oversight

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)

                                                                                    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



                                               61
                                                                                   Appendix D-6
                                                                                     Page 2 of 2

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.




                                               62
                                                                                   Appendix D-7
                                                                                     Page 1 of 1

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.




                                               63
                                                                                  Appendix D-8
                                                                                    Page 1 of 2

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

                                               64
                                                                                  Appendix D-8
                                                                                    Page 2 of 2

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.




                                               65
                                                                                    Appendix D-9
                                                                                      Page 1 of 2

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.




                                                66
                                                                                    Appendix D-9
                                                                                      Page 2 of 2

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.




                                                67
                                                                                Appendix D-10
                                                                                   Page 1 of 1

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.




                                               68
                                                                                    Appendix D-11
                                                                                       Page 1 of 1

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.




                                                 69
                                                                                           Appendix D-12
                                                                                              Page 1 of 1

     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.




                                                       70
                                                                                 Appendix D-13
                                                                                    Page 1 of 2

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

                                               71
                                                                                Appendix D-13
                                                                                   Page 2 of 2

problems require sufficient written explanation from the borrower. However, the lender did not
obtain an explanation from the borrower.




                                              72