oversight

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)

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