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.
2
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.
12
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)