oversight

AmericaHomeKey, Inc., Dallas, TX, Did Not Follow HUD-FHA Loan Requirements in Underwriting 13 of 20 Manufactured Home Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-23.

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

                                                              Issue Date
                                                                      September 23, 2011
                                                              Audit Report Number
                                                                      2011-FW-1016




TO:        Deborah Holston
           Acting Deputy Assistant Secretary for Single Family Housing, HU

           Craig T. Clemmensen
           Director, Departmental Enforcement Center, CACB

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

SUBJECT: AmericaHomeKey, Inc., Dallas, TX, Did Not Follow HUD-FHA Loan
           Requirements in Underwriting 13 of 20 Manufactured Home Loans


                                  HIGHLIGHTS

 What We Audited and Why

            We audited AmericaHomeKey, Inc., a Federal Housing Administration (FHA)
            direct endorsement lender in Dallas, TX. We selected AmericaHomeKey for
            audit because during our review of Gold Financial Services (2011-FW-1002), an
            AmericaHomeKey branch office, we identified three loans originated by one of its
            underwriters that contained underwriting and valuation deficiencies. Our
            objective was to determine whether AmericaHomeKey originated manufactured
            home loans in accordance with U. S. Department of Housing and Urban
            Development (HUD) and FHA requirements for loans with beginning
            amortization dates between March 1, 2008, and February 28, 2010.

 What We Found


            AmericaHomeKey did not follow HUD-FHA underwriting requirements in 13 of
            20 loan originations reviewed. This deficiency occurred because its quality
            control procedures were not adequate to consistently identify and correct
                 underwriting deficiencies. As a result, AmericaHomeKey originated more than
                 $1.7 million in ineligible loans that resulted in losses to FHA’s Mutual Mortgage
                 Insurance Fund totaling $538,132 and increased the risk to the insurance fund by
                 more than $680,000.

    What We Recommend

                 We recommend that the Acting Deputy Assistant Secretary for Single Family
                 Housing require AmericaHomeKey to (1) indemnify HUD for the eight ineligible
                 FHA loans with an estimated potential loss of more than $680,000, 1 (2) support or
                 repay the FHA insurance fund $23,803 for claims paid as of July 31, 2011, or the
                 current total amount of claims paid for four insured loans, (3) reimburse the FHA
                 insurance fund $514,329 for actual losses incurred on five insured loans and (4)
                 improve its quality control procedures to ensure that it consistently identifies and
                 corrects underwriting deficiencies in a timely manner. We also recommend that
                 HUD refer AmericaHomeKey to the Mortgagee Review Board for consideration
                 of administrative actions against the lender for not having a compliant quality
                 control program in place and take appropriate administrative actions against the
                 underwriter responsible for the 13 questioned loans. We further recommend that
                 the Director, Departmental Enforcement Center take appropriate administrative
                 sanctions, including possible debarment or other remedies, against the underwriter
                 responsible for the 13 questioned loans.

                 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 our discussion draft to AmericaHomeKey on August 1, 2011, and
                 held the exit conference on August 23, 2011. We requested a written response by
                 August 18, 2011. AmericaHomeKey disagreed with our conclusions and
                 provided voluminous documentation to support its position. We reviewed the
                 documentation and made changes to the report where appropriate. Our final
                 conclusions regarding the 13 questioned loans remain unchanged.

                 The complete text of the auditee’s response, along with our evaluation of that
                 response, can be found in appendix B of this report. The exhibits referred to in
                 the auditee's response are available upon request.




1
     The amount is based on the estimated percentage of loss of 59 percent that HUD would incur when the FHA
     property is foreclosed upon and resold as supported by the HUD Single Family Acquired Asset Management
     System’s case management profit and loss by acquisition as of September 2010.

                                                       2
                             TABLE OF CONTENTS

Background and Objective                                                      4

Results of Audit
        Finding: AmericaHomeKey Did Not Comply With HUD-FHA Requirements in   6
                 Underwriting 13 of 20 Manufactured Home Loans

Scope and Methodology                                                         13

Internal Controls                                                             14

Follow-up on Prior Audits                                                     15

Appendixes
   A.   Schedule of Questioned Costs and Funds To Be Put to Better Use        16
   B.   Auditee Comments and OIG’s Evaluation                                 17
   C.   Schedule of Indemnification and Repayment Amounts                     60
   D.   Case Narratives
                                                                              61




                                             3
                         BACKGROUND AND OBJECTIVE

AmericaHomeKey, Inc. is located at 3838 Oak Lawn, Suite 1050, Dallas, TX.
AmericaHomeKey is a nonsupervised direct endorsement lender, which was approved by the
U. S. Department of Housing and Urban Development (HUD) to originate Federal Housing
Administration (FHA)-approved mortgage loans on April 25, 2001.

The direct endorsement program simplified 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. 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 and projects that might not be able to meet conventional underwriting requirements by
protecting the lender against default. 2

According to HUD’s Neighborhood Watch system, 3 AmericaHomeKey originated 2,870 loans in
2008 with an original mortgage amount of more than $485 million. HUD did not pay any claims
in 2008 for loans originated by AmericaHomeKey. However, beginning in January 2009, its
loan volume, delinquencies, and HUD claims increased significantly. From January 1, 2009,
through February 28, 2011, AmericaHomeKey originated 13,838 loans with an original
mortgage amount of more than $2 billion. During calendar years 2009 and 2010, HUD paid
claims totaling more than $5.2 million for 47 loans. During the same 2-year period,
AmericaHomeKey's default rate was 4.20 percent compared to an average default rate for all
FHA loans in the United States of 2.83 percent.

During a previous audit of Gold Financial Services, an AmericaHomeKey branch office located
in San Antonio, TX, we identified three loans with underwriting deficiencies that were
underwritten by the same underwriter. The underwriter was employed by AmericaHomeKey
from December 2007 through February 2009. Using HUD’s Neighborhood Watch system, we
determined that this particular underwriter originated 39 manufactured home loans 4 totaling $5.2
million during her employment at AmericaHomeKey. Of the 39 loans, 20 loans totaling $2.7
million defaulted in 20 payments or fewer. As a result, we opened this audit of
AmericaHomeKey.




2
    HUD defines a default as the inability to make timely mortgage payments or otherwise comply with mortgage
    terms. A loan is considered in default when no payment has been made 30 days after the due date. Once a loan
    is in default, the lender can exercise legal rights defined in the contract to begin foreclosure proceedings.
3
    Neighborhood Watch is Web-based software that displays loan performance data for FHA-insured single-family
    loan information. The system is designed to highlight exceptions so that potential problems are readily
    identifiable.
4
    AmericaHomeKey ceased underwriting manufactured home loans in January 2009.


                                                       4
Our objective was to determine whether AmericaHomeKey originated manufactured home loans
in accordance with HUD and FHA requirements for loans with beginning amortization dates
between March 1, 2008, and February 28, 2010.




                                           5
                                     RESULTS OF AUDIT

Finding: AmericaHomeKey Did Not Comply With HUD-FHA
         Requirements in Underwriting 13 of 20 Manufactured Home
         Loans
AmericaHomeKey did not follow HUD-FHA requirements for 13 of 20 loans reviewed. 5 This
condition occurred because its quality control procedures were not adequate to consistently
identify and correct underwriting deficiencies in a timely manner. As a result,
AmericaHomeKey originated 13 ineligible loans with mortgages totaling more than $1.7 million.
The ineligible loans resulted in $514,329 in losses to FHA’s insurance fund and $23,803 in claim
payments. Further, the loans increased the insurance fund’s risk by more than $680,000 in
additional estimated losses.


    AmericaHomeKey Did Not
    Follow HUD-FHA
    Requirements

                 All FHA lenders must follow all applicable statutes, regulations, and HUD’s
                 written instructions, including program handbooks and mortgagee letters.
                 Specifically, lenders must follow HUD Handbook 4155.1, REV-5, “Mortgage
                 Credit Analysis for Mortgage Insurance on One-to Four-Unit Mortgage Loans,”
                 when underwriting FHA loans. The lender is responsible for eliciting a complete
                 picture of the borrower’s financial situation, source of funds for the transaction,
                 and intended use of the property. Its decision to approve the loan must be
                 documented, supported, and verifiable.

                 AmericaHomeKey did not follow HUD requirements when originating and
                 underwriting 13 of 20 manufactured home loans reviewed. Specifically, it did not
                 adequately document compensating factors, adequately evaluate the borrower’s
                 creditworthiness, correctly calculate income, or document the transfer of gift
                 funds. Further, AmericaHomeKey (1) did not ensure that one loan closed in
                 accordance with the loan’s approval terms and (2) did not verify the previous
                 housing obligation payment history for two loans reviewed. Additionally,
                 AmericaHomeKey inappropriately used documents obtained from the seller.




5
     Appendix C is a schedule of indemnification and repayment amounts.

                                                       6
                 A single AmericaHomeKey underwriter approved the 13 loans with multiple
                 deficiencies as outlined in the following table.

                 Summary of underwriting deficiencies




                 We included case narratives describing the underwriting deficiencies for each
                 loan in appendix D.

    AmericaHomeKey Did Not
    Adequately Document
    Compensating Factors


                 For 9 of the 20 loans reviewed, the borrowers’ qualifying ratios exceeded FHA
                 established limits, and AmericaHomeKey did not document compensating factors as
                 required. Qualifying ratios are used to determine whether borrowers can reasonably
                 be expected to meet the expenses involved with home ownership and still provide
                 for their families. FHA requires the lender to compute two ratios: (1) mortgage
                 payment expense to effective income and (2) total fixed payment to effective
                 income.6 The first ratio considers the total mortgage payment to the borrower’s
                 income, while the second ratio considers all of the borrower’s debts, including the
                 mortgage payment, to the borrower’s income. The qualifying ratios generally
                 should not exceed 31 and 43 percent, respectively, without acceptable compensating
                 factors.7 When a borrower’s qualifying ratios exceed FHA-established limits, FHA
                 requires the underwriter to support loan approval with compensating factors and
                 support the factors with documentation.8 For four of the nine loans, the underwriter
                 listed acceptable compensating factors9 on the mortgage credit analysis worksheet
                 but did not include documentation in the loan files to support that the compensating

6
     HUD Handbook 4155.1, REV-5, paragraph 2-12
7
     Mortgagee Letter 2005-16
8
     HUD Handbook 4155.1, REV-5, paragraph 2-13
9
     HUD Handbook 4155.1, REV-5, paragraph 2-13, identifies FHA’s compensating factors that are acceptable to
     justify loan approval when qualifying ratios exceed the FHA limits.

                                                       7
                 factors existed. The underwriter did not list acceptable compensating factors on the
                 mortgage credit analysis worksheet for the remaining five loans.

     AmericaHomeKey Did Not
     Adequately Evaluate
     Creditworthiness


                 AmericaHomeKey did not adequately evaluate the borrower’s creditworthiness
                 for 7 of the 20 loans reviewed. Past credit performance serves as the most useful
                 guide in determining a borrower’s attitude toward credit obligations and
                 predicting a borrower’s future actions. When delinquent accounts are revealed,
                 the lender must document its analysis as to whether the late payments were based
                 on a disregard for financial obligations, an inability to manage debt, or factors
                 beyond the control of the borrower. Major indications of derogatory credit,
                 including judgments, collections, and other recent credit problems, require
                 sufficient written explanation from the borrower. The borrower’s explanation
                 must make sense and be consistent with other credit information in the file.
                 Further, the lender must document reasons for approving a mortgage when the
                 borrower has collection accounts or judgments. 10 FHA also requires the lender to
                 include the debts of nonpurchasing spouses when the borrower resides in a
                 community property State or if the property being insured is located in a
                 community property State. 11

                 Four of the seven loans had written explanations that were inconsistent with other
                 credit information in the files. A fifth loan file did not contain a written
                 explanation for derogatory credit. The sixth loan file contained a written
                 explanation that, when analyzed against the credit history, showed a poor attitude
                 toward credit obligations. There was no documentation in the loan file to show
                 the underwriter’s reasons for approving this mortgage. Finally, the seventh loan
                 was for a property in a community property State and did not contain all of the
                 necessary information to determine qualifying ratios because it did not include the
                 nonpurchasing spouse’s credit report.




10
      HUD Handbook 4155.1, REV-5, paragraph 2-3
11
      HUD Handbook 4155.1, REV-5, paragraph 2-2D

                                                   8
     AmericaHomeKey Did Not
     Correctly Calculate Income or
     Verify Income Stability

                  AmericaHomeKey did not correctly calculate income for 3 of the 20 loans
                  reviewed. Also, it did not verify income stability for a fourth loan.

                  FHA requires the lender to analyze the borrower’s income to determine whether it
                  can reasonably be expected to continue through at least the first 3 years of the
                  mortgage loan. Lenders are allowed to include overtime income in the effective
                  income calculation if the borrower has received such income for the past 2 years
                  and it is likely to continue. The lender must develop an average of the income for
                  the past 2 years. 12 In two loans, the underwriter used an average income
                  calculated from a period of less than 2 years.

                  In the third loan, the borrower had been employed at his commission-earning job
                  for only 3 months before closing. The underwriter included the commission in
                  the effective income calculation. However, commissions earned for less than 1
                  year are not allowed to be considered in the effective income calculation. 13

                  AmericaHomeKey did not verify income stability for a fourth loan. FHA requires
                  the lender to verify the borrower’s employment for the most recent 2 full years and
                  to explain gaps in employment spanning 1 month or more.14 The underwriter
                  obtained employment verification for only 1 year. The underwriter also verified
                  other income from 5 years before the loan application, but the information was not
                  current or relevant.

     AmericaHomeKey Did Not
     Document Gift Fund Transfers

                  FHA requires the lender to document the transfer of gift funds from the donor to the
                  borrower. 15 AmericaHomeKey did not document the transfer of gift funds for 2 of
                  20 loans reviewed. For another loan, the lender only documented $7,525, when the
                  borrower received $8,200 in gift funds.




12
       HUD Handbook 4155.1, REV-5, paragraph 2-7 and 2-7A
13
       HUD Handbook 4155.1, REV-5, paragraph 2-7D
14
       HUD Handbook 4155.1, REV-5, paragraph 2-6
15
       HUD Handbook 4155.1, REV-5, paragraph 2-10C

                                                     9
     AmericaHomeKey Underwrote
     Loans With Other Significant
     Errors

                 AmericaHomeKey did not ensure that one loan closed in accordance with the
                 loan’s approval terms. Further, it did not verify the previous housing obligation
                 payment history for 2 of the 20 loans reviewed.

                 Loan Did Not Close in Accordance With Approval Terms
                 AmericaHomeKey did not ensure that one loan closed in accordance with the loan
                 approval terms. A person other than the borrower signed the mortgage security
                 instrument for this loan. There was no evidence in the loan file that the lender
                 reviewed this person’s income, creditworthiness, assets, etc. FHA requires the
                 loan to close in the same manner in which it was underwritten and approved.
                 FHA may withhold endorsement of the loan if there are additional signatures on
                 the security instruments or mortgage note of individuals not reviewed during
                 mortgage credit analysis. 16

                 Previous Housing Obligation Payment History Not Verified
                 AmericaHomeKey did not verify the previous housing obligation payment history
                 for 2 of the 20 loans reviewed. FHA requires the lender to determine the
                 borrower’s housing obligation payment history through the credit report,
                 verification of rent, verification of mortgage, or review of canceled checks
                 covering the most recent 12-month period. 17 Neither of the loan files contained
                 documentation to show that the underwriter verified the borrower’s previous
                 housing obligation payment history.

     AmericaHomeKey Used
     Documents Obtained From the
     Seller

                 AmericaHomeKey should have rejected some documents that passed through the
                 seller to the mortgage company for 3 of 20 loans reviewed. FHA prohibits lenders
                 from accepting or using documents related to the credit, employment, or income of
                 borrowers that are handled by or transmitted from or through interested third parties
                 (real estate agents, builders, sellers) or by using their equipment. 18 For all three
                 loans cited, the underwriter accepted income and credit documents that were faxed
                 from the seller.




16
      HUD Handbook 4155.2, paragraph 6A2f
17
      HUD Handbook 4155.1, REV-5, paragraph 2-3A
18
      HUD Handbook 4155.1, paragraph 3-1

                                                   10
     AmericaHomeKey’s Quality
     Control Was Not Effective

                   All 20 loans reviewed were approved by the same underwriter. Of the 13
                   questioned loans, 9 required quality control reviews because they defaulted within
                   the first 6 payments. 19 We requested copies of the quality control reviews for six
                   of the nine questioned loans that defaulted within the first six payments, but
                   AmericaHomeKey only provided documents for two of the reviews. Neither of
                   the two reviews was completed in a timely manner, 20 and no findings or patterns
                   of deficiencies were reported to HUD as required. 21 In addition,
                   AmericaHomeKey did not provide evidence that it took corrective action in
                   response to the two quality control reviews. FHA requires a lender’s senior
                   management to take prompt action to deal appropriately with any material
                   findings in a quality control report. The final report or an addendum must
                   identify actions being taken, the timetable for their completion, and planned
                   follow-up activities. 22 Further, since AmericaHomeKey did not provide the other
                   four quality control reviews requested, we could not determine whether it
                   performed the reviews in accordance with requirements or whether it had
                   performed the reviews at all.

                   Because AmericaHomeKey’s quality control plan was ineffective, it did not
                   identify patterns of deficient underwriting and did not perform quality control
                   reviews in a timely manner. Further, it did not take prompt action to deal
                   appropriately with quality control report findings.

     Conclusion

                   AmericaHomeKey did not comply with HUD and FHA requirements in
                   underwriting 13 of 20 manufactured home loans reviewed because its quality
                   control procedures were not adequate to consistently identify and correct
                   underwriting deficiencies in a timely manner. As a result, AmericaHomeKey
                   originated more than $1.7 million in ineligible loans that resulted in losses to
                   FHA’s insurance fund totaling $538,132 and increased the risk to the insurance
                   fund by more than $680,000.




19
      HUD Handbook 4060.1, REV-2, “FHA Title II Mortgagee Approval Handbook,” paragraph 7-6D
20
      One review was completed 14 months after the first default, and the other review was completed 12 months
      after the first default.
21
      Mortgagee Letter 2005-26
22
      HUD Handbook 4060.1, REV-2, paragraph 7-3I

                                                        11
     Recommendations

                 We recommend that the Acting Deputy Assistant Secretary of Single Family
                 Housing require AmericaHomeKey to

                 1A. Indemnify HUD for four insured loans23 with unpaid principal balances of
                     $582,795, thereby putting an estimated $343,848 to better use based on the
                     FHA insurance fund average loss rate of 59 percent of the unpaid principal
                     balances.

                 1B. Indemnify HUD for four insured loans24 with unpaid principal balances of
                     $576,052, thereby putting an estimated $339,870 to better use where HUD
                     paid claims but the properties had not been conveyed.

                 1C. Support or repay the FHA insurance fund $23,803 for claims paid as of July
                     31, 2011, or the current total amount of claims paid, on four insured loans (see
                     footnote 24). If HUD has taken title to the properties or sold the properties,
                     rather than seeking repayment of the claims paid, the amount to be repaid
                     should be adjusted to the amount of the actual losses to FHA. If the properties
                     are subsequently conveyed to HUD and sold, the loss amounts should be
                     adjusted to reflect any amounts repaid pursuant to this recommendation.

                 1D. Reimburse the FHA insurance fund $514,329 for actual losses incurred on five
                     insured loans.25

                 1E. Take actions to ensure that its quality control procedures are adequate to
                     consistently identify and correct underwriting deficiencies in a timely
                     manner.

                 We also recommend that the Acting Deputy Assistant Secretary

                 1F. Refer AmericaHomeKey to the Mortgagee Review Board for consideration of
                     administrative actions for failure to implement a quality control program in
                     compliance with HUD requirements, resulting in $538,132 in losses and
                     claims and increased risk for future losses to the insurance fund.

                 We further recommend that the Director, Departmental Enforcement Center

                 1G. Take appropriate administrative sanctions, including possible debarment or
                     other remedies, against the underwriter responsible for the 13 questioned
                     loans.



23
      FHA case numbers 422-2858487, 221-4024471, 011-5918674, and 421-4340956
24
      FHA case numbers 495-7838607, 421-4407985, 091-4395020, and 281-3386718
25
      FHA case numbers 495-7871535, 492-8043749, 491-9300557, 491-9144966, and 492-8004302

                                                    12
                                  SCOPE AND METHODOLOGY

To accomplish our objective, we

   •   Reviewed applicable HUD regulations, requirements, and mortgagee letters;
   •   Reviewed reports and information on HUD’s Neighborhood Watch and Single Family
       Data Warehouse systems;
   •   Reviewed AmericaHomeKey’s written quality control plan;
   •   Analyzed AmericaHomeKey’s quality control review reports for two loans;
   •   Reviewed AmericaHomeKey’s loan files, policies, procedures, and independent audit
       reports; and
   •   Conducted interviews with applicable HUD staff, AmericaHomeKey staff, local county
       appraisal districts, the Texas comptroller, and borrowers.

During a previous audit of Gold Financial Services, an AmericaHomeKey branch office located
in San Antonio, TX, we identified three loans with underwriting problems that were underwritten
by the same AmericaHomeKey underwriter and were all for manufactured homes. Using HUD’s
Neighborhood Watch system, we determined the manufactured homes originated by that
underwriter and selected all of the defaulted loans (20) for review. We used a nonrepresentative
sample because we wanted to identify underwriting deficiencies on only the loans that defaulted
and did not intend to project the test results on the population of loans. We did not evaluate the
reliability of HUD’s Neighborhood Watch system because we used the data for background
purposes only.

Our original objective was to determine whether AmericaHomeKey originated and valued
manufactured home loans in accordance with HUD and FHA loan requirements for defaulted
loans endorsed between January 1, 2008, and December 31, 2009. Our valuation approach was
to compare county appraisal district valuations with FHA appraised values. However, after we
discussed appraisal objectives with the local county appraisal districts and the Texas comptroller,
we found that the county valuations would not suit our objective without considerable effort to
validate the values with actual sales. As a result, we modified our objective to determining
whether AmericaHomeKey originated manufactured home loans in accordance with HUD and
FHA requirements for loans with beginning amortization dates between March 1, 2008, and
February 28, 2010.

We performed our fieldwork between August 4, 2010, and May 18, 2011, at our office in San
Antonio, TX. AmericaHomeKey provided copies of its loan origination files.

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.




                                                13
                              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:

               •   Policies and procedures intended to ensure that FHA-insured loans are properly
                   originated, underwritten, and closed.
               •   Safeguarding FHA-insured mortgages from high-risk exposure.
               •   Policies and procedures intended to ensure that the quality control program is an
                   effective tool in reducing underwriting errors and noncompliance.

               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.

 Significant Deficiency


               Based on our review, we believe that the following item is a significant deficiency:

               •   AmericaHomeKey did not implement an effective quality control program to
                   quickly identify poor underwriting and correct identified deficiencies
                   (finding).


                                                14
                  FOLLOW-UP ON PRIOR AUDITS

Audit Report 2011-FW-1002

          On October 25, 2010, we issued audit report number 2011-FW-1002, Gold
          Financial Services, Inc., San Antonio, TX, Did Not Follow HUD Requirements in
          Originating Three Loans. That audit was of Gold Financial Services, Inc., a
          branch of AmericaHomeKey. We found that Gold Financial did not require two
          borrowers to explain recent poor credit and violated its own internal controls on a
          third loan concerning borrowers with poor credit when it did not require the
          borrowers to have 3 months reserves in accordance with Gold Financial’s closing
          instructions. The report contained the following recommendations:

          •    Indemnify HUD for one insured loan (number 495-7829555) with an unpaid
               principal balance of $144,808, thereby putting an estimated $86,885 to
               better use based on the FHA insurance fund average loss rate of 60 percent
               of the unpaid principal balance.

          •    Reimburse the FHA insurance fund $71,259 for losses incurred on loan
               number 495-7786023.

          The recommendations in the prior audit report remain open pending completion
          of actions. We noted similar findings in this audit as listed below.

          •    AmericaHomeKey approved loans with questionable borrower
               creditworthiness.
          •    AmericaHomeKey approved loans without documenting that adequate cash
               reserves were available.




                                          15
                                       APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS
                AND FUNDS TO BE PUT TO BETTER USE

          Recommendation          Ineligible 1/        Unsupported 2/    Funds to be put
              number                                                     to better use 3/
                         1A                                                      $343,848
                         1B                                                       339,870
                         1C                                   $23,803
                         1D             $514,329
                      Totals            $514,329              $23,803            $683,718




1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
   that the auditor believes are not allowable by law; contract; or Federal, State, or local policies
   or regulations.

2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or
   activity when we cannot determine eligibility at the time of the audit. Unsupported costs
   require a decision by HUD program officials. This decision, in addition to obtaining
   supporting documentation, might involve a legal interpretation or clarification of
   departmental policies and procedures.

3/ Recommendations that funds be put to better use are estimates of amounts that could be used
   more efficiently if an Office of Inspector General (OIG) recommendation is implemented.
   These amounts include reductions in outlays, deobligation of funds, withdrawal of interest,
   costs not incurred by implementing recommended improvements, avoidance of unnecessary
   expenditures noted in preaward reviews, and any other savings that are specifically
   identified. Implementation of our recommendation to require AmericaHomeKey to
   indemnify HUD for the nine loans that were not originated in accordance with HUD-FHA
   requirements will reduce FHA’s risk of loss to the insurance fund. The amount reflects that,
   upon the sale of the mortgaged property, FHA’s average loss experience is about 59 percent
   of the unpaid principal balance. The 59 percent loss rate is based on HUD’s Single Family
   Acquired Asset Management System’s Case Management Profit and Loss by Acquisition
   computation for Fiscal Year 2010 based on actual sales.



                                                  16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         17
18
19
20
Comment 34




Comment 34




             21
22
Comment 1




Comment 2




            23
Comment 3




            24
Comment 4




Comment 5




Comment 6




            25
Comment 7




            26
Comment 8




            27
Comment 9




Comment 10




             28
Comment 11




Comment 12




             29
Comment 13




             30
31
Comment 14




Comment 15




             32
Comment 16




Comment 17




             33
Comment 18




Comment 19




             34
Comment 20




             35
Comment 21




Comment 1




             36
Comment 22




             37
Comment 23




             38
Comment 24




Comment 9




Comment 14




             39
Comment 25




Comment 25




             40
Comment 26




             41
Comment 26




Comment 27




             42
Comment 28




Comment 28




             43
Comment 29




Comment 30




Comment 31




             44
Comment 32




             45
46
Comment 33




             47
Comment 33




Comment 33




             48
Comment 33




             49
50
Comment 34




             51
                            OIG Evaluation of Auditee Comments

Comment 1: AmericaHomeKey stated that the borrower maintained $9,775 in an Employee
Stock Ownership Plan, which provided the borrower with the option of cashing-out by taking a
taxable distribution of all or part of the fund. FHA prohibits lenders from accepting or using
documents related to the credit, employment or income of borrowers that are handled by or
transmitted from or through interested third parties (real estate agents, builders, sellers) or by
using their equipment. The documentation that AmericaHomeKey provided to support this
claim was faxed from the builder, and is therefore, not acceptable documentation to support the
reserves. In addition, the statement provided is dated 17 months prior to loan closing, and no
recent contributions had been made. We concluded that there is no acceptable evidence that the
balance existed at the time of underwriting. As a result, we did not remove the issue from the
final report.

Comment 2: AmericaHomeKey suggested that the borrower's low monthly obligations
demonstrate a conservative attitude toward credit, which is an acceptable compensating factor.
However, a review of the credit report that was run prior to loan closing reveals three credit
scores ranging between 496 and 594, two collection accounts, and one charge off account within
the 2 years prior to closing. The collections and charge off account did not represent a
conservative attitude toward credit. Thus, we did not remove the issue from the final audit
report. AmericaHomeKey also presented two additional compensating factors, including a
minimal increase in housing expense and a stellar rental history. When the qualifying ratios
exceed the benchmark guidelines, underwriters must record compensating factors used to support
loan approval on the “remarks” section of the Mortgage Credit Analysis Worksheet. These
additional compensating factors were not recorded on the Mortgage Credit Analysis Worksheet,
and therefore, not used in the lender’s decision to approve the loan. Regardless, we believe that
the other violations set forth in the finding override the additional compensating factors.

Comment 3: AmericaHomeKey stated the borrower's low monthly debt and significant cash
reserves reflected a conservative attitude toward credit and the ability to accumulate savings.
The Verification of Deposit shows that the borrower paid $77 per week toward his car payment
rather than $77 per month as indicated on the credit report. We analyzed the payments against
the balance and determined that the $77 payments per week are more logical in order to pay the
balance down. Based on the Verification of Deposit, we calculated the monthly car payment at
$308. We reviewed the credit reports provided and including the car payment, calculated
monthly debt at $518. With the increased monthly debt, we calculated the ratios at 33 and 46
percent. We changed the final report to reflect the new ratio calculation. Regarding the ability
to accumulate savings, the verification of deposit shows a balance of $1,890, and an average
balance of $595. This does not illustrate an ability to accumulate savings. FHA requires 3
months of cash reserves when used as a compensating factor. We determined that the borrower
needed at least $3,784 to meet the reserve requirement. As a result, we did not remove the issue
from the final report.

Comment 4: AmericaHomeKey stated that the borrower had $2,500 in cash reserves, and even
though the amount was “just shy” of the required $2,759, the savings still evidenced the ability to
save. Neither the loan file nor the written response contained documentation to support the cash
reserves. FHA guidelines require documentation to support compensating factors. Further, the

                                                52
borrower took a pay advance of $400 from his employer just 1 month prior to closing, which
demonstrated an inability to accumulate savings.

Comment 5: AmericaHomeKey stated that it was not required to show continuance of overtime
income since it was not used in the effective income calculation and only used as a compensating
factor. The lender also provided copies of three of the borrower's pay statements to show that
overtime was earned. When overtime income is used as a compensating factor, the lender must
document that the income directly affects the borrower’s ability to pay the mortgage. We do not
question the overtime income demonstrated in the pay statements provided. However, there was
no documentation in the loan file to demonstrate that the additional income will directly affect
the borrower’s ability to pay the mortgage payment. In fact, the borrower's need to take a pay
advance 1 month prior to closing illustrates that the overtime income does not directly affect his
ability to pay the mortgage. We question the lender’s judgment in this loan because it did not
verify the compensating factors used to justify loan approval, and it accepted documents related
to the borrower’s credit from the seller.

Comment 6: AmericaHomeKey stated that the borrower's low monthly debt and $1,141 in
savings illustrated the borrower's conservative attitude toward credit and ability to save.
However, the borrower's credit report showed five collection accounts within the past 2 years,
which does not demonstrate the ability to save. Additionally, the Verification of Deposit
demonstrated an average 2-month balance of only $306. This does not reflect the borrower's
ability to accumulate savings. FHA requires 3 months of cash reserves when used as a
compensating factor. The borrower needed at least $3,280 to meet this requirement.

Comment 7: AmericaHomeKey stated that the borrower's low monthly debt and $2,200 in cash
reserves ($97 less than the required $2,297) illustrated the borrower's conservative attitude
toward credit and an ability to save. The borrower's credit report showed two collection
accounts within the past 2 years, and the bank statement referred to in AmericaHomeKey's
response is a transaction history with only one deposit and no other activity. Further, there is no
beginning balance. FHA requires the lender to obtain 3 months of bank statements when
verifying funds on deposit. In addition, FHA requires a credible explanation for large increases
or new accounts. Based on the transaction history provided, it appears that the borrower opened
the account during the same month that the document was printed when the borrower deposited
$2,200. There was no explanation for the new account in the loan file. Therefore, the borrower's
low monthly debt is negated by the recent collections, and the bank information is insufficient to
demonstrate an ability to save.

Comment 8: AmericaHomeKey stated that the borrower's low monthly debt and $1,475 in cash
reserves demonstrated a conservative attitude towards the use of credit and an ability to
accumulate savings. Further, the front-end ratio was only 1 percent above the benchmark.
Borrowers with limited recurring expenses are allowed greater latitude on this ratio. We do not
dispute the borrower's low level of recurring expenses. However, the borrower had a collection
account as recent as 6 months prior to closing. There was no explanation in the loan file for the
collection account. Therefore, we do not agree with AmericaHomeKey's assertion that the
borrower demonstrated a conservative attitude toward credit. The bank statements provided
show a balance as of April 3, 2008, of $807, including a $6,361 deposit from the Internal



                                                53
Revenue Service. The borrower did not demonstrate the ability to accumulate savings. Since the
compensating factors are refuted, the latitude for the front-ratio was not permissible.

Comment 9: AmericaHomeKey stated that the borrower's low monthly debt of $359 and 2
months of cash reserves demonstrated a conservative attitude towards the use of credit and an
ability to accumulate savings. We reviewed the credit report provided and calculated monthly
debt totaling $734, including a mortgage payment for a conventional loan. Further, the
borrower's credit scores ranged between 523 and 600 and included two charge off accounts and
one collection account within the past 2 years. Based on this information, we do not agree with
AmericaHomeKey's assertion that the borrower demonstrated a conservative attitude towards
credit. AmericaHomeKey did not provide any bank statements to demonstrate the borrower's
ability to accumulate savings. The loan file contained a bank statement for one co-borrower for
a period of only 1 month with no deposits and charges totaling $520. With only 1 month of bank
activity for only one co-borrower, and a decreasing balance, the borrower did not demonstrate an
ability to accumulate savings.

Comment 10: AmericaHomeKey stated that since the loan closed over 3 years ago, the fact that
it could not locate documentation to support the cash reserves, doesn’t mean that the missing
documentation wasn’t contained in the original loan file. The original loan file contained
documentation to show funds on deposit. However, a large deposit totaling $3,000 appeared to
be a loan from the borrower's employer that will be paid back with labor or future vacation.
Since the $3,000 appears to be a loan, we concluded that AmericaHomeKey did not properly
document the cash reserves, and the borrower did not demonstrate an ability to accumulate
savings. AmericaHomeKey also indicated that the borrower had minimal recurring expenses
totaling $398 per month. We agree that the borrower had minimal revolving debt. However,
with such a small monthly obligation, the borrower should have been able to accumulate savings
rather than borrow $3,000 from his employer. As a result, we do not agree with
AmericaHomeKey's assertion that the borrower demonstrated a conservative attitude towards
credit. Further, there is no reason for the asset documentation to be missing when the rest of the
loan files in question appear to be intact.

Comment 11: AmericaHomeKey's response addressed FHA loan number 281-3386715. We
did not question this loan in the audit report. Based on the narrative in relation to the loan
number and documents provided with the written response that included the borrower’s name,
we concluded that the loan number is a typographical error, and that AmericaHomeKey's
response actually addresses FHA loan number 281-3386718.

Comment 12: In its response, AmericaHomeKey stated that the borrower had low monthly
obligations and $2,075 in cash reserves, which demonstrated a conservative attitude towards
credit and the ability to accumulate savings. We do not dispute the low monthly obligations.
However, the borrower's credit scores ranged between 498 and 536. The low credit scores show
that the borrower does not have a conservative attitude towards credit. The Verification of
Deposit in the loan file showed an average monthly balance of only $470. The bank statements
provided in AmericaHomeKey's response support the $2,075 reserves referred to but do not
show a beginning balance. Further, the bank statements are questionable because they do not
show the name of the bank and were certified by the teller the day before the statement was
printed. In addition, the non-purchasing spouse's bank information was provided, which is not

                                                54
relevant in determining whether the borrower demonstrated the ability to accumulate savings.
We do not agree with AmericaHomeKey's assertion that the borrower demonstrated an ability to
accumulate savings.

Comment 13: AmericaHomeKey stated that the borrower's low monthly obligations totaling
$246 and his 1 month's worth of cash reserves illustrated his conservative attitude towards the
use of credit and his ability to accumulate savings. We reviewed the documentation and agreed
with AmericaHomeKey's assertion. As a result, we removed the issue from the final audit
report.

Comment 14: AmericaHomeKey stated that it already signed an indemnification agreement for
this loan and requested that the OIG remove the loan from the final report. We reviewed the
indemnification agreement provided and determined that there is no documentation to show that
AmericaHomeKey has reimbursed HUD for losses incurred. The report recommends
reimbursement to HUD for actual losses incurred for this loan. Therefore, we did not change the
audit report.

Comment 15: AmericaHomeKey stated that the loan closed in September 2008, and it cannot
locate the missing credit report. FHA requires lenders to maintain case binders for at least 2
years after the date of endorsement. This particular loan was endorsed on December 30, 2008.
We began our fieldwork on August 4, 2010, well within the 2-year time frame. Without the non-
purchasing spouse's credit report, we have no means of verifying that the non-purchasing
spouse's debt was included in the calculation of the qualifying ratios.

Comment 16: AmericaHomeKey stated that the borrower was unemployed for several months,
which can have more than a short-term impact on the ability to pay debts. Therefore, the written
explanation supported the derogatory credit. We reviewed the loan application and determined
that the borrower was unemployed for only 3 months between 2006 and 2008 (1 month in 2006,
and 2 months in 2008). The credit report shows three collections, including two that became
collections while the borrower was employed. In addition, a current account showed several late
payments in its payment history. Therefore, we disagree that borrower's short periods of
unemployment impacted his ability to pay his debts. We did not change the audit report.

Comment 17: AmericaHomeKey stated that documentation in the loan file supported the
borrower's written explanation that she was using an agency to assist with her credit issues and
nothing in the loan file contradicted the explanation. However, HUD requires lenders to
document that 1 year of the pay-out period has elapsed and the borrower’s payment performance
has been satisfactory. In addition, the borrower must receive written permission from the
counseling agency to enter into the mortgage. As stated in the audit report, the loan file did not
contain any documentation from a credit counseling agency. We amended the audit report to
reflect the additional criteria.

Comment 18: AmericaHomeKey is unable to locate documentation to support the borrower's
claim that her bad debt had been paid in full but sites that the loan was processed over 3 years
ago. FHA requires lenders to maintain case binders for at least 2 years after the date of
endorsement. This particular loan was endorsed on December 19, 2008. We began our
fieldwork on August 4, 2010, well within the 2-year time frame.

                                                55
Comment 19: AmericaHomeKey stated that the borrowers took their financial obligations
seriously since they satisfied some of the delinquent accounts after recovery from pregnancy
complications, retained higher paying employment, and made their housing payments on time for
3 years. We reviewed the borrower's credit report and identified a collection account as recent as
6 months prior to closing. The loan file contained documentation to show that only one
delinquent account had been paid. Further, according to the borrower's letter of explanation, her
pregnancy complications occurred in 2004 and she retained the higher paying job since 2005 - 3
years prior to this loan's origination. Therefore, we disagree with AmericaHomeKey's assertion
that the borrowers took their financial obligations seriously. In addition, when the qualifying
ratios exceed the benchmark guidelines, underwriters must record compensating factors used to
support loan approval on the “remarks” section of the Mortgage Credit Analysis Worksheet. The
borrower’s rental history was not recorded on the Mortgage Credit Analysis Worksheet, and
therefore, was not used in the lender’s decision to approve the loan. Regardless, we believe that
the other violations set forth in the finding override the additional compensating factor.

Comment 20: AmericaHomeKey stated that the borrower was unable to pay his own debt
obligations as a result of being forced to pay obligations incurred by his ex-wife. Collections
and judgments indicate a borrower's regard for credit obligations and must be considered in the
creditworthiness analysis. FHA requires sufficient written explanation from the borrower for
major indications of derogatory credit. The explanation must make sense and be consistent with
other credit information in the file. We disagree with AmericaHomeKey’s assertion that the
explanation makes sense given that the borrower couldn't afford to pay his debts.

Comment 21: AmericaHomeKey asserts that since the Verification of Employment is silent
regarding the continuance of overtime income, there was no indication that overtime would not
continue. Further, FHA allows overtime income earned over a period less than 2 years provided
the lender justifies and documents in writing the reason for using the income for qualifying
purposes. HUD Handbook 4155.1, REV-5, paragraph 2-7(A) states that overtime income may
be included in the effective income calculation if the borrower has received such income for the
past 2 years and it is likely to continue. Since the Verification of Employment is silent on the
issue, the underwriter did not ensure that the overtime was likely to continue. Further, the
borrower told the OIG that her hours were cut. In addition, the 2 weeks of pay stubs that were
provided show that overtime was present but not consistent in the amount of hours. One week,
the borrower earned $439 in overtime. The following week, the borrower earned $98. The
inconsistency is further indication that overtime income is not reliable and should have been
researched further prior to its inclusion in the effective income calculation. We did not change
the audit report.

Comment 22: AmericaHomeKey agreed that commission income should not have been used in
the qualifying ratio calculations but contends that without the commission income, the borrower
still qualified for the loan because there were acceptable compensating factors for the excessive
ratios. AmericaHomeKey stated that the Mortgage Credit Analysis Worksheet shows a
compensating factor of an ability to accumulate savings since the borrower had cash reserves
totaling $5,799. Regardless, FHA guidelines require documentation to support compensating
factors. The bank statement in the loan file was incomplete and showed an ending balance of
only $1,682. Therefore, we concluded that since the reserves on the Mortgage Credit Analysis

                                               56
Worksheet were not supported, the borrower did not have any significant compensating factors
to support the excessive ratios.

Comment 23: AmericaHomeKey asserted that the stability of income was verified because the
underwriter properly documented the borrower's work history prior to a leave of absence and
properly documented current employment. The lender is required to verify the borrower's
employment for the most recent 2 full years. The borrower must explain gaps in employment
spanning 1 month or more. AmericaHomeKey did not provide an explanation for the “leave of
absence.” Other income verified in the loan file was from 5 years before the loan application and
was not relevant.

Comment 24: AmericaHomeKey contends that overtime income earned for less than 1 year was
properly used in the effective income calculation because periods less than 2 years may be
acceptable provided the lender justifies and documents in writing the reason for using the income
for qualifying purposes. In addition, AmericaHomeKey agreed that without the overtime income
inclusion, the qualifying ratios increased to 42 percent and 56 percent. However, the overtime
income directly affects the borrower's ability to pay the mortgage, which is a compensating
factor. As stated in AmericaHomeKey's response, the lender may use overtime income earned
for less than 1 year provided the lender justifies and documents in writing the reason for doing
so. However, there is no documented justification from the lender to justify using the overtime
income that was earned for less than 1 year. Also, AmericaHomeKey stated that the Verification
of Employment is silent regarding the issue of whether the overtime income will continue. As a
result, we were unable to determine whether the overtime income will directly affect the
borrower's ability to pay the mortgage payment.

Comment 25: AmericaHomeKey stated that while it accepted credit documents from the seller
rather than directly from the borrower, there is no reason to suspect the integrity of the
documents. Lenders are prohibited from accepting or using documents related to the credit,
employment, or income of borrowers that are handled by or transmitted from or through
interested third parties (real estate agents, builders, sellers) or by using their equipment. We did
not change the audit report.

Comment 26: AmericaHomeKey stated that since the loans in question were processed over 3
years ago, it is unable to locate the wire transfer evidencing the transfer of funds and asserted
that there is no evidence in the file that the down payment assistance was not received in the
matter reported on the HUD-1. FHA requires the lender to document the transfer of gift funds
from the donor to the borrower. Further, there is no reason for the wire documentation to be
missing when the rest of the loan files in question appear to be intact.

Comment 27: AmericaHomeKey recognized the discrepancy between the HUD-1 and the wire
transfer documentation regarding the amount of gift funds but asserted that since the settlement
agents certified to the accuracy of the HUD-1, the gift amount was for the full $8,200 as
recorded on the HUD-1. FHA requires the lender to document the transfer of gift funds from the
donor to the borrower. Since the entire transfer of the gift funds is not documented, we are
unable to determine the actual amount of gift funds actually received, or whether the HUD-1 is
accurate.



                                                 57
Comment 28: AmericaHomeKey stated that it did, in fact, resolve the life estate issue and
appraisal discrepancies addressed in the draft audit report. We reviewed the documents provided
and agree with AmericaHomeKey's statements. As a result, we removed the issues from the
final audit report.

Comment 29: AmericaHomeKey agreed that it did not properly verify the borrower's previous
housing obligation but contends that it obtained the best documentation available because there
were no cancelled checks available since the previous rent was paid to a family member in cash
and the current rent was $0 since the housing was provided by the employer. FHA requires the
lender to determine the borrower's housing obligation payment history through the credit report,
verification of rent directly from the landlord, verification of the mortgage directly from the
mortgage servicer, or the review of canceled checks that cover the most recent 12-month period.
We did not change the audit report because the lender could have verified the borrower's housing
obligation payment history with the employer and the family member.

Comment 30: AmericaHomeKey stated that only the borrower signed the mortgage note. We
reviewed the documentation and agreed with the lender. However, an additional person signed
the mortgage security instrument. We made the necessary corrections to the audit report.

Comment 31: AmericaHomeKey stated that while there is no verification of prior rental history
in the loan file, the Mortgage Credit Analysis Worksheet, Universal Residential Loan
Application, and credit report all contain consistent information regarding the borrower’s
address, and the credit report doesn’t show any delinquent payments associated with the address.
Regardless, FHA requires the lender to determine the borrower’s housing obligation payment
history through the credit report, verification of rent, verification of mortgage, or the review of
canceled checks that cover the most recent 12 month period.

Comment 32: AmericaHomeKey stated that it maintains and implements a robust quality
control program that meets HUD requirements. We disagree because AmericaHomeKey
provided only two of the six requested quality control reviews. In addition, of the two quality
control reviews performed, AmericaHomeKey did not provide evidence that it took corrective
actions in response to the findings, and it did not report the findings to HUD as required.

Comment 33: AmericaHomeKey opposes the OIG's inclusion of funds to be put to better use
and its calculation of these funds since the nine loans used in the calculation may not end up
actually going into foreclosure. AmericaHomeKey believes that the figure is overstated and
unrepresentative of HUD's actual loss risk in connection with the ineligible loans. The 2010
fiscal year to date loss severity rate is 59 percent, supported by the Single Family Acquired Asset
Management System's Case Management Profit and Loss by Acquisition, as of September 2010.
This rate is the FHA’s average loss experience for FY 2010 based on its return on properties sold
through its Real Estate Owned Inventory. The OIG and FHA consistently use FHA’s most
recent fiscal year’s loss severity rate as a reasonable basis for calculating the funds to be put to
better use.

Comment 34: AmericaHomeKey concluded that it substantially complied with FHA
underwriting requirements, and that the issues presented in the finding do not constitute
violations of HUD/FHA requirements or affect the loans’ insurability. AmericaHomeKey also

                                                58
stated in its written response that HUD has acknowledged that underwriting is more of an art
than a science. We disagree with AmericaHomeKey’s conclusion. While AmericaHomeKey
submitted some documents to successfully remove issues set forth in the draft audit report, the
finding still demonstrates that AmericaHomeKey did not substantially comply with FHA
requirements. Further, while HUD does acknowledge that underwriting is more of an art than a
science, it also expects lenders to use both sound judgment and due diligence in the underwriting
of loans to be insured by the FHA. Finally, HUD Handbook 4000.4, REV-1 requires lenders to
obtain and verify information with at least the same care that would be exercised if originating a
mortgage when the lender would be entirely dependent on the property as security to protect its
investment. This audit report clearly demonstrates AmericaHomeKey’s lack of sound judgment
and due diligence in the underwriting of the 13 questioned loans.




                                                59
Appendix C

                        SCHEDULE OF INDEMNIFICATION
                          AND REPAYMENT AMOUNTS
                                                   Claims                                            Loan status
                   Original         Unpaid        paid as of     Loss on                               as of
    FHA case       mortgage        mortgage        July 31,      property      Indemnification        April 30,
     number         amount         balance          2011a          saleb          amountc              2011
495-7838607          $148,943        $143,193         $1,000                            $84,484     Delinquent
                                                                                                    Foreclosed-
495-7871535           $80,353                                      $67,626                          property sold
421-4407985          $166,881        $163,036         $1,000                            $96,191     Delinquent
492-8043749          $101,750                                      $90,481                          Foreclosed-
                                                                                                    property sold
491-9300557          $136,805                                     $113,205                          Foreclosed-
                                                                                                    property sold
422-2858487          $226,445        $221,716                                          $130,812     Reinstated by
                                                                                                    mortgagor;
                                                                                                    July payment
                                                                                                    not paid
                                                                                                    Foreclosed –
491-9144966          $134,883                                     $121,866                          Property sold
221-4024471           $93,075         $89,842                                           $53,007     Delinquent
011-5918674          $133,406        $128,555                                           $75,847     Delinquent
                                                                                                    Foreclosed-
492-8004302          $133,416                                     $121,151                          property sold
091-4395020          $144,372        $139,041        $15,147                            $82,034     Delinquent
281-3386718          $135,867        $130,782         $6,656                            $77,161     Reinstated
                                                                                                    after loss
                                                                                                    mitigation
421-4340956          $148,667        $142,682                                           $84,182     Reinstated by
                                                                                                    mortgagor;
                                                                                                    June and July
                                                                                                    2011
                                                                                                    payments not
                                                                                                    paid
        Totals     $1,784,863      $1,158,847        $23,803      $514,329             $683,718

a
  We classified $23,803 in claims paid by HUD as unsupported costs that would be required to be supported or
repaid to HUD.
b
  The loss amount was obtained from HUD personnel.
c
  We classified $683,718 as funds to be put to better use. This is 59 percent of the $1,158,847 in unpaid principal
balances for the eight loans as of July 31, 2011. The 59 percent is the estimated percentage of loss HUD would
incur when the FHA property is foreclosed upon and resold as supported by SAM’S Case Management Profit and
Loss by Acquisition as of September 2010.




                                                         60
Appendix D

                                   CASE NARRATIVES

                      Case Narrative—Loan Number 495-7838607
Mortgage amount: $148,943

Date of loan closing: May 8, 2008

Status as of July 31, 2011: 2 months delinquent; $1,000 partial claim paid

Payments before first default reported: Two

Underwriting deficiencies:
The underwriter did not
   • Verify compensating factors.
   • Calculate income correctly.
   • Document gift funds transfer.
   • Reject documents passed through the seller to the mortgage company.

Summary:

Verified Compensating Factors Were Not Provided
The borrower’s qualifying ratios were 31 and 46 percent, respectively, thus exceeding the limits
of 31 and 43 percent. 26 On the mortgage credit analysis worksheet, the underwriter documented
that the borrower had good reserves and not a lot of debt. FHA’s list of acceptable compensating
factors includes at least 3 months of cash reserves after closing. A low level of debt is not listed
as a compensating factor. 27 The underwriter documented reserves on the mortgage credit
analysis worksheet totaling $7,054. This amount is enough to satisfy the 3 months of reserves
requirement. However, FHA guidelines also require documentation to support the compensating
factors. 28 The verification of deposit, dated April 6, 2008, showed a balance of only $1,555 and
an average balance of $279.

Underwriter Calculated Income Incorrectly
The underwriter overstated the borrower’s monthly income by $437. Using the overstated
income, the underwriter calculated the borrower’s ratios of 31 and 46, respectively. Based on the
pay stubs in the loan file, overtime income was present but not consistent. Overtime income may
be included in the effective income calculation if the borrower has received such income for the
past 2 years and it is likely to continue. The lender must develop an average of the income for
the past 2 years. 29 The underwriter used 13 months of income instead of the required 24 months.

26
     Mortgage Letter 2005-16
27
     HUD Handbook 4155.1, REV-5, paragraph 2-13
28
     Ibid.
29
     HUD Handbook 4155.1, REV-5, paragraph 2-7.A

                                                   61
Further, there was no documentation in the file to show that overtime income would continue.
The underwriter should have excluded the overtime from the ratio calculations, which would
have resulted in ratios of 35 and 49 percent. Given the higher ratios, the borrower would not
have qualified for the FHA mortgage loan.

Gift Funds Transfer Was Not Documented
The underwriter did not document the transfer of gift funds from the donor to the borrower.
FHA requires the lender to document the transfer of gift funds from the donor to the borrower. 30

Documents Passed Through the Seller to the Mortgage Company
The borrower’s Internal Revenue Service Form W-2 passed through the seller to the mortgage
company. Lenders are prohibited from accepting or using documents related to the credit,
employment, or income of borrowers that are handled by or transmitted from or through
interested third parties (real estate agents, builders, sellers) or by using their equipment. 31




30
     HUD Handbook 4155.1, REV-5, paragraph 2-10.C
31
     HUD Handbook 4155.1, REV-5, paragraph 3-1

                                                    62
                      Case Narrative—Loan Number 495-7871535

Mortgage amount: $ 80,353

Date of loan closing: July 16, 2008

Status as of July 31, 2011: Title conveyed to insurer; claims paid totaling $88,151. HUD sold
the property on February 18, 2011, for $29,500. The total loss to HUD was $67,626.

Payments before first default reported: Five

Underwriting deficiencies:
The underwriter did not
   • Adequately evaluate the borrower’s creditworthiness.
   • Reject documents handled by the seller and sent to the mortgage company.

Summary:

Borrower’s Creditworthiness Was Not Adequately Evaluated
The borrower’s credit report showed two active tax liens in California. The loan file contained a
release letter for each of the liens. However, they were faxed from the seller. FHA requirements
prohibit lenders from accepting or using documents related to the credit, employment, or income
of borrowers that are handled by or transmitted from or through interested third parties (real
estate agents, builders, sellers) or by using their equipment. 32 The lender should have rejected
the letters that were faxed from the seller and obtained the letters directly from the borrowers or
from California. FHA also requires sufficient written explanation from the borrower for major
indications of derogatory credit. The explanation must make sense and be consistent with other
credit information in the file. 33 There was no written explanation in the loan file to explain the
tax liens.

Seller Handled Documents That Were Sent to the Mortgage Company
The underwriter allowed documents related to the borrower’s credit and income documents to
pass through the seller to the mortgage company. Lenders are prohibited from accepting or using
documents related to the credit, employment, or income of borrowers that are handled by or
transmitted from or through interested third parties (real estate agents, builders, sellers) or by
using their equipment. 34




32
     Ibid.
33
     HUD Handbook 4155.1, REV-5, paragraph 2-3
34
     See footnote 31.

                                                 63
                      Case Narrative—Loan Number 421-4407985
Mortgage amount: $166,881

Date of loan closing: December 16, 2008

Status as of July 31, 2011: 2 months delinquent; $1,000 partial claim paid

Payments before first default reported: Zero

Underwriting deficiencies:
The underwriter did not
   • Provide acceptable compensating factors.

Summary:


Acceptable Compensating Factors Were Not Provided
The underwriter calculated the qualifying ratios as 33 and 37 percent, respectively. Since the
borrower’s total mortgage payment-to-income ratio of 33 percent exceeded the limit of 31
percent, the underwriter was required to provide acceptable compensating factors. 35 The
underwriter documented that the borrower had 1½ half months of reserves, had paid off a
judgment, and had a low level of debt. FHA regulations require the lender to obtain supporting
documentation from borrowers and document the compensating factor(s) when borrowers exceed
qualifying ratios to justify mortgage origination. 36 FHA’s list of compensating factors requires
at least 3 months of cash reserves after closing. A low level of debt and a paid judgment are not
listed as compensating factors. 37 The lender provided additional documentation, after we
provided it with the draft audit report, that showed the borrower's monthly debt at $518 instead
of the $167 reported on the Mortgage Credit Analysis Worksheet. As a result, we calculated the
borrower's qualifying ratios at 34 and 46.




35
     See footnote 27.
36
     HUD Handbook 4155.1, REV-5, paragraphs 2-12 & 2-13
37
     See footnote 27.

                                                  64
                        Case Narrative—Loan Number 492-8043749
Mortgage amount: $101,750

Date of loan closing: May 8, 2008

Status as of July 31, 2011: Title conveyed to insurer; claims paid totaling $109,399, HUD sold
the property on March 11, 2010 for $24,325. The total loss to HUD was $90,481.

Payments before first default reported: Two

Underwriting deficiencies:
The underwriter did not
   • Verify compensating factors.
   • Reject documents passing through the seller to the mortgage company.

Summary:

Verified Compensating Factors Were Not Provided
The borrower’s qualifying ratios of 38 and 47 percent, respectively, exceeded the limits of 31
and 43 percent. 38 On the mortgage credit analysis worksheet, the underwriter documented that
the borrower had 3 months of reserves, not a lot of debt, and overtime income that was not used
to qualify. The reserves and overtime income are acceptable compensating factors under FHA
guidelines. However, FHA guidelines also require documentation to support the compensating
factors. 39 The underwriter documented cash reserves totaling $2,500. The required reserves
were $2,759. The overtime income that was not used to qualify was not addressed in the
verification of employment. Therefore, we were unable to determine whether the overtime
income was likely to continue.

The Seller Handled Mortgage Documents That Were Sent to the Mortgage Company
The underwriter allowed documents related to the borrower’s credit to pass through the seller to
the mortgage company. FHA requirements prohibit lenders from accepting or using documents
related to the credit, employment, or income of borrowers that are handled by or transmitted
from or through interested third parties (real estate agents, builders, sellers) or by using their
equipment. 40




38
     See footnote 26.
39
     See footnote 27.
40
     See footnote 31.

                                                65
                      Case Narrative—Loan Number 491-9300557
Mortgage amount: $136,805

Date of loan closing: September 5, 2008

Status as of July 31, 2011: Title conveyed to insurer; claims paid totaling $145,379. HUD sold
the property on June 10, 2010 for $37,500. The total loss to HUD was $113,205.

Payments before first default reported: Two

Underwriting deficiencies:
The underwriter did not
   • Adequately evaluate the borrower’s creditworthiness.
   • Verify previous housing obligation payment history.

Summary:

Borrower’s Creditworthiness Was Not Adequately Evaluated
The subject property is located in Texas, a community property State. According to the Form
HUD-1, Settlement Statement, the borrower was married. Only one borrower signed the
mortgage note, making the borrower’s spouse a nonpurchasing spouse. FHA requires the lender
to include the debts of nonpurchasing spouses when the borrower resides in a community
property State or if the property being insured is located in a community property State. 41
Therefore, the credit for both borrowers should have been analyzed to ensure that the spouse’s
debt was included in the qualifying ratios. There was no credit documentation in the file for the
nonpurchasing spouse.

Previous Housing Obligation Payment History Was Not Verified
The borrower’s housing obligation payment history holds significant importance when
evaluating credit. The lender must determine the borrower’s housing obligation payment history
through the credit report, verification of rent directly from the landlord (for landlords with no
identity of interest with the borrower), verification of the mortgage directly from the mortgage
servicer, or the review of canceled checks covering the most recent 12-month period. 42 The loan
file did not contain a verification of rent or previous housing payments.




41
     HUD Handbook 4155.1, REV-5, paragraph 2-2D
42
     HUD Handbook 4155.1, REV-5, paragraph 2-3.A

                                                   66
                      Case Narrative—Loan Number 422-2858487
Mortgage amount: $226,445

Date of loan closing: July 30, 2008

Status as of July 31, 2011: Reinstated by mortgagor. July payment not paid.

Payments before first default reported: Nine

Underwriting deficiencies:
The underwriter did not
   • Calculate income correctly.
   • Adequately evaluate the borrower’s creditworthiness.

Summary:

Income Was Calculated Incorrectly
The lender calculated monthly income at $6,000 per month. However, the lender incorrectly
used commission income in its calculation. According to documents in the loan file, the
borrower was employed at his current job for only 3 months before closing. Commissions
earned for less than 1 year are not considered effective income. 43 The borrower’s prior position
was in the same industry, but there was no documentation in the file to show that he earned a
commission. The lender is responsible for asking sufficient questions to elicit a complete picture
of the borrower’s financial situation. All information must be verified and documented. 44 As a
result, the borrower’s commission income could not be used in the effective income calculation.
Because the lender included the commission income, it understated the borrower’s ratios on the
mortgage credit analysis worksheet. The ratios used for loan approval were 30 and 39 percent,
respectively. We calculated the borrower’s effective income at $4,333 per month ($1,667 less
than the lender’s calculation) and the ratios at 42 and 54 percent, which exceeded the FHA limits
of 31 and43 percent. 45 The lender was required to obtain supporting documentation from
borrowers and document the compensating factor(s) when borrowers exceeded qualifying ratios
to justify mortgage origination. 46 The underwriter documented 3 months in reserves. However,
we did not find any documentation in the loan file to support the claimed reserves.

Borrower’s Creditworthiness Was Not Adequately Evaluated
The borrower’s credit report showed several accounts that were charged off and late payment
histories. Some of these accounts were more than 24 months old. The letter of explanation
stated that the borrower was unemployed for several months. This explanation was not
consistent with the credit history since the poor credit spanned several years. FHA requires
sufficient written explanation from the borrower for major indications of derogatory credit. The
explanation must make sense and be consistent with other credit information in the file. 47

43
     HUD Handbook 4155.1, REV-5, paragraph 2-3D
44
     HUD Handbook 4155.1, REV-5, Chapter 3
45
     See footnote 26.
46
     See footnote 36.
47
     See footnote 33.

                                                  67
                      Case Narrative—Loan Number 491-9144966
Mortgage amount: $134,883

Date of loan closing: March 27, 2008

Status as of July 31, 2011: Title conveyed to insurer; claims paid totaling $150,527. HUD sold
the property on September 1, 2011 for $34,000. The total loss to HUD was $121,866.
Payments before first default reported: Three

Underwriting deficiencies:
The underwriter did not
   • Provide acceptable compensating factors.
   • Adequately evaluate the borrower’s creditworthiness.

Summary:

Acceptable Compensating Factors Were Not Provided
The borrower’s qualifying ratios of 33 and 45 percent exceeded the limits of 31 and 43 percent. 48
The underwriter documented that the borrower had 1 month of reserves and not a lot of debt as
compensating factors. Neither of these items met the requirements of FHA’s list of
compensating factors. FHA’s list of compensating factors requires at least 3 months of cash
reserves after closing. A low level of debt is not listed as a compensating factor. 49

Borrower’s Creditworthiness Was Not Adequately Evaluated
The borrower’s credit report showed several accounts with charge offs. The written explanation
stated that all of the derogatory credit was old and she was using an agency to clean up her
credit. However, no documentation from any type of credit counseling agency was in the file.
FHA requires the lender to document that 1 year of the pay-out period has elapsed under the
plan, and the borrower’s payment performance has been satisfactory. In addition, the borrower
must receive written permission from the counseling agency to enter into the mortgage
transaction. 50




48
     See footnote 26.
49
     See footnote 27.
50
     HUD Handbook 4155.1, REV-5, paragraph 2-3F.

                                                   68
                      Case Narrative—Loan Number 221-4024471
Mortgage amount: $93,075

Date of loan closing: July 11, 2008

Status as of July 31, 2011: 31 months delinquent; first legal action to commence foreclosure

Payments before first default reported: Two

Underwriting deficiencies:
The underwriter did not
   • Verify compensating factors.
   • Adequately evaluate the borrower’s creditworthiness.
   • Document stability of income.
   • Ensure that the loan closed in compliance with the loan approval requirements.

Summary:

Verified Compensating Factors Were Not Provided
The borrower’s qualifying ratios of 36 and 45 percent exceeded the limits of 31and 43 percent. 51
The underwriter documented that the borrower had 3 months of reserves and not a lot of debt.
The reserves are acceptable compensating factors under FHA guidelines. However, FHA
guidelines also require documentation to support the compensating factors. 52 The underwriter
did not provide documentation to support 3 months of reserves.

Borrower’s Creditworthiness Was Not Adequately Evaluated
The borrower’s credit report showed several accounts that were charged off. The borrower’s
written explanation stated that she had paid the accounts off and that she had been ill. However,
there was no documentation in the loan file to show that the accounts had been paid off.
Collections and judgments indicate a borrower’s regard for credit obligations and must be
considered in the creditworthiness analysis. FHA requires sufficient written explanation from
the borrower for major indications of derogatory credit. The explanation must make sense and
be consistent with other credit information in the file. 53

Income Stability Was Not Properly Documented
The lender did not verify the most recent 2 years of income. The lender is required to verify the
borrower’s employment for the most recent 2 full years. The borrower must explain gaps in
employment spanning 1 month or more. 54 Other income verified was from 5 years before the
loan application and was not relevant.



51
     See footnote 26.
52
     See footnote 27.
53
     See footnote 33.
54
     HUD Handbook 4155.1, REV-5, paragraph 2-6

                                                 69
The Loan Did Not Close in Accordance With the Loan Approval Requirements
A person other than the borrower signed the mortgage security instrument for this loan. There
was no evidence in the loan file that the lender reviewed this person for income,
creditworthiness, assets, etc. FHA requires the loan to close in the same manner in which it was
underwritten and approved. FHA may withhold endorsement of the loan if there are additional
signatures on the security instruments or mortgage note of individuals not reviewed during
mortgage credit analysis. 55




55
     HUD Handbook 4155.2, paragraph 6.A.2.f

                                               70
                        Case Narrative—Loan Number 011-5918674
Mortgage amount: $133,406

Date of loan closing: May 30, 2008

Status as of July 31, 2011: 8 months delinquent, and the borrower had a confirmed bankruptcy
plan

Payments before first default reported: Zero

Underwriting deficiencies:
The underwriter did not
   • Provide acceptable compensating factors.
   • Adequately evaluate the borrower’s creditworthiness.

Summary:

Acceptable Compensating Factors Were Not Provided
The borrower’s qualifying ratios of 32 and 40 percent exceeded the limits of 31 and 43 percent. 56
The underwriter documented that the borrower had 1 month of reserves and not a lot of debt.
Neither of these items met the requirements of FHA’s list of compensating factors. FHA’s list of
compensating factors requires at least 3 months of cash reserves after closing. A low level of
debt is not listed as a compensating factor. 57

Borrower’s Creditworthiness Was Not Adequately Evaluated
The borrower’s credit report showed several accounts in collection or charged off. The
borrower’s written explanation stated that complications during pregnancy contributed to the
derogatory credit. However, there was no evidence in the file to show that the borrower
attempted to pay the delinquent accounts (except for one payoff letter of a $450 debt) once the
pregnancy ended and health was restored. The borrower’s failure to pay the derogatory accounts
illustrated a poor attitude toward credit obligations. Collections and judgments indicate a
borrower’s regard for credit obligations and must be considered in the creditworthiness analysis.
FHA requires sufficient written explanation from the borrower for major indications of
derogatory credit. The explanation must make sense and be consistent with other credit
information in the file. Further, the lender must document reasons for approving a mortgage
when the borrower has collection accounts or judgments. 58 We did not find documentation in
the loan file showing the lender’s reasons for approving the mortgage.




56
     See footnote 26.
57
     See footnote 27.
58
     See footnote 33.

                                               71
                        Case Narrative—Loan Number 492-8004302

Mortgage amount: $133,416

Date of loan closing: April 2, 2008

Status as of July 31, 2011: Title conveyed to insurer; claims paid totaling $141,213. HUD sold
the property on June 25, 2010 for $24,402. The total loss to HUD was $121,151.
Payments before first default reported: 11

Underwriting deficiencies:
The underwriter did not
   • Provide acceptable compensating factors.
   • Calculate income correctly.

Summary:

Acceptable Compensating Factors Were Not Provided
The borrower’s qualifying ratios of 33 and 44 percent exceeded the limits of 31 and 43 percent. 59
The underwriter documented that the borrower had 2 months of reserves and not a lot of debt as
a compensating factor. Neither of these items met the requirements of FHA’s list of
compensating factors. FHA’s list of compensating factors requires at least 3 months of cash
reserves after closing. A low level of debt is not listed as a compensating factor. 60

Underwriter Calculated Income Incorrectly
The underwriter overstated the borrower’s monthly income by $747 per month. Using the
overstated income, the underwriter calculated the borrower’s qualifying ratios as 33 and 44
percent, respectively. Overtime income may be included in the effective income calculation if
the borrower has received such income for the past 2 years and it is likely to continue. The
lender must develop an average of the income for the past 2 years. 61 There was no
documentation in the file to indicate that the overtime income would continue. Regardless, the
underwriter used 13.72 months of income instead of the required 24 months. The underwriter
should have excluded the overtime from the ratio calculations, which would have resulted in
ratios of 42 and 56 percent. Given the higher ratios, the borrower would not have qualified for
the FHA mortgage loan.




59
     See footnote 26.
60
     See footnote 27.
61
     See footnote 29.

                                               72
                        Case Narrative—Loan Number 091-4395020
Mortgage amount: $144,372

Date of loan closing: May 22, 2008

Status as of July 31, 2011: 16 months delinquent; first legal action to commence foreclosure.
Claim paid totaling $15,147.

Payments before first default reported: 11

Underwriting deficiencies:
The underwriter did not
   • Verify compensating factors.
   • Adequately evaluate the borrower’s creditworthiness.
   • Document gift funds transfer.

Summary:

Verified Compensating Factors Were Not Provided
The borrower’s qualifying ratios of 36 and 48 percent exceeded the limits of 31 and 43 percent. 62
The underwriter documented that the borrower had 3 months of reserves and not a lot of debt.
The reserves are acceptable compensating factors under FHA guidelines. However, FHA
guidelines also require documentation to support the compensating factors. 63 The underwriter
did not provide documentation to support 3 months of reserves.

Borrower’s Creditworthiness Was Not Adequately Evaluated
The borrower’s credit report showed several accounts that were charged off. The borrower’s
written explanation stated that his derogatory credit was the result of a divorce. We searched
public records and found that the borrower divorced in 2001 and married his current wife in
2006. Most of the derogatory credit occurred after the divorce. Collections and judgments
indicate a borrower’s regard for credit obligations and must be considered in the creditworthiness
analysis. FHA requires sufficient written explanation from the borrower for major indications of
derogatory credit. The explanation must make sense and be consistent with other credit
information in the file. 64

Gift Funds Transfer Was Not Documented
The Form HUD-1 showed that the borrower received $8,200 in gift funds. However, the gift
funds transfer showed that only $7,525 was transferred. The underwriter did not document the
transfer of the remaining $675 in gift funds. FHA requires the lender to document the transfer of
gift funds from the donor to the borrower. 65



62
     See footnote 26.
63
     See footnote 27.
64
     See footnote 33.
65
     See footnote 30.

                                               73
                        Case Narrative— Loan Number 281-3386718
Mortgage amount: $135,867

Date of loan closing: April 1, 2008

Status as of July 31, 2011: Reinstated after loss mitigation. Claims paid totaling $6,656.

Payments before first default reported: Two

Underwriting deficiencies:
The underwriter did not
   • Provide acceptable compensating factors.

Summary:

Acceptable Compensating Factors Were Not Provided
The borrower’s qualifying ratios of 34 and 45 percent exceeded the FHA limits of 31 and 43
percent. 66 The underwriter documented that the borrower had 2 months of reserves and not a lot
of debt as compensating factors. Neither of these items met the requirements of FHA’s list of
compensating factors. FHA’s list of compensating factors requires at least 3 months of cash
reserves after closing. A low level of debt is not listed as a compensating factor. 67




66
     See footnote 26.
67
     See footnote 27.

                                               74
                        Case Narrative— Loan Number 421-4340956

Mortgage amount: $148,667

Date of loan closing: February 22, 2008

Status as of July 31, 2011: Reinstated by mortgagor; June and July 2011 payments not paid

Payments before first default reported: Not available

Underwriting deficiencies:
The underwriter did not
     •
     • Verify previous housing obligation payment history.
     • Document the transfer of gift funds.

Summary:


Previous Housing Obligation Payment History Was Not Verified
FHA requires the lender to determine the borrower’s housing obligation payment history through
the credit report, verification of rent, verification of mortgage, or the review of canceled checks
covering the most recent 12-month period. 68 The borrower’s loan application documented that
he was renting for the 2 years before closing the mortgage. We did not find a verification of rent
or previous housing payments in the loan file to show that the lender verified the borrower’s
housing obligation payment history.

Gift Funds Transfer Was Not Documented by Lender
The loan file contained a gift letter for $3,030 from a relative. The Form HUD-1 showed that the
borrower paid $3,030 at closing. However, the loan file did not contain documentation to show
the transfer of the gift funds from the donor to the borrower. FHA requires the lender to
document the transfer of the funds from the donor to the borrower. 69




68
     See footnote 42.
69
     See footnote 30.

                                                75