Telephone: (913) 551-5429 http://www.hud.gov/offices/oig Fax: (913) 551-5877
U.S. Department of Housing and Urban Development
Office of Inspector General
Office of Audit - Civil Fraud Division
451 7th Street, SW
Washington, DC 20410
MEMORANDUM NO:
2011-CF-1801
March 2, 2011
MEMORANDUM FOR: Vicki Bott, Deputy Assistant Secretary for Single Family
Housing, HU
//signed//
FROM: Kim Randall, Director, Civil Fraud Division, GA
SUBJECT: An Underwriting Review of 15 FHA Lenders Demonstrated That HUD Missed
Critical Opportunities To Recover Losses to the FHA Insurance Fund
INTRODUCTION
In January 2010, the U.S. Department of Housing and Urban Development’s (HUD) Office of
Inspector General (OIG) began Operation Watchdog, an initiative to review the underwriting of
15 Federal Housing Administration (FHA) direct endorsement lenders having default and claim
rates indicating lender performance problems. The FHA Commissioner had expressed concern
regarding the increasing default and claim rates against the FHA insurance fund for failed loans,
prompting this initiative.
Our review objective was to determine whether each lender underwrote its respective loans in
accordance with FHA requirements. To accomplish the objective, we reviewed between 12 and
20 FHA loans underwritten by each of the 15 lenders that resulted in claims against the FHA
insurance fund. We reported our results in individual memorandums to HUD. Appendix A
identifies the memorandums issued between July and September 2010.
This memorandum summarizes the results of the Operation Watchdog initiative and expresses
OIG’s concerns about systemic problems with the underwriting of FHA insured loans and the
resulting costs to the FHA insurance fund for loans that should not have been insured. We
provided the draft memorandum to HUD on December 21, 2010, and HUD replied with written
comments on the date requested, February 4, 2011. HUD responded with a description of its
multi-faceted approach to minimizing losses to the FHA insurance fund, which it maintains will
achieve the intent of our recommendation.
The complete text of HUD’s response, along with our evaluation of that response, can be found
in appendix B of this memorandum.
METHODOLOGY AND SCOPE
We selected 15 direct endorsement lenders from HUD’s publicly available Neighborhood
Watch1 system (system) for a review of underwriting quality. The selected lenders each 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, had defaulted within the first 30 months, and were (1) not streamline
refinanced, (2) not electronically underwritten by Fannie Mae or Freddie Mac, or (3) associated
with an underwriter (usually an individual) with a high number of claims.
We selected up to 20 loans in claim status from each of the 15 lenders. These 15 lenders had
endorsed 183,278 loans valued at $31.3 billion from 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.
Our review objective was to determine whether the selected loans were properly underwritten
and if not, whether the underwriting reflected systemic problems. We performed our work from
January through July 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 each lender, consider the results of previous audits, or
communicate with each lender’s management in advance. We did not follow standards in these
areas because our objective was to aid HUD in identifying FHA single-family insurance program
risks and patterns of underwriting problems or potential wrongdoing in poorly performing
lenders that led to a high rate of defaults and claims against the FHA insurance fund. To meet
our objective, it was not necessary to fully comply with the standards, nor did our approach
negatively affect our review results.
BACKGROUND
FHA’s mortgage insurance programs help low- and moderate-income families become
homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance
also encourages lenders to approve mortgages for otherwise creditworthy borrowers that might
not be able to meet conventional underwriting requirements by protecting the lender against
default. The direct endorsement program simplifies the process for obtaining FHA mortgage
insurance by allowing lenders to underwrite and close the mortgage loan without prior HUD
review or approval. 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.
1
Neighborhood Watch is a system that aids HUD/FHA staff in monitoring lenders and FHA programs. This system
allows staff to oversee lender origination activities for FHA-insured loans and tracks mortgage defaults and claims.
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.
2
RESULTS OF REVIEW
The 15 direct endorsement lenders did not properly underwrite 140 of 284 loans reviewed, or 49
percent, because its underwriters did not follow FHA’s requirements. As a result, FHA’s
insurance fund suffered or can be expected to suffer losses of more than $11 million. Appendix
C provides basic data on the 140 questioned loans, including the loan closing date, number of
payments made before the first default, original mortgage amount, and actual and expected
losses to HUD.
The material deficiencies in the 140 loans fell into 9 categories, demonstrated in the following
table. Appendix D summarizes the material deficiencies of the 140 questioned loans on a per
loan basis.
Areas of noncompliance/
material deficiencies Number of loans
Income/employment history 57
Assets 20
Liabilities 24
Qualifying ratios 36
Gift funds 49
Credit history 76
Rent verification 13
Borrower investment 26
Skipped mortgage payments 3
Income/Employment History
Lenders did not properly calculate or verify borrowers’ income, determine income stability, or
verify employment history for 57 loans. HUD does not allow income to be used in calculating a
borrower’s income ratios if it cannot be verified, is not stable, or will not continue. Lenders are
required to analyze whether income is reasonably expected to continue through at least the first 3
years of the mortgage loan.
Assets
Lenders did not properly document the source of borrowers’ funds to close the loan for 20 loans.
HUD requires the lender to verify and document the borrowers’ investment in the property.
Liabilities
Lenders did not properly assess the borrowers’ financial obligations for 24 loans. HUD requires
lenders to consider debts if the amount of the debts affect the borrowers’ ability to make the
mortgage payment during the months immediately after closing.
Qualifying Ratios
Lenders improperly approved 36 loans when the borrowers’ ratios exceeded FHA’s
requirements. Effective April 13, 2005, the mortgage payment-to-income and total fixed
3
payment-to-income ratios were increased from 29 and 41 percent to 31 and 43 percent,
respectively. If either or both ratios are exceeded on a manually underwritten mortgage, the
lender is required to describe the compensating factors used to justify the mortgage approval.
Gift Funds
For 49 loans, lenders did not properly document gift funds received by borrowers. HUD requires
that the lender be able to determine that gift funds ultimately were not provided by an
unacceptable source.
Credit History
Lenders did not properly evaluate the borrowers’ credit histories for 76 loans. HUD requires the
lender to consider collection accounts in analyzing a borrower’s creditworthiness. The lender
must explain all collections in writing.
Rent Verification
Lenders did not properly verify borrowers’ rental histories for 13 loans. HUD notes that the
payment history of the borrower’s housing obligations holds significant importance in evaluating
credit. The lender must determine the borrower’s housing payment history through acceptable
means, including verification of rent directly from the landlord or through cancelled checks
covering the most recent 12-month period.
Borrower Investment
For 26 loans, lenders did not verify the borrowers’ investment in the property. At the time of
these loans, HUD required borrowers to make a 3 percent minimum cash investment to close the
loan.
Skipped Mortgage Payments
Contrary to requirements, one lender allowed skipped mortgage payments on three loans. HUD
rules state that lenders are not permitted to allow borrowers to “skip” payments. Borrowers are
either to make the payment when it is due or bring the monthly mortgage payment to settlement
because FHA does not permit the inclusion of mortgage payments “skipped” by the homeowner
in the new mortgage amount. HUD also requires that for no-cash-out refinances, the mortgage
being refinanced must be current for the month due.
Incorrect Underwriter’s Certifications Submitted to HUD
The 15 lenders incorrectly certified to HUD that they had conducted due diligence and reviewed
all associated documents when underwriting the 140 questioned loans. Under the Program Fraud
Civil Remedies Act of 1986 (231 U.S.C. (United States Code) 3801), HUD may pursue civil
remedies against a lender that certifies to such due diligence when the due diligence did not
occur. Therefore, we recommended that HUD pursue the 15 lenders for more than $23 million
in remedies for the 140 loans. Appendix A details the $23 million potential civil enforcement
remedies on a per loan basis.
The Program Fraud Civil Remedies Act provides 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 permit
4
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.
Missing Critical Opportunities To Recover Losses and Pursue Civil Remedies
HUD missed critical opportunities to recover losses on loans not meeting FHA requirements, and
did not pursue civil remedies when lenders improperly certified to using due diligence in
approving FHA loans when due diligence was not practiced. The consistency of noncompliance
identified during Operation Watchdog indicated systemic problems in how lenders certified to
compliance on underwritten loans ultimately insured by FHA. Further, HUD did not have a
formal process established to review all claims paid on defaulted mortgages or at least all such
claims paid that met high-risk criteria, resulting in unrecovered losses to the insurance fund for
loans that never should have been insured.
In recent years, HUD has experienced exponential growth in the dollar amount of single-family
claims paid from the FHA insurance fund. From fiscal years 2007 through 2010, HUD
experienced a nearly 174 percent increase in the dollar value of claims paid that resulted in
FHA’s paying off the mortgage, from about $5.3 billion in 2007 to about $14.5 billion in 2010.
HUD expected the trend to continue and estimated that it would pay out more than $20 billion in
fiscal year 2011 for all forms of payments from the insurance fund, a nearly 31 percent increase
from 2010, as demonstrated by the following chart.
Increase in Increase in
Increase in Increase in Value of value of value of
Number value of value of total total total
of full Value of full full claims full claims claims claims claims
claims claims paid paid vs. paid vs. paid (in paid vs. paid vs.
Fiscal year (FY) paid* (in billions)* prior year FY 2007 billions)** prior year FY 2007
Actual FY 2007 55,928 $5.3 B - - $5.8 B - -
Actual FY 2008 63,191 $6.5 B 22.6% 22.6% $7.2 B 24.1% 24.l%
Actual FY 2009 80,823 $9.1 B 40.0% 71.7% $9.9 B 37.5% 70.7%
Actual FY 2010 120,434 $14.5 B 59.3% 173.6% $15.6 B 57.6% 169.0%
Projected 151,752 - - - $20.4 B 30.8% 251.7%
FY 2011***
* Number and value of full claims paid represents only claims paid that resulted in the FHA insurance fund’s paying
off a loan and HUD’s terminating the FHA insurance. They exclude other forms of FHA insurance payments
such as subsequent claims paid after insurance is terminated or payments made that allowed the borrower to retain
the home and the FHA insurance to stay in force (partial claims).
**Amount of total claims paid represents all full and partial claims paid from the FHA insurance fund.
***HUD estimate as of December 3, 2010.
As previously stated, the FHA Commissioner had expressed concern about the increasing default
and claim rates against the FHA insurance fund. Therefore, we completed Operation Watchdog,
a risk-based initiative targeting lenders with indicated performance problems. Our results
5
showed that the sooner a borrower defaulted and the loan reached claim status, the higher the
likelihood that the loan did not meet FHA requirements. For the 140 loans that did not meet
FHA requirements, the borrowers made an average of only five payments before defaulting.
Further, borrowers of 100 of the 140 loans (71 percent) made 6 payments or fewer before
defaulting, as shown in the following chart.
Number of
payments made
before first default Number of loans
0 19
1 19
2 18
3 13
4 15
5 7
6 9
7 to 24 40
140 loans
HUD recognizes the importance and high risk of loans defaulting quickly. HUD requires lenders
to have an FHA-compliant quality control plan in place, including a requirement to review all
loans going into default within the first six payments. Goals of the required quality control
program include protecting the lender and FHA from unacceptable risk and guarding against
errors, omissions, and fraud. Therefore, HUD places great emphasis on loans defaulting quickly
and should place similar emphasis on its own targeting and review efforts.
We recognize that not all defaults and resulting claims are caused by poor underwriting.
However, poor underwriting played a major role in the 140 ineligible loans identified through
Operation Watchdog. Reviewing loans that have had claims paid by using risk-based targeting
or a statistically valid sample of quickly defaulting loans could provide HUD with an opportunity
to recover unnecessary losses caused by these loans. Protecting the financial stability of the
FHA insurance fund, which should be self-sustaining, is paramount to the FHA program and its
ability to serve those that were meant to benefit from it without needing taxpayer assistance.
OIG has noted in past audits HUD’s unnecessary exposure when paying claims on loans that did
not qualify for insurance. For example, we reported in July 2006 that HUD did not
independently validate that mortgage loans insured under the FHA program met requirements
after paying billions in insurance claims. Of 175 randomly selected claims, HUD paid 44 claims
on mortgages that did not meet program requirements, based on the documents in the FHA loan
file submitted to HUD. HUD paid the claims, as required by law, but did not subsequently
review the loan files for compliance with program requirements, fraud, and/or
misrepresentations. HUD relied on lender certifications that the loans were eligible for insurance
(OIG Audit Report: Single Family Mortgage Insurance Claims, 2006-SE-0001, July 11, 2006).
6
HUD generally disagreed with our recommendation to establish procedures to review paid
claims associated with early defaulted loans and related costs (projected to be about $214 million
annually at the time of the report) and independently verify that loans met FHA requirements and
were, therefore, eligible for insurance. HUD ultimately agreed to review loans that had gone to
claim through its Quality Assurance Division targeting process when it performed lender
reviews. It further agreed that if claim file reviews showed inadequate documentation by the
lender, HUD would take appropriate corrective actions regarding the responsible lender.
Because HUD did not agree with our original recommendation, it is unlikely that HUD would
have selected the 140 loans that we reviewed and found noncompliant during the Operation
Watchdog initiative. Therefore, HUD would not have detected these loans as having caused
more than $11 million in unnecessary losses to the FHA insurance fund.
HUD selects lenders to review based on an annual risk-based targeting plan, which includes
claims, defaults, and compare ratios, among other factors. Further, HUD uses a case-level tool to
select loans for review. HUD asserts that the tool prepares a statistically valid sample of loans
based upon various risk factors. These include claims, early payment defaults (0-6 months), and
defaults in the first year (7 to 12 months). HUD reviews all loans generated by the case targeting
tool. However, this method does not ensure that all claims are reviewed and may not target
sufficient loans with claims paid to reasonably protect the fund.
HUD has recently tightened FHA lending requirements, but those improvements affect future
loans and not the rapidly growing influx of claims from lenders that originated loans in the past
few years. HUD should continue to strengthen its requirements and hold lenders accountable.
However, it also needs to quickly confront the problem of billions being paid for defaulted loans
and not being recovered when many loans were not eligible for FHA insurance.
In summary, Operation Watchdog demonstrated that for the 15 lenders reviewed, the FHA
insurance fund suffered an unacceptable percentage of loans defaulting and resulting in claims
that never should have caused losses to FHA. HUD should do more to target and review claims
and recover losses incurred on loans that did not meet FHA requirements and were, therefore,
never qualified for FHA insurance. Further, such actions should serve as a strong deterrent
against faulty underwriting and cause lenders to take the certifications made to HUD more
seriously.
RECOMMENDATIONS
We recommended in each of the 15 issued memorandums that HUD pursue appropriate remedies
under the Program Fraud Civil Remedies Act against each lender and/or its principals for
incorrectly certifying to the integrity of the data or that due diligence was exercised during the
underwriting of the 140 questioned loans. These loans resulted in actual losses or were expected
to result in losses to the FHA insurance fund of more than $11 million. Further, the lenders’
improper certifications could result in affirmative civil enforcement actions of more than $23
million. We also recommended that HUD take appropriate administrative action against each
lender and/or its principals.
7
Based on the overall results of the Operation Watchdog initiative and the systemic problems
identified, we are making the following additional recommendation to HUD.
We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing
1A. Develop and implement procedures to review a statistical or risk-based selection of loans
for which FHA paid a claim on the mortgage insurance within the first two years of
endorsement, to verify that the loans met FHA requirements and were qualified for
insurance. These procedures should include a requirement for HUD to seek appropriate
civil and administrative remedies to recover losses incurred on loans not qualified for
FHA insurance.
For each recommendation without a management decision, please respond and provide status
reports in accordance with the U.S. Department of Housing and Urban Development’s (HUD)
Handbook 2000.06, REV-3. Please furnish us copies of any correspondence or directives issued
because of the review.
8
Appendix A
AUDIT MEMORANDUMS ISSUED
Potential
affirmative
OIG Actual or civil
memorandum Issued potential enforcement
Lender Location number date loss to HUD action*
1st Advantage Mortgage, LLC Lombard, IL 2010-CH-1806 7/15/10 $325,452 $710,904
Birmingham Bancorp
Mortgage Corporation West Bloomfield, MI 2010-CH-1807 7/21/10 $643,340 $1,354,180
Mac-Clair Mortgage Corporation Flint, MI 2010-CH-1808 7/22/10 $562,551 $1,177,602
Alacrity Lending Company Southlake, TX 2010-LA-1803 7/26/10 $1,599,529 $3,341,558
Dell Franklin Financial, LLC Millersville, MD 2010-CH-1810 7/30/10 $542,330 $1,107,160
D & R Mortgage Corporation Farmington Hills, MI 2010-CH-1811 8/4/10 $936,572 $1,940,644
Assurity Financial Services, LLC Englewood, CO 2010-LA-1804 8/5/10 $1,180,997 $2,421,992
Americare Investment Group Arlington, TX 2010-LA-1805 8/6/10 $741,498 $1,572,996
American Sterling Bank Sugar Creek, MO 2010-LA-1806 8/24/10 $492,239 $1,051,978
Webster Bank Cheshire, CT 2010-NY-1805 9/1/10 $516,990 $1,078,980
Alethes, LLC Lakeway, TX 2010-LA-1807 9/8/10 $1,056,447 $2,255,394
Security Atlantic
Mortgage Company, Inc. Edison, NJ 2010- NY-1806 9/22/10 $553,730 $1,152,460
First Tennessee Bank, N.A. Memphis, TN 2010-NY-1807 9/27/10 $435,574 $908,648
Pine State Mortgage Corporation Atlanta, GA 2010-NY-1808 9/29/10 $1,095,202 $2,295,404
Sterling National
Mortgage Company, Inc. Great Neck, NY 2010-NY-1809 9/30/10 $508,823 $1,062,646
Total $11,191,274 $23,432,546
* Amounts based upon the Program Fraud Civil Remedies Act of 1986 which allows Federal agencies, which are the
victims of false, fictitious, and fraudulent claims and statements, to recover double damages plus up to $7,500 for each
violation (recovery limited to claims of $150,000 or less). Other remedies are available to the Federal government,
including the False Claim Act, which could result in additional potential for civil enforcement.
9
Appendix B
HUD COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation HUD Comments
Comment 1
Comment 2
10
Ref to OIG Evaluation HUD Comments
Comment 3
Comment 4
11
Ref to OIG Evaluation HUD Comments
12
OIG Evaluation of Auditee Comments
Comment 1 We recognize that HUD has taken important steps in recent years to
implement risk-based techniques to identify lenders and loans that pose
significant risk to the FHA insurance fund, and to tighten underwriting
requirements. We commend HUD for its efforts and encourage it to
continue to evaluate and improve its methods to ensure that the FHA
insurance fund does not incur unnecessary costs for unacceptable loans.
We agree that HUD’s targeting tools and other recent initiatives generally
meet the intent of our recommendation, which was aimed at protecting the
FHA insurance fund from unnecessary costs. In the coming months,
through the management decision process, we will work with HUD to gain
more insight into the risk-based factors used to select lenders and loans for
review, the targeting enhancements that are under development, and the
two new initiatives launched in fiscal year 2010.
Comment 2 We maintain our belief that claims paid on loans that should not have been
insured continue to have a significant, negative impact on the FHA
insurance fund and HUD should continue to evaluate the best way to
identify high-risk claims paid and expand its pursuit of appropriate actions
against the lender and other responsible parties.
Comment 3 We agree with HUD that working toward identifying unacceptable loans
before conveyance claims are filed is a better method than trying to recoup
the FHA insurance claim funds after payment of a claim. As mentioned in
the memorandum, once a lender files a claim, by law HUD must pay the
claim and then try to recover its losses at a later date if the loan is found to
be unqualified for FHA insurance. Recovering the losses can be an
arduous process, and in some instances it can be a futile effort if the lender
has ceased doing business, generally leaving the FHA insurance fund with
unnecessary losses that weaken its financial stability. Putting
indemnification agreements in place on unacceptable loans before the
lender files a claim would be a very efficient and cost-effective means of
protecting the FHA insurance fund from improper claims.
Comment 4 We agree that leveraging technology and using risk-based loan selection
methods in the post-endorsement technical review process to identify
high-risk loans and/or fraudulent loans as early in the loan cycle as
possible should help HUD take appropriate actions on the identified loans.
It should also help HUD reduce unnecessary claim payouts and resulting
losses to the FHA insurance fund. As previously stated, we encourage
HUD to continue to evaluate and improve its methods of review to ensure
that the FHA insurance fund does not incur unnecessary costs for
unacceptable loans.
13
Appendix C
LOANS NOT MEETING FHA
UNDERWRITING REQUIREMENTS
Number of Actual and
FHA/loan Closing payments before Original expected losses
Lender number date first default mortgage amount to HUD*
1st Advantage 261-9102016 08/28/06 6 $ 83,341 $ 96,276
1st Advantage 361-3030073 06/28/06 22 89,203 27,035
1st Advantage 421-4233347 08/14/06 2 61,514 39,455
1st Advantage 421-4238265 10/13/06 9 46,631 28,600
1st Advantage 492-7646642 07/07/06 14 127,991 38,810
1st Advantage 492-7676492 07/28/06 17 83,686 48,008
1st Advantage 492-7844383 07/13/07 18 98,124 36,843
1st Advantage 495-7563145 11/20/06 11 49,508 10,425
Birmingham 105-3017718 05/29/07 1 89,248 57,256
Birmingham 151-8410864 10/24/07 1 82,209 54,461
Birmingham 201-3487218 11/03/05 9 41,800 44,773
Birmingham 261-9009876 03/31/06 4 96,019 114,361
Birmingham 261-9071686 05/25/06 19 59,073 63,185
Birmingham 262-1681931 09/14/07 7 56,000 57,931
Birmingham 263-3870605 03/30/06 3 90,578 86,252
Birmingham 263-3922022 10/27/06 0** 74,825 79,696
Birmingham 263-3938261 11/20/06 0 101,408 85,425
Mac-Clair 261-9230184 07/31/07 2 56,535 47,525
Mac-Clair 262-1625921 07/14/06 4 129,959 119,746
Mac-Clair 262-1628044 08/14/06 3 92,449 82,764
Mac-Clair 262-1636498 10/20/06 3 66,431 75,225
Mac-Clair 262-1652638 04/06/07 4 125,352 96,364
Mac-Clair 262-1653481 03/23/07 4 44,457 46,849
Mac-Clair 262-1673933 07/13/07 0 106,160 94,078
Alacrity 491-8963664 07/02/07 0 108,534 76,532
Alacrity 491-9013281 09/07/07 0 87,378 78,529
Alacrity 491-9057781 11/01/07 2 115,324 104,659
Alacrity 491-9147581 03/28/08 7 120,115 71,081
Alacrity 491-9198939 05/29/08 4 73,348 43,406
Alacrity 491-9224552 07/08/08 2 112,610 90,811
Alacrity 492-7781697 04/11/07 4 156,774 92,744
Alacrity 492-7783521 05/17/07 3 128,737 78,142
Alacrity 492-7788223 05/31/07 1 115,192 70,102
Alacrity 492-7801327 04/27/07 4 72,905 62,057
Alacrity 492-7803859 11/21/07 5 116,510 93,477
Alacrity 492-7814448 06/14/07 13 113,567 97,310
Alacrity 492-7815245 06/08/07 3 123,068 98,063
Alacrity 492-7852604 07/20/07 0 113,223 87,532
Alacrity 492-7854686 07/31/07 1 125,127 110,398
Alacrity 492-7866921 11/30/07 0 125,728 90,326
Alacrity 492-7907982 01/24/08 1 191,002 112,534
Alacrity 492-7933323 02/15/08 0 105,641 87,420
14
Number of Actual and
FHA/loan payments before Original expected losses
Lender number Closing date first default mortgage amount to HUD*
Alacrity 493-8414070 09/07/07 0 91,563 54,406
Dell Franklin 241-7744658 06/16/06 24 282,170 107,214
Dell Franklin 241-7768099 10/17/06 4 367,100 358,049
Dell Franklin 483-3658679 09/27/06 2 90,823 77,067
D & R Mortgage 483-3712823 03/29/07 10 128,950 55,888
D & R Mortgage 262-1650023 02/12/07 2 156,450 84,648
D & R Mortgage 261-9177201 03/28/07 13 198,400 152,655
D & R Mortgage 483-3758135 09/07/07 14 125,950 62,495
D & R Mortgage 261-9065622 04/27/06 4 168,300 130,123
D & R Mortgage 261-9065826 05/15/06 5 70,400 90,914
D & R Mortgage 261-9205529 06/01/07 16 207,550 111,983
D & R Mortgage 261-8996673 12/06/05 4 92,550 102,633
D & R Mortgage 261-9111473 09/21/06 6 224,700 145,233
Assurity 023-2343260 04/14/06 18 219,037 153,517
Assurity 023-2397348 10/16/06 20 236,495 170,120
Assurity 043-7406274 05/31/07 2 187,267 138,524
Assurity 052-4159366 09/28/07 0 167,475 147,831
Assurity 052-4311569 04/11/08 1 103,377 60,829
Assurity 094-5402355 04/09/08 1 255,526 151,214
Assurity 095-0485724 10/31/07 11 212,135 165,306
Assurity 095-0539086 12/28/07 3 310,000 193,656
Americare 491-8965784 06/09/07 9 107,245 80,345
Americare 491-8985262 08/04/07 1 167,373 102,402
Americare 492-7660621 07/28/06 3 84,454 52,068
Americare 492-7667490 07/28/06 9 93,972 47,710
Americare 492-7697201 08/25/06 7 91,563 50,255
Americare 492-7703727 09/27/06 17 86,138 54,157
Americare 492-7738863 01/12/07 8 104,607 74,078
Americare 492-7739636 12/22/06 6 86,809 -0-
Americare 492-7790183 04/30/07 4 122,084 94,143
Americare 493-8109055 11/28/05 6 101,279 73,459
Americare 493-8201387 06/29/06 11 36,083 13,578
Americare 493-8357125 06/28/06 3 174,443 99,303
American Sterling 023-2459219 05/30/07 2 206,755 122,684
American Sterling 431-4366963 03/03/08 4 240,230 57,598
American Sterling 461-4204295 12/31/07 5 146,160 81,154
American Sterling 491-8898498 11/29/06 11 85,325 48,371
American Sterling 491-8972325 05/22/07 10 60,627 35,367
American Sterling 492-7731763 12/05/06 5 51,601 7,761
American Sterling 492-7737924 12/29/06 1 115,192 47,982
American Sterling 492-7755169 02/16/07 1 126,514 66,925
American Sterling 492-7807135 04/30/07 6 107,069 24,397
Webster 105-3302961 12/04/07 2 101,900 60,136
Webster 132-1827919 07/28/05 1 72,055 34,419
Webster 197-3647194 04/16/07 4 315,056 191,105
Webster 461-4133646 05/31/07 2 123,068 61,257
Webster 481-2619404 07/06/07 9 143,103 93,911
Webster 562-2061518 06/25/07 6 153,265 76,162
Alethes 491-8729593 01/09/06 0 109,061 42,852
Alethes 491-8747204 11/23/05 9 161,665 88,177
Alethes 491-8766328 04/21/06 3 96,425 72,032
Alethes 491-8817515 06/28/06 1 111,072 51,782
Alethes 491-8842946 08/04/06 0 79,170 51,177
15
Number of Actual and
FHA/loan payments before Original expected losses
Lender number Closing date first default mortgage amount to HUD*
Alethes 491-8846382 09/26/06 0 148,724 70,908
Alethes 491-8856548 08/23/06 1 135,178 95,916
Alethes 491-8875185 10/26/06 2 52,584 39,424
Alethes 491-8913905 01/23/07 2 95,057 72,375
Alethes 491-8927014 03/07/07 12 143,939 59,749
Alethes 491-8932218 03/19/07 0 126,500 61,236
Alethes 491-9013914 08/27/07 1 137,837 35,618
Alethes 491-9042939 10/05/07 10 125,874 43,392
Alethes 491-9052920 11/15/07 8 158,543 26,748
Alethes 491-9067953 01/11/08 0 185,095 66,613
Alethes 491-9081188 01/03/08 2 114,991 50,464
Alethes 492-7753781 01/24/07 2 141,479 70,991
Alethes 492-7916830 11/15/07 1 137,944 26,570
Alethes 492-7963491 03/12/08 0 107,315 30,423
Security Atlantic 011-5621419 06/12/07 7 89,294 80,326
Security Atlantic 011-5865507 04/24/08 3 78,764 68,556
Security Atlantic 095-0567977 02/29/08 2 172,296 101,513
Security Atlantic 105-3100085 11/14/07 0 198,076 130,843
Security Atlantic 421-4296353 11/01/07 1 166,585 60,694
Security Atlantic 441-8065074 12/12/07 4 156,761 111,798
First Tennessee 151-8161023 08/23/06 5 128,898 66,300
First Tennessee 241-7877788 07/25/07 6 293,680 141,906
First Tennessee 291-3491113 12/11/06 5 156,543 47,215
First Tennessee 332-4542658 03/11/08 0 214,368 121,347
First Tennessee 441-7773869 03/31/06 10 87,310 58,806
Pine State 105-2427729 08/09/05 1 98,658 55,774
Pine State 105-2541058 12/21/05 2 202,340 161,736
Pine State 105-2632402 03/17/06 13 199,295 82,525
Pine State 105-2721400 06/16/06 3 128,245 66,849
Pine State 105-2903785 01/29/07 2 125,308 38,625
Pine State 105-2926206 02/12/07 4 127,853 28,103
Pine State 105-2957702 06/11/07 6 166,561 99,662
Pine State 105-2978097 03/27/07 16 110,132 64,416
Pine State 105-3008866 08/31/07 7 148,240 86,179
Pine State 105-3011817 05/02/07 1 122,965 57,306
Pine State 105-3033155 05/24/07 3 182,174 108,421
Pine State 105-3123930 07/26/07 5 139,410 67,619
Pine State 105-3129145 07/30/07 6 167,509 106,003
Pine State 105-3121214 07/30/07 11 83,905 71,984
Sterling National 022-1885701 08/31/07 10 142,100 111,279
Sterling National 105-3453987 02/26/08 3 142,871 61,050
Sterling National 361-3078756 05/09/07 2 165,648 49,280
Sterling National 381-8219106 12/06/07 9 134,445 79,120
Sterling National 412-5666814 12/04/07 0 198,940 90,212
Sterling National 412-5681688 12/27/07 1 125,098 117,882
$18,280,197 $11,191,274
*Actual losses incurred by the FHA insurance fund are losses resulting when HUD sells the property related to the
insured FHA loan. For those loans which HUD had not yet sold the related property, we estimated the loss to the
FHA insurance fund as 60 percent of the unpaid principal balance of the loan. The 60 percent loss severity rate is
published in the Fiscal Year 2009 Actuarial Review of the FHA Mutual Mortgage Fund.
**Loan payment data for loan #263-3922022 was inconclusive but it appears that no payments were made on the
loan.
16
Appendix D
MATERIAL UNDERWRITING DEFICIENCIES PER LOAN
Significant credit-related
Underreported liabilities
deficiencies or no credit
Incomplete verification
Minimum investment
Unsupported income
employment history
Unsupported assets
Skipped mortgage
Excessive ratios
or questionable
Insufficient gift
documentation
of rent history
not verified
payments
FHA loan number
261-9102016 X
361-3030073 X
421-4233347 X
421-4238265 X X X
492-7646642 X X X
492-7676492 X
492-7844383 X
495-7563145 X
105-3017718 X X X X
151-8410864 X
201-3487218 X X
261-9009876 X X
261-9071686 X
262-1681931 X
263-3870605 X X X X
263-3922022 X X
263-3938261 X
261-9230184 X X X
262-1625921 X X X
262-1628044 X
262-1636498 X
262-1652638 X X X X
262-1653481 X X
262-1673933 X
17
Significant credit-related
Underreported liabilities
deficiencies or no credit
Incomplete verification
Minimum investment
Unsupported income
employment history
Unsupported assets
Skipped mortgage
Excessive ratios
or questionable
Insufficient gift
documentation
of rent history
not verified
payments
FHA loan number
491-8963664 X X X
491-9013281 X X
491-9057781 X X
491-9147581 X X X X X
491-9198939 X X X
491-9224552 X
492-7781697 X X X
492-7783521 X X
492-7788223 X X X
492-7801327 X X
492-7803859 X
492-7814448 X X
492-7815245 X
492-7852604 X X X X
492-7854686 X
492-7866921 X X X
492-7907982 X X X
492-7933323 X
493-8414070 X X
241-7744658 X X
241-7768099 X X
483-3658679 X
483-3712823 X X
262-1650023 X X
261-9177201 X X
483-3758135 X X
261-9065622 X
261-9065826 X X
261-9205529 X X
261-8996673 X X
261-9111473 X
18
Significant credit-related
Underreported liabilities
deficiencies or no credit
Incomplete verification
Minimum investment
Unsupported income
employment history
Unsupported assets
Skipped mortgage
Excessive ratios
or questionable
Insufficient gift
documentation
of rent history
not verified
payments
FHA loan number
023-2343260 X X X
023-2397348 X
043-7406274 X X
052-4159366 X
052-4311569 X X
094-5402355 X X
095-0485724 X X
095-0539086 X X X
491-8965784 X
491-8985262 X X
492-7660621 X
492-7667490 X
492-7697201 X X
492-7703727 X
492-7738863 X X X
492-7739636 X X X
492-7790183 X X X
493-8109055 X
493-8201387 X
493-8357125 X X X
023-2459219 X X X X X
431-4366963 X
461-4204295 X
491-8898498 X X X X
491-8972325 X
492-7731763 X
492-7737924 X X
492-7755169 X X
492-7807135 X X X X
105-3302961 X
132-1827919 X
19
Significant credit-related
Underreported liabilities
deficiencies or no credit
Incomplete verification
Minimum investment
Unsupported income
employment history
Unsupported assets
Skipped mortgage
Excessive ratios
or questionable
Insufficient gift
documentation
of rent history
not verified
payments
FHA loan number
197-3647194 X
461-4133646 X X
481-2619404 X X X
562-2061518 X
491-8729593 X X X
491-8747204 X X X X
491-8766328 X X X X X
491-8817515 X X X X
491-8842946 X
491-8846382 X X
491-8856548 X X X X X X
491-8875185 X X
491-8913905 X X
491-8927014 X X
491-8932218 X
491-9013914 X X
491-9042939 X X X X
491-9052920 X X
491-9067953 X X
491-9081188 X X X X X X
492-7753781 X
492-7916830 X
492-7963491 X X X X X
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
151-8161023 X X
241-7877788 X X
20
Significant credit-related
Underreported liabilities
deficiencies or no credit
Incomplete verification
Minimum investment
Unsupported income
employment history
Unsupported assets
Skipped mortgage
Excessive ratios
or questionable
Insufficient gift
documentation
of rent history
not verified
payments
FHA loan number
291-3491113 X X X
332-4542658 X X
441-7773869 X
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
022-1885701 X X
105-3453987 X X
361-3078756 X
381-8219106 X
412-5666814 X
412-5681688 X X
Totals 57 20 24 36 49 76 13 26 3
21
An Underwriting Review of 15 FHA Lenders Demonstrated That HUD Missed Critical Opportunities To Recover Losses to the FHA Insurance Fund
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-03-02.
Below is a raw (and likely hideous) rendition of the original report. (PDF)