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-1808
September 29, 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: Pine State Mortgage Corporation, Atlanta, GA, Did Not Properly Underwrite a
Selection of FHA Loans
INTRODUCTION
We conducted a review of 20 Federal Housing Administration (FHA)-insured loans underwritten
by Pine State Mortgage Corporation (Pine State), 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 Pine State underwrote the 20 loans
reviewed 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 mailed to Pine State officials on August 24, 2010; however, it
was returned as undeliverable on September 7, 2010. We telephoned Pine State officials on
several occasions; however, they did not return our calls. During the audit resolution process
HUD officials will attempt to establish contact with Pine State officials to give them an
opportunity to address the issues in this report.
METHODOLOGY AND SCOPE
Pine State 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
underwritten by Pine State that had gone into claim status within 30 months. The selected loans
consisted of 20 purchases and were (1) not streamline 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. To accomplish our objectives, we reviewed applicable
HUD handbooks, mortgagee letters, and reports from HUD’s Quality Assurance Division.
This review was performed from January through July 2010. We conducted our review in
accordance with generally accepted government auditing standards, except that we did not
consider the internal controls or information systems controls of Pine State, consider the results
of previous audits, or communicate with Pine State’s management in advance. We did not
follow standards in these areas because our overall goal was to aid HUD in identifying material
underwriting deficiencies and/or potential wrongdoing on the part of poorly performing lenders
that contributed to a high rate of defaults 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
Pine State is a HUD-approved Title II nonsupervised3 direct endorsement lender located in
Atlanta, GA. It became a direct endorsement lender on February 11, 1993. Under the direct
endorsement program, lenders are allowed to underwrite FHA-insured single-family mortgages
without prior HUD 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.
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 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
1
Neighborhood Watch is a Web-based data processing, automated query, reporting, and analysis system designed to
highlight exceptions to lending practices of high-risk lenders 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 nonsupervised 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
December 2009. During these periods, respectively, Pine State endorsed 6,054 loans valued at
more than $946 million and submitted 732 claims valued at more than $99.4 million.
The objective of this review was to determine whether Pine State underwrote the 20 selected
loans in accordance with HUD/FHA requirements and if not, whether the underwriting reflected
systemic problems.
RESULTS OF REVIEW
Pine State officials did not underwrite 14 of 20 loans reviewed in accordance with HUD/FHA
regulations. As a result, the FHA insurance fund suffered actual losses of $1,030,786 on 13
loans and faces a potential loss of $64,416 on 1 loan for a total of $1,095,202 as shown in the
table below.
Number of
Original Total actual &
FHA case Closing payments Unpaid Actual loss to
mortgage
balance @ Potential loss ± potential loss
number date before 1st HUD
amount to HUD
default
105-2427729 08/09/05 1 $98,658 95,761 $55,774 $55,774
105-2541058 12/21/05 2 $202,340 195,750 $161,736 $161,736
105-2632402 03/17/06 13 $199,295 192,891 $82,525 $82,525
105-2721400 06/16/06 3 $128,245 125,803 $66,849 $66,849
105-2903785 01/29/07 2 $125,308 124,028 $38,625 $38,625
105-2926206 02/12/07 4 $127,853 126,547 $28,103 $28,103
105-2957702 06/11/07 6 $166,561 162,022 $99,662 $99,662
105-2978097 03/27/07 16 $110,132 107,360 $64,416 $64,416
105-3008866 08/31/07 7 $148,240 145,886 $86,179 $86,179
105-3011817 05/02/07 1 $122,962 121,021 $57,306 $57,306
105-3033155 05/24/07 3 $182,174 178,624 $108,421 $108,421
105-3123930 07/26/07 5 $139,410 137,446 $67,619 $67,619
105-3129145 07/30/07 6 $167,509 163,981 $106,003 $106,003
105-3121214 07/30/07 11 $83,905 81,785 $71,984 $71,984
Total $2,002,592 1,958,905 $1,030,786 $64,416 $1,095,202
±
The potential loss represents 60% of the unpaid balance. This loss percentage is based on the actuarial
review of the FHA Insurance Mutual Mortgage Fund for fiscal year 2009.
@
The loss amount is rounded and 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.
The below table summarizes the material underwriting deficiencies that were identified in the 14
loans.
3
Areas in which underwriting deficiencies were
Number of loans *
found
Income 4
Liabilites 1
Ratios 1
Credit 5
Gift 13
Statutory Minimum Investment 13
*
The deficiencies noted are not independent of one another, as one loan may have
contained more than one deficiency.
Appendix A of this report shows a summary schedule of material deficiencies in each of the 14
loans, and Appendix B provides a detailed description of all loans with material underwriting
deficiencies noted in this report.
Specific examples of these underwriting deficiencies follow.
Inadequate Verification of Income
Pine State officials approved four loans without adequately verifying the borrower’s income.
For example, for loan number 105-3011817, Pine State officials failed to address a discrepancy
in the borrower’s employment income. While the FHA file contained a verification of
employment that reported an average weekly income of $650, which was used to calculate ratios,
the average weekly income reported on the borrower’s pay stubs was $526. In addition, Pine
State officials did not verify two full years of employment as required, thus failing to ensure that
the borrower had income stability. These deficiencies are important because the reported cause
of default, which occurred after one payment, was a curtailment of income.
Excessive Ratios Without Adequate Compensating Factors
Underreported Liabilities
Pine State officials approved one loan that had underreported liabilities and excessive ratios
without adequate compensating factors. For loan number 105-3033155, the mortgage credit
analysis worksheet noted a fixed payment-to-income ratio of 47.42 percent with the following
compensating factors: home-buyer counseling, minimal use of revolving credit, overtime for
borrower not considered, and FICO (credit score) 570, 548, none of which is a valid
compensating factor. Home-buyer counseling does not increase the borrower’s ability to pay the
mortgage, minimal use of revolving credit alone is not a compensating factor because the
borrower must also show an ability to accumulate savings, and the low FICO scores are not
compensating factors. Further, FHA regulations would prohibit considering overtime because
the underwriter did not demonstrate that the overtime income was likely to continue and that it
had been received for the past two years. In addition, the lender incorrectly calculated the debt-
to-income ratio because a monthly liability relating to a student loan of $251 was not considered.
Although the credit report indicated that the student loan could be deferred, the file did not have
an independent confirmation that the loan was deferred. Including the $251 in liabilities would
4
raise the debt-to-income ratio to 52.50 percent, which would require significant compensating
factors.
Credit-Related Deficiencies
Pine State officials approved five loans that had significant credit-related deficiencies. For loan
number 105-2541058, Pine State officials did not adequately assess the borrower’s credit history.
The HUD-1 settlement statement reported four collection items totaling $878. While the
borrower provided a letter of explanation for these items stating that she fell behind on her bills
when she became unemployed on February 1, 2003, these items had gone into collection two to
three years before the unemployment occurred; therefore, the borrower’s explanation was
inadequate. The assessment of her creditworthiness is important because the borrower defaulted
with only two payments made and the cause of default was reported as excessive obligations. In
addition, while the HUD-1 noted that the seller was going to pay these collection items in
advance, there was no evidence that the items were paid.
Insufficient Gift Documentation
Statutory Minimum Investment Not Verified
Pine State officials approved 13 loans that had inadequate verification of the transfer of gift
funds, which also resulted in the statutory minimum investment not being verified. For loan
number 105-2541058, the loan file lacked adequate documentation to verify the transfer of a
$6,118 gift; therefore, the borrower’s investment in the property was not verified. The mortgage
credit analysis worksheet reported the borrower’s statutory cash investment requirement as
$6,118, and the FHA case binder contained a gift letter, dated December 7, 2005, from a
nonprofit for a $6,118 gift. The gift letter stated that the funds, to be applied toward the property
purchase, would be wired to the closing attorney one day before the day of closing on or about
December 19, 2005. Although the loan closed on December 21, 2005, there was no
documentation to verify that the gift funds were provided to the closing agent. Further, the
lender did not verify that the gift did not ultimately come from an unacceptable source. Without
documentation verifying that the closing agent received these funds, Pine State officials verified
neither receipt of the gift funds nor that the borrower met the statutory minimum investment as
required.
Incorrect Underwriter’s Certifications Submitted to HUD
We reviewed the certifications for the 14 loans with material underwriting deficiencies for
accuracy. Pine State’s direct endorsement underwriters incorrectly certified that due diligence
was used in underwriting these 14 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
5
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).
Regulations at 24 CFR 30.35 provide that the Mortgagee Review Board may initiate a civil
money penalty action against any lender that 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 Pine State and/or its principals for incorrectly certifying to the integrity of
the data or that due diligence was exercised during the underwriting of 14 loans that
resulted in actual losses of $1,030,786 on 13 loans and potential losses of $64,416 on one
loan, for a total loss of $1,095,202, which could result in affirmative civil enforcement
action of approximately $2,295,404.4
We also recommend that HUD’s Deputy Assistant Secretary for Single Family
1B. Take appropriate administrative action against Pine State 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 COST
Recommendation Ineligible 1/
number
1A $1,095,202
Total $1,095,202
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 13 properties ($1,030,786) and the potential loss related to 1 property ($64,416).
4
Double damages for actual loss amounts related to 13 loans and potential loss related to 1 loan ($1,030,786 +
$64,416 = $1,095,202) plus fines of $7,500 each for the 14 loans with material underwriting deficiencies.
($1,095,202 x 2) + ($7,500 x 14) = $2,295,404.
6
Appendix A
SUMMARY OF MATERIAL UNDERWRITING DEFICIENCIES
adequate compensating factors
Inadequate verification of
Significant credit- related
Underreported liabilities
Excessive ratios without
investment not verified
Statutory minimum
income/employment
documentation
Insufficient gift
deficiencies
FHA loan
number
105-2427729 X X
105-2541058 X X X
105-2632402 X X
105-2721400 X X X X
105-2903785 X X
105-2926206 X X
105-2957702 X X X
105-2978097 X X X
105-3008866 X X X
105-3011817 X
105-3033155 X X X X
105-3123930 X X X
105-3129145 X X
105-3121214 X X X
4 1 1 5 13 13
7
Appendix B
LOANS WITH MATERIAL UNDERWRITING DEFICIENCIES
Loan number 105-2427729
Mortgage amount: $98,658
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: August 9, 2005
Status as of July 31, 2010: Claim
Payments before first default reported: One
Loss to HUD: $55,774
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds and inadequate verification of statutory minimum investment.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
There was inadequate documentation showing that the receipt of two gifts of $2,984 and $500
had been verified. While the file contained a gift letter for $2,984 from a nonprofit stating that
the gift would be wired to the closing attorney before closing, there was no documentation to
verify receipt of the gift funds. Since the source of the borrower’s statutory minimum cash
investment was the gift, the lender failed to verify that the borrower made the minimum required
statutory cash investment. In addition, the file contained a signed affidavit for a $500 gift and a
faxed bank statement printout reporting the deposit of a $500 donor’s check into the seller’s real
estate broker’s account; however, there was no evidence that the lender verified that the $500 gift
was the donor’s own funds. Thus, the lender did not verify that the gift did not ultimately come
from an unacceptable source. It is important to note that the loan defaulted after the first month’s
payment and these gift funds represented the borrower’s earnest money deposit.
8
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5 paragraph 2-10, provides 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.
HUD Handbook 4155.1, REV-5, paragraph 1-7, provides that the borrower must make a 3
percent minimum cash investment in the property and borrower-paid closing costs may be used
to meet the cash investment requirements.
9
Loan number 105-2541058
Mortgage amount: $202,340
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: December 21, 2005
Status as of July 31, 2010: Claim
Payments before first default reported: Two
Loss to HUD: $161,736
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds, inadequate verification of statutory minimum investment, and inadequate evaluation of
credit history.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The loan files lacked adequate documentation to verify the transfer of a $6,118 gift; therefore,
the borrower’s investment in the property was not verified. The mortgage credit analysis
worksheet reported the borrower’s statutory cash investment requirement as $6,118, and the
FHA case binder contained a gift letter, dated December 7, 2005, from a nonprofit for a $6,118
gift. The gift letter stated that the funds, to be applied toward the property purchase, would be
wired to the closing attorney one day before the day of closing on or about December 19, 2005.
Although the loan closed on December 21, 2005, there was no documentation to verify that the
gift funds were provided to the closing agent. Further, the lender did not verify that the gift did
not ultimately come from an unacceptable source. Without documentation verifying that the
closing agent received these funds, the lender did not verify the receipt of the gift funds or that
the borrower met the statutory minimum investment as required.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, provides 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.
10
HUD Handbook 4155.1, REV-5, paragraph 1-7, provides that the borrower must make a 3
percent minimum cash investment in the property.
C. Inadequate Evaluation of Credit History
The lender did not adequately evaluate the borrower’s credit history. The HUD-1 settlement
statement reported four collection items totaling $878. While the borrower provided a letter of
explanation for these items stating that she fell behind on her bills when she became unemployed
on February 1, 2003, these items had gone into collection two to three years before the
unemployment occurred; therefore, the borrower’s explanation was inadequate. The assessment
of her creditworthiness is important because the borrower defaulted with only two payments
made and the cause of default was reported as excessive obligations. In addition, while the
HUD-1 noted that the seller was going to pay these collection items in advance, there was no
evidence that the items were paid.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-3, provides that while minor derogatory
information occurring 2 or more years in the past does not require explanation, major indications
of derogatory credit–including judgments, collections, and other recent credit problems–require
sufficient written explanation from the borrower. The borrower’s explanation must make sense
and be consistent with other credit information in the file.
11
Loan number 105-2632402
Mortgage amount: $199,295
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: March 17, 2006
Status as of July 31, 2010: Claim
Payments before first default reported: 13
Loss to HUD: $82,525
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds and inadequate verification of statutory minimum investment.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The loan files lacked adequate documentation to verify the transfer of a $6,073 gift; therefore,
the borrower’s investment in the property was not verified. The mortgage credit analysis
worksheet reported the borrower’s statutory cash investment requirement as $6,073, and the
FHA case binder contained a gift letter, dated March 16, 2006, from a nonprofit for a $6,073 gift.
The gift letter stated that the funds would be wired to the closing attorney one day before the day
of closing on or about March 17, 2006. The HUD-1 settlement statement reported that the loan
closed on March 17, 2006; however, there was no documentation to verify that the gift funds
were provided to the closing agent. Further, the lender did not verify that the gift did not
ultimately come from an unacceptable source. Without documentation verifying that the closing
agent received these funds, the lender verified neither receipt of the gift funds nor that the
borrower met the statutory minimum investment as required.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, provides 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.
12
HUD Handbook 4155.1, REV-5, paragraph 1-7, provides that the borrower must make a 3
percent minimum cash investment in the property.
13
Loan number 105-2721400
Mortgage amount: $128,245
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: June 16, 2006
Status as of July 31, 2010: Claim
Payments before first default reported: Three
Loss to HUD: $66,849
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds, inadequate verification of statutory minimum investment, inadequate verification of
employment, and inadequate evaluation of creditworthiness.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The loan file lacked adequate documentation to verify the transfer of two gifts; therefore, neither
the borrower’s gift nor investment in the property were verified. The mortgage credit analysis
worksheet reported that the borrower’s statutory cash investment requirement was $3,878, and
the FHA case binder contained a gift letter for the borrower in the amount of $3,878, dated June
6, 2006, from a nonprofit. The gift letter stated that the funds would be wired to the closing
attorney one day before the day of closing on or about June 16, 2006. While the HUD-1
settlement statement reported that the loan closed on June 16, 2006, neither the FHA case binder
nor the lender's file contained documentation verifying that the closing agent received these gift
funds. Further, the lender did not verify that the gift did not ultimately come from an
unacceptable source. Without documentation verifying that the closing agent received these
funds, the lender did not verify and document the receipt of gift funds and borrower’s investment
in the property. In addition, the loan file lacked adequate documentation to verify the transfer of
a $500 gift from the borrower’s mother, which was to be used as part of the earnest money
deposit. While the file contained copies of the mother’s bank statements showing two $500
transactions (a deposit on June 1, 2006, and a withdrawal on June 5, 2006), the lender did not
verify that the funds were not from an interested third party. Therefore, in this instance, the
lender did not verify the borrower’s gift and earnest money deposit.
14
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, provides 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.
HUD Handbook 4155.1, REV-5, paragraph 1-7, provides that the borrower must make a 3
percent minimum cash investment in the property.
C. Inadequate Verification of Employment
The lender failed to obtain an adequate alternative verification of employment for the borrower.
The borrower provided two pay stubs for the period ending March 5 and 19, 2006, which did not
represent the most recent 30-day period since the closing date was June 16, 2006. Further, the
lender only obtained 1 year’s Internal Revenue Service (IRS) W-2 form, not the required 2 years,
and the tax transcripts provided were faxed from an unknown source.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 3-1(E), provides that as an alternative to obtaining a
verification of employment, the lender may obtain the borrower’s original pay stub(s) covering
the most recent 30-day period, along with original IRS W-2 forms from the previous 2 years.
The pay stub(s) must show the borrower’s name, Social Security number, and year-to-date
earnings. The lender also must verify by telephone all current employers. The loan file must
include a certification from the lender that original documents were examined and the name,
title, and telephone number of the person with whom employment was verified. The lender also
may use an electronic retrieval service for obtaining W-2 and tax return information.
HUD Handbook 4155.1, REV-5, paragraph 3-1, also provides that the verification of deposit and
verification of employment may be faxed documents or printed pages from the Internet if they
clearly identify their sources (e.g., contain the names of the borrower’s employer or
depository/investment firm). The lender is accountable for determining the authenticity of the
document by examining information included in a document’s headers and footers. The lender
should verify the authenticity of printed Web pages by examining the pages for similar
information. A printed Web page also must show its uniform resource locator (URL) address, as
well as the date and time the document was printed.
D. Inadequate Evaluation of Creditworthiness
The lender did not adequately evaluate the borrower’s creditworthiness. The borrower’s credit
report showed a $2,436 paid collection in January 2006 related to an apartment complex.
However, the lender did not obtain an explanation for this collection, which indicated the
borrower’s failure to meet housing obligations. The rental payments related to the collection
15
started in December 2004, and the last activity was in January 2006. Although, the lender
obtained a verification of rent reporting that the borrower had been residing at the same location
for the past 32 years and was currently paying $250 per month for rent, the verification was not
from an acceptable source. There was an identity of interest because the verification was from
the borrower’s mother. In addition, page one of the loan application noted that the borrower
lived rent free at her present address, while page two noted that she paid $250 per month for rent;
however there was no explanation for this discrepancy. These deficiencies are particularly
important because the borrower defaulted after making only three payments and the reason for
default was excessive obligations.
HUD/FHA Requirements:
HUD Handbook 4155.1 REV-5, paragraph 2-3 provides that while minor derogatory information
occurring 2 or more years in the past does not require explanation, major indications of
derogatory credit-including judgments, collections, and other recent credit problems-require
sufficient written explanation from the borrower. The borrower’s explanation must make sense
and be consistent with other credit information in the file.
HUD Handbook 4155.1, REV-5, paragraph 2-3(A), provides that the payment history of the
borrower’s housing obligations holds significant importance in evaluating credit. 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 verification of mortgage directly from the mortgage servicer, or canceled checks
covering the most recent 12-month period.
16
Loan number 105-2903785
Mortgage amount: $125,308
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: January 29, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: Two
Loss to HUD: $38,625
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds and inadequate verification of statutory minimum investment.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a $3,818 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 $3,818, and the FHA case binder
contained a gift letter, dated January 29, 2007, from a nonprofit for a $3,818 gift to the borrower
to be applied toward the property purchase. The loan closed on January 29, 2007, and neither the
FHA case binder nor the lender’s file contained documentation verifying that the closing agent
received these gift funds. Further, the lender did not verify that the gift did not ultimately come
from an unacceptable source. Without documentation verifying that the closing agent received
these funds, the lender did not verify and document the borrower’s gift and investment in the
property.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, provides 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.
17
HUD Handbook 4155.1, REV-5, paragraph 1-7, provides that the borrower must make a 3
percent minimum cash investment in the property and borrower-paid closing costs may be used
to meet the cash investment requirements.
18
Loan number 105-2926206
Mortgage amount: $127,853
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: February 12, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: Four
Loss to HUD: $28,103
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds and inadequate verification of statutory minimum investment.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a of $3,866 gift; therefore, the borrower’s
required minimum investment in the property was not verified. The minimum investment
required was $3,866, which the borrower was to have received as a gift from a nonprofit.
Although a gift letter was in the file, there was no documentation verifying that the closing agent
received these gift funds. Further, the lender did not verify that the gift did not ultimately come
from an unacceptable source. Without documentation that the closing agent received these
funds, the lender did not verify and document the borrower’s gift and investment in the property.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, 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.
HUD Handbook 4155.1, REV-5, paragraph 1-7, requires that the borrower make a 3 percent
minimum cash investment in the property.
19
Loan number 105-2957702
Mortgage amount: $166,561
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: June 11, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: Six
Loss to HUD: $99,662
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds, inadequate verification of statutory minimum investment, and inadequate evaluation of
credit history.
A. Inadequate Verification of Gift
B. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a of $5,075 gift; therefore, the borrower’s
required minimum investment in the property was not verified. The minimum investment
required was $5,075, which the borrower was to have received as a gift from a nonprofit.
Although a gift letter was in the file, there was no documentation verifying that the closing agent
received these gift funds. Further, the lender did not verify that the gift did not ultimately come
from an unacceptable source. Without documentation showing that the closing agent received
these funds, the lender did not verify and document the borrower’s gift and investment in the
property.
HUD/FHA Requirements
HUD Handbook 4155.1, REV-5, paragraph 2-10, 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.
HUD Handbook 4155.1, REV-5, paragraph 1-7, requires that the borrower make a 3 percent
minimum cash investment in the property.
20
C. Inadequate Evaluation of Credit History
The lender failed to adequately evaluate the borrower’s credit history. The borrower’s credit
report disclosed three accounts that were 30 days past due. Moreover, the borrower had an
account for $853 that had been under collection since August 2006. Nevertheless, the lender
failed to obtain an explanation for these delinquencies.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-3, provides that while minor derogatory
information occurring 2 or more years in the past does not require explanation, major indications
of derogatory credit–including judgments, collections, and other recent credit problems–require
sufficient written explanation from the borrower. The borrower’s explanation must make sense
and be consistent with other credit information in the file.
21
Loan number: 105-2978097
Mortgage amount: $110,132
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: March 27, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: 16
Potential Loss to HUD: $64,416
Summary:
We found material underwriting deficiencies relating to inadequate evaluation of credit history,
inadequate verification of transfer of gift funds, and inadequate verification of statutory
minimum investment.
A. Inadequate Evaluation of Credit History
The lender did not adequately evaluate the borrower’s credit history. The borrower had eight
accounts that went into collection totaling $1,581. The borrower submitted a letter of
explanation stating that “he was not smart enough to handle his finances and when he got angry,
he did not pay his bills.” However, this is an inadequate explanation that does not provide
assurance of the borrower’s capacity to meet obligations. In addition, the lender did not confirm
whether the borrower had satisfied these accounts.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-3, provides that while minor derogatory
information occurring two or more years in the past does not require explanation, major
indications of derogatory credit–including judgments, collections, and any other recent credit
problems–require sufficient written explanation from the borrower. The borrower's explanation
must make sense and be consistent with other credit information in the file.
B. Inadequate Verification of Transfer of Gift Funds
C. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a $3,356 gift; therefore, the borrower’s
required minimum investment in the property was not verified. The mortgage credit analysis
worksheet showed that the borrower’s statutory cash investment requirement was $3,356, and the
FHA case binder contained a gift letter, dated March 26, 2007, from a nonprofit for a $3,356 gift
22
to the borrower to be applied toward the property purchase. The loan closed on March 27, 2007,
and neither the FHA case binder nor the lender’s file contained documentation verifying that the
closing agent received these gift funds. Further, the lender did not verify that the gift did not
ultimately come from an unacceptable source. Without documentation verifying that the closing
agent received these funds, the lender did not verify and document the borrower’s gift and
investment in the property.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, 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.
HUD Handbook 4155.1, REV-5, paragraph 1-7, requires that the borrower make a 3 percent
minimum cash investment in the property.
23
Loan number: 105-3008866
Mortgage amount: $148,240
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: August 31, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: Seven
Loss to HUD: $86,179
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds, inadequate verification of statutory minimum investment, and inadequate evaluation of
credit history.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a $4,714 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 $4,518, and the FHA case binder
contained a gift letter, dated August 31, 2007, from a nonprofit for a $4,714 gift to the borrower
to be applied toward the property purchase. While the loan closed on August 31, 2007, neither
the FHA case binder nor the lender’s file contained documentation verifying that the closing
agent received these gift funds. Further, the lender did not verify that the gift did not ultimately
come from an unacceptable source. Without documentation verifying that the closing agent
received these funds, the lender did not verify and document the borrower’s gift and investment
in the property. In addition, the gift letter shows a different address than that of the subject
property and there is no documentation that the lender resolved this discrepancy.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, 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.
24
HUD Handbook 4155.1, REV-5, paragraph 1-7, requires that the borrower make a 3 percent
minimum cash investment in the property.
C. Inadequate Evaluation of Credit History
The files inadequately documented explanations for derogatory credit. The credit report had
eight accounts totaling $5,383 that went into collection from July 2001 through December 2005.
The file contained two letters explaining that this situation was due to the job loss of the
coborrower and taking custody of two siblings. However, documentation in the file indicated
that these accounts went into collection prior to the period that the coborrower became
unemployed. The coborrower was unemployed for four months from September through
December 2005, and for two weeks at the beginning of June 2006. Therefore, the explanation
was not consistent with the facts, and there was no other documentation to verify that the
borrowers had custody of two siblings.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-3, provides that while minor derogatory
information occurring 2 or more years in the past does not require explanation, major indications
of derogatory credit–including judgments, collections, and other recent credit problems–require
sufficient written explanation from the borrower. The borrower’s explanation must make sense
and be consistent with other credit information in the file.
25
Loan number: 105-3011817
Mortgage amount: $122,962
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: May 2, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: One
Loss to HUD: $57,306
Summary:
We found a material underwriting deficiency relating to inadequate verification of
income/employment.
A. Inadequate Verification of Income/Employment
The lender failed to address an unexplained discrepancy in the borrower’s income. While the
FHA file contained a verification of employment that reported an average weekly income of
$650, which was used to calculate ratios, the average weekly income reported on the borrower’s
pay stubs was $526. In addition, the lender failed to verify two full years of employment as
required, thus failing to ensure that the borrower had income stability. These discrepancies are
important because the reported cause of default, which occurred after one payment, was a
curtailment of income.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 3-1(E), provides that verification of employment and
the borrower’s most recent pay stub are to be provided. As an alternative to obtaining a
verification of employment, the lender may obtain the borrower’s original pay stub(s) covering
the most recent 30-day period, along with original IRS W-2 forms from the previous 2 years.
The pay stub(s) must show the borrower’s name, Social Security number, and year-to-date
earnings. The lender also must verify by telephone all current employers. The loan file must
include a certification from the lender that original documents were examined and the name,
title, and telephone number of the person with whom employment was verified. The lender also
may use an electronic retrieval service for obtaining W-2 and tax return information. If the
employer will not give telephone confirmation of employment or if the IRS W-2 form indicates
inconsistencies (e.g., FICA (Federal Insurance Contributions Act) payments not reflecting
earnings), standard employment documentation must be used.
26
HUD Handbook 4155.1, REV-5, chapter 2, 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 a source that cannot be verified, is not stable, or will not continue.
HUD Handbook 4155.1, REV-5, provides that the lender must establish that the borrower has the
ability and willingness to repay the mortgage debt. This decision must be predicated on sound
underwriting principles consistent with the guidelines, rules, and regulations described
throughout HUD Handbook 4155.1, REV-5, and must be supported by sufficient documentation.
Lenders are expected to exercise both sound judgment and due diligence in the underwriting of
loans to be insured by FHA.
27
Loan number: 105-3033155
Mortgage amount: $182,174
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: May 24, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: Three
Loss Amount $108,421
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds, inadequate verification of statutory minimum investment, excessive ratios with
insufficient compensating factors, and underreported liabilities.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a $5,551 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 $5,551, and the FHA case binder
contained a gift letter, dated May 15, 2007, from a nonprofit for a $5,551 gift to the borrower to
be applied toward the property purchase. While the loan closed on May 24, 2007, neither the
FHA case binder nor the lender’s file contained documentation verifying that the closing agent
received these gift funds. Further, the lender did not verify that the gift did not ultimately come
from an unacceptable source. Without documentation verifying that the closing agent received
these funds, the lender did not verify and document the borrower’s gift and investment in the
property.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, 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.
28
HUD Handbook 4155.1, REV-5, paragraph 1-7, requires that the borrower make a 3 percent
minimum cash investment in the property.
C. Excessive Ratios With Insufficient Compensating Factors
D. Underreported Liabilities
The lender approved the loan with excessive ratios and insufficient compensating factors. The
mortgage credit analysis worksheet noted a fixed payment-to-income ratio of 47.42 percent with
the following compensating factors: home-buyer counseling, minimal use of revolving credit,
overtime for borrower not considered, and FICO (credit score) 570, 548, none of which is a valid
compensating factor. Home-buyer counseling does not increase the borrower’s ability to pay the
mortgage, minimal use of revolving credit alone is not a compensating factor because the
borrower must also show an ability to accumulate savings, and the low FICO scores are not
compensating factors. Further, FHA regulations would prohibit considering overtime because
the underwriter did not demonstrate that the overtime income was likely to continue and that it
had been received for the past two years. In addition, the lender incorrectly calculated the debt-
to-income ratio because a monthly liability relating to a student loan of $251 was not considered.
Although the credit report indicated that the student loan could be deferred, the file did not have
an independent confirmation that the loan was deferred. Including the $251 in liabilities would
raise the debt-to-income ratio from 47.42 to 52.50 percent, which would require significant
compensating factors.
HUD/FHA Requirements:
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.
HUD Handbook 4155.1, REV-5, paragraph 2-13, provides that compensating factors may be
used to justify approval of mortgage loans with ratios that exceed HUD benchmark guidelines;
however, underwriters must record in the “remarks” section of the mortgage credit analysis
worksheet the compensating factor(s) used to support loan approval. A compensating factor
used to justify mortgage approval must be supported by documentation.
HUD Handbook 4155.1, REV-5, paragraph 2-11(A), provides that in computing the debt-to-
income ratios, the lender must include the monthly housing expense and all other recurring
charges extending 10 months or more, including payments on installment accounts, child support
or separate maintenance payments, revolving accounts, alimony, etc.
HUD Handbook 4155.1, REV-5, paragraph 2-7(A), provides that both overtime and bonus
income may be used to qualify a borrower if such income was received for the past 2 years and is
likely to continue. The lender must develop an average of bonus or overtime income for the past
2 years, and the employment verification must not state that such income is unlikely to continue.
Periods of less than 2 years may be acceptable provided the lender justifies and documents the
reason for using the income for qualifying purposes.
29
Loan number: 105-3123930
Mortgage amount: $139,410
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: July 26, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: Five
Loss to HUD: $67,619
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds, inadequate verification of statutory minimum investment, and improper verification of
income.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a $4,248 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 $4,248, and the FHA case binder
contained a gift letter, dated July 5, 2007, from a nonprofit for a $4,248 gift to the borrower to be
applied toward the property purchase. While the loan closed on July 26, 2007, neither the FHA
case binder nor the lender’s file contained documentation verifying that the closing agent
received these gift funds. Further, the lender did not verify that the gift did not ultimately come
from an unacceptable source. Without documentation verifying that the closing agent received
these funds, the lender did not verify and document the borrower’s gift and investment in the
property.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, provides 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.
30
HUD Handbook 4155.1, REV-5, paragraph 1-7, requires that the borrower make a 3 percent
minimum cash investment in the property.
C. Improper Verification of Income
The lender failed to properly verify income because it did not document that overtime income
was received for the past two years, nor provide an explanation for why overtime income of less
than two years was used to calculate income. As a result, the lender overstated income by
improperly calculating overtime. The lender calculated that borrower income was $2,598, which
included $2,144 in base income and $454 in overtime income. The borrower’s verification of
employment reported overtime or $5,447; $2,834 for 5.5 months in calendar year 2006 and
$2,613 for 6.5 months year-to-date through July 17, 2007 for a total of one year. Thus, in
calculating allowable overtime, the lender only documented one year’s worth of overtime. The
lender should have also documented an explanation for why overtime income less than two years
was used. As a result, since the borrower did not have two years’ worth of overtime and the
verification of employment did not state that overtime was likely to continue, overtime income
should not have been factored into the debt-to-income ratio. Without the overtime, the fixed
payment to income (back) ratio would have increased from 43.58 percent to an unacceptable
52.80 percent.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-7(A), provides that both overtime and bonus
income may be used to qualify a borrower if such income was received for the past 2 years and is
likely to continue. The lender must develop an average of bonus or overtime income for the past
2 years, and the employment verification must not state that such income is unlikely to continue.
Periods of less than 2 years may be acceptable provided the lender justifies and documents in
writing the reason for using the income for qualifying purposes.
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.
31
Loan number: 105-3129145
Mortgage amount: $167,509
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: July 30, 2007
Status as of July 31, 2010: Claim
Payments before first default reported: Six
Loss to HUD: $106,003
Summary:
We found material underwriting deficiencies relating to inadequate verification of transfer of gift
funds, and inadequate verification of statutory minimum investment.
A. Inadequate Verification of Transfer of Gift Funds
B. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a $5,104 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 $5,104, and the FHA case binder
contained a gift letter, dated July 23, 2007, from a nonprofit for a $5,104 gift to the borrower to
be applied toward the property purchase. While the loan closed on July 30, 2007, neither the
FHA case binder nor the lender’s file contained documentation verifying that the closing agent
received these gift funds. Further, the lender did not verify that the gift did not ultimately come
from an unacceptable source. Without documentation verifying that the closing agent received
these funds, the lender did not verify and document the borrower’s gift and investment in the
property.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, provides 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.
HUD Handbook 4155.1, REV-5, paragraph 1-7, requires that the borrower make a 3 percent
minimum cash investment in the property.
32
Loan number: 105-3121214
Mortgage amount: $83,905
Section of Housing Act: 203(b)
Loan purpose: Purchase
Date of loan closing: July 30, 2007
Status as of July 31, 2010: Claim
Payments before first default reported 11
Loss Amount $71,984
Summary:
We found material underwriting deficiencies relating to inadequate verification of employment,
transfer of gift funds, and statutory minimum investment.
A. Inadequate Verification of Employment
The lender failed to adequately verify the borrower’s employment. The borrower had eight
different employers and many employment gaps for the last two years. The lender obtained
seven verbal verifications of intermittent employment for the period May 2005 through January
2007, and one employer refused to give out employment information. The borrower’s
explanation for the many employers and employment gaps was that he worked for a union as an
independent contractor, which gave him different jobs for short periods of time. Since the work
was sporadic and did not cover a full two years, the lender should have used alternative
procedures to determine stability of income. The lender also failed to obtain two year’s worth of
IRS W-2 forms or tax transcripts. The loan closed in July of 2007; therefore, the lender should
have obtained W-2 forms or tax transcripts for 2005 and 2006. Instead, the lender obtained
documentation for the years 2004 and 2005; therefore, employment and income stability was not
verified. This matter is significant because the cause of default after 11 payments was
unemployment.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-6, provides that the borrower must explain gaps in
employment spanning 1 month or more. To analyze and document the probability of continued
employment, lenders must examine the borrower’s past employment record, qualifications for
the position, and previous training and education and the employer’s confirmation of continued
employment. A borrower who changes jobs frequently within the same line of work but
continues to advance in income or benefits should be considered favorably. In this analysis,
income stability takes precedence over job stability.
33
HUD Handbook 4155.1, REV-5, paragraph 3-1(E), provides that as an alternative to obtaining a
verification of employment, the lender may obtain the borrower’s original pay stub(s) covering
the most recent 30-day period, along with original IRS W-2 forms from the previous 2 years.
The pay stub(s) must show the borrower’s name, Social Security number, and year-to-date
earnings. Any copies of the W-2 form not submitted with the borrower’s income tax returns are
considered “original” W-2s. (These original documents may be photocopied and returned to the
borrower.) The lender also must verify by telephone all current employers. The loan file must
include a certification from the lender that original documents were examined and the name,
title, and telephone number of the person with whom employment was verified. For all loans
processed in this manner, the lender also must obtain a signed copy of Form IRS-4506, Request
for Copy of Tax Form; Form IRS-8821; or a document that is appropriate for obtaining tax
returns directly from the IRS. The lender also may use an electronic retrieval service for
obtaining W-2 and tax return information.
B. Inadequate Verification of Transfer of Gift Funds
C. Inadequate Verification of Statutory Minimum Investment
The lender did not adequately verify the transfer of a $2,484 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 $2,557, and the FHA case binder
contained a gift letter, dated July 19, 2007, from a nonprofit for a $2,484 gift to the borrower to
be applied toward the property purchase. While the loan closed July 30, 2007, neither the FHA
case binder nor the lender’s file contained documentation verifying that the closing agent
received these gift funds. Further, the lender did not verify that the gift did not ultimately come
from an unacceptable source. Without documentation verifying that the closing agent received
these funds, the lender did not verify and document the borrower’s gift and investment in the
property.
HUD/FHA Requirements:
HUD Handbook 4155.1, REV-5, paragraph 2-10, 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.
HUD Handbook 4155.1, REV-5, paragraph 1-7, states that the borrower must make a 3 percent
minimum cash investment in the property and borrower-paid closing costs may be used to meet
the cash investment requirements.
34
Pine State Mortgage Corporation, Atlanta, GA, Did Not Properly Underwrite a selection of FHA Loans
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)