) as 46.29 percent and the total fixed payment-to-income ratio
(back) as 48.53 percent using monthly income of $5,388. Based on the documented monthly
income of $5,328, we calculated ratios of 46.81 percent and 49.08 percent, respectively.
Mortgagee Letter 2005-16 states that for manually underwritten mortgages in which the direct
endorsement underwriter must make the credit decision, the qualifying ratios are raised to 31
percent and 43 percent and if either or both ratios are exceeded on a manually underwritten
mortgage, the lender must describe the compensating factors used to justify mortgage approval.
The compensating factors listed on the mortgage credit analysis worksheet of excellent work
history and that the down payment was made with the borrower‘s own funds were not allowable
according to HUD Handbook 4155.1, REV-5, section 2-13.
C. Inadequate Evaluation of Savings Pattern
The checking account statement indicated that the borrower had made two nonpayroll deposits
on July 19 and July 20, 2007, totaling $2,230. The available balance for the checking account
statement was $4,001 as of July 20, 2007. There was no explanation in the file by the borrower
for these excessive deposits. HUD Handbook 4155.1, REV-5, section 2-10B, states that if there
is a large increase in a bank account, the lender must obtain credible explanation of the source of
those funds.
D. Inadequate Verification of Earnest Money Deposit
The HUD-1 settlement statement shows an earnest money deposit of $10,000. A total of $9,000
of the $10,000 earnest money deposit had been transferred from the borrower‘s checking account
as of May 29, 2007. However, on May 29, 2007, a deposit of $1,170 was made to the
borrower‘s checking account, resulting in a pretransfer balance of $9,080. If this deposit had not
been made on May 29, 2007, the checking account balance would have been $7,910. There was
no explanation in the file for the source of these funds. HUD Handbook 4155.1, REV-5, section
2-10A, states that if the amount of the earnest money deposit exceeds 2 percent of the sales price
or appears excessive based on the borrower‘s history of accumulated savings, the lender must
verify with documentation the deposit amount and source of funds.
57
Appendix D-4
Page 2 of 2
E. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower‘s investment in
the property be verified and documented. The HUD-1 settlement statement for the FHA loan
indicated that the borrowers were required to pay $5,044 at closing. Due to the unsupported
earnest money deposit of $1,170 (explained in section D), the borrowers would have needed
$6,214 at closing. In the checking account statement, the available balance was $4,001;
however, if the unexplained nonpayroll deposit of $2,230 (see section C) is not included, the
borrower would have had $1,771 ($4,001 - $2,230) in available funds in the checking account.
The assets in the savings account were verified as $126, thus total available funds were $1,898.
Therefore, the borrower would have had a deficit of $4,316 ($6,214 - $1,898). Since the funds to
close were not verified as explained above, the borrower did not have sufficient funds to close.
F. Inadequate Support for Income Calculation
The file contained documentation of an average monthly overtime income of $305 for 30
months. However, the lender did not verify that overtime income was likely to continue. HUD
Handbook 4155.1, REV-5, section 2-7A, states that both overtime and bonus income may be
used to quality if the borrower has received such income for the past two years and it is likely to
continue.
G. Inadequate Credit Analysis
The credit report contained derogatory items, and a judgment was listed for the coborrower. The
file contained a letter written by the coborrower; however, it was inadequate because it did not
explain the derogatory items and judgment listed on the credit report. HUD Handbook 4155.1,
REV-5, section 2-3, states that major indications of derogatory credit including judgments,
collections, and any other recent credit problems require sufficient written explanation from the
borrower. The lender did not obtain a credible explanation for derogatory credit.
58
Appendix D-5
Page 1 of 2
Case number: 352-5605932
Loan amount: $305,210
Unpaid balance: $303,594
Closing date: September 5, 2007
Default status: Special forbearance
Pertinent Details:
A. Inaccurate Debt-to-Income Ratios
B. Excessive Debt-to-Income Ratios without Adequate Compensating Factors
The lender listed the mortgage payment-to-income ratio (front) as 41.24 percent and the total
fixed payment-to-income ratio (back) as 48.44 percent on the mortgage credit analysis
worksheet. The ratios calculated by the lender were incorrect because the borrower‘s monthly
income was overstated. Based on a monthly income of $5,958, we calculated ratios of 45.09
percent and 52.97 percent, respectively. Mortgagee Letter 2005-16 states that the lender must
describe the compensating factors used to justify mortgage approval when the borrower‘s
mortgage payment-to-income ratio (front) and the total fixed payment-to-income ratio (back)
exceed 31 and 43 percent, respectively. The lender did not list compensating factors.
C. Inadequate Gift Funds Transfer
The donor of the gift deposited $9,000 into his own account on July 25, 2007, and then made the
gift payment of $8,000 on July 25, 2007, to the coborrower. However, the lender did not
adequately verify the source of funds for the gift. The assets available on the mortgage credit
analysis worksheet were shown as $8,010. If the gift amount is not included, the borrower
would have had $10 available to close. The HUD-1 settlement statement indicated that the
borrower would have needed $8,000 to close. HUD Handbook 4155.1, REV-5, section 2-10C,
states that the lender must be able to determine that the gift funds were not ultimately provided
from an unacceptable source and were indeed the donor‘s own funds. The lender did not
adequately verify the source of the donor‘s gift.
D. Inadequate Support for Income Calculation
The monthly employment income on the mortgage credit analysis worksheet was listed as
$6,515; however, our calculation of the monthly employment income based on the pay stubs was
$5,958. Therefore, monthly income was overstated by $557.
E. Inadequate Support for Employment
For one of the coborrowers, there were employment gaps for the months of April 2006, August
2006, and September 2006, with no explanations as to the reason for these gaps. HUD
Handbook 4155.1, REV-5, section 2-6, states that the borrower also must explain any gaps in
59
Appendix D-5
Page 2 of 2
employment spanning one month or more. The lender did not obtain an explanation for the gaps
in employment.
F. Inadequate Credit Analysis
The lender did not conduct an adequate analysis of the borrower‘s credit history. The credit
report in the file contained two judgments in March 2002 and May 2003. The lender did not
obtain information on the status of the judgments or an explanation from the borrower. HUD
Handbook 4155.1, REV-5, section 2-3, states that major indications of derogatory credit
including judgments, collections, and any other recent credit problems require sufficient written
explanation from the borrower.
60
Appendix D-6
Page 1 of 2
Case number: 352-5526607
Loan amount: $218,900
Unpaid balance: $217,899
Closing date: January 12, 2007
Default status: Chapter 13 – bankruptcy
Pertinent Details:
A. Inaccurate Debt-to-Income Ratios
B. Excessive Debt-to-Income Ratios without Adequate Compensating Factors
The ratios calculated by the lender were incorrect because the borrower‘s monthly income was
overstated. The mortgage credit analysis worksheet listed the mortgage payment expense-to-
income ratio (front) as 37.20 percent and the total fixed payment-to-income ratio (back) as 45.45
percent. Based on a monthly income of $5,013, we calculated ratios of 37.70 percent and 46.05
percent, respectively. Mortgagee Letter 2005-16 states that the lender must describe the
compensating factors used to justify the mortgage approval when the borrower‘s mortgage
payment expense-to-income ratio (front) and the total fixed payment-to-income ratio (back)
exceeds 31 and 43 percent, respectively. The lender did not list compensating factors.
C. Inadequate Support for Assets
The mortgage credit analysis worksheet listed $5,807 as assets, which appeared to be a $5,000
grant, $800 (cash on hand), and $7 (credit union account). However, there was no supporting
documentation in the file for the $800 in cash on hand. HUD Handbook 4155.1, REV-5, section
2-10M, provides that borrowers who have saved cash at home and are able to demonstrate
adequately the ability to do so are permitted to have this money included as an acceptable source
of funds to close the mortgage. To include such funds in assessing the home buyer‘s cash assets
for closing, the money must be verified—whether deposited in a financial institution or held by
the escrow/title company—and the borrower must provide satisfactory evidence of the ability to
accumulate such savings. The asset verification process requires the borrower to explain in
writing how such funds were accumulated and the amount of time taken to do so. The file did
not contain such documents.
D. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower‘s investment in
the property be verified and documented. The HUD-1 settlement statement for the FHA loan
indicated that the borrowers were required to pay $3,037 in addition to the $5,000 in funds
provided by the grant. In the section of the HUD-1 settlement statement, entitled ―Amounts to
Be Paid by or on Behalf of Borrower,‖ the $5,000 (grant) was included. Based on the assets
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available of $807, the $800 would be excluded because it was not supported (explained in
section C). Thus, the borrowers would only have had $7 according to the verified available
assets. Therefore, the borrowers would have had a deficit of $3,030 ($3,037 - $7) at closing.
Since the funds to close were not verified as explained above, the borrower did not have
sufficient funds to close.
E. Inadequate Support for Employment
The lender did not obtain the co-borrower‘s original pay stubs covering the most recent 30-day
period. In the file, there was documentation indicating a verbal verification of employment and
copies of checks dated November 4, 2006, November 14, 2006, November 29, 2006, and
December 29, 2006. HUD Handbook 4155.1, REV-5, section 3-1E, requires the lender to obtain
a verification of employment and the most recent pay stub showing year-to-date earnings for at
least one month; this was not done.
F. Inadequate Support for Income Calculation
The co-borrower‘s monthly employment income (base pay) on the mortgage credit analysis
worksheet was listed as $866; however, our calculation of the monthly employment income
based on pay stubs was $800. Therefore, income was overstated by $66.
G. Incomplete Mortgage Credit Analysis Worksheet
The mortgage credit analysis worksheet was not signed or dated by the underwriter.
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Appendix D-7
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Case number: 352-5564815
Loan amount: $289,430
Unpaid balance: $283,352
Closing date April 10, 2007
Default status: Reinstated after loss mitigation intervention
Pertinent Details:
A. Excessive Debt-to-Income Ratios without Adequate Compensating Factors
The lender calculated the mortgage payment expense-to-income ratio (front) as 37.73 percent
and the total fixed payment-to-income ratio (back) as 44.45 percent, which exceeded HUD‘s
threshold; however, no compensating factors were listed. Mortgagee Letter 2005-16 states that if
either or both ratios exceed 31 percent and 43 percent, respectively, the lender must describe the
compensating factors used to justify the mortgage approval.
B. Inadequate Evaluation of Savings Pattern
The checking account statement indicated that the borrower had a nonpayroll deposit of $3,640
on March 28, 2007. The available balance for the checking account statement was $6,056 as of
April 5, 2007. There was no explanation in the file by the borrower for this excessive deposit.
HUD Handbook 4155.1, REV-5, section 2-10B, states that if there is a large increase in an
account or if the account was opened recently, the lender must obtain a credible explanation of
the source of those funds. The lender had not obtained a credible explanation.
C. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower‘s investment in
the property be verified and documented. The HUD-1 settlement statement for the FHA loan
indicated that the borrowers were required to pay $6,297. The checking account statement
available balance was $6,056; however, if we do not include the unexplained nonpayroll deposit
of $3,640, the borrower would have $2,416 ($6,056 - $3,640) in available funds. The borrower
would have had a deficit of $3,881 ($6,297 - $2,416) at closing. Since the funds to close were
not verified as explained above, the borrower did not have sufficient funds to close.
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Case number: 351-4842564
Loan amount: $214,600
Unpaid balance: $212,201
Closing date: December 28, 2006
Default status: Delinquent
Pertinent Details:
A. Inadequate Bank Account Documentation
In the file, there were bank statements from Andrews Federal Credit Union for the periods July 5
to August 4, 2006; September 5 to October 4, 2006; and November 25 to December 20, 2006.
We were later provided the bank statements from July 5 through November 4, 2006. The
Andrews Federal Credit Union bank documentation for November 5 through November 24,
2006, appeared to be missing. HUD Handbook 4155.1, REV-5, section 3-1F, states that a
verification of deposit and most recent bank statement are to be provided. As an alternative to
obtaining a verification of deposit, the lender may obtain from the borrower the original bank
statements covering the most recent three-month period. Provided the bank statement shows the
previous month‘s balance, this requirement is met by obtaining the two most recent, consecutive
statements. The lender did not obtain bank statements for the two most recent, consecutive
months.
B. Inadequate Evaluation of Savings Pattern
The files contained an Andrews Federal Credit Union bank statement for the period September 5
to October 4, 2006, in which there were two nonpayroll deposits totaling $1,930 ($980 + $950).
Also, there was a savings account statement for the period November 25 to December 20, 2006,
with an ending balance of $4,207. On December 6 and December 16, 2006, there were
nonpayroll deposits for $1,600 and $1,900. The available balance for the savings account was
$4,207 as of December 20, 2006. In the file, there was no explanation by the borrower for these
excessive nonpayroll deposits. HUD Handbook 4155.1, section 2-10B, states that a verification
of deposit, along with the most recent bank statement, may be used to verify savings and
checking accounts. If there is a large increase in an account or the account was opened recently,
the lender must obtain a credible explanation of the source of those funds. The lender did not
obtain a credible explanation of the source of the nonpayroll deposits.
C. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
The lender did not verify or document that the borrower had adequate funds to close. HUD
Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower‘s investment in
the property be verified and documented. The HUD-1 settlement statement for the FHA loan
indicated that the borrowers were required to pay $6,104. The savings account available balance
was $4,207; however, exclusion of the unexplained nonpayroll deposit of $3,500 results in a
$707 ($4,207 - $3,500) balance for this account. The assets in the other savings account were
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verified as $3,432, thus leaving available funds of $4,139. Therefore, the borrower would have
had a deficit of $1,965 ($6,104 – $4,139) at closing and would not have had sufficient funds to
close the loan.
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Appendix D-9
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Case number: 351-4902260
Loan amount: $226,446
Unpaid balance: $225,411
Closing date: June 29, 2007
Default status: First legal action to commence foreclosure – Chapter 13
bankruptcy
Pertinent Details:
A. No Verification of Retirement Account
In the file, there was a 401(k) statement for the period January 1 through March 31, 2007. The
statement balance was $29,287; however, the maximum amount that can be used in the
underwriting analysis is normally only 60 percent of the statement balance or $17,572. There
was no evidence of redemption of the 401(k) account. HUD Handbook 4155.1, REV-5, sections
2-10K, states that assets such as individual retirement accounts, thrift savings plans, and 401(k)s
may be included in the underwriting analysis up to only 60 percent of value unless the borrower
provides conclusive evidence that a higher percentage may be withdrawn after subtracting any
federal income tax and any withdrawal penalties. Evidence of redemption is required. The
lender did not obtain evidence of redemption of the 401(k).
B. Inadequate Evaluation of Savings Pattern
The checking account transaction history indicated that the borrower had one nonpayroll deposit
on March 26, 2007, totaling $4,300. The available balance for the checking account statement
was $11,214 as of May 3, 2007. There was no explanation by the borrower for this excessive
deposit in the file. HUD Handbook 4155.1, section 2-10B, states that if there are large increases
in an account or the account was opened recently, the lender must obtain an explanation of the
source of funds. The lender did not obtain a credible explanation for this deposit.
C. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
HUD Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower‘s
investment in the property be verified and documented. The HUD-1 settlement statement
indicated that the borrowers were required to pay $10,209. In the checking account transaction
history, the available balance was $11,214; however, if we do not include the unexplained
nonpayroll deposit of $4,300, the borrower would have had a $6,914 ($11,214 – $4,300) balance
in this account. The assets in the savings account were verified as $1,054. Therefore, the
borrower would have had a deficit of $2,241 ($10,209 – $7,968) ($6,914 checking balance +
$1,054 savings balance) and did not have sufficient funds to close the loan.
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D. Inadequate Bank Account Documentation
The lender obtained only one savings account statement for the period March 27 through April
24, 2007. The other savings account statements appeared to be missing. HUD Handbook
4155.1, REV-2, section 3-1F, states that as an alternative to obtaining a verification of deposit,
the lender may obtain the borrower‘s original bank statements covering the most recent three-
month period, provided the bank statements show that the previous month‘s balance requirement
was met by obtaining the two most recent, consecutive statements. The lender did not obtain or
maintain bank statements for the two most recent, consecutive months.
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Appendix D-10
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Case number: 351-4900883
Loan amount: $221,523
Unpaid balance: $0
Closing date: May 24, 2007
Default status: Property conveyed to insurer,
Claim filed, HUD incurred loss of $229,427
Pertinent Details:
A. Inadequate Support for Employment
The lender did not obtain the borrower‘s original pay stubs covering the most recent 30-day
period. In the file, there were four statements of wages and earnings dated April 13, 2007, April
20, 2007, May 11, 2007, and May 18, 2007. HUD Handbook 4155.1, REV5, section 3-1E, states
that as an alternative to obtaining a verification of employment, the lender may obtain the
borrower‘s original pay stub(s) covering the most recent 30-day period. The pay stub(s) must
show the borrower's name, Social Security number, and year-to-date earnings. The lender did
not obtain pay stubs covering the most recent 30-day period.
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Appendix D-11
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Case number: 352-5503273
Loan amount: $232,200
Unpaid balance: $229,938
Closing date: August 4, 2006
Default status: Chapter 13 bankruptcy
Pertinent Details:
A. Inadequate Evaluation of Savings Pattern
The First Bank Americano checking account statement indicated that the borrower had made
four nonpayroll deposits from June to July 2007 totaling $5,169. In the file, there was no
explanation by the borrower for these excessive deposits. HUD Handbook 4155.1, REV-5,
section 2-10B, states that if there was a large increase in an account, the lender must obtain a
credible explanation of the source of those deposits. The lender did not obtain a credible
explanation for the source of the funds.
B. No Verification of Retirement Account
The lender did not properly verify the borrower‘s available funds. In the mortgage credit
analysis Worksheet, the lender listed assets available as $47,219. The lender used the FHA Total
Scorecard to process the loan and included the following assets in determining the available
funds: mutual funds ($14,376), checking ($638), and retirement account ($32,205). The lender
used the borrower‘s personal retirement benefits statement for December 31, 2004, to obtain the
retirement balance of $32,205. The FHA Total Mortgage Scorecard User Guide requires the
lender to obtain the most recent statements for each account to verify that there are sufficient
funds to close and to document the terms and conditions for withdrawal and/or borrowing and
that the borrower is eligible for these withdrawals. We noted that in the final loan application,
there were total assets of $15,014 (checking account $638 and investment account $14,376).
The FHA 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 if the borrower‘s income and/or cash assets/reserves decrease. However, the lender
did not resubmit the loan through the automated underwriting system although there had been a
substantial decrease in the borrower‘s assets.
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Appendix D-12
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Case number: 352-5596824
Loan amount: $177,120
Unpaid balance: $177,120
Closing date: June 22, 2007
Default status: Foreclosure sale held
Pertinent Details:
A. Inadequate Evaluation of Savings Pattern
The United Investors Federal Credit Union statement indicated that the borrower had made one
nonpayroll deposit on June 21, 2007, totaling $900. The available balance for the checking
account statement was $5,865 as of June 21, 2007. The file contained no explanation from the
borrower for this excessive deposit. HUD Handbook 4155.1, REV-5, section 2-10B, states that
if there was a large increase in an account or the account was opened recently, the lender must
obtain a credible explanation of the source of those funds. The lender did not obtain a credible
explanation as to the source of the funds.
B. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
HUD Handbook 4155.1, REV-5, section 2-10, requires that all funds for the borrower‘s
investment in the property be verified and documented. The HUD-1 settlement statement
indicated that the borrowers were required to pay $5,749. For the savings account, the available
balance was $5,865; however, exclusion of the unexplained nonpayroll deposit of $900 results in
the borrower having savings of $4,965 ($5,865 - $900) in this account. Therefore, the borrower
would have had a deficit of $784 ($5,749 - $4,965) and did not have sufficient funds to close the
loan.
C. Inadequate Verification of Rent Payments
The mortgage credit analysis worksheet and the initial and final loan applications indicated that
the borrower paid an $800 monthly rent. However, a June 7, 2007, letter from the borrower
stated that he did not pay rent. HUD Handbook 4155.1, REV-5, section 2-3A, states that the
payment history of the borrower‘s housing obligation holds significant importance in evaluating
credit. The lender must determine the borrower‘s payment history of housing obligation through
either the credit report, verification of rent directly from the landlord (with no identity of interest
with the borrower), or verification of mortgage directly from the mortgage servicer or through
canceled checks covering the most recent 12-month period. The lender did not obtain a credible
explanation regarding the discrepancy in the rental history of the borrower.
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Appendix D-13
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Case number: 352-5545714
Loan amount: $274,800
Unpaid balance: $268,008
Closing date: March 23, 2007
Default status: Delinquent
Pertinent Details:
A. No Verification of Retirement Account
The mortgage credit analysis worksheet and the loan application listed $36,011 as assets, which
appeared to be, respectively, the borrower‘s retirement account of $34,612 and an Amboy
National checking statement account of $1,399. The lender obtained a copy of the retirement
statement for the period October 1 through December 31, 2006. However, the lender did not
obtain evidence of redemption. Also, the lender calculated the available assets using 70 percent
of the value, yet there was no explanation provided. HUD Handbook 4155.1, REV-5, section 2-
10K, states that assets such as individual retirement accounts, thrift savings plans, and 401(k)s
may be included in the underwriting analysis up to only 60 percent of value unless the borrower
provides conclusive evidence that a higher percentage may be withdrawn after subtracting any
federal income tax and withdrawal penalties. Evidence of redemption is required.
B. Inadequate Verification of Funds to Close on HUD-1 Settlement Statement
The HUD-1 settlement statement indicated that the borrower was required to pay $12,382 at
closing. Due to the unsupported earnest money deposit of $10,000 (explained in paragraph C),
the borrower would have needed $22,382 to close. Since the funds to close were not all verified,
the borrower did not have sufficient funds to close the loan.
C. Inadequate Verification of Earnest Money Deposit
The HUD-1 settlement statement reported an earnest money deposit of $10,000 that exceeded 2
percent of the sale price. The lender did not obtain supporting documentation for the deposit.
HUD Handbook 4155.1, REV-5, section 2-10A, states that when the amount of the earnest
money deposit exceeds 2 percent of sales price or appears excessive based on the borrower‘s
history of accumulated savings, the lender must verify with documentation the deposit amount
and source of funds. The lender did not obtain evidence of the source of funds including a
verification of deposit or bank statement showing that at the time the deposit was made, the
average balance was sufficient to cover the amount of the earnest money deposit.
D. Inadequate Credit Analysis
The credit report indicated that several accounts were in collection. The FHA file contained no
explanations from the borrower. HUD Handbook 4155.1, REV-5, section 2-3, states that major
indications of derogatory credit including judgments, collections, and any other recent credit
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Appendix D-13
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problems require sufficient written explanation from the borrower. However, the lender did not
obtain an explanation from the borrower.
72
Jersey Mortgage Company, Cranford, New Jersey, Did Not Always Comply with HUD/FHA Loan Underwriting Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-10-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)