oversight

Midland Mortgage Company, Oklahoma City, OK, Generally Complied With FHA-HAMP Rules and Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-08.

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

                                                                             Issue Date
                                                                                    April 8, 2011
                                                                             Audit Report Number
                                                                                    2011-FW-1008




TO:             Ivery Himes, Acting Director, Office of Single Family Asset Management, HUF

                //signed//
FROM:           Gerald R. Kirkland
                Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: Midland Mortgage Company, Oklahoma City, OK, Generally Complied With
           FHA-HAMP Rules and Regulations


                                           HIGHLIGHTS

    What We Audited and Why

                 We performed a limited review of Midland Mortgage Company (Midland) as a
                 result of our internal audit of the Federal Housing Administration’s (FHA) Home
                 Affordable Modification Program (HAMP). During the internal audit, we visited
                 Midland and reviewed a limited number of loans to determine whether the
                 National Servicing Center implemented and operated FHA-HAMP in accordance
                 with rules and regulations. Our objective for this limited review was to determine
                 whether Midland followed U. S. Department of Housing and Urban Development
                 (HUD) rules and regulations when processing defaulted loans for the FHA-
                 HAMP loss mitigation option.


    What We Found

                 Overall, Midland complied with FHA-HAMP rules and regulations. Our limited
                 review of 15 loans 1 showed that Midland did not always check for borrower
                 eligibility or assign the appropriate maturity date for FHA-HAMP partial claims.

1
     We reviewed 10 loans that had FHA-HAMP paid claims and 5 loans for default status code issues. We did not
     have any findings concerning the five loans selected for default status code issues.
           Midland has since developed processes to ensure that it complies with FHA-
           HAMP rules and regulations for the two areas of noncompliance.

What We Recommend


           Midland implemented several recommendations during the review to correct
           issues of noncompliance detailed in this report. However, we recommend that the
           Acting Director of the Office of Single Family Asset Management require
           Midland to correct the maturity dates on the legal documents for the three FHA-
           HAMP loans identified during our review.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We provided a draft report to Midland on March 14, 2011, and requested
           comments by March 29, 2011. We held an exit conference with Midland on
           March 23, 2011. Midland provided its comments on March 30, 2011. Midland
           agreed with our one recommendation. However Midland stated payment of the
           partial claim is not required until payoff of the mortgage or notification of the
           borrower no longer living in the property. The complete text of the auditee’s
           response, along with our evaluation of that response, can be found in appendix A
           of this report.




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                          TABLE OF CONTENTS

Background and Objective                                                     4

Results of Audit
   Finding: Midland Generally Complied With FHA-HAMP Rules and Regulations   5

Scope and Methodology                                                        7

Internal Controls                                                            9

Appendix
   A. Auditee Comments and OIG’s Evaluation                                  11




                                         3
                         BACKGROUND AND OBJECTIVE

On August 31, 1950, Oklahoma City businessmen organized Midland Mortgage Company
(Midland) in Oklahoma City, OK. Midland services approximately 400,000 mortgage loans.
Midland’s parent company is MidFirst Bank.

This limited review of Midland resulted from a spinoff of an internal audit of the Federal Housing
Administration’s (FHA) Home Affordable Modification Program (HAMP) loss mitigation option.2
Midland is an FHA-approved servicer. Therefore, it can offer the FHA-HAMP loss mitigation
option for FHA-insured loans either facing imminent default or already in default.

HUD introduced the FHA-HAMP loss mitigation option on July 30, 2009, and it became effective
August 15, 2009.3 FHA-HAMP combines the already established loan modification and partial
claim loss mitigation options. The FHA-HAMP loan modification must reduce the unmodified
monthly principal and interest payment, and the servicer must reamortize the loan for 30 years. The
FHA-HAMP partial claim can be up to 30 percent of the unmodified unpaid principal balance. The
FHA-HAMP partial claim is due at the (1) maturity of the FHA-HAMP mortgage, (2) sale of the
property, or (3) payoff or refinancing of the FHA-HAMP mortgage.

As of June 7, 2010, Midland had the most completed FHA-HAMP claims with 337, or more than
46 percent of the 731 FHA-HAMP completed claims. We chose Midland to review during our
internal audit due to the number of completed FHA-HAMP claims.

Our objective was to determine whether Midland followed U. S. Department of Housing and Urban
Development (HUD) rules and regulations when processing defaulted loans for the FHA-HAMP
loss mitigation option.




2
    See audit report 2011-FW-0001, dated April 8, 2011, “The National Servicing Center Implemented the FHA-
    HAMP Loss Mitigation Option in Accordance with Rules and Regulations” for the results of the review.
3
    Mortgagee Letter 2009-23


                                                      4
                                       RESULTS OF AUDIT

Finding: Midland Generally Complied With FHA-HAMP Rules and
Regulations
Overall, Midland followed FHA-HAMP rules and regulations. However, it did not always
comply with checking for borrower eligibility and assigning the appropriate maturity date for the
FHA-HAMP partial claim. Since this was a recently developed program, a limited review within
the first year of the program showed that some processes needed improvement. While Midland
had implemented new polices to correct future occurrences, it needs to correct the maturity dates
of three instances noted. If Midland does not correct the maturity dates, then it will obligate the
borrowers to pay off the partial claim before the modified mortgage is due and potentially result
in defaulted loans.



    Midland Did Not Ensure
    Borrower Eligibility


                  In the 10 loans reviewed for FHA-HAMP paid claims, Midland did not check to
                  ensure borrower eligibility. To participate in FHA-HAMP, regulations required
                  servicers to check HUD’s Limited Denial of Participation list and General Services
                  Administration’s (GSA) Excluded Parties List System (EPLS) to ensure borrower
                  eligibility before approving a borrower for the loss mitigation option.4 Review of
                  EPLS showed that all borrowers were eligible.5 Nonetheless, Midland must check
                  borrower eligibility to ensure that it does not approve an ineligible borrower for
                  FHA-HAMP. Midland had implemented this change and no further action was
                  necessary.

    Maturity Dates Were Not
    Always in Agreement With
    Requirements

                  Of the 10 loans reviewed for FHA-HAMP paid claims, three had FHA-HAMP
                  partial claim documentation with a maturity date not in accordance with
                  requirements. FHA-HAMP regulations required servicers to assign the FHA-
                  HAMP partial claim the same maturity date as that of the FHA-HAMP loan
                  modification. 6 Contrary to requirements, Midland inadvertently used the
                  unmodified loan maturity date and filed legal documents with the incorrect

4
     Mortgagee Letter 2009-23 and its attachment
5
     We did not review the Limited Denial of Participation list.
6
     Mortgagee Letter 2009-23 and its attachment


                                                          5
                 maturity date. 7 If uncorrected, the borrower will be required to payoff the FHA-
                 HAMP claim before paying off the loan. Upon notification, Midland revised its
                 policy to ensure that the FHA-HAMP partial claim maturity date was the same as
                 that of the loan modification maturity date. However, it needs to correct the three
                 instances reviewed in which it used the incorrect maturity date.


Conclusion


                 Overall, Midland complied with FHA-HAMP rules and regulations. Midland’s
                 new policies to check borrower eligibility and assign the appropriate maturity date
                 for the FHA-HAMP partial claim will help it service the FHA-HAMP loss
                 mitigation option in accordance with rules and regulations. HUD should require
                 Midland to correct the maturity date on the three FHA-HAMP loans identified
                 during the review. If not, the borrowers will be obligated to pay off the partial
                 claim before the mortgage and potentially result in defaulted loans.

    Recommendations



                 We recommend that the Acting Director of the Office of Single Family Asset
                 Management require Midland to

                 1A. Correct the maturity dates on the legal documents for the three FHA-HAMP
                     loans identified during our review.




7
     For example, a borrower’s unmodified loan maturity date was October 2037 with the modified loan maturity
     date of December 2039. Midland filed the partial claim with the maturity date of October 2037 instead of
     December 2039; which was not in accordance with Mortgage Letter 2009-23 and its attachment.


                                                       6
                             SCOPE AND METHODOLOGY

To accomplish our objective, we

         •    Reviewed relevant criteria,
         •    Reviewed Midland loan files,
         •    Reviewed GSA’s EPLS system to ensure borrowers’ eligibility,
         •    Interviewed National Servicing Center and Midland staff, and
         •    Analyzed the Single Family Data Warehouse’s loss mitigation table and default
              history table as discussed in detail below. We performed this analysis under the
              internal audit; however, we used it to select a sample of loans to review from
              Midland.

Loss Mitigation Table

The Single Family Data Warehouse’s loss mitigation table contained more than 1.1 million
records 8 as of June 7, 2010. Using ACL software, we filtered these records to show paid claims
for loan modifications and partial claims with or without an FHA-HAMP indicator. We ran a
duplicates test to determine whether HUD paid any claims twice on the same loan that had a loan
modification or partial claim with an FHA-HAMP indicator. One loan had a duplicate claim for
a loan modification with an FHA-HAMP indicator. Further, we joined tables of these filtered
records to determine the number of

        •    Completed FHA-HAMP claims (731),
        •    Paid claims for an FHA-HAMP loan modification without a corresponding FHA-
             HAMP partial claim (14),
        •    Paid claims for an FHA-HAMP partial claim without a corresponding FHA-HAMP
             loan modification (131),
        •    Paid claims for an FHA-HAMP partial claim that had a previous partial claim without
             a HAMP indicator (41), and
        •    Instances in which the FHA-HAMP loan modification claim process date was before
             the FHA-HAMP partial claim process date (7).

As of June 7, 2010, Midland had the most completed FHA-HAMP claims with 337.

We chose a total of 10 files as follows:

        •    Two loans from the completed FHA-HAMP table–one with the oldest endorsement
             date and one with the highest FHA-HAMP partial claim amount;
        •    Two loans from the paid claim for an FHA-HAMP partial claim without a
             corresponding HAMP loan modification–one with the highest FHA-HAMP partial
             claim amount and one with the oldest process date with the highest FHA-HAMP
             partial claim amount;
8
    The loss mitigation table included special forbearance, loan modification, and partial claim.


                                                          7
         •    Two loans from the paid claim for an FHA-HAMP loan modification without a
              corresponding FHA-HAMP partial claim–the first two listed;
         •    Two loans from the paid claim for an FHA-HAMP partial claim that had a previous
              partial claim without a HAMP indicator–one with the highest FHA-HAMP partial
              claim amount and one with the highest regular partial claim amount; and
         •    Two loans for which the FHA-HAMP loan modification claim process date was
              before the FHA-HAMP partial claim process date; Midland only had two of these
              loans.

Default History Table

As of June 10, 2010, the Single Family Data Warehouse’s default history table for default status
codes 39 and 41 9 contained more than 18,800 records. We filtered the records to isolate the
default status codes into individual tables: default status code 39 contained 16,662 records and
default status code 41 contained 2,139 records. We then joined the default status code tables to
determine how many loans had a default status code 39 that matched and did not match default
status code 41. After eliminating any duplicate case numbers, 10 our analysis showed that 746
loans had both default status codes of 39 and 41. Additionally, 8,848 loans had a default status
code of 39 but not 41.

We chose at total of five loans to review that had a default status code of 39 but not 41. We
assigned a random number to each loan and sorted in ascending order. Before selecting the loan
to review, we reviewed Neighborhood Watch to ensure that the loan did not already have a
completed FHA-HAMP claim. 11 If the loan had a completed FHA-HAMP claim, we discarded
that loan and chose the next loan until we had five loans total.

We relied on the above data to select a sample of loans to review for our objective. We reviewed
the underlying documentation to form our conclusions. We do not express an opinion on the
overall reliability of the data.

We initially performed this work under an internal audit. We performed audit work at Midland’s
office and our office in Oklahoma City from June 2010 through January 2011.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.


9
     Default status code 39 indicates the servicer approved a borrower to participate in the FHA-HAMP trial plan.
     Default status code 41 indicates the borrower completed the trial plan and the servicer is beginning the process
     to file the partial claim and loan modification claims.
10
     Servicers would report a default status code 39 for the 3- or 4-month period during which the participant was in
     the trial plan.
11
     HUD considered the FHA-HAMP loss mitigation option failed when the servicer reported a default status code
     39 but not 41. We did not select any borrowers that had completed FHA-HAMP claims because this indicated
     they did not fail FHA-HAMP.


                                                          8
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
               We determined that the following internal controls were relevant to our audit
               objective:

               •   Program operations – Local policies and procedures that management has
                   implemented to reasonably ensure that a program meets its objectives.
               •   Compliance with laws and regulations – Policies and procedures that
                   management has implemented to reasonably ensure that resource use is
                   consistent with laws and regulations.
               •   Validity and reliability of data – Policies and procedures that management has
                   implemented to reasonably ensure that it obtains, maintains, and fairly discloses
                   valid and reliable data in reports.

               We assessed the relevant controls identified above.

               A deficiency in internal controls exists when the design or operation of a control
               does not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.




                                                 9
Significant Deficiency

             We evaluated internal controls related to the audit objective in accordance with
             generally accepted government auditing standards. We did not design our evaluation
             of internal controls to provide assurance regarding the effectiveness of the internal
             control structure as a whole. Accordingly, we do not express an opinion on the
             effectiveness of the Midland’s internal control.




                                              10
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         11
                        OIG Evaluation of Auditee Comments

Comment 1   We appreciate Midland’s cooperation during this review. We commend Midland
            for taking appropriate action regarding the incorrect maturity dates.

Comment 2   Our objective focused on the FHA-HAMP rules and regulations. Those rules and
            regulations required the maturity date of the FHA-HAMP partial claim to be the
            same as the maturity date of the FHA-HAMP loan modification.




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