U. S. Department of Housing and Urban Development
Office of Inspector General
26 Federal Plaza, Room 3430
New York, NY 10278 0068
MEMORANDUM NO: 2010-NY-1805
September 1, 2010
MEMORANDUM FOR: Vicki Bott, Deputy Assistant Secretary for Single Family
Housing, HU
Dane M. Narode, Associate General Counsel for Program
Enforcement, CACC
FROM: Edgar Moore, Regional Inspector General for Audit, New York/New Jersey, 2AGA
SUBJECT: Webster Bank, Cheshire, CT, Did Not Properly Underwrite a Selection of FHA
Loans
INTRODUCTION
We conducted a review of Federal Housing Administration (FHA) loans underwritten by
Webster Bank (Webster), an FHA direct endorsement lender. This review was conducted as part
of our “Operation Watchdog” initiative to review the underwriting of 15 direct endorsement
lenders at the suggestion of the FHA Commissioner. The Commissioner expressed concern
regarding the increasing claim rates against the FHA insurance fund for failed loans. The
objective of the review was to determine whether Webster underwrote 20 loans in accordance
with U.S. Department of Housing and Urban Development (HUD)/FHA requirements.
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 this review.
The draft memorandum report was provided to Webster officials on July 22, 2010 and Webster
officials provided a written response on August 6, 2010. Webster officials disagreed with our
findings and recommendations. The complete text of Webster officials’ response, along with our
evaluation of that response, can be found in appendix C of this memorandum, except for the
exhibits, which were too voluminous to be included within the report.
METHODOLOGY AND SCOPE
Webster Bank is 1 of 15 direct endorsement lenders we selected from HUD’s publicly available
Neighborhood Watch1 system for a review of underwriting quality. These direct endorsement
1
Neighborhood Watch is a Web-based data processing, automated query, reporting, and analysis system designed to
highlight exceptions to lending practices to high-risk mortgages so that potential problems are readily identifiable.
lenders all had a compare ratio2 in excess of 200 percent of the national average as listed in the
system for loans endorsed between November 1, 2007, and October 31, 2009. We selected loans
that had gone into claims status. We selected 20 loans underwritten by Webster that had gone
into claims status within 30 months of the loan's endorsement date. The sample of 20 loans
consisted of 17 purchases and 3 refinances. The selected loans did not include streamline
refinances. To accomplish our objectives, we reviewed applicable HUD handbooks, mortgagee
letters, and reports from HUD’s Quality Assurance Division.
We performed our work from March3 through June 2010. We conducted our work in accordance
with generally accepted government auditing standards, except that we did not consider the
internal controls or information systems controls of Webster Bank, consider the results of
previous audits, or communicate with Webster’s management in advance. We did not follow
standards in these areas because our goal was to aid HUD in identifying material underwriting
deficiencies and/or potential wrongdoing on the part of poor performing lenders that contributed
to a high rate of default and claims against the FHA insurance fund. To meet our objectives, it
was not necessary to fully comply with standards, nor did our approach negatively affect our
review results.
BACKGROUND
Webster Bank is a HUD-approved Title II supervised mortgagee located in Cheshire, CT. A
supervised mortgagee is a HUD/FHA approved financial institution that is a member of the
Federal Reserve System or an institution whose accounts are insured by the Federal Deposit
Insurance Corporation or the National Credit Union Administration, which is not required to
have mortgage lending as its principal source of revenue and may be approved to originate, sell,
purchase, hold, and/or service HUD/FHA insured mortgages, depending on its wishes and
qualifications. FHA approved Webster on November 14, 1935. Webster is approved to
participate in the Lender’s Insurance (LI) program effective February 2, 2006. The LI program
enables high-performing mortgagees pursuant to section 256 of the National Housing Act, to
endorse FHA mortgage loans without a pre-endorsement review4 being conducted by FHA.
Under the LI program, the approved mortgagee performs its own pre-endorsement review and
enters mortgage loan level data to FHA via the FHA Connection5. The FHA Connection will
perform an automated verification process to check the data for accuracy and completeness, and
the mortgagee then will be able to endorse the mortgage loan automatically.
2
HUD defines “compare ratio” as a value that reveals the largest discrepancies between the direct endorser’s default
and claim percentage and the default and claim percentage to which it is being compared. FHA policy establishes a
compare ratio of more than 200 percent as a warning sign of a lender’s performance.
3
On January 12, 2010, OIG served a subpoena on Webster requesting all documents related to 20 FHA loans,
however, our work did not begin until March 2010.
4
A pre-endorsement review is conducted by HUD’s Homeownership Center staff on the FHA case binder to ensure
that FHA documentation requirements have been met, forms and certifications are properly executed, and FHA
Connection and Automated Underwriting System data have integrity.
5
FHA Connection is an interactive system available through the Internet that gives approved FHA lenders real-time
access to FHA systems for the purpose of conducting official FHA business in an electronic fashion.
2
The goal of Operation Watchdog is to determine why the selected lenders had such a high rate of
defaults and claims. We selected up to 20 loans in claims status from each of the 15 lenders.
The 15 lenders selected for Operation Watchdog endorsed 183,278 loans valued at $31.3 billion
during the period January 2005 to December 2009. These same lenders also submitted 6,560
FHA insurance claims with an estimated value of $794.3 million from November 2007 through
December 2009. During this period, Webster endorsed 6,808 loans valued at more than $921
million and submitted 201 claims worth more than $29.7 million.
The objective of this review was to determine whether Webster underwrote the 20 selected loans
in accordance with HUD/FHA requirements, and if not, whether patterns of underwriting
deficiencies reflected systemic problems.
RESULTS OF REVIEW
Webster Bank officials did not underwrite 6 of 20 loans reviewed in accordance with HUD/FHA
regulations. As a result, the FHA insurance fund suffered actual losses of $456,854 on five
loans and faces potential loss of $60,136 on one loan for a total of $516,990 as shown in the
below table.
Number of Potential TOTAL
payments Original Loss to Actual and
FHA/loan Closing Acquisition Unpaid Actual loss
before mortgage HUD (60% Potential
number date Cost Balance to HUD6
first amount of Unpaid Loss to
default Balance) HUD
105-3302961 12/04/07 2 111,199 100,227 101,900 60,136 60,136
132-1827919 07/28/05 1 80,653 69,709 72,055 34,419 34,419
197-3647194 04/16/07 4 331,584 309,559 315,056 191,105 191,105
461-4133646 05/31/07 2 130,487 120,351 123,068 61,257 61,257
481-2619404 07/06/07 9 152,603 140,521 143,103 93,911 93,911
562-2061518 06/25/07 6 168,513 149,724 153,265 76,162 76,162
$908,447 $456,854 $60,136 $516,990
.
The below table summarizes the material underwriting deficiencies that we identified in the six
loans.
Area where underwriting deficiencies were found Number of loans7
Income 2
Liabilities 1
Excessive Ratios 1
Gift documentation 2
Borrower investment in property not verified 3
6
The loss amount was obtained from HUD’s Single Family Acquired Asset Management System (SAMS). SAMS
tracks properties from acquisition to final sales closing and maintains all accounting data associated with the case
records.
7
The deficiencies noted are not independent of one another, as one loan may have contained more than one
deficiency.
3
Appendix A of this report shows a summary schedule of material deficiencies in each of the six
loans, and Appendix B provides a detailed description of all loans with material underwriting
deficiencies noted in this report.
Specific examples of theses underwriting deficiencies follow.
Unsupported Income or Questionable Employment History
Webster officials incorrectly calculated borrower income or did not verify employment stability
for two loans. For example, for loan number 105-3302961, Webster officials calculated the
borrower’s monthly effective income as $2,720 using a letter dated October 25, 2007, from the
borrower’s current employer that was faxed from an unknown source. The letter stated that the
borrower received an internal transfer effective November 26, 2007. The letter also stated that
the borrower will be paid a monthly salary of $2,720 payable monthly in arrears. Based on this
letter, the borrower had to work from November 26, 2007 through December 26, 2007 to receive
this new salary in January 2008. Since this loan closed on December 4, 2007, Webster officials
should have used the borrower’s current salary. In addition, Webster’s file contained copies of
the borrower’s pay stubs for two weeks and not the required 30 days and these pay stubs only
showed that the borrower worked 20 hours per week at an hourly rate of $11.06. Using the
income documented by the borrower’s pay stubs, we calculate the borrower’s monthly effective
income to be $958.53 by multiplying the hourly rate by the number of hours worked ($11.06 X
20 hours per week X 52 weeks /12 months) instead of the $2,720 used by the lender.
Underreported Liabilities
Webster officials underreported liabilities for one loan. Specifically, for loan number 481-
2619404, Webster officials incorrectly calculated the borrower’s back ratio8 because it
underreported the borrower’s liabilities by excluding monthly child support payments totaling
$500. The mortgage credit analysis worksheet9 listed the borrower’s total monthly payments as
$30 and a back ratio of 39.99 percent. However, Webster’s file contained an "Order of Divorce"
and a "Property Settlement Agreement," which showed that the borrower had to pay $500 in
monthly child support beginning November 1, 2003. Webster officials did not include this in the
borrower’s back ratio because of an email from the borrower's former wife, which stated that the
borrower does not pay $500 a month in child support. However, this email does not relieve the
borrower of his legal and financial responsibilities for his minor child and without legal
documents stating otherwise, the borrower is legally responsible for the child support.
Therefore, Webster officials should have included the $500 child support debt in calculating the
borrower’s back ratio. Including the $500 in monthly child support increases the borrower’s
back ratio from 39.99 to 58.17 percent requiring significant compensating factors to justify
mortgage approval.
8
The front ratio is the mortgage payment-to-income ratio, and the back ratio is the fixed payment-to-income ratio;
HUD’s benchmarks are 31 percent and 43 percent, as set forth in Mortgagee Letter 2005-16.
9
The mortgage credit analysis worksheet is used to analyze and document mortgage approval.
4
Excessive Ratio(s) without Adequate Compensating Factors
Webster officials approved one loan that had excessive ratios without adequate compensating
factors. For loan number 562-2061518, without documenting acceptable compensating factors,
Webster officials approved the loan for the borrower that had a front ratio of 44.50 percent and a
back ratio of 48.10 percent, which exceeded HUD’s benchmarks of 31 percent and 43 percent as
set forth in Mortgagee letter 2005-16. The underwriter listed the following compensating
factors: 8 years on the job, had good credit history until joining a credit counseling service then
lates occurred and he cancelled, and good on mortgage-FHA. Regarding the compensating
factor related to 8 years on the job, FHA requires stable employment as a basis for mortgage
approval; therefore, it should not be used as a compensating factor. While good mortgage
history is a valid compensating factor, the borrower’s monthly payments increased from $769.61
to $968.74; and the factor regarding the borrower joining a credit consolidating company and
subsequently cancelling is not an acceptable compensating factor, but is indicative of the
borrower’s previous credit problems. Therefore, the underwriter did not present and document
compensating factors that were significant enough to justify mortgage approval for this loan in
which the ratios exceeded HUD’s benchmarks.
Insufficient Gift Documentation
Webster officials did not properly verify the transfer of gift funds for two loans. For loan
number 461-4133646, Webster officials did not adequately verify the transfer of a $3,750 gift;
therefore, the borrower’s investment in the property was not verified. The mortgage credit
analysis worksheet showed that the borrower's statutory cash investment requirement was $3,750
and Webster’s file contained a gift letter dated May 22, 2007 from a public charity for a $3,750
gift to the borrower to assist with the home purchase. The gift letter stated that once the closing
office has all of the signed and completed documents required, the closing office will disburse
the gift funds at the loan closing for the purchase of the home. The HUD-1 settlement statement
shows that this loan closed on May 31, 2007 and lists gift funds of $3,750; however, Webster’s
file did not contain any documentation to verify that these gift funds were provided to the closing
agent. Without any documentation verifying that the closing agent received these funds,
Webster officials did not verify and document the gift funds or the borrower's investment in the
property.
Borrower Investment in Property Not Verified
Webster officials did not verify the borrower’s investment in the property for three loans. For
two of the three loans, Webster officials did not verify the transfer of gift funds; therefore, the
borrowers’ investment in the property was not verified. For the third loan, FHA number 197-
3647194, Webster officials did not verify and document the cash sales proceeds from the sale of
the borrower’s prior residence. Webster’s file only contained two pages of the HUD-1
settlement statement from the sale of this home and not the fully executed HUD-1 settlement
statement; therefore, Webster did not document the actual sale and the sufficiency of the net
proceeds required for settlement. In addition, the HUD-1 settlement statement for this purchase
listed an earnest money deposit of $14,537.92; however, there was no documentation in the file
to verify the source of funds or that the funds were received by either the closing agent or the
5
seller. Without this documentation, Webster officials did not verify and document the
borrower’s investment in the property.
Incorrect Underwriter’s Certifications Submitted to HUD
We reviewed the certifications for the six loans with material underwriting deficiencies for
accuracy, Webster’s direct endorsement underwriters incorrectly certified that due diligence was
used in underwriting these six loans. When underwriting a loan manually, HUD requires a direct
endorsement lender to certify that it used due diligence and reviewed all associated documents
during the underwriting of a loan.
Applicable Statutes
The Program Fraud Civil Remedies Act of 1986 (31 U.S.C. (United States Code) 3801-3812)
and (24 C.F.R. Part 28) provides Federal agencies, which are the victims of false, fictitious, and
fraudulent claims and statements, with an administrative remedy to (1) recompense such
agencies for losses resulting from such claims and statements; (2) permit administrative
proceedings to be brought against persons who make, present, or submit such claims and
statements; and (3) deter the making, presenting, and submitting of such claims and statements
in the future; up to $7,500 for each violation and double the amount of paid claims (recovery
limited to claims of $150,000 or less).
Civil Money Penalties (24 C.F.R. Part 30.35) provides that the Mortgagee Review Board may
initiate a civil money penalty action against any mortgagee or lender who knowingly violates any
of the listed 14 different violations; up to $7,500 for each violation, but not to exceed
$1,375,000.
RECOMMENDATIONS
We recommend that HUD’s Associate General Counsel for Program Enforcement
1A. Determine legal sufficiency and if legally sufficient, pursue remedies under the Program
Fraud Civil Remedies Act (31 U.S.C Section 3801-3812) and/or, Civil Money Penalties
(24 C.F.R. Part 30.35) against Webster and/or its principals for incorrectly certifying to
the integrity of the data or that due diligence was exercised during the underwriting of six
loans that resulted in actual losses of $456,854 on five loans and potential loss of $60,136
on one loan, which could result in affirmative civil enforcement action of approximately
$1,078,980.10
We also recommend that HUD’s Deputy Assistant Secretary for Single Family
1B. Take appropriate administrative action against Webster and/or its principals for the
material underwriting deficiencies cited in this report once the affirmative civil
enforcement action cited in Recommendation 1A is completed.
10
Double damages for actual loss amounts related to five loans and potential loss related to one loan ($516,990 x 2
= $1,033,980) plus $45,000, which is a $7,500 fine for each of the six loans with material underwriting
deficiencies.
6
SCHEDULE OF INELIGIBLE COSTS AND
FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/
number
1A $516,990
Totals $516,990
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or Federal, State, or local
policies or regulations. The amount shown represents the actual loss HUD incurred when
it sold 5 properties ($456,854) and potential loss related to 1 property ($60,136).
7
Appendix A
SUMMARY OF MATERIAL UNDERWRITING DEFICIENCIES
Questionable Employment
Excessive Ratio(s) without
Underreported Liabilities
Adequate Compensating
Unsupported Income or
Borrower investment in
property not verified
Insufficient gift
documentation
FHA Number
History
Factors
105-3302961* X
132-1827919 X
197-3647194* X
461-4133646* X X
481-2619404* X X X
562-2061518* X
TOTALS 2 1 1 2 3
* Loan was originated under the Lender's Insurance Program, therefore, lender self insures
the FHA loan and only submits those case binders (paper or electronic) when requested
for review by HUD.
8
Appendix B
LOANS WITH MATERIAL UNDERWRITING DEFICIENCIES
Loan number: 105-3302961
Mortgage amount: $101,900
Section of Housing Act: 203 (b)
Loan purpose: Purchase
Date of loan closing: December 4, 2007
Status as of February 28, 2010: Claim
Payments before first default reported: 2
Potential Loss to HUD: $60,136
Summary:
We found a material underwriting deficiency relating to income, which resulted in excessive
ratios.
Incorrect Calculation of Borrower Income Resulting in Excessive Ratios
Webster officials incorrectly calculated the borrower's monthly effective income. Webster
officials calculated the borrower’s monthly effective income as $2,720 using a letter dated
October 25, 2007 from the borrower’s current employer that was faxed from an unknown source.
The letter stated that the borrower received an internal transfer effective November 26, 2007.
The letter also stated that the borrower will be paid a monthly salary of $2,720 payable monthly
in arrears. Based on this letter, the borrower had to work from November 26, 2007 through
December 26, 2007 to receive this new salary in January 2008. Since this loan closed on
December 4, 2007, Webster should have used the borrower’s current salary. Webster’s file
contained copies of the borrower’s pay stubs for two weeks and not the required 30 days and
these pay stubs only showed that the borrower worked 20 hours per week. Specifically, the
borrower’s paystub dated October 19, 2007 related to the pay period from 10/06/2007 to
10/12/2007, showed the borrower’s hourly rate as $11.06 and showed 20.03 hours worked. The
borrower’s paystub dated October 26, 2007 related to the pay period from 10/13/2007 to
10/19/2007 showed the borrower’s hourly rate as $11.06 and showed 20 hours worked. Using
the income documented by the borrower’s pay stubs, we calculate the borrower’s monthly
effective income to be $958.53 by multiplying the weekly rate by the number of hours worked
($11.06 per hour x 20 hours per week x 52 weeks /12 months) instead of the $2,720 used by the
9
Lender; accordingly, the income used by the Webster official is questionable. Using the income
documented by the borrower’s paystubs increases the borrower’s front ratio (mortgage payment-
to-income) from 30.16 to 85.64 percent and increases the back ratio (fixed payment-to-income)
from 33.10 to 93.99 percent requiring compensating factors. The mortgage credit analysis
worksheet documented compensating factors of manual approval; ratios are in line; and good
reserves. Manual approval and ratios are in line are not acceptable compensating factors. Good
reserves is an acceptable compensating factor if Webster officials had documented that the
borrower has cash reserves equal to three months of principal, interest, taxes and insurance. The
mortgage credit analysis worksheet shows principal, interest, taxes, and insurance as $820,
therefore, Webster should have documented borrower cash reserves totaling $2,460. Copies of
the borrower’s bank statements showed a savings balance of $5 and an ending checking balance
of $1,668. The beginning checking balance was $25 and included a large deposit of $1,632 that
the borrower explained as an overage from his student grant; therefore, Webster officials did not
document cash reserves as a significant compensating factor. Additionally, the file contained a
verification of employment conducted on February 22, 2008 using the Work Number of the
Employer, which showed that the borrower was hired 9/10/2007 and was inactive as of 1/7/2008.
Also, Neighborhood Watch showed that the borrower defaulted after only making two payments.
HUD/FHA Requirements:
Chapter 2 of HUD Handbook 4155.1 REV-5 provides that the anticipated amount of income, and
the likelihood of its continuance, must be established to determine a borrower's capacity to repay
mortgage debt, and income may not be used in calculating the borrower's income ratios if it
comes from any source that cannot be verified, is not stable, or will not continue.
Mortgagee Letter 2005-16 dated April 13, 2006 states that for manually underwritten mortgages,
the qualifying ratios are raised to 31% and 43% 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.
Chapter 2-13 of HUD Handbook 4155.1, REV-5, provides that compensating factors may be
used to justify approval of mortgage loans with ratios that exceed HUD benchmark guidelines;
however, underwriters must note in the “remarks” section of the mortgage credit analysis
worksheet any compensating factor used and provide supporting documentation. Chapter 2-13 G
states that an acceptable compensating factor is that the borrower has substantial documented
cash reserves (at least three months’ worth of principal, interest, taxes, and insurance) after
closing.
10
Loan number: 132-1827919
Mortgage amount: $72,055
Section of Housing Act: 203 (b)
Loan purpose: Purchase
Date of loan closing: July 28, 2005
Status as of February 28, 2010: Claim
Payments before first default reported: 1
Loss to HUD: $34,419
Summary:
We found material underwriting deficiencies relating to income.
Income Stability Not Established
Webster officials did not verify the borrower’s employment for the most recent two-full years;
therefore, income stability was not established. Review of the FHA case binder and Webster’s
file determined that the borrower worked for 5 months beginning on December 14, 2004 at his
current employer, worked six months from January 1, 2004 to July 4, 2004 at a previous
employer, but the borrower did not explain the five month gap between July 4, 2004 and
December 14, 2004. Webster officials obtained a verification of employment dated 6/17/05 from
the borrower’s current employer and obtained W-2s for 2003 and 2004 from the borrower’s
previous employers; however, Webster officials did not obtain an explanation from the borrower
for the five month gap in employment from July 4, 2004 to December 14, 2004. Therefore,
Webster officials only documented an eleven month employment history rather than the required
two-year period.
HUD/FHA Requirements:
Chapter 2-6 of HUD Handbook 4155.1 REV-5 states that the lender must verify the borrower's
employment for the most recent two full years and the borrower must explain any gaps in
employment spanning one month or more.
Incorrect Calculation of Borrower Income but Ratios Are Not Excessive
Webster officials improperly calculated the borrower’s income because they did not document
that overtime income used had been received for the past two years, or was likely to continue.
Webster officials included $96 in overtime payments in calculating the borrower’s monthly
effective income; however, the borrower only worked at his current employer for 7 months.
Further, Webster officials did not justify or document the reasons for using this overtime income
11
for qualifying purposes. Since Webster officials did not verify that the borrower had received
overtime for the past 2 years and did not justify or document the reasons for using the overtime
income for qualifying purposes, the overtime income should not have been included in the
calculation of the borrower income. Using the borrower’s most recent paystub, we calculate the
monthly effective income to be $1,880 instead of the $1,976 used by Webster officials. This
increases both the mortgage payment to income ratio and the fixed payment to income ratio from
36.80 to 38.68 percent; however, these ratios are not excessive.
HUD/FHA Requirements:
Chapter 2-7 A of HUD Handbook 4155.1 REV-5, provides that overtime income may be used to
qualify if the borrower has received such income for the past two years and it is likely to
continue; however, the overtime income must be averaged for the past 2 years, and the
employment verification must not state that such income is unlikely to continue. In addition,
periods of less than two years may be acceptable provided the lender justifies and documents in
writing the reason for using the income for qualifying purposes.
12
Loan number: 197-3647194
Mortgage amount: $315,056
Section of Housing Act: 203 (b)
Loan purpose: Purchase
Date of loan closing: April 16, 2007
Status as of February 28, 2010: Claim
Payments before first default reported: 4
Loss to HUD: $191,105
Summary:
We found material underwriting deficiencies relating to verification of proceeds from the sale of
the borrower’s prior residence and the borrower’s investment.
Inadequate Verification of Proceeds from Sale of Prior Residence
Borrower Investment in Property Not Verified
Webster officials did not verify and document the cash sales proceeds from the sale of the
borrower’s prior residence; therefore, the borrower’s cash investment in the property was not
verified and documented. Review of the uniform residential loan application in Webster’s file
determined that the borrower was using proceeds from the sale of his home in Oregon to
purchase this home located in California. Webster’s file only contained two pages of the HUD-1
settlement statement from the sale of this home and not the fully executed HUD-1 settlement
statement; therefore, Webster officials did not document the actual sale and the sufficiency of the
net proceeds required for settlement. The HUD-1 settlement statement for this purchase listed an
earnest money deposit of $14,537.92; however, there was no documentation in the file to verify
the source of funds or that the funds were received by either the closing agent or the seller.
Without this documentation Webster officials did not verify and document the borrower’s
investment in the property.
HUD/FHA Requirements:
Chapter 2-10 of HUD Handbook 41551.1, REV-5 states that all funds for the borrower’s
investment in the property must be verified and documented. Chapter 2-10 E states that the net
proceeds from an arms-length sale of a currently owned property may be used for the cash
investment on a new house, but a fully executed HUD-1 Settlement Statement must be provided
as satisfactory evidence of the cash sales proceeds accruing to the borrower, and the lender must
document both the actual sale and the sufficiency of the net proceeds required for settlement.
13
Loan number: 461-4133646
Mortgage amount: $123,068
Section of Housing Act: 203 (b)
Loan purpose: Purchase
Date of loan closing: May 31, 2007
Status as of February 28, 2010: Claim
Payments before first default reported: 2
Loss to HUD: $61,257
Summary:
We found material underwriting deficiencies relating to gift funds and the borrower’s
investment.
Inadequate Verification of transfer of gift funds:
Borrower Investment Not Verified and Documented
Webster officials did not adequately verify the transfer of a $3,750 gift; therefore, the borrower’s
investment in the property was not verified. The mortgage credit analysis worksheet showed that
the borrower's statutory cash investment requirement was $3,750 and Webster’s file contained a
gift letter dated May 22, 2007 from a public charity, for a $3,750 gift to the borrower to assist
with the home purchase. The gift letter stated that once the closing office has all of the signed
and completed documents required by the Preferred Program,11 the closing office will disburse
the gift funds at the loan closing for the purchase of the home. The HUD-1 settlement statement
shows that this loan closed on May 31, 2007 and lists gift funds of $3,750; however, Webster’s
file did not contain any documentation to verify that these gift funds were provided to the closing
agent. Without any documentation verifying that the closing agent received these funds,
Webster officials did not verify and document the gift funds or the borrower's investment in the
property.
HUD/FHA Requirements:
Chapter 2-10 of HUD Handbook 4155.1 REV-5 states that all funds for the borrower's
investment in the property must be verified and documented and 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. When the transfer occurs at closing, the lender remains
responsible for obtaining verification that the closing agent received funds from the donor for the
amount of the purported gift and that those funds came from an acceptable source.
11
The Non-profit provides down payment assistance through its products, Preferred Program and Hope Funds
Program.
14
Loan number: 481-2619404
Mortgage amount: $143,103
Section of Housing Act: 203 (b)
Loan purpose: Purchase
Date of loan closing: July 6, 2007
Status as of February 28, 2010: Claim
Payments before first default reported: 9
Loss to HUD: $93,911
Summary:
We found material underwriting deficiencies relating to underreported liabilities, gift funds, and
the borrower’s investment.
Incorrectly Calculated Ratio Due to Underreported liabilities
Webster officials incorrectly calculated the borrower’s back ratio because it underreported the
borrower’s liability for child supports payments totaling $500. The mortgage credit analysis
worksheet listed the borrower’s total monthly payments as $30 and a back ratio of 39.99 percent.
However, Webster’s file contained an "Order of Divorce" and a "Property Settlement
Agreement," which showed that the borrower had to pay $500 in monthly child support
beginning November 1, 2003. Webster officials did not include this in the borrower’s back ratio
because of an email from the borrower's former wife, which stated that the borrower does not
pay $500 a month in child support. Specifically, the email stated that the borrower does not pay
$500 per month in child support because subsequent to the divorce; the borrower and his ex-wife
agreed that the borrower would help out with the child’s daily needs without going through the
court system. However, this email does not relieve the borrower of his legal and financial
responsibilities for his minor child and without legal documents stating otherwise, the borrower
is legally responsible for the child support. Therefore, Webster officials should have included
the $500 in child support debt in calculating the borrower’s back ratio. Including the $500 in
monthly child support increases the back ratio from 39.99 to 58.17 percent requiring significant
compensating factors to justify mortgage approval. The mortgage credit analysis worksheet
listed the following as compensating factors: the borrower receives a substantial amount of
commission income not used in qualifying; he is a limited user of credit, and he has been with
his current employer for over three years. The borrower’s credit report shows various credit
accounts and does not support that the borrower is a limited user of credit. Regarding the
borrower being with his current employer for over three years, job stability is a requirement of
mortgage approval and not a compensating factor. The factor related to substantial amount of
commission income not used in qualifying was supported by the borrower’s pay stubs for five
pay periods in 2007, which showed commission income earned through April 29, 2007 of
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$5,133. However, this compensating factor is not significant enough to justify mortgage
approval with a back ratio of 58.17 percent after including the child support in the borrower’s
back ratio.
HUD/FHA Requirements:
Chapter 2-11 of HUD Handbook 4155.1, REV-5, states that the lender must include the monthly
housing expenses and all additional recurring charges extending 10 months or more, including
payments on installment accounts, child support, or separate maintenance payments in
computing the debt-to-income ratios.
Mortgagee Letter 2005-16 dated April 13, 2006 states that for manually underwritten mortgages,
the qualifying ratios are raised to 31% and 43% 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.
Chapter 2-13 of HUD Handbook 4155.1, REV-5, provides that compensating factors may be
used to justify approval of mortgage loans with ratios that exceed HUD benchmark guidelines;
however, underwriters must note in the “remarks” section of the mortgage credit analysis
worksheet any compensating factor used and provide supporting documentation.
Inadequate Verification of transfer of gift funds
Borrower Investment in Property Not Verified
Webster officials did not adequately verify and document a $3,360 gift; therefore, the borrower’s
investment in the property was not verified and documented. Webster’s file contained a gift
letter from the borrower's father for a $3,360 gift to the borrower to be used for the home
purchase; however; Webster’s file did not contain a withdrawal document showing that the
withdrawal was from the donor’s account. Additionally, Webster’s file contained an illegible
copy of the borrower’s deposit slip and did not contain the borrower’s bank statement showing
deposit of the gift funds. Without this documentation, Webster officials did not verify and
document the gift funds or the borrower's investment in the property.
HUD/FHA Requirements:
Chapter 2-10 C of HUD Handbook 4155-1 REV-5 states that all funds for the borrower's
investment in the property must be verified and documented and the lender must be able to
determine that gift funds were not provided from an unacceptable source, were the donor's own
funds, and the lender must obtain the withdrawal document showing that the withdrawal is from
the donor's account, as well as the homebuyer's deposit slip and bank statement that shows the
deposit.
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Loan number: 562-2061518
Mortgage amount: $153,265
Section of Housing Act: 203 (b)
Loan purpose: Cash-out Refinance
Date of loan closing: June 25, 2007
Status as of February 28, 2010: Claim
Payments before first default reported: 6
Loss to HUD: $76,162
Summary:
We found a material underwriting deficiency relating to excessive ratios without adequate
compensating factors.
Excessive Ratios without Documentation of Acceptable Compensating Factors to Justify
Mortgage Approval
Webster officials approved the mortgage with a front ratio of 44.50 percent and a back ratio of
48.10 percent, which exceeded HUD’s benchmarks (31 percent and 43 percent as set forth in
Mortgagee letter 2005-16) without documenting acceptable compensating factors. The mortgage
credit analysis worksheet showed 44.50 percent as the mortgage payment-to-income (front) and
48.10 percent as the fixed payment-to-income (back) ratios, and the underwriter listed the
following compensating factors: 8 years on the job, had a good credit history until joining a
credit counseling service then lates occurred and he cancelled, good on mortgage-FHA.
Regarding the compensating factor related to 8 years on the job, stability of income/employment
is a requirement for mortgage approval and should not be used as a compensating factor to
justify approving the mortgage with ratios above HUD’s benchmarks. While good mortgage
history is a valid compensating factor, the borrower’s monthly payments increased from $769.61
to $968.74 and Webster’s file did not contain a mortgage payoff statement, therefore we are
unable to determine whether or not the borrower made the last mortgage payment due.
Additionally, the factor regarding the borrower joining a credit consolidating company and
subsequently cancelling is not an acceptable compensating factor, but is indicative of the
borrower’s previous credit problems. In fact, the HUD-1 settlement statement showed that the
cash out refinance was used to pay off borrower credit debts totaling $16,876. Therefore, the
underwriter did not present and document compensating factors that were significant enough to
justify mortgage approval for this loan in which the ratios exceeded HUD’s benchmarks.
17
HUD/FHA Requirements:
Mortgagee Letter 2005-16 dated April 13, 2006 states that for manually underwritten mortgages,
the qualifying ratios are raised to 31% and 43% 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.
Chapter 2-13 of HUD Handbook 4155.1, REV-5, provides that compensating factors may be
used to justify approval of mortgage loans with ratios that exceed HUD benchmark guidelines;
however, underwriters must note in the “remarks” section of the mortgage credit analysis
worksheet any compensating factor used and provide supporting documentation.
Chapter 2-6 Stability of Income states that the lender must verify the borrower’s employment for
the most recent two full years.
Chapter 1 of HUD Handbook 4155.1, REV-5, cautions that cash-out refinances for debt
consolidation represent a considerable risk, especially if the borrower has not had an attendant
increase in income, and such transactions must be carefully evaluated.
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APPENDIX C
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
19
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
20
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 1
Comment 2
21
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
22
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 3
23
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 4
24
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
25
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 5
26
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 6
27
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 6
28
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 6
29
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 7
30
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 7
Comment 8
Comment 7
Comment 9
Comment 10
31
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 10
Comment 11
32
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 11
Comment 12
33
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 12
Comment 13
34
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 13
35
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 13
Comment 13
36
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 13
37
LENDER COMMENTS AND OIG’s EVALUATION
Ref to OIG Evaluation Lender Comments
Comment 13
38
OIG’s Evaluation of Lender Comments
Comment 1 Webster officials question the methodology used to select the 20 loan files
reviewed. However, we want to point out that the loan sample was not intended
to be statistical or random. The sample was the result of targeted analysis to
specifically identify loans that had gone into claim status. Further, the review
does not project results to Webster’s universe of FHA loans, and the conclusions
only relate to the now six FHA loans identified as having material underwriting
deficiencies.
Comment 2 Webster officials have taken issue with the press release announcing OIG’s
Operation Watchdog initiative, however, the January 12, 2010 HUD press release
does not make any accusations or presumptions of fraud. The goal of the
initiative was to determine why there was such a high rate of defaults and claims
with the 15 lenders and whether there may have been wrongdoing involved. The
detection and investigation of fraud is the responsibility of the Office of Inspector
General in each of its audits and reviews. As such, the reviews are proactive in
trying to identify systemic problems that HUD needs to address.
Comment 3 We agree that projected income can be used to qualify if a borrower is about to
start a new job, however, Chapter 2-7 R of HUD Handbook 4155.1 REV-5
provides that a guaranteed, non-revocable contract for employment is needed for
qualifying purposes. In this case, the internal transfer letter did not indicate that it
was a guaranteed, non-revocable contract; therefore, the income should not have
been used for qualifying purposes. Accordingly, since there was no guaranteed,
non-revocable contract and the borrower defaulted on this loan after making only
two payments, OIG will not remove this case from the report.
Comment 4 Without a written explanation for the five month gap in the borrower’s
employment, Webster officials did not establish income stability for the borrower.
While HUD allows overtime income received for periods of less than two years to
be used to qualify (See Chapter 2-6 of HUD Handbook 4155.1 REV-5), we do not
believe that overtime income received for seven months is sufficient for
qualifying purposes. Additionally, the borrower defaulted after only making one
payment; therefore, this case will remain in the report.
Comment 5 Webster officials contend that the underwriter reasonably excluded a $500 child
support payment from the borrower's liabilities, however, it is not reasonable to
exclude court ordered child support as indicated in legal documents because of an
email from the borrower’s former wife. Additionally, we do not believe that
significant compensating factors were presented to justify mortgage approval;
therefore, this case will remain in the report.
Comment 6 Webster officials state that although the borrower’s ratios exceeded HUD’s
thresholds by a few percentage points the compensating factors presented justify
approving this loan. However, the factors of job stability, an excellent credit
39
history, making the last payment on a previous mortgage and incurring a minimal
increase in the refinanced mortgage payment are not significant compensating
factors for this case. FHA cautions that cash-out refinances for debt
consolidation represent a considerable risk, especially if the borrower has not had
a corresponding increase in earned income. While the borrower did realize a
monthly savings of $650 through debt consolidation, the borrower’s refinanced
mortgage payment increased $200 per month and the monthly income increased
minimally ($35 a month). However, given the minimal increase in earned
income, the borrower’s history of an inability to save, as evidenced by
accumulating only $54 per month ($649/12) in retirement savings, and incurrence
of large amounts of debt, approval of the loan represents a significant risk,
especially since the ratios, even after debt consolidation, exceeded HUD’s
guidelines. Consequently, the loan should not have been approved with these
insignificant compensating factors. Furthermore, since the borrower defaulted on
this loan after making only six payments and filed for chapter 7 bankruptcy, this
case will remain in the report.
Comment 7 For FHA numbers 105-3258296 and 137-3707930, Webster officials provided the
wire transfers showing that the gift funds were received by the closing agent;
therefore, the material deficiencies and both loans have been removed from the
report.
Comment 8 For FHA number 132-1827919, Webster officials provided the wire transfer
showing that the $3,654.75 was received by the closing agent; therefore, the
material deficiency related to the gift has been removed.
Comment 9 For FHA Loan 461-4133646, Webster officials provided a fax from the nonprofit
to the closing agent stating that the gift funds were wired; however, there is no
documentation from the closing agent confirming that the closing agent received
the gift funds; therefore, this case will remain in the report.
Comment 10 For FHA Loan 481-2619404, Webster officials provided a deposit search inquiry
and an account detail inquiry for the donor’s account, as well as a copy of the
donor’s withdrawal document; but none of these documents showed a beginning
or ending balance for the donor’s account. Without evidence of the donor’s
beginning or ending balances, there is no documentation showing that the funds
were the donor’s, and that the funds did not come from an unacceptable source.
Comment 11 At the cornerstone of FHA is the 3 percent minimum required cash investment to
be made by borrowers. While FHA allows the entire 3 percent investment to come
from gift funds, it is imperative that the lender document that the gift funds were
actually received, were from an acceptable source, and the borrower’s investment
in the property is verified and documented (see Chapters 1-7 and 2-10 of HUD
Handbook 4155.1 REV-5)
Webster officials state that rather than cite new allegations regarding the
borrower’s source of funds to close, the report merely repeats the assertion made
40
regarding gift funds. However, the report states that the borrowers’ investment in
the property was not verified or documented. The loan files indicated that the gift
funds would be provided as part of the borrower’s investment in the property.
Nevertheless, if the gift funds were not adequately verified, then Webster officials
did not verify the gift or the borrower’s investment in the property. Thus, this is
not a repeat allegation, nor is it inflammatory to report that this is a dual violation
of HUD/FHA regulations.
Comment 12 For FHA Loan 197-3647194, Webster officials stated that the HUD-1 signature
page was inadvertently omitted for the sale of the borrower’s prior residence;
however, Webster officials still did not provide the signature page for the HUD-1
in its response. Although Webster officials provided copies of receipts from the
title company for a $1,000 initial deposit dated 3/28/2007 and a $13,537.92
deposit for funds for closing dated 4/13/2007; the HUD-1 settlement statement
shows that the earnest money deposit was $14,537.92. In addition, since Chapter
2-10 E of HUD Handbook 4155.1 REV-5 specifically requires a fully executed
HUD-1; without the signed HUD-1, we still question the proceeds from the sale
of the prior residence.
Comment 13 Webster officials believe that the recommendations for remedies under Program
Fraud Civil Remedies Act, Civil Money Penalties, and/or administrative action
are not appropriate and should be removed from the report. However, we did not
change the recommendations because violations of FHA rules are subject to civil
and administrative action. Nevertheless, the report does recommend that HUD
make determinations of the legal sufficiency of the deficiencies cited and pursue
remedies under the Program Fraud Civil Remedies Act, Civil Money Penalties,
and/or administrative actions, if necessary.
41
Webster Bank, Cheshire, CT, Did Not Properly Underwrite a selection of FHA Loans
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-01.
Below is a raw (and likely hideous) rendition of the original report. (PDF)