oversight

Security Atlantic Mortgage Company, Inc., Edison, NJ, Did Not Properly Underwrite a Selection of FHA Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-22.

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

                                        U. S. Department of Housing and Urban Development
                                                                       Office of Inspector General
                                                                     26 Federal Plaza, Room 3430
                                                                        New York, NY 10278 0068


                                                        MEMORANDUM NO: 2010-NY-1806

September 22, 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: Security Atlantic Mortgage Company, Inc., Edison, NJ, Did Not Properly
          Underwrite a Selection of FHA Loans

                                      INTRODUCTION

We conducted a review of Federal Housing Administration (FHA) loans underwritten by
Security Atlantic Mortgage Company, Inc. (Security Atlantic), an FHA direct endorsement
lender. This review was conducted as part of the Office of Inspector General’s (OIG) 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 Security Atlantic 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 Security Atlantic officials on August 12, 2010
and Security Atlantic officials provided a written response on August 26, 2010. Security
Atlantic officials generally disagreed with our findings and recommendations. The complete text
of Security Atlantic 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. Adjustments were made to the report in some areas as a result of
documentation and comments provided in Security Atlantic’s written response.
                                     METHODOLOGY AND SCOPE

Security Atlantic 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 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 claim status. We selected loans for Security Atlantic that
defaulted within the first 30 months and were (1) not streamlined refinanced, (2) not
electronically underwritten by Fannie Mae or Freddie Mac, and (3) associated with an
underwriter (usually an individual) with a high number of claims. The sample of loans consisted
of 20 purchases. To accomplish our objectives, we reviewed applicable HUD handbooks,
mortgagee letters, and reports from HUD’s Quality Assurance Division.

We performed our work from March 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 Security Atlantic, consider the results of
previous audits, or communicate with Security Atlantic’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 claim 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

Security Atlantic was a HUD-approved Title II non-supervised3 direct endorsement lender
located in Edison, NJ. It became a direct endorsement lender on June 30, 1993, and voluntarily
withdrew from the direct endorsement program on May 25, 2010. Under the direct endorsement
program, lenders are allowed to underwrite FHA-insured single-family mortgages without prior
review, but FHA lenders are responsible for complying with all applicable HUD regulations and
are required to evaluate the borrower’s ability and willingness to repay the mortgage debt.
Lenders are protected against default by FHA’s Mutual Mortgage Insurance Fund, which is
sustained by borrower premiums. Security Atlantic endorsed 99 percent of its loans through the
Lender’s Insurance (LI) program in 2007 and 2008 and endorsed 96 percent of its loans in 2009.
The LI program enables high-performing lenders, pursuant to section 256 of the National


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.
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
  A non-supervised lender is a HUD/FHA-approved lending institution that has as its principal activity the lending or
  investment of funds in real estate mortgages and may be approved to originate, sell, purchase, hold, and/or service
  HUD/FHA-insured mortgages, depending upon its wishes and qualifications.

                                                             2
Housing Act, to endorse FHA mortgage loans without a pre-endorsement review4 being
conducted by FHA. Under the LI program, the LI-approved lender performs its own pre-
endorsement review and provides mortgage loan level data to FHA via the FHA Connection.5
The FHA Connection performs an automated verification process to check the data for accuracy
and completeness, and the lender then will be able to endorse the mortgage loan automatically.
Security Atlantic was removed from the LI program on December 1, 2009. HUD’s Quality
Assurance Division conducted its last review of Security Atlantic on August 13, 2007. Security
Atlantic did business as Security American Mortgage Company.

The goal of Operation Watchdog is to determine why the selected lenders had such a high rate of
defaults and claims as compared to the national average. We selected up to 20 loans in claim
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, Security Atlantic
endorsed 34,278 loans valued at more than $6.7 billion and submitted 348 claims worth more
than $62.3 million.

The objective of this review was to determine whether Security Atlantic 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

Security Atlantic 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 $452,217 on five
loans and faces a potential loss of $101,513 on one loan for a total of $553,730 as shown in the
table below.

                             Number of                                                             Estimated loss
                                                                         Original                                    Total actual
     FHA/loan     Closing     payments      Acquisition   Unpaid                     Actual loss   to HUD (60%
                                                                         mortgage                                   and potential
      number       date      before first      cost       balance                     to HUD6        of unpaid
                                                                         amount                                      loss to HUD
                               default                                                                balance)
    011-5621419   6/12/07          7           $ 90,000   $ 87,909        $ 89,294      $ 80,326                        $ 80,326
    011-5865507   4/24/08          3             80,000     77,852          78,764        68,556                           68,556
    095-0567977   2/29/08          2            175,000    169,188         172,296                      $101,513         101,513
    105-3100085   11/14/07         0            201,185    196,580         198,076       130,843                         130,843
    421-4296353   11/1/07          1            169,200    164,656         166,585        60,694                           60,694
    441-8065074   12/12/07         4            158,000    154,089         156,761       111,798                         111,798
                                                                          $861,776      $452,217        $101,513        $553,730


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.
6
  The loss amount was obtained from HUD’s Single Family Acquired Asset Management System (SAMS). SAMS
  tracks properties from acquisition to final sale closing and maintains all accounting data associated with the case
  records.

                                                                     3
The table below summarizes the material underwriting deficiencies that we identified in the six
loans.

    Area in which underwriting deficiencies were found                            Number of loans7
    Income                                                                              1
    Liabilities                                                                         3
    Assets                                                                              1
    Gift documentation                                                                  3
    Credit-related deficiencies                                                         2
    Rental history                                                                      1
    Borrower investment in property not verified                                        4

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 Rental Income

For loan number 441-8065074, Security Atlantic officials included monthly rental income of
$595 as the borrower’s other earnings on the mortgage credit analysis worksheet without
verifying this rental income. The appraisal report estimated income from the unit that would not
be occupied by the borrower to be $700; therefore, Security Atlantic officials applied the
Philadelphia Homeownership Center’s vacancy rate of 15 percent to the $700 to arrive at
monthly rental income of $595. However, neither Security Atlantic’s file nor the FHA case
binder contained a current signed lease or other rental agreement verifying the rental income
used to qualify. Without this monthly rental income, the borrower’s front ratio8 increases from
33 to 38.15 percent and the back ratio increases from 43.53 to 50.33 percent, requiring
compensating factors, which were not presented or documented in the file. The remarks section
of the mortgage credit analysis worksheet only documented that purchase income was base plus
rent from the second unit as a compensating factor; however, this is not an acceptable
compensating factor.

Underreported Liabilities

Security Atlantic officials underreported liabilities for three loans. For example, for loan number
105-3100085, Security Atlantic officials incorrectly calculated the borrower’s back ratio because
it underreported the borrower’s liabilities by $1,171 by excluding the borrower’s monthly

7
  The deficiencies noted are not independent of one another, as one loan may have contained more than one
  deficiency.
8
  Mortgagee Letter 2005-16 defines the front ratio as the mortgage payment-to-income ratio and the back ratio as the
  fixed payment-to-income ratio and set HUD’s benchmarks for the front and back ratio as 31 and 43 percent,
  respectively.


                                                           4
mortgage payments on rental property. The mortgage credit analysis worksheet listed the
borrower’s total monthly payments as $1,756 and a back ratio of 36.88 percent. However, the
borrower’s credit report in Security Atlantic’s file showed that the borrower had an outstanding
real estate loan with a balance of $124,375 and monthly payments of $1,171, which was not
included in the back ratio. Including this monthly mortgage payment for the borrower’s rental
property increases the back ratio to 49.59 percent, requiring significant compensating factors.
The mortgage credit analysis worksheet listed job stability as a compensating factor, however,
stability of income/employment is a requirement for mortgage approval and is not one of HUD’s
acceptable compensating factors to justify approving the mortgage with ratios above HUD’s
benchmarks.

Unsupported Assets

Security Atlantic officials did not adequately verify borrower assets for one loan. Specifically,
for loan number 095-0567977, Security Atlantic officials did not adequately document and verify
the borrowers’ earnest money deposit of $3,000 and cash to close totaling $3,205; therefore, the
borrower’s investment in the property was not verified. The HUD-1 settlement statement, dated
February 29, 2008, showed that the borrowers made an earnest money deposit of $3,000 and
needed $3,205 in cash to close. Security Atlantic’s file had a letter from the real estate company
stating that $3,000 was being held in its escrow account. The file also had copies of the front
and back of three checks for the borrowers’ earnest money deposit; however, these checks were
not in sequential order and were faxed from an unknown source. Additionally, the file did not
contain documentation to support the source of the $3,000 in funds. The file only contained
copies of the borrowers’ bank statements that were more than 120 days old and a verification of
the borrowers’ bank balance, which was faxed from an unknown source and not the bank
providing the verification. As a result, the lender did not document or verify the borrowers’
earnest money deposit, cash to close, or investment in the property.

Insufficient Gift Documentation

Security Atlantic officials did not properly document gift funds for three loans. For loan number
421-4296353, Security Atlantic officials did not adequately verify the transfer of a $7,500 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
$5,076 and listed gift funds of $8,000. Security Atlantic’s file contained a gift letter signed by a
nonprofit and the borrower, stating that a gift of $7,500 was being provided to purchase the home
and the gift funds would be transferred to settlement personnel on or before the closing date.
The HUD-1 settlement statement, dated November 1, 2007, listed $7,500 in gift funds; however,
Security Atlantic’s file did not contain documentation verifying that the closing agent received
these gift funds. Without documentation verifying that the closing agent received these funds,
Security Atlantic officials did not verify and document the borrower’s gift and investment in the
property.

Significant Credit-Related Deficiencies

Security Atlantic officials approved two loans with material credit-related deficiencies.
Specifically, for loan number 421-4296353, Security Atlantic officials did not adequately

                                                   5
analyze the borrower’s credit because a liability listed on the borrower’s credit report was
excluded from the back ratio and the borrower’s explanation for derogatory accounts
demonstrated the borrower’s disregard for their financial obligations. The borrower’s credit
report listed a conventional real estate loan with an outstanding balance of $15,078 and monthly
payments of $465, which was not included in the fixed payment-to-income ratio (back ratio).
Security Atlantic’s file did not contain documentation showing a valid reason for excluding this
mortgage debt from the borrower’s back ratio. Including this debt increases the back ratio from
27.78 to 35.87 percent. Additionally, the borrower’s credit report showed six collection accounts
totaling $3,338. Although FHA does not require that collection accounts be paid off as a
condition of mortgage approval; the lender did not document its reasons for approving a
mortgage when the borrower had collection accounts or judgments, which is indicative of the
borrower’s disregard for his financial obligations. This disregard was further supported by the
fact that the borrower defaulted on this loan after making only one payment.

Rental Payment History Not Analyzed

Security Atlantic officials did not analyze the borrower’s rental payment history for one loan.
Specifically, for loan number 441-8065074, Security Atlantic’s file did not contain a verification
of rent or other documentation to support the borrower’s rental payment history. Without
documentation verifying the borrower’s rental payment history, Security Atlantic officials did
not analyze the borrower’s ability to make the monthly mortgage payments, and this borrower
defaulted after only making four mortgage payments.

Borrower Investment in Property Not Verified

Security Atlantic officials did not verify the borrower’s investment in the property for four loans.
For three of the four loans (FHA numbers 011-5621419, 421-4296353, and 441-8065074),
Security Atlantic officials did not adequately verify and document gift funds; therefore, the
borrowers’ investment in the property was not verified. For the remaining loan, FHA number
095-0567977, Security Atlantic officials did not verify the borrowers’ assets; therefore, the
borrowers’ investment in the property was not verified.

Incorrect Underwriter’s Certifications Submitted to HUD

We reviewed the certification for the six loans with material underwriting deficiencies for
accuracy. Security Atlantic’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 CFR (Code of Federal Regulations) Part 28 provide Federal agencies, which are the
victims of false, fictitious, and fraudulent claims and statements, with an administrative remedy
(1) to recompense such agencies for losses resulting from such claims and statements; (2) to

                                                   6
permit administrative proceedings to be brought against persons who make, present, or submit
such claims and statements; and (3) to deter the making, presenting, and submitting of such
claims and statements in the future—up to $7,500 for each violation and double the amount of
paid claims (recovery limited to claims of $150,000 or less).

Regulations at 24 CFR 30.35 provide that the Mortgagee Review Board may initiate a civil
money penalty action against any lender who knowingly violates any of the listed 14 different
violations—up to $7,500 for each violation but not to exceed $1.375 million.

                                            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 3801-3812) and/or civil money penalties (24 CFR
           30.35) against Security Atlantic 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 $452,217 on five loans and the potential loss of
           $101,513 on one loan, which could result in affirmative civil enforcement action of
           approximately $1,152,460.9

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

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


                        SCHEDULE OF INELIGIBLE COSTS
                          Recommendation number                   Ineligible 1/




                                                 1A               $553,730

                                            Totals                $553,730

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 ($452,217) and potential loss related to 1 property ($101,513).

9
    Double damages for actual loss amounts related to five loans ($452,217) and the potential loss ($101,513) related
    to one loan ($553,730 x 2 = $1,107,460) plus $45,000, which is a $7,500 fine for each of the six loans with
    material underwriting deficiencies.

                                                              7
Appendix A

SUMMARY OF MATERIAL UNDERWRITING DEFICIENCIES




                                                                                                                                                                                                                            Borrower investment in property not
                                                                                                                                            Significant credit-related deficiencies


                                                                                                                                                                                      Rental payment history not analyzed
                                                                                                          Insufficient gift documentation
                             Unsupported rental income


                                                         Underreported liabilities


                                                                                     Unsupported assets




                                                                                                                                                                                                                                         verified
     FHA loan number




        011-5621419*                                                                                              X                                                                                                                      X

        011-5865507*                                           X

        095-0567977*                                           X                         X                                                                                                                                               X

        105-3100085*                                           X

        421-4296353*                                                                                              X                                  X                                                                                   X

        441-8065074*               X                                                                              X                                  X                                        X                                          X
            Totals                   1                           3                         1                        3                                   2                                        1                                        4
    * Loan was originated under the LI program; therefore, the 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: 011-5621419

Mortgage amount: $89,294

Section of Housing Act: 203(b)

Loan purpose: Purchase

Date of loan closing: June 12, 2007

Status as of June 30, 2010: Claim

Payments before first default reported: Seven

Loss to HUD: $ 80,326

Summary:

We found a material underwriting deficiency relating to gift funds, and the borrower’s
investment.

Inadequate Verification of Transfer of Gift Funds
Borrower Investment in Property Not Verified

Security Atlantic officials did not adequately verify the transfer of a $2,700 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 $2,700 and Security
Atlantic’s file contained a gift letter, dated June 7, 2007, from a public charity for a $2,700 gift to
the borrower to assist with the property purchase. The gift approval letter stated that $2,700 in
gift funds would be wired from the nonprofit to the closing attorney. However, neither the FHA
case binder nor Security Atlantic’s file contained documentation verifying that the closing agent
received these gift funds. The HUD-1 settlement statement showed that this loan closed on June
12, 2007; however, there was no documentation to verify that these gift funds were received by
the closing agent. Without documentation verifying that the closing agent received these funds,
Security Atlantic officials did not verify and document the borrower’s investment in the
property.




                                                    9
HUD/FHA Requirements:

Paragraph 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.

Paragraph 2-10 C of HUD Handbook 4155.1, REV-5 states that the lender must document the
gift funds by obtaining a gift letter, signed by the donor and borrower, that specifies the dollar
amount of the gift, states that no repayment is required, shows the donor’s name, address,
telephone number and states the nature of the donor’s relationship to the borrower. When the
transfer occurs at closing, the lender remains responsible for obtaining verification that the
closing agent received the funds from the donor for the amount of the purported gift and that
those funds came from an acceptable source. Regardless of when the gift funds are made
available to the homebuyer, 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.




                                                   10
Loan number: 011-5865507

Mortgage amount: $78,764

Section of Housing Act: 203(b)

Loan purpose: Purchase

Date of loan closing: April 24, 2008

Status as of June 30, 2010: Claim

Payments before first default reported: Three

Loss to HUD: $68,556

Summary:

We found a material underwriting deficiency relating to underreported liabilities, resulting in
excessive ratios.

Incorrectly Calculated Ratio Due to Underreported liabilities, resulting in Excessive
Ratios

Security Atlantic officials incorrectly calculated the fixed payment-to-income ratio (back ratio)
because liabilities were underreported. Specifically, one revolving account and four past-due
accounts shown on the borrower’s credit report, dated April 9, 2008, were not included on the
mortgage credit analysis worksheet. The borrower’s credit report listed a revolving account with
an outstanding balance totaling $796 with monthly payments of $24; however, the mortgage
credit analysis worksheet did not list any recurring expenses. Additionally, the borrower’s credit
report listed four past-due accounts with past-due amounts totaling $1,374, which were not
included in the mortgage credit analysis worksheet. The four past-due accounts consisted of a
telephone collection account for $492, child support placed for collection for $375, checking
account for $305, and another checking account for $202. The file contained a letter of
explanation from the borrower, dated April 9, 2008, stating that he and his wife were back
together, the wife was working, and they had made arrangements to clear up all outstanding
balances. The borrower’s wife was not a co-borrower on this loan, nor was there documentation
in the file regarding the wife’s income. Security Atlantic’s file did not include bank statements
or documentation indicating that the borrower had cash assets available after loan closing. Also,
Security Atlantic officials did not document the reasons for excluding the revolving debt or the
past-due amounts from the borrower’s back ratio, and the borrower acknowledged that
arrangements had been made to pay off the outstanding balances for this accounts; therefore,
these accounts should have been included in the borrower’s back ratio. If we accept the
borrower’s written explanation that he and his wife were back together and exclude the $375 for
child support, the lender still should have included recurring debt totaling $1,023 in the back
ratio, which increases the back ratio from 23.47 to 59.95 percent, requiring significant


                                                  11
compensating factors. The mortgage credit analysis worksheet only documented the purchase as
a compensating factor, and it is not an acceptable compensating factor.

HUD/FHA Requirements:

Paragraph 2-11A (1) of HUD Handbook 4155.1, REV-5, states that for revolving accounts, if the
account shown on the credit report has an outstanding balance, monthly payments for qualifying
purposes must be calculated at the greater of 5 percent of the balance or $10 (unless the account
shows a specific minimum monthly payment).

Paragraph 2-11 A of HUD Handbook 4155.1, REV-5, states that the borrower’s liabilities
include all installment loans, revolving charge accounts, child support, and other continuing
obligations and in computing the debt-to-income ratios, debts lasting less than 10 months must
be counted if the amount of the debt affects the borrower’ ability to make the mortgage payment
during the months immediately after loan closing; this is especially true if the borrower will have
limited or no cash assets after loan closing.

Mortgagee Letter 2005-16 dated April 13, 2005 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.

Paragraph 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.




                                                  12
Loan number: 095-0567977

Mortgage amount: $172,296

Section of Housing Act: 234 (c)

Loan purpose: Purchase

Date of loan closing: February 29, 2008

Status as of June 30, 2010: Claim

Payments before first default reported: Two

Potential Loss to HUD: $101,513

Summary:

We found material underwriting deficiencies relating to underreported liabilities, assets, and
borrowers’ investment.

Underreported Liabilities

Security Atlantic officials underreported the borrower’s liabilities. Specifically, the mortgage
credit analysis worksheet showed the borrower’s total monthly payment as $424; however, the
borrower’s credit report showed monthly installment payments of $378 and monthly revolving
payments of $116 ($131 less $15 for an account reported twice), representing total monthly
recurring debt of $494. The difference of $70 relates to a revolving account for a credit card
with an outstanding balance of $916, a monthly payment amount of $70, and a past-due amount
of $372, which is shown on the credit report but not included in the borrower’s back ratio.
Including this debt, increases the borrower’s back ratio from 43.73 percent to 45.25 percent.

HUD/FHA Requirements:

Paragraph 2-11 A (1) of HUD Handbook 4155.1, REV-5, states that for revolving accounts, if
the account shown on the credit report has an outstanding balance, monthly payments for
qualifying purposes must be calculated at the greater of 5 percent of the balance or $10 (unless
the account shows a specific minimum monthly payment).

Assets Not Documented or Verified
Borrower Investment in Property Not Verified

Security Atlantic officials did not adequately document and verify the borrowers’ earnest money
deposit of $3,000 and cash to close totaling $3,204.55; therefore, the borrowers’ investment in
the property was not verified. The mortgage credit analysis worksheet showed the borrowers’

                                                  13
statutory investment requirement as $5,250, and the HUD-1 settlement statement, dated February
29, 2008, showed that the borrowers’ made an earnest money deposit of $3,000 and needed
$3,204.55 in cash to close. Security Atlantic’s file had a letter from the real estate company
stating that $3,000 was being held in its escrow account. The file also had copies of the front
and back of three checks for the borrowers’ checking account for the borrowers’ earnest money
deposit; however, these checks were not in sequential order and were faxed from an unknown
source. Additionally, the file did not contain documentation to support the source of the $3,000
in funds. The file only contained copies of the borrowers’ bank statements from February 27
through April 26, 2007, that were more than 120 days old and a verification of the borrowers’
bank balance, which was documented with an undated letter stating that the borrower had a
checking account with a current balance of $2,499.66. This letter was faxed from an unknown
source and not the bank providing the verification. As a result, the lender did not document or
verify the borrowers’ earnest money deposit, cash to close, or investment in the property.

HUD/FHA Requirements:

Paragraph 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.

Paragraph 2-10 A of HUD Handbook 4155.1, REV-5 states that the earnest money deposit must
be verified with documentation, which includes a copy of the borrower’s cancelled check, a
certification from the deposit holder acknowledging receipt of funds, or separate evidence of the
source of funds. A verification of deposit, along with the most recent bank statement, may be
used to verify savings and checking accounts.

Paragraph 3-1of HUD Handbook 4155.1, REV-5, states that the verification of deposit may be
faxed documents if it clearly identifies the source (e.g., contains the names of the borrower’s
employer or depository/investment firm), the bank statements may not be more than 120 days
old when the loan closes, and no document used in the processing or underwriting of a loan may
be handled or transmitted by or through an interested third party to the transaction.




                                                 14
Loan number: 105-3100085

Mortgage amount: $198,076

Section of Housing Act: 203 (b)

Loan purpose: Purchase

Date of loan closing: November 14, 2007

Status as of June 30, 2010: Claim

Payments before first default reported: Zero

Loss to HUD: $130,843

Summary:

We found a material underwriting deficiency relating to underreported liabilities.

Incorrectly Calculated Ratio Due to Underreported Liabilities

Security Atlantic officials incorrectly calculated the borrower’s back ratio because it
underreported the borrower’s liabilities by $1,171 by excluding the borrower’s monthly
mortgage payments on rental property. The mortgage credit analysis worksheet listed the
borrower’s total monthly payments as $1,756 and a back ratio of 36.88 percent. However, the
borrower’s credit report in Security Atlantic’s file showed that the borrower had an outstanding
real estate loan with a balance of $124,375 and monthly payments of $1,171, which was not
included in the back ratio. Including this monthly mortgage payment for the borrower’s rental
property increases the back ratio to 49.59 percent, requiring significant compensating factors.
The mortgage credit analysis worksheet listed job stability as a compensating factor, however,
stability of income/employment is a requirement for mortgage approval and is not one of HUD’s
acceptable compensating factors to justify approving the mortgage with ratios above HUD’s
benchmarks.

HUD/FHA Requirements:

Paragraph 2-11 A of HUD Handbook 4155.1, REV-5, states that the lender must include the
borrower’s liabilities, including all installment loans, revolving charge accounts, real estate
loans, alimony, child support, and other continuing obligations, in computing the debt-to-income
ratios.

Paragraph 2-6 of HUD Handbook 4155.1, REV-5; entitled “Stability of Income,” states that the
lender must verify the borrower’s employment for the most recent 2 full years.




                                                 15
Mortgagee Letter 2005-16 dated April 13, 2005 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.

Paragraph 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.




                                               16
Loan number: 421-4296353

Mortgage amount: $166,585

Section of Housing Act: 203(b)

Loan purpose: Purchase

Date of loan closing: November 1, 2007

Status as of June 30, 2010: Claim

Payments before first default reported: One

Loss to HUD: $60,694

Summary:

We found material underwriting deficiencies relating to credit, gift funds, the borrower’s
investment in the property, and inadequate documentation of self-employment.

Inadequate Analysis of Borrower Credit

Security Atlantic officials did not adequately analyze the borrower’s credit because a liability
listed on the borrower’s credit report was excluded from the back ratio and the borrower’s
explanation for derogatory accounts demonstrates the borrower’s disregard of their financial
obligations. The borrower’s credit report listed a conventional real estate loan with an
outstanding balance of $15,078 and monthly payments of $465, which was not included in the
fixed payment-to-income ratio (back ratio). The borrower’s credit report listed this real estate
loan as a joint account, and there was a handwritten note on the credit report stating that it was a
house for the daughter. However, Security Atlantic’s file did not contain documentation
showing that this mortgage debt was being paid by the daughter or document a valid reason for
excluding this mortgage debt from the borrower’s back ratio. Including this debt increases the
back ratio from 27.78 to 35.87 percent. Additionally, the borrower’s credit report showed six
collection accounts totaling $3,338, and the borrower’s explanation for these collection accounts
indicated a disregard for credit obligations. The borrower explained that she “gives tons of
money to her family and financial fear or my net worth had nothing to do with being late.”
Although FHA does not require that collection accounts be paid off as a condition of mortgage
approval, collections and judgments indicate a borrower’s regard for credit obligations and must
be considered in the analysis of creditworthiness, with the lender documenting its reasons for
approving a mortgage when the borrower has collection accounts or judgments. The mortgage
credit analysis worksheet noted that the borrower provided an excellent signed explanation for
credit. However, the explanation provided by the borrower was indicative of her disregard for
her financial obligations, which was further supported by the fact that the borrower defaulted on
this loan after making only one payment.



                                                   17
HUD/FHA Requirements:

Paragraph 2-11 A of HUD Handbook 4155.1, REV-5; provides that the borrower’s liabilities
include all installment loans, revolving charge accounts, real estate loans, alimony, child support,
and other continuing obligations.

Paragraph 2-3 of HUD Handbook 4155.1, REV-5, states that major indications of derogatory
credit—including judgments, collections, and other recent credit problems—require sufficient
written explanation from the borrower and the explanation must make sense and be consistent
with other credit information in the file.

Inadequate Verification of Transfer of Gift Funds
Borrower Investment Not Verified

Security Atlantic officials did not adequately verify the transfer of a $7,500 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 $5,076 and listed gift
funds of $8,000. Security Atlantic’s file contained a gift letter signed by a nonprofit and the
borrower, stating that a gift of $7,500 was being provided to purchase the home and the gift
funds would be transferred to settlement personnel on or before the closing date. The HUD-1
settlement statement, dated November 1, 2007, listed $7,500 in gift funds; however, Security
Atlantic’s file did not contain documentation verifying that the closing agent received these gift
funds. Without documentation verifying that the closing agent received these funds, Security
Atlantic officials did not verify and document the borrower’s gift and investment in the property.

HUD/FHA Requirements:

Paragraph 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.

Paragraph 2-10 C of HUD Handbook 4155.1, REV-5 states that the lender must document the
gift funds by obtaining a gift letter, signed by the donor and borrower, that specifies the dollar
amount of the gift, states that no repayment is required, shows the donor’s name, address,
telephone number and states the nature of the donor’s relationship to the borrower. When the
transfer occurs at closing, the lender remains responsible for obtaining verification that the
closing agent received the funds from the donor for the amount of the purported gift and that
those funds came from an acceptable source. Regardless of when the gift funds are made
available to the homebuyer, 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.

Inadequate Documentation of Borrower Self-Employment

Security Atlantic officials did not obtain signed and dated individual tax returns for the self-
employed borrower. Security Atlantic’s file contained unsigned individual tax returns for 2005
and 2006 for the self-employed borrower.

                                                   18
HUD/FHA Requirements:

Paragraph 2-9 B of HUD Handbook 4155.1, REV-5; provides that signed and dated individual
tax returns, plus all applicable schedules for the most recent 2 years are required from self-
employed borrowers.




                                                 19
Loan number: 441-8065074

Mortgage amount: $156,761

Section of Housing Act: 203(b)

Loan purpose: Purchase

Date of loan closing: December 12, 2007

Status as of June 30, 2010: Claim

Payments before first default reported: Four

Loss to HUD: $111,798

Summary:

We found material underwriting deficiencies relating to unsupported rental income, resulting in
excessive ratios, credit, rental payment history, gift funds, and the borrower’s investment.

Unsupported Rental Income Used To Qualify, Resulting in Excessive Ratios

Security Atlantic officials included monthly rental income of $595 as the borrower’s other
earnings on the mortgage credit analysis worksheet without verifying this rental income. The
appraisal report estimated income from the unit that would not be occupied by the borrower to be
$700; therefore, Security Atlantic officials applied the Philadelphia Homeownership Center’s
vacancy rate of 15 percent to the $700 to arrive at monthly rental income of $595. However,
neither the Security Atlantic file nor the FHA case binder contained a current signed lease or
other rental agreement verifying the rental income used to qualify. Without this monthly rental
income, the borrower’s front ratio increases from 33 to 38.15 percent and the back ratio increases
from 43.53 to 50.33 percent, requiring compensating factors, which were not presented or
documented in the file. The mortgage credit analysis worksheet only documented that purchase
income was base plus rent from the second unit as a compensating factor; however, this is not an
acceptable compensating factor.

HUD/FHA Requirements:

Paragraph 2-7M of HUD Handbook 4155.1, REV-5, states that if the borrower resides in one or
more units of a multiple-unit property and charges rent to tenants of other units, that rent may be
used for qualifying purposes only after deducting the Homeownership Center’s vacancy and
maintenance factor, and a current signed lease or other rental agreement must be provided to
verify the rental income.

Mortgagee Letter 2005-16 dated April 13, 2005 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

                                                  20
manually underwritten mortgage, the lender must describe the compensating factors used to
justify mortgage approval.

Paragraph 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 Analysis of Borrower Credit

The borrower’s credit report shows 12 collection accounts totaling $3,323; however, the
borrower’s written explanation for these collection accounts was not sufficient. Specifically, the
borrower explained that she did not receive the bills because they were sent to her mother’s
home and she was not on speaking terms with her mother. However, this is not a valid
explanation because the borrower could have notified the U.S Postal Service of the change in
address, and should have known that her bills were due. Additionally, although FHA does not
require that collection accounts be paid off as a condition of mortgage approval, collections and
judgments indicate a borrower’s regard for credit obligations and must be considered in the
analysis of creditworthiness, with the lender documenting its reasons for approving a mortgage
when the borrower has collection accounts or judgments. There was no documentation in either
Security Atlantic’s file or the FHA case binder to indicate that the lender considered these
collection accounts in its analysis of creditworthiness.

HUD/FHA Requirements:

Paragraph 2-3 of HUD Handbook 4155.1, REV-5, states that major indications of derogatory
credit—including judgments, collections, and other recent credit problems—require sufficient
written explanation from the borrower and the explanation must make sense and be consistent
with other credit information in the file.

Rental Payment History Not Analyzed

Security Atlantic’s file did not contain a verification of rent or other documentation to support
the borrower’s rental payment history. Without documentation verifying the borrower’s rental
payment history, Security Atlantic officials did not analyze the borrower’s ability to make the
monthly mortgage payments, and this borrower defaulted after only making four mortgage
payments.

HUD/FHA Requirements:

Paragraph 2-3 A of HUD Handbook 4155.1, REV-5, states that the payment history of the
borrower’s housing obligations holds significant importance in evaluating credit and the lender
must 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 the mortgage servicer, or canceled checks covering the most recent 12-month
period.

                                                  21
Inadequate Verification of Transfer of Gift Funds
Borrower Investment Not Verified

Security Atlantic officials did not did not adequately verify the transfer of a $5,000 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
$4,740 but did not list gift funds. Security Atlantic’s file contained a gift letter from the
borrower’s brother for a $5,000 gift to the borrower to be used for the home purchase; however,
Security Atlantic’s file did not contain a withdrawal document showing that the withdrawal was
from the donor’s account. Without this documentation, Security Atlantic officials did not verify
and document the gift funds or the borrower’s investment in the property.

HUD/FHA Requirements:

Paragraph 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.

Paragraph 2-10 C of HUD Handbook 4155.1, REV-5 states that the lender must document the
gift funds by obtaining a gift letter, signed by the donor and borrower, that specifies the dollar
amount of the gift, states that no repayment is required, shows the donor’s name, address,
telephone number and states the nature of the donor’s relationship to the borrower. In addition,
the lender must document the transfer of funds from the donor to the borrower. If the gift funds
are in the homebuyer's bank account, the lender must document the transfer of the funds from the
donor to the homebuyer by obtaining a copy of the canceled check or other withdrawal document
showing that the withdrawal is from the donor's account. The homebuyer's deposit slip, and
bank statement that shows the deposit is also required. Regardless of when the gift funds are
made available to the homebuyer, 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.

.




                                                 22
APPENDIX C

             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




                               23
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




                               24
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 1




                               25
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 2




                               26
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 3




                               27
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 4




                               28
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 4




Comment 5




                               29
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 5




Comment 6




                               30
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 6




Comment 6




                               31
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 7




                               32
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 7




Comment 8




                               33
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 8




Comment 8




                               34
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 8




                               35
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 9




Comment 10
Comment 11
Comment 12
Comment 13
Comment 14




                               36
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 15




                               37
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




                               38
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 16




                               39
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 16




Comment 16




                               40
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 17




Comment 18




                               41
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 18




Comment 19




                               42
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 19




Comment 20




                               43
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 20




Comment 20




                               44
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 20




                               45
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




Comment 20




Comment 20




                               46
             LENDER COMMENTS AND OIG’s EVALUATION

Ref to OIG Evaluation       Lender Comments




                               47
                   OIG’s Evaluation of Lender Comments

Comment 1   Security Atlantic 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 Security Atlantic’s universe of FHA loans, and
            the conclusions only relate to the now six FHA loans identified as having material
            underwriting deficiencies.

Comment 2   Security Atlantic 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 companies 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   For loan number 441-8065074, Security Atlantic officials contend that the
            borrower could not enter into a lease agreement with tenants prior to closing;
            therefore, no verification of the projected rental income was necessary. We
            disagree because although HUD Handbook 4155.1 REV-5 allows projected rental
            income from additional units to be used to qualify, all rental income must be
            verified either with a current signed lease or other rental agreement. In this case,
            the borrower could have entered into an agreement to lease with the tenant
            currently occupying the unit to verify the $595 in rental income that was used to
            qualify. As such, this case will remain in the report.

Comment 4   For loan number 011-5621419, Security Atlantic official’s response stated that the
            revolving accounts were delinquent collection accounts that were medical in
            nature and not revolving charge accounts; therefore, the accounts were not
            required to be paid off or included in the borrower’s back ratio. In addition, the
            underwriter obtained two written letters of explanation for these collection
            accounts, which were provided. As a result, since the accounts were not revolving
            charge accounts; but were collections related to medical expenses incurred by the
            borrower while uninsured, we have removed the material deficiency related to
            underreported liabilities.

Comment 5   For loan number 011-5865507, Security Atlantic officials agree that the revolving
            account with an outstanding balance of $796 and monthly payments of $24 should
            have been included in the borrower’s back ratio; however, Security Atlantic
            officials disagree that the 3 collection accounts with a balance of $999 should
            have been included. It is our position that the outstanding balances for these 3
            collection accounts should have been included in the borrower’s back ratio
            because the borrower acknowledged that arrangements had been made to pay this

                                               48
            outstanding balance and Security Atlantic officials did not document that the
            borrower had sufficient cash assets after closing to pay this $999 outstanding
            balance. Including this $999 increases the back ratio to 59.95 percent requiring
            significant compensating factors, which were not documented. Further the
            borrower defaulted on this loan after making only three payments and the reason
            for default was unknown, as Neighborhood Watch listed “unable to contact
            borrower”. Therefore, this case will remain in the report.

Comment 6   For loan number 095-0567977, Security Atlantic officials agree that the revolving
            account with an outstanding balance of $916 and monthly payments of $70 should
            have been included in the borrower’s back ratio. Additionally, in their response,
            Security Atlantic officials provided a copy of the borrower’s letter of explanation
            for derogatory accounts, which officials state was inadvertently placed in another
            file and was not previously provided to us. Therefore, the deficiency related to no
            letter of explanation for derogatory accounts has been removed from the report;
            however, the deficiency related to underreported liabilities remains in the report.

Comment 7   For loan number 105-3100085, Security Atlantic officials agree that the
            borrower’s back ratio was incorrectly calculated because mortgage payments
            totaling $1,171 on the borrower’s rental property was excluded; however, officials
            contend that significant compensating factors were documented in the loan file.
            In their response, Security Atlantic again presented job stability as well as
            additional compensating factors of substantial cash reserves of $34,104 in a
            retirement account, and excellent payment history on prior mortgage. Regarding
            job stability, this is a requirement for mortgage approval and is not one of HUD’s
            acceptable compensating factors to justify approving the mortgage with ratios
            above HUD’s benchmarks. Regarding cash reserves, Paragraphs 2-10 K and 2-13
            G of HUD Handbook 4155.1 REV-5, states that only 60 percent of the value can
            be used in underwriting and the lender must judge whether or not the asset is
            liquid or readily convertible to cash and can be done so absent retirement or job
            termination. Security Atlantic officials documented that the borrower had funds
            in a retirement account; however, Security Atlantic officials did not provide any
            documentation showing that these retirement funds could be readily converted to
            cash without the borrower retiring. Regarding excellent payment history on prior
            mortgage, this is not a valid compensating factor because the borrower’s credit
            report only documented a 4 month payment history and not the required 12 month
            payment history and the mortgage relates to the borrower’s rental property, which
            was excluded from the borrower’s back ratio. Therefore, the deficiency related to
            underreported liabilities remains in the report because significant compensating
            factors were not presented and the borrower made no payments on this mortgage.

Comment 8   For loan number 095-0567977, Security Atlantic officials contend that the
            borrower’s earnest money deposit did not exceed 2 percent of the sales price;
            therefore, they were not required to document the source of the funds. However,
            we disagree because Paragraph 2-10 of HUD Handbook 4155.1, REV-5,
            pertaining to the borrower investment states that all funds for the borrower’s

                                              49
              investment in the property must be verified and documented. The borrowers’
              investment for this purchase was $5,250; therefore, Security Atlantic officials
              were required to verify and document the source of funds. Security Atlantic
              officials contend that the file contains a letter from the settlement agent indicating
              that he was holding $3,000 for the borrowers; however, this is incorrect and the
              letter is in fact from the seller’s real estate broker. Additionally, Security Atlantic
              officials state that it is not unusual for checks to be out of sequential order and
              would not raise concerns with the underwriter. We disagree because the file
              documents that the borrowers provided three separate checks of $1,000 consisting
              of check number 107 dated 01/02/2008, check number 105 dated 01/10/2008, and
              check number 135 dated 2/5/2008 and the underwriter should have questioned
              how check 107 was issued before check 105 and why there is such a significant
              gap between checks issued in January and early February. Also, Security Atlantic
              officials agree that the borrower’s bank statements were more than 120 days old;
              however, officials contend that the borrowers had all but $704 needed to close and
              could have used a portion of their pay checks to satisfy this. We disagree because
              Security Atlantic officials did not document the borrowers’ savings pattern and
              only presented a savings bank balance of $2,499.86 with no savings history
              documented and a checking account statement for May 30, 2007 to June 27, 2007
              with an ending balance of only $127.89. Therefore, this material deficiency
              remains in the report.

Comment 9     For FHA number 011-5621419, Security Atlantic officials stated that the
              settlement agent was unable to locate the file before the response was due and did
              not provide us with any documentation verifying that the settlement agent
              received the gifts funds. Therefore, the material deficiency remains in the report.

Comment 10 For FHA number 011-5758688, Security Atlantic officials provided the wire
           transfer showing that the gift funds were received by the closing agent; therefore,
           the material deficiency and the loan has been removed from the report.

Comment 11 For FHA number 011-5865507, Security Atlantic officials provided the wire
           transfer showing that the gift funds were received by the closing agent; therefore,
           the material deficiency has been removed from the report.

Comment 12 For FHA number 105-3100085, Security Atlantic officials provided the wire
           transfer showing that the gift funds were received by the closing agent; therefore,
           the material deficiency has been removed from the report.

Comment 13 For FHA number 105-3315364, Security Atlantic officials provided the wire
           transfer showing that the gift funds were received by the closing agent; therefore,
           the material deficiency and the loan has been removed from the report.

Comment 14 For FHA number 421-4296353, Security Atlantic officials provided a copy of the
           settlement agent’s disbursement worksheet, which listed $7,500 in gift funds;
           however, Security Atlantic did not provide any documentation showing that the

                                                  50
              settlement agent received the gift funds. Without evidence that the settlement
              agent received the gift funds, Security Atlantic officials did not verify the gift
              funds or the borrower’s investment in the property. Therefore, the material
              deficiency and the loan remain in the report.

Comment 15 For FHA number 441-8065074, Security Atlantic officials provided a copy of the
           donor’s withdrawal document and the borrower’s bank statement showing that the
           $5,000 gift was deposited into the borrower’s account. However, the donor’s
           withdrawal document did not show 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. Therefore, the material deficiency and the
           loan remain in the report.

Comment 16 For FHA number 421-4296353, Security Atlantic officials agree that the $465 real
           estate loan should have been included in the borrower’s back ratio; however, they
           disagreed that the borrower’s explanation for collection accounts indicated a
           disregard for credit obligations. Officials also agree that the borrower’s signed
           tax return that indicated self employment income was not included in the files.
           Further they state that they could not have known or predicted the borrower’s
           inability to meet obligations after loan closing. It is our position that the
           borrower’s explanation did indicate a disregard for credit obligations because
           Paragraph 2-3 of HUD Handbook 4155.1 REV-5 states that past credit
           performance serves as the most useful guide in determining a borrower’s attitude
           toward credit obligations and predicting a borrower’s future actions. In this instance,
           the borrower’s past credit history indicated that this borrower’s disregard
           for financial obligations would most likely continue and it did as the borrower
           made only one mortgage payment before defaulting. Further, Officials should
           have considered the unsigned tax return more closely because the inadequate
           documentation of the borrower’s self employment income may have been a
           contributing factor in that the reason for loan default was curtailment of borrower
           income. Therefore; the material deficiency and this loan will remain in the report.

Comment 17 For loan number 441-8065074, Security Atlantic officials agreed that its loan file
           did not contain a verification of rent; however, they contend that the underwriter
           obtained a verification of rent and it was reviewed by the underwriter and
           provided in the case binder. Our review of the FHA case binder did not find a
           verification of rent; therefore, this deficiency and the loan will remain in the
           report.

Comment 18 For loan number 441-8065074, Security Atlantic officials state that the
           borrower’s collection accounts were considered in its analysis of creditworthiness
           and the underwriter concluded that the collection accounts resulted from medical
           events outside the borrower’s control and a misunderstanding of when student
           loans were to be repaid. We disagree because the student loan collections did not
           result from a misunderstanding, but from the fact that the borrower was not

                                                  51
              having her mail forwarded from her mother’s residence to her residence.
              Additionally, this borrower defaulted on the mortgage after only making four
              payments and the reason for default was excessive obligations.

Comment 19 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). Based on the gift documentation provided in Security
           Atlantic’s response, we removed the borrower’s investment deficiency for four of
           the eight loans and removed two loans from the report.

              Further, Security Atlantic officials state that rather than cite new allegations
              regarding the borrower’s source of funds to close, the report merely repeats the
              assertion made regarding gift funds and borrower assets. However, the report
              states that the borrowers’ investment in the property was not verified or
              documented. The loan files indicated that the gift funds and/or borrower assets
              would be provided as part of the borrower’s investment in the property.
              Nevertheless, if the gift funds and/or borrower assets were not adequately
              verified, then Security Atlantic officials did not verify the gift (for 3 loans), assets
              (for 1 loan), or the borrower’s investment in the property (for 4 loans). Thus, this
              is not a repeat allegation, nor is it inflammatory to report that these are dual
              violations of HUD/FHA regulations.

Comment 20 Security Atlantic 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.




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